UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-13219
OCWEN FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Florida 65-0039856
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(State or other jurisdiction (I.R.S. Employer
Of incorporation or organization) Identification No.)
1661 Worthington Road, Suite 100, West Palm Beach, Florida 33409
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(Address of principal executive offices) (Zip Code)
(561) 682-8000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ].
Number of shares of Common Stock, $0.01 par value, outstanding as of
July 8, 2005: 62,934,102 shares.
OCWEN FINANCIAL CORPORATION
FORM 10-Q
INDEX
Page
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PART I - FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements (Unaudited)............................................................ 3
Consolidated Balance Sheets at June 30, 2005 and December 31, 2004............................................... 3
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2005 and 2004.................. 4
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended
June 30, 2005 and 2004 ......................................................................................... 5
Consolidated Statement of Changes in Stockholders' Equity for the Six Months Ended June 30, 2005................. 6
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004............................ 7
Notes to Consolidated Financial Statements....................................................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................................... 43
Item 4. Controls and Procedures.......................................................................................... 44
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................................................ 45
Item 4. Submission of Matters to a Vote of Security Holders.............................................................. 45
Item 6. Exhibits......................................................................................................... 45
Signature................................................................................................................ 47
2
PART I - FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS (Unaudited)
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
June 30, December 31,
2005 2004
------------- -------------
ASSETS
Cash ............................................................................ $ 310,233 $ 542,891
Trading securities, at fair value
Investment grade .............................................................. 2,942 86,215
Subordinates and residuals .................................................... 45,343 39,527
Match funded assets (including advances on loans serviced for others of $331,337
and $276,626)................................................................... 334,689 280,760
Advances on loans and loans serviced for others ................................. 187,423 240,430
Mortgage servicing rights ....................................................... 132,333 131,409
Receivables ..................................................................... 119,943 126,719
Real estate ..................................................................... 9,314 18,732
Affordable housing properties ................................................... 4,406 5,641
Loans (net of allowance for loan losses of $4,334 and $4,546) ................... 8,725 3,792
Premises and equipment .......................................................... 41,115 37,440
Other assets .................................................................... 86,181 68,976
------------- -------------
Total assets .................................................................. $ 1,282,647 $ 1,582,532
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Match funded liabilities ...................................................... $ 284,822 $ 244,327
Servicer liabilities .......................................................... 310,369 291,266
Lines of credit and other secured borrowings .................................. 52,525 50,612
Debt securities ............................................................... 231,249 231,249
Other liabilities ............................................................. 65,856 56,849
Deposits ...................................................................... -- 290,507
Escrow deposits ............................................................... -- 86,084
------------- -------------
Total liabilities ........................................................... 944,821 1,250,894
------------- -------------
Minority interest in subsidiaries ............................................... 1,742 1,530
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY
Common stock, $.01 per value; 200,000,000 shares authorized; 62,934,102 and
62,739,478 shares issued and outstanding .................................... 629 627
Additional paid-in capital .................................................... 182,254 181,336
Retained earnings ............................................................. 153,428 148,133
Accumulated other comprehensive income (loss), net of taxes ................... (227) 12
------------- -------------
Total stockholders' equity .................................................... 336,084 330,108
------------- -------------
Total liabilities and stockholders' equity .................................. $ 1,282,647 $ 1,582,532
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
3
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
Three Months Six Months
---------------------------- ----------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ---------------------------------------------------------------------- ------------- ------------- ------------- -------------
REVENUE
Servicing and related fees ......................................... $ 44,161 $ 39,460 $ 88,548 $ 80,782
Vendor management fees ............................................. 10,783 11,487 21,665 24,490
Gain (loss) on trading securities, net ............................. (1,269) 2,503 (2,667) 1,860
Valuation gains (losses) on real estate ............................ 4 (1,974) 93 (3,825)
Gain (loss) on sales of real estate ................................ 13 81 48 (460)
Operating income (losses) from real estate ......................... (165) 565 (339) 573
Other income ....................................................... 6,016 6,293 8,903 13,882
------------- ------------- ------------- -------------
Non-interest revenue ............................................. 59,543 58,415 116,251 117,302
------------- ------------- ------------- -------------
Interest income .................................................... 6,764 5,962 13,096 10,567
Interest expense ................................................... 9,072 7,096 17,512 14,898
------------- ------------- ------------- -------------
Net interest income (expense) before provision for loan losses ... (2,308) (1,134) (4,416) (4,331)
Provision for loan losses .......................................... (16) (287) (12) (819)
------------- ------------- ------------- -------------
Net interest income (expense) after provision for loan losses..... (2,292) (847) (4,404) (3,512)
------------- ------------- ------------- -------------
Total revenue .................................................. 57,251 57,568 111,847 113,790
------------- ------------- ------------- -------------
NON-INTEREST EXPENSE
Compensation and employee benefits ................................. 24,355 20,897 48,727 42,930
Occupancy and equipment ............................................ 4,571 4,021 8,813 8,018
Technology and communication costs ................................. 7,862 6,616 15,261 13,285
Loan expenses ...................................................... 6,084 6,783 11,796 14,710
Professional services and regulatory fees .......................... 5,656 7,994 10,377 13,819
Loss (gain) on investments in affordable housing properties ........ (118) (41) 524 (79)
Other operating expenses ........................................... 3,668 2,151 8,239 5,187
------------- ------------- ------------- -------------
Non-interest expense ........................................... 52,078 48,421 103,737 97,870
------------- ------------- ------------- -------------
Income (loss) before income taxes .................................... 5,173 9,147 8,110 15,920
Income tax expense (benefit) ......................................... 2,265 55 2,815 66
------------- ------------- ------------- -------------
Net income (loss) ................................................ $ 2,908 $ 9,092 $ 5,295 $ 15,854
============= ============= ============= =============
EARNINGS (LOSS) PER SHARE
Basic ............................................................ $ 0.05 $ 0.13 $ 0.08 $ 0.23
Diluted .......................................................... $ 0.05 $ 0.13 $ 0.08 $ 0.23
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic ............................................................ 62,809,286 68,160,020 62,776,469 67,961,217
Diluted .......................................................... 63,709,246 69,534,999 63,864,247 69,314,392
The accompanying notes are an integral part of these
consolidated financial statements.
4
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
Three Months Six Months
----------------------- -----------------------
For the periods ended June 30, 2005 2004 2005 2004
- --------------------------------------------------------------- ---------- ---------- ---------- ----------
Net income (loss) ............................................. $ 2,908 $ 9,092 $ 5,295 $ 15,854
Other comprehensive income (loss), net of taxes:
Change in unrealized foreign currency translation adjustment
arising during the period (1) ................................ (541) (954) (239) (1,001)
---------- ---------- ---------- ----------
Comprehensive income (loss) ................................... $ 2,367 $ 8,138 $ 5,056 $ 14,853
========== ========== ========== ==========
(1) Net of tax benefit (expense) of $305 and $560 for the three months and of
$127 and $588 for the six months ended June 30, 2005 and 2004,
respectively.
The accompanying notes are an integral part of these
consolidated financial statements.
5
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2005
(Dollars in thousands)
Accumulated
Other
Common Stock Additional Comprehensive
----------------------- Paid-in Retained Income (Loss),
Shares Amount Capital Earnings Net of Taxes Total
---------- ---------- ---------- ---------- -------------- ----------
Balances at December 31, 2004 .......... 62,739,478 $ 627 $ 181,336 $ 148,133 $ 12 $ 330,108
Net income ............................. -- -- -- 5,295 -- 5,295
Issuance of restricted common stock
awards to employees and directors ..... 185,393 2 837 -- -- 839
Exercise of common stock options ....... 9,231 -- 81 -- -- 81
Other comprehensive income (loss), net
of taxes .............................. -- -- -- -- (239) (239)
---------- ---------- ---------- ---------- -------------- ----------
Balances at June 30, 2005 .............. 62,934,102 $ 629 $ 182,254 $ 153,428 $ (227) $ 336,084
========== ========== ========== ========== ============== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
6
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the six months ended June 30, 2005 2004
- ------------------------------------------------------------------------------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ................................................................... $ 5,295 $ 15,854
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities
Net cash provided by trading activities ......................................... 73,872 5,887
Premium amortization (discount accretion) on securities, net .................... 384 (2,122)
Amortization of servicing rights ................................................ 50,045 48,669
Depreciation and other amortization ............................................. 6,578 7,067
Provision for loan losses ....................................................... (12) (819)
Valuation (gains) losses on real estate ......................................... (93) 3,825
(Gain) loss on trading and match funded securities .............................. 2,667 (1,860)
Provision for losses on affordable housing properties ........................... 721 --
(Gain) loss on sale of real estate .............................................. (48) 460
(Gain) loss on sale of deposits ................................................. (1,750) --
Increase (decrease) in servicer liabilities ..................................... 19,103 64,325
(Increase) decrease in advances and match funded advances on loans and loans
serviced for other .............................................................. (1,704) 36,559
(Increase) decrease in receivables and other assets, net ........................ (10,429) (16,507)
Increase (decrease) in other liabilities, net ................................... 5,884 (4,220)
Other ........................................................................... 2,189 (3,046)
------------- -------------
Net cash provided (used) by operating activities .................................... 152,702 154,072
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments received on match funded loans ............................... 499 5,031
Acquisitions of match funded loans .............................................. -- (7,119)
Proceeds from sale of affordable housing properties ............................. -- 327
Purchase of mortgage servicing rights ........................................... (50,969) (18,348)
Principal payments received on loans ............................................ 461 29,521
Purchases, originations and funded loans commitments, net........................ (219) (15,975)
Proceeds from sale of real estate ............................................... -- 18,910
Additions to premises and equipment ............................................. (6,828) (5,755)
Proceeds from sale of subsidiary ................................................ 4,337 --
------------- -------------
Net cash provided (used) by investing activities .................................... (52,719) 6,592
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in deposits and escrow deposits ............................. (210,850) 38,861
Sale of deposits ................................................................ (165,741) --
Premium received on sale of deposits ............................................ 1,500 --
Proceeds from (repayment of) lines of credit and other secured borrowings, net .. 1,913 (79,802)
Proceeds from (repayment of) match funded liabilities, net ...................... 40,495 2,351
Exercise of common stock options ................................................ 42 2,317
------------- -------------
Net cash provided (used) by financing activities .................................... (332,641) (36,273)
------------- -------------
Net increase (decrease) in cash ..................................................... (232,658) 124,391
Cash at beginning of period ......................................................... 542,891 316,167
------------- -------------
Cash at end of period ............................................................... $ 310,233 $ 440,558
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
7
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
For the six months ended June 30, 2005 2004
- ------------------------------------------------------------------------------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for
Interest ........................................................................ $ 18,567 $ 15,588
Income tax payments (refunds) ................................................... 70 (48)
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Assumption of line of credit by purchaser of real estate ........................ $ -- $ 20,000
Equipment acquired through capital leases ....................................... 3,123 --
SALE OF SUBSIDIARY
Fair value of subsidiary sold ................................................... $ 9,200 $ --
Financing to buyer .............................................................. (4,863) --
------------- -------------
Net cash received for subsidiary sold ........................................... $ 4,337 $ --
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
8
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(Dollars in thousands)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
have been prepared in conformity with the instructions to Form 10-Q and Article
10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly,
they do not include all of the information and footnotes required by U.S.
generally accepted accounting principles ("GAAP") for complete financial
statements. The interim consolidated financial statements of Ocwen Financial
Corporation ("OCN") include the accounts of OCN and its subsidiaries. At June
30, 2005, OCN owns all of the outstanding stock of its primary subsidiaries,
Ocwen Loan Servicing, LLC ("OLS"), Investors Mortgage Insurance Holding Company,
Ocwen Technology Xchange, Inc. ("OTX"), Ocwen Asset Investment Corp. ("OAC") and
Ocwen Financial Solutions, Private Limited ("India"). OCN also owns 70% of
Global Servicing Solutions, LLC ("GSS") with the remaining 30% minority interest
held by ML IBK Positions, Inc. ("Merrill Lynch"). We have eliminated all
significant intercompany transactions and balances in consolidation.
In our opinion, the accompanying unaudited financial statements
contain all adjustments, consisting only of normal recurring accruals, necessary
for a fair statement of our financial condition at June 30, 2005 and December
31, 2004, the results of our operations for the three and six months ended June
30, 2005 and 2004, our comprehensive income (loss) for the three and six months
ended June 30, 2005 and 2004, our changes in stockholders' equity for the six
months ended June 30, 2005 and our cash flows for the six months ended June 30,
2005 and 2004. The results of operations and other data for the three and six
months ended June 30, 2005 are not necessarily indicative of the results that
may be expected for any other interim period or the entire year ending December
31, 2005. The unaudited consolidated financial statements presented herein
should be read in conjunction with the audited consolidated financial statements
and related notes thereto included in our Annual Report on Form 10-K for the
year ended December 31, 2004. Certain reclassifications have been made to the
prior periods' interim consolidated financial statements to conform to the June
30, 2005 presentation.
In preparing the consolidated financial statements, we are required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the dates of the balance sheet and revenues and expenses for the
periods covered. Material estimates that are particularly significant in the
near or medium term relate to our determination of allowances for loans,
servicing advances, and receivables, as well as our valuation of securities,
affordable housing properties, servicing rights, intangibles and deferred tax
assets. Actual results could differ from those estimates and assumptions.
NOTE 2 CURRENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 123 (R),
"Share-Based Payment". This Statement was issued by the Financial Accounting
Standards Board ("FASB") on December 16, 2004 and is a revision of SFAS No. 123,
"Accounting for Stock-Based Compensation". This Statement also supersedes
Accounting Principles Board ("APB") Opinion No. 25 and its related
implementation guidance.
SFAS No. 123 (R) requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exceptions). That cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award - the requisite service period
(usually the vesting period). No compensation cost is recognized for equity
instruments for which employees do not render the requisite service. The fair
value of an award is not re-measured after its initial estimation on the grant
date (except in the case of a liability award or if the award is subsequently
modified). The grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models adjusted for the
unique characteristics of those instruments (unless observable market prices for
the same or similar instruments are available). The notes to financial
statements will disclose information to assist users of financial information to
understand the nature of share-based payment transactions and the effects of
those transactions on the financial statements.
SFAS No. 123 (R) eliminates the alternative to use Opinion 25's
intrinsic value method of accounting that was provided in SFAS No. 123 as
originally issued. Under APB Opinion No. 25, issuing stock options to employees
generally resulted in recognition of no compensation cost, except with respect
to options that were granted with an exercise price that was less than fair
value of the stock at the date of grant.
On April 14, 2005, the Securities and Exchange Commission ("SEC")
approved a new rule that delays the effective date of SFAS 123 (R) for public
companies. Under the SEC's rule, SFAS 123 (R) is now effective for public
companies for annual, rather than interim, periods that begin after June 15,
2005. SFAS 123 (R) applies to all awards granted after the required effective
date and to awards modified, repurchased, or cancelled after that date. The
cumulative effect of initially applying this Statement, if any, is recognized as
of the required effective date.
9
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2005
(Dollars in thousands)
As of the required effective date, all public entities will apply this
Statement using a modified version of prospective application. Under that
transition method, compensation cost is recognized on or after the required
effective date for the portion of outstanding awards for which the requisite
service has not yet been rendered, based on the grant-date fair value of those
awards calculated under Statement 123 for either recognition or pro forma
disclosures. For periods before the required effective date, public entities may
elect to apply a modified version of retrospective application under which
financial statements for prior periods are adjusted on a basis consistent with
the pro forma disclosures required for those periods by SFAS No. 123.
We have not yet determined which transition method we will apply or
the cumulative effect of initially adopting this Statement. We have determined
that awards we have granted to date will be classified as equity awards (versus
liability awards) because their terms contain service conditions. Therefore, the
fair value of these awards will not be re-measured after our initial estimation
on the grant date. We currently account for our stock option plans based on the
intrinsic value method set forth in APB Opinion No. 25. Therefore, we anticipate
that the amount of compensation expense we recognize in connection with our
stock option awards will increase under the fair value based method of SFAS Nos.
123 and 123(R).
Earnings Per Share - An Amendment of SFAS No. 128. The FASB has
decided to defer the issuance of a final standard on EPS until the third quarter
of 2005. When issued, the provisions of the final standard are expected to
require retrospective application for all prior periods presented. When
computing diluted EPS for year-to-date periods, it is expected that companies
will be required to use the year-to-date average stock price to compute the
number of treasury shares that could theoretically be purchased with the
proceeds from exercise of share contracts such as options or warrants. The
year-to-date computation would be performed independently from the quarterly
computations. The old method required companies to calculate an average of the
potential incremental common shares computed for each quarter when computing
year-to-date incremental shares. This amendment is expected to impact Ocwen as
we use the treasury stock method to determine the number of incremental shares
from the assumed exercise of stock options to be included in the denominator of
diluted EPS computations. Under the treasury stock method, the proceeds from the
assumed exercise of options are assumed to be used to purchase common stock at
the average market price during the period. The incremental shares (the
difference between the number of shares assumed issued and the number of shares
assumed purchased) are included in the denominator of the diluted EPS
computation.
Statement of Position 03-3, "Accounting for Certain Loans for Debt
Securities Acquired in a Transfer" ("SOP 03-3"), which was issued by the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants in December 2003, requires acquired impaired loans for which
it is probable that the investor will be unable to collect all contractually
required payments receivable to be recorded at the present value of expected
cash flows. Under SOP 03-3, it is not appropriate to create or carry over a
valuation allowance at the time of acquisition. SOP 03-3 was issued in December
2003 and is effective for loans acquired on or after January 1, 2005. Our total
net investment in loans at June 30, 2005 amounted to $8,725 and other than to
repurchase single family residential loans previously sold, we have not acquired
any loans since 2000; therefore, the application of SOP 03-3 did not have a
significant impact on our consolidated financial statements.
NOTE 3 BASIC AND DILUTED EARNINGS PER SHARE
Basic EPS excludes common stock equivalents and is calculated by
dividing net income by the weighted average number of common shares outstanding
during the year. We calculate diluted EPS by dividing net income, as adjusted to
add back interest expense on the 3.25% Convertible Notes (if dilutive), by the
weighted average number of common shares outstanding, including the dilutive
potential common shares related to outstanding stock options, restricted stock
awards and the Convertible Notes.
10
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2005
(Dollars in thousands)
The following is a reconciliation of the calculation of basic EPS to
diluted EPS for the periods ended:
Three Months Six Months
--------------------------- ---------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------------ ------------ ------------ ------------ ------------
Basic EPS:
Net income (loss) .......................................... $ 2,908 $ 9,092 $ 5,295 $ 15,854
============ ============ ============ ============
Weighted average shares of common stock .................... 62,809,286 68,160,020 62,776,469 67,961,217
============ ============ ============ ============
Basic EPS .................................................. $ 0.05 $ 0.13 $ 0.08 $ 0.23
============ ============ ============ ============
Diluted EPS:
Net income (loss) .......................................... $ 2,908 $ 9,092 $ 5,295 $ 15,854
============ ============ ============ ============
Weighted average shares of common stock .................... 62,809,286 68,160,020 62,776,469 67,961,217
Effect of dilutive elements:
Convertible Notes (1) .................................... -- -- -- --
Stock options (2) ........................................ 798,015 1,113,009 856,606 1,083,721
Restricted stock awards .................................. 101,945 261,970 231,172 269,454
------------ ------------ ------------ ------------
Dilutive weighted average shares of common stock ........... 63,709,246 69,534,999 63,864,247 69,314,392
============ ============ ============ ============
Diluted EPS ................................................ $ 0.05 $ 0.13 $ 0.08 $ 0.23
============ ============ ============ ============
(1) Conversion of the Convertible Notes into shares of common stock is not
assumed for purposes of computing diluted EPS for the second quarter and
first six months of 2005 because the effect would be anti-dilutive. The
effect is anti-dilutive whenever interest expense on the Convertible
Notes, net of income tax, per common share obtainable on conversion
exceeds basic EPS.
(2) Excludes the effect of an average of 1,629,171 and 1,006,205 of options
that were anti-dilutive for the second quarter of 2005 and 2004,
respectively, because their exercise price was greater than the average
market price of our stock. Year to date, an average of 1,630,605 and
1,006,205 options were anti-dilutive for 2005 and 2004, respectively.
NOTE 4 FOREIGN CURRENCY EXCHANGE RATE RISK MANAGEMENT
We entered into foreign currency derivatives to hedge our net
investments in foreign subsidiaries that own residual securities backed by
subprime residential loans originated in the United Kingdom ("U.K.") and that
owned a shopping center located in Halifax, Nova Scotia. During the first
quarter of 2005, we sold our foreign subsidiary that owned the shopping center.
However, in connection with the sale, OCN extended a short-term Canadian Dollar
loan in the amount of C$6,000 ($4,898 U.S. Dollar equivalent at June 30, 2005)
to the buyer. We are managing our exposure to foreign currency exchange rate
risk related to this foreign currency-denominated transaction through the use of
currency futures. Our principal exposure to foreign currency exchange rates
exists with the British Pound versus the U.S. dollar and the Canadian Dollar
versus the U.S. dollar. Our policy is to periodically adjust the amount of
foreign currency derivative contracts we have entered into in response to
changes in our recorded investment as well as to changes in our assets
denominated in a foreign currency. Our net exposures are subject to gain or loss
if foreign currency exchange rates fluctuate. Currency futures are commitments
to either purchase or sell foreign currency at a future date for a specified
price. We have determined that the local currency of our investment in U.K.
residuals is the functional currency. The foreign currency derivative financial
instrument related to our foreign subsidiary that owns the residual securities
was designated as a hedge. Accordingly, for this instrument we include the gains
or losses in the net unrealized foreign currency translation in accumulated
other comprehensive income in stockholders' equity. The foreign currency
derivative financial instrument related to our Canadian Dollar-denominated loan
was not designated as a hedge. Gains and losses from this instrument are
included in earnings as an offset to the related foreign currency transaction
gain or loss arising from remeasurement of the loan.
11
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2005
(Dollars in thousands)
The following table sets forth the terms and values of these foreign
currency financial instruments at the dates indicated:
Position Maturity Notional Amount (1) Strike Rate Fair Value
-------- ---------- ------------------- ----------- ------------
June 30, 2005:
- ---------------------------------------
Canadian Dollar currency futures....... Short Sept. 2005 C$ 6,000 0.7985 $ (107)
British Pound currency futures......... Short Sept. 2005 (pound) 15,250 1.8143 427
------------
$ 320
============
December 31, 2004:
- ---------------------------------------
Canadian Dollar currency futures....... Short March 2005 C$ 11,500 0.8416 $ 109
British Pound currency futures......... Short March 2005 (pound) 17,000 1.9248 301
------------
$ 410
============
(1) The U.S. Dollar equivalent notional amounts of the Canadian Dollar
currency futures and British Pound currency futures at June 30, 2005 were
$4,898 and $27,319, respectively. At December 31, 2004, the U.S. Dollar
equivalent notional amounts were $9,570 and $32,609, respectively.
Foreign currency futures contracts are exchange traded. Holders of
these instruments look to the exchange for performance under these contracts and
not the entity holding the offsetting futures contract, thereby minimizing the
risk of nonperformance. Accordingly, the notional principal amount does not
represent our exposure to credit loss.
NOTE 5 REGULATORY MATTERS
Effective June 30, 2005, Ocwen Federal Bank FSB (the "Bank"), a wholly
owned subsidiary, terminated its status as a federal savings bank. This process,
which we have referred to as "debanking," began on November 24, 2004, when the
Bank filed an Application for Voluntary Dissolution with the Office of Thrift
Supervision ("OTS"). Prior to returning its original thrift charter to the OTS
on July 1, 2005, the Bank operated as a federal savings bank organized under the
Home Owners' Loan Act (the "Act"), and OCN was a registered savings and loan
holding company. We were subject to extensive federal and state regulation under
the Act, as well as other U.S. federal and state laws. Our primary regulatory
authority was the OTS.
In connection with our debanking process, on February 4, 2005, OCN and
the Bank entered into a Branch Purchase and Deposit Assumption Agreement (the
"Branch Purchase Agreement") with Marathon National Bank of New York
("Marathon"). Pursuant to the Branch Purchase Agreement, Marathon agreed to
assume the deposit liabilities of the accounts associated with the Bank's branch
facility in Fort Lee, New Jersey. In addition, Marathon agreed to take over the
lease and other contracts and acquire the assets related to the branch. We
agreed to make a cash payment to Marathon, which is calculated based upon, among
other things, the amount of those deposit account liabilities as of the closing.
On June 13, 2005, the OTS approved our plan of voluntary dissolution for the
Bank subject to certain conditions, including, among other things, our entering
into a guaranty of the obligations of the Bank (other than the deposit and other
liabilities to be assumed by Marathon in connection with the Branch Purchase
Agreement), a cash collateral agreement and a collateral trust agreement, all on
terms acceptable to the OTS.
Following receipt of OTS approval, OCN entered into an Assignment and
Assumption Agreement, dated June 28, 2005, with its subsidiaries Investors
Mortgage Insurance Holding Company, Rocaille Acquisition Subsidiary, Inc., the
Bank and OLS whereby the Bank assigns to OLS, directly or indirectly, all of its
assets, liabilities and business remaining after the consummation of the
transactions contemplated by the Branch Purchase Agreement (the "Assignment").
On the same date, pursuant to the conditions set forth in the OTS
Approval, OCN entered into a Guaranty, dated June 28, 2005, in favor of the OTS
and any holders of claims with respect to liabilities assumed by OLS from the
Bank in connection with the Assignment (the "Assumed Liabilities"). Assumed
Liabilities include all legal actions against the Bank. The Guaranty contains
affirmative covenants relating to the maintenance of a cash collateral account,
reporting requirements, transactions with affiliates, preservation of the
existence of our subsidiaries and maintenance of not less than $35,000 of
unencumbered assets. Pursuant to the Guaranty, we also agreed that we and our
subsidiaries would not, among other things:
12
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2005
(Dollars in thousands)
o incur debt (as defined) if, following the incurrence of such debt, the
ratio of our consolidated debt to our tangible net worth (as defined)
for the most recent fiscal quarter exceeds 7.25:1.00;
o enter into any merger transaction or sale of all or substantially all
of our assets, except for certain mergers among us and our
subsidiaries or with an entity with a specified minimum credit rating
that agrees to assume our obligations under the Guaranty, and provided
that we maintain a specified minimum net worth;
o sell, lease, transfer or otherwise dispose of any assets, except in
exchange for consideration of at least 85% cash for fair value and
provided that, after giving effect to any such sale, lease, transfer
or disposition, the ratio of our consolidated debt to our tangible net
worth for the most recent fiscal quarter does not exceed 7.25:1.00; or
o declare or pay any dividends or acquire any of our capital stock or
ownership interests or make any distributions or return of capital to
our stockholders, partners or members, except for (i) such dividends
or distributions that are payable only in OCN's common stock, (ii)
such declarations, dividends, acquisitions, distributions or returns
of capital in cash if we maintain a minimum net worth of $333,000 and
rating of B2 from Moody's and B- from S&P on our unsecured, non
credit-enhanced debt and any such capital distributions do not exceed
our consolidated net income for the year plus our retained earnings
for the two preceding years or (iii) cash dividends paid by a
subsidiary of OCN to OCN or to any of OCN's wholly owned subsidiaries
of which such entity is a subsidiary.
The Guaranty will remain in effect until the later of (a) the sixth
anniversary of the date on which the Bank's federal bank charter was cancelled
or (b) the date on which we have paid in full (i) any obligations that arise
out of the Assumed Liabilities with respect to which a claim has been asserted
on or prior to the sixth anniversary of the date on which the Bank's federal
bank charter was cancelled and (ii) all other amounts payable by us under the
Guaranty.
OCN also entered into a Cash Collateral Agreement and a Collateral
Trust Agreement, each dated June 28, 2005, with the Bank of New York pursuant to
which we established a collateral trust account to secure payment of our
obligations under the Guaranty. We have agreed to maintain in the cash
collateral account a minimum of $5,000. The Cash Collateral Agreement and the
Collateral Trust Agreement will terminate upon termination of the Guaranty and
receipt of proper notice of such termination. This cash collateral deposit is
included with other assets in the consolidated balance sheet.
On June 30, 2005, we completed our divestiture to Marathon of the
deposit liabilities of the accounts associated with the branch and our
assignment of the remaining assets, liabilities and business of the Bank to OLS.
We recognized a gain of $1,750 from the sale of our branch deposit liabilities
to Marathon. In addition, we recorded a one-time provision of $1,124, which is
net of a related adjustment to the deferred tax asset valuation allowance,
arising from the recapture of bad debt reserves in connection with our
termination of the Bank's status as a federal savings bank.
Effective June 30, 2005, the Supervisory Agreement (the "Agreement")
that the Bank and OTS had entered into on April 19, 2004 terminated because we
are no longer an FDIC-insured institution. The OTS retains, for a period of six
years after termination of the Agreement, the right to bring enforcement actions
in respect of any breach or noncompliance by the Bank with the Agreement, or
other applicable regulations, that may have occurred prior to debanking.
We are continuing the Bank's non-depository businesses, including its
residential mortgage servicing business, under OLS, which is a licensed servicer
in fifty states, the District of Columbia and Puerto Rico. As a result of
debanking, we are no longer able to take deposits in the United States or
benefit from federal preemption with regard to post-debanking activities.
Bankhaus Oswald Kruber GmbH & Co. KG ("BOK"), our German banking
subsidiary that we acquired on September 30, 2004, is licensed as a credit
institution (Kreditinstitut) under the laws of the Federal Republic of Germany
and is supervised and regulated in Germany by the German Federal Financial
Supervisory Authority (Bundesanstalt fur Finanzdienstleistungsaufsicht - BaFin),
the German Central Bank (Deutsche Bundesbank) and, in respect of minimum
reserves on deposits, the European Central Bank.
13
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2005
(Dollars in thousands)
Although currently not significant to our operations, BOK, under its
license, may engage not only in a number of traditional banking activities such
as deposit and lending business, but also in investment banking, underwriting
and securities trading transactions, both for its own account and for customers.
German regulatory requirements applicable to BOK concern in particular
the maintenance of adequate regulatory capital and liquidity, the monitoring of,
and limitations on, large credit exposures, limitations on equity and
equity-like participations in other companies, the protection of depositors and
the adoption of certain accounting standards and business practices. The German
Federal Financial Supervisory Authority and the German Central Bank monitor
compliance with the applicable German banking laws, rules and regulations
largely upon the basis of extensive reporting requirements as well as through
general and specific audits. BOK is in compliance in all material respects with
the German regulatory requirements that are applicable to its business.
NOTE 6 BUSINESS SEGMENT REPORTING
An operating segment is defined as a component of an enterprise that
(a) engages in business activities from which it may earn revenues and incur
expenses, (b) whose operating results are regularly reviewed by the enterprise's
chief operating decision maker to make decisions about resources to be allocated
to the segment and assess its performance and (c) for which discrete financial
information is available. In the first quarter of 2005, we redefined our segment
reporting. We have restated prior periods to conform to the new segment
structure. A brief description of our segments at June 30, 2005 follows.
o Residential Servicing. Through this business we provide loan
servicing, including asset management and resolution services, to
third party owners of subprime residential mortgage and high
loan-to-value loans for a fee. We acquire the rights to service loans
and obtain such rights by purchasing them outright or by entering into
sub-servicing contracts. This segment also includes our residential
loan servicing system product (REALServicing).
o Residential Origination Services. This business provides various loan
origination services, including residential property valuation
services (Ocwen Realty Advisors, or ORA), mortgage due diligence,
title services, loan refinancing for Residential Servicing customers
and our internet-based vendor management system (REALTrans). This
segment also includes the results of our subprime residual trading
securities that were reported as a separate segment (Subprime Finance)
prior to 2005.
o Commercial Servicing. This segment includes the results of both our
domestic and international servicing of primarily commercial assets
(loans and real estate), as well as our commercial loan servicing
system product (REALSynergy). International servicing is conducted
through GSS.
o Business Process Outsourcing. Business Process Outsourcing provides
outsourcing services to third parties including mortgage underwriting,
data entry, call center services and mortgage research.
o Ocwen Recovery Group. This business conducts collection activities for
third party owners of unsecured receivables and for a portfolio of
unsecured credit card receivables that we acquired at a discount in
1999 and 2000.
o Corporate Items and Other. This segment includes certain items of
revenue and expense that are not directly related to a business,
including business activities that are individually insignificant,
interest income on short-term investments of cash and the related
costs of financing these investments and certain other corporate
expenses.
Based on the relative insignificance of the assets remaining in the
following segments, the remaining assets of these businesses and any related
income or loss arising from their resolution have been included in the Corporate
Items and Other segment beginning January 1, 2005.
o Commercial Assets. This segment comprised operations to acquire
sub-performing commercial loans at a discount, as well as operations
to invest in and reposition under-performing real estate assets. No
assets have been acquired since 2000; since that time, this business
has consisted of the repositioning, management and resolution of the
remaining non-core assets.
o Affordable Housing. Includes our investments, primarily through
limited partnerships, in qualified low-income rental housing for the
purpose of obtaining Federal income tax credits pursuant to Section 42
of the Internal Revenue Code of 1986, as amended. Except to complete
those projects in which an investment had already been made, we ceased
making investments in properties in 2000.
We allocate interest income and expense to each business segment for
the investment of funds raised or funding of investments made. We also make
allocations of non-interest expense generated by corporate support services to
each business segment.
14
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2005
(Dollars in thousands)
Financial information for our segments is as follows for the dates
indicated:
Total Assets
---------------------------
June 30, December 31,
2005 2004
------------ ------------
Core businesses:
Residential Servicing ............. $ 686,165 $ 687,233
Residential Origination Services .. 66,580 49,348
Commercial Servicing .............. 12,425 13,659
Business Process Outsourcing ...... 1,245 2,502
Ocwen Recovery Group .............. 880 541
------------ ------------
767,295 753,283
------------ ------------
Non-core businesses:
Commercial Assets ................. -- 24,149
Affordable Housing ................ -- 36,715
------------ ------------
-- 60,864
------------ ------------
Corporate Items and Other (1) ......... 515,352 768,385
------------ ------------
$ 1,282,647 $ 1,582,532
============ ============
(1) Includes cash of $303,363 and $535,733 at June 30, 2005 and December 30,
2004, respectively.
Net Interest
Income
(Expense) Pre-Tax
Non-Interest after Provision Non-Interest Income
Revenue for Loan Losses Expense (Loss)
--------------- ------------------ --------------- --------
For the three months ended June 30, 2005
Core businesses:
Residential Servicing ................ $ 34,392 $ (5,208) $ 26,585 $ 2,599
Residential Origination Services ..... 12,092 2,891 13,258 1,725
Commercial Servicing ................. 4,757 (7) 4,415 335
Business Process Outsourcing ......... 2,858 (19) 2,575 264
Ocwen Recovery Group ................. 3,296 -- 3,052 244
--------------- ------------------ --------------- --------
57,395 (2,343) 49,885 5,167
--------------- ------------------ --------------- --------
Corporate Items and Other ................ 2,148 51 2,193 6
--------------- ------------------ --------------- --------
$ 59,543 $ (2,292) $ 52,078 $ 5,173
=============== ================== =============== ========
For the three months ended June 30, 2004
Core businesses:
Residential Servicing ................ $ 38,444 $ (5,390) $ 25,614 $ 7,440
Residential Origination Services ..... 10,834 3,354 9,831 4,357
Commercial Servicing ................. 3,908 (1) 4,418 (511)
Business Process Outsourcing ......... 2,193 (5) 1,480 708
Ocwen Recovery Group ................. 3,179 -- 2,290 889
--------------- ------------------ --------------- --------
58,558 (2,042) 43,633 12,883
--------------- ------------------ --------------- --------
Non-core businesses:
Commercial Assets .................... 252 767 829 190
Affordable Housing ................... 17 (473) 731 (1,187)
--------------- ------------------ --------------- --------
269 294 1,560 (997)
--------------- ------------------ --------------- --------
Corporate Items and Other ................ (412) 901 3,228 (2,739)
--------------- ------------------ --------------- --------
$ 58,415 $ (847) $ 48,421 $ 9,147
=============== ================== =============== ========
15
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2005
(Dollars in thousands)
Net Interest
Income
(Expense) Pre-Tax
Non-Interest after Provision Non-Interest Income
Revenue for Loan Losses Expense (Loss)
--------------- ------------------ --------------- --------
For the six months ended June 30, 2005
Core businesses:
Residential Servicing ................ $ 69,099 $ (9,312) $ 54,240 $ 5,547
Residential Origination Services ..... 23,026 5,851 24,319 4,558
Commercial Servicing ................. 9,505 (51) 9,097 357
Business Process Outsourcing ......... 5,443 (52) 5,030 361
Ocwen Recovery Group ................. 7,190 -- 6,441 749
--------------- ------------------ --------------- --------
114,263 (3,564) 99,127 11,572
--------------- ------------------ --------------- --------
Corporate Items and Other ................ 1,988 (840) 4,610 (3,462)
--------------- ------------------ --------------- --------
$ 116,251 $ (4,404) $ 103,737 $ 8,110
=============== ================== =============== ========
For the six months ended June 30, 2004
Core businesses:
Residential Servicing ................ $ 75,517 $ (10,662) $ 51,922 $ 12,933
Residential Origination Services ..... 21,998 6,090 20,697 7,391
Commercial Servicing ................. 7,800 (2) 8,351 (553)
Business Process Outsourcing ......... 4,348 (8) 3,237 1,103
Ocwen Recovery Group ................. 6,658 -- 4,368 2,290
--------------- ------------------ --------------- --------
116,321 (4,582) 88,575 23,164
--------------- ------------------ --------------- --------
Non-core businesses:
Commercial Assets .................... (2,042) 983 1,991 (3,050)
Affordable Housing ................... 17 (853) 1,323 (2,159)
--------------- ------------------ --------------- --------
(2,025) 130 3,314 (5,209)
--------------- ------------------ --------------- --------
Corporate Items and Other ................ 3,006 940 5,981 (2,035)
--------------- ------------------ --------------- --------
$ 117,302 $ (3,512) $ 97,870 $ 15,920
=============== ================== =============== ========
NOTE 7 COMMITMENTS AND CONTINGENCIES
Under the terms of the sales agreements entered into in connection
with the sale of certain of our affordable housing properties, we have a
commitment to fund cash deficits that may arise from the operations of those
properties. The remaining term of these commitments ranges from two to five
years. The obligation under these commitments was $4,656 and $4,813 as of June
30, 2005 and December 31, 2004, respectively. Any operating deficits we fund are
supported by a promissory note to be repaid to us from future cash flows of the
property. In addition, we have provided to the purchasers of certain affordable
housing properties guaranties against the possible recapture of future tax
credits. We have never experienced a recapture of tax credits on any of the
affordable housing properties in which we invested or sold. We have not
recognized these guaranties as a liability because the probability of recapture
is considered remote.
As discussed in Note 5, under the terms of the Assignment and
Assumption agreement OLS has become the successor to the Bank with respect to
all legal actions. Therefore, any references to the Bank in connection with the
following legal matters pertain to OLS as successor.
On April 13, 2004 the United States Judicial Panel on Multi-District
Litigation granted our petition to transfer and consolidate a number of lawsuits
against the Bank, OCN and various third parties arising out of the servicing of
plaintiffs' mortgage loans into a single case to proceed in the United States
District Court for the Northern District of Illinois under caption styled: In re
Ocwen Federal Bank FSB Mortgage Servicing Litigation, MDL Docket No. 1604 (the
"MDL Proceeding"). The consolidated lawsuits in which the Bank and/or OCN are
defendants involve 54 mortgage loans currently or previously serviced by the
Bank. Additional similar lawsuits have been brought in other courts, some of
which may be transferred and consolidated in the MDL Proceeding.
The borrowers in these lawsuits seek class action certification. No class has
been certified in the MDL Proceeding or any related lawsuits. On August 23,
2004, plaintiffs in the MDL Proceeding filed a Consolidated Complaint containing
various claims under federal statutes, including the Real Estate Settlement
Procedures Act and Fair Debt Collection Practices Act, state deceptive trade
practices statutes and common law. The claims are generally based on allegations
of improper loan servicing practices, including (i) charging borrowers allegedly
improper or unnecessary fees such as breach letter fees, hazard insurance
premiums, foreclosure-related fees, late fees and property inspection fees; (ii)
untimely posting and misapplication of borrower payments; and (iii) improperly
treating borrowers as in default on their loans. While some of the individual
borrowers had set forth specific damage allegations in their lawsuits prior to
their being consolidated into the MDL Proceeding (e.g., the complaint in
Unatiben Gandabhai and Dineshan Tandel v. Ocwen Federal Bank FSB, Case No.
3:04-2582 (N.D. Cal.) claimed actual damages of $61; the complaint in Kweku
Hanson v. Ocwen Federal Bank, Ocwen Financial Corporation, William Erbey, Litton
Loan Servicing LP, Moss, Codilis, Stawiarski, Morris, Schneider & Prior, LLP,
Moss, Pite & Duncan, LLP, Gerald R. Moss, Codilis & Stawiarski, P.C., Ernie
Codilis, Leo C. Stawiarski, Jr., Morris, Schneider & Prior, LLC, Arthur J.
Morris, Thomas E. Prior, Randolph Schneider, Fein, Such, Khan & Shepard, P.C.,
Alan F. Such, Weltman, Weinberg & Reis Co,, LPA, Larry R. Rothenberg, Boles,
Boles & Ryan, P.L.C., William R. Boles, Jr., Case No. 02-CV-860 (D. Conn.)
claimed actual damages of $150,000 and punitive and exemplary damages of
$1,500,000), the Consolidated Complaint in the MDL Proceeding does not set forth
any specific amounts of claimed damages. The absence of any specification of
damages in the Consolidated Complaint does not, however, preclude plaintiffs in
the MDL Proceeding from requesting leave from the court to amend the
Consolidated Complaint or from otherwise seeking damages should the matter
proceed to trial. On April 25, 2005, the court entered an Opinion and Order
granting partial summary judgment to defendants finding that, as a matter of
law, the mortgage loan contracts signed by plaintiffs authorize the imposition
of breach letter fees and other legitimate default or foreclosure related
expenses. The court explained that its ruling was in favor of defendants to the
specific and limited extent that plaintiffs' claims challenge the propriety of
the above-mentioned fees. The court has not yet ruled on any other claims
presented in the MDL Proceeding. We cannot currently determine the ultimate
outcome of the MDL Proceeding or the other matters described above and have not
established a reserve in respect thereof. We believe the allegations in the MDL
Proceeding and the other matters described above are without merit and will
continue to vigorously defend against them.
16
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2005
(Dollars in thousands)
On November 3, 2004, the trial judge in litigation brought by Cartel
Asset Management, Inc. ("Cartel") against OCN, the Bank and OTX in federal court
in Denver, Colorado entered final judgment in the amount of $520 against OTX and
nominal damages of two dollars against the Bank. No damages were entered against
OCN. By the November 3, 2004 order, the judge reduced a prior jury verdict in
the amount of $9,320 after trial on this matter involving allegations of
misappropriation of trade secrets and contract-related claims brought by a
former vendor. The litigation does not relate to our core Residential Loan
Servicing business practices. Notwithstanding the nominal damage award against
the Bank, it was assessed a statutory award to Cartel of attorneys' fees in an
additional amount of $170, and the Bank and OTX were further assessed costs in
the amount of $9. Cartel and defendants are pursuing cross-appeals in the United
States Court of Appeals for the Tenth Circuit. We intend to continue to
vigorously defend this matter.
On February 8, 2005, a jury in Circuit Court for Palm Beach County,
Florida returned verdicts of $1,000 and $1,056 in compensatory damages in favor
of two former employees of the Bank in a lawsuit against OCN and the Bank. The
jury rejected plaintiffs' request for punitive damages. The plaintiffs brought
claims under the Florida Civil Rights Act, the Florida Whistleblower Act and
state tort law, arising out of an alleged invasion of privacy and related
incidents allegedly committed by other former employees of the Bank in 1998 for
which plaintiffs sought to hold the Ocwen defendants vicariously liable. We
believe the verdicts, which were reduced to final judgments on May 20, 2005, are
against the weight of evidence and contrary to law. On June 16, 2005 we filed a
notice to take an appeal to the Florida Court of Appeals for the Fourth District
and, in connection therewith, an appeal bond has been posted in the amount of
$2,397 to cover the amount of the judgments plus interest that may accrue during
the period of the appeal. Also pending in the trial court is plaintiffs' motion
for an award of attorneys' fees in the amount of $1,100 as to which we have
objected and requested a full accounting. We intend to continue to vigorously
defend this matter.
On March 9, 2005, the Bank was served with a complaint filed in
Superior Court for Los Angeles County, California, by Banco Popular North
America, successor by merger to Quaker City Bank ("Banco Popular"), which claims
to be a holder of residual interest in two mortgage loan trusts for which the
Bank provides loan servicing. The case was subsequently removed upon the Bank's
motion to the United States District Court for the Central District of
California. In this lawsuit, Banco Popular challenges the Bank's fee charges for
recoveries on charged-off loans. The complaint variously alleges breach of
contract, conversion, breach of fiduciary duty and fraud, and seeks declaratory
and equitable relief, along with claimed compensatory damages in excess of
$3,000 and punitive damages in an unspecified amount. We believe the allegations
are without merit and were prepared to vigorously defend this matter if
necessary. The parties have reached a settlement agreement in principle pursuant
to which a stipulation is to be filed dismissing all claims with prejudice. The
settlement is subject to the parties finalizing a mutually acceptable written
definitive agreement. We do not expect the amount of the settlement to have any
material effect on our financial condition, results of operations or cash flows.
On August 5, 2005, the trial judge in County Court for Nueces County,
Texas, entered an Agreed Order of Dismissal ("Dismissal Order"), dismissing with
prejudice all claims brought by two investor plaintiffs whose mortgage loan on
an investment property was serviced by the Bank. After a trial in February,
2005, the jury returned a verdict in favor of plaintiffs for compensatory and
statutory damages in the amount of $140. The jury rejected plaintiffs' request
for punitive damages but awarded plaintiff attorneys' fees of $2,900. In April,
2005, we filed an opposition to plaintiffs' request for entry of judgment and a
motion to instead set aside or substantially reduce the attorneys' fee award as
unsupported by the evidence and impermissibly excessive under the controlling
legal authorities. The parties subsequently entered into a definitive settlement
agreement disposing of all claims. In entering the Dismissal Order, the court
ordered that the attorneys' fee award is "null and void" and is to be
"disregarded and deemed stricken." The amount of the settlement was within the
reserve amount established for the case.
17
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
JUNE 30, 2005
(Dollars in thousands)
OCN and the Bank are also subject to various other pending legal
proceedings. In our opinion, the resolution of these proceedings will not have a
material effect on our financial condition, results of operations or cash flows.
We continuously monitor the status of our litigation, including advice
from external legal counsel, and perform periodic assessments of our litigation
for potential accrual of litigation reserves and disclosure. We have accrued and
maintain litigation reserves where it is probable that a liability had been
incurred and the amount of loss can be reasonably estimated.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollars in thousand, except share data)
GENERAL
OCN is a diversified financial services holding company with
headquarters in West Palm Beach, Florida and operations in Canada, China,
Germany, India, Japan and Taiwan. We are principally engaged in servicing and
origination processing services for the loan industry. Our five core business
segments, aligned within our two areas of focus - servicing and loan processing
services, were as follows at June 30, 2005:
Servicing
Residential Servicing
Commercial Servicing
Ocwen Recovery Group
Loan Processing Services
Residential Origination Services
Business Process Outsourcing
Based on the relative insignificance of the assets remaining in the
Commercial Assets and Affordable Housing segments, the remaining assets of these
businesses and any related income or loss arising from their resolution have
been included in the Corporate Items and Other segment beginning January 1,
2005. See Note 6 to the Interim Consolidated Financial Statements and "Results
of Operations - Segment Results" for additional information regarding segments.
Key elements of our business strategy are summarized as follows:
o continue to grow our residential servicing business, including the
opportunistic acquisition of servicing and sub-servicing rights;
o grow our residential loan origination services, including mortgage due
diligence, mortgage loan processing, property valuation and loan
refinancing;
o continue our globalization efforts through both the expansion of our
international facilities and the expansion of the potential client
base for our products and services; and
o expand our other core businesses, such as unsecured debt collection
and business process outsourcing.
As disclosed in Note 5 to the Interim Consolidated Financial
Statements, we have terminated the Bank's status as a federal savings bank,
which eliminates the restrictions imposed on the amount of mortgage servicing
rights that we may obtain and, therefore, provides us more flexibility to grow
our residential servicing business. As a result of debanking, we are no longer
able to take deposits in the United States or benefit from federal preemption.
OVERVIEW OF RISKS AND RELATED CRITICAL ACCOUNTING POLICIES
Risks Relating to Our Business. We include a discussion of the
principal risk factors that relate to our businesses and that may affect future
results on pages 13 through 18 of Management's Discussion and Analysis of
Operations and Financial Conditions in our Annual Report on Form 10-K for the
year ended December 31, 2004.
Critical Accounting Policies. Our strategy to grow our core businesses
is affected by risks in the marketplace. Further, our ability to measure and
report our operating results and financial position is heavily influenced by the
need to estimate the impact or outcome of these risks or other future events.
Our critical accounting policies are those that relate to the estimation and
measurement of these risks; an understanding of these policies is fundamental to
understanding Management's Discussion and Analysis of Results of Operations and
Financial Condition. We summarize our more subjective and complex accounting
policies as they relate to our overall business strategy on pages 18 through 21
of Management's Discussion and Analysis of Results of Operations and Financial
Condition in our Annual Report on Form 10-K for the year ended December 31,
2004. We discuss our significant accounting policies in detail in Note 1 to our
Consolidated Financial Statements included in our Annual Report on Form 10-K for
the year ended December 31, 2004.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
The following discussion of our consolidated financial condition,
results of operations, capital resources and liquidity should be read in
conjunction with the Interim Consolidated Financial Statements and related
Notes.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables present selected consolidated financial
information at the dates and for the periods indicated.
Increase (Decrease)
June 30, December 31, ---------------------------
Financial Condition Data 2005 2004 $ %
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Total assets .......................................... $ 1,282,647 $ 1,582,532 $ (299,885) (19)%
Cash .............................................. $ 310,233 $ 542,891 $ (232,658) (43)%
Trading securities:
Investment grade ................................ $ 2,942 $ 86,215 $ (83,273) (97)%
Subordinate and residuals ....................... $ 45,343 $ 39,527 $ 5,816 15%
Match funded assets, net .......................... $ 334,689 $ 280,760 $ 53,929 19%
Advances on loans and loans serviced for others ... $ 187,423 $ 240,430 $ (53,007) (22)%
Mortgage servicing rights ......................... $ 132,333 $ 131,409 $ 924 1%
Receivables ....................................... $ 119,943 $ 126,719 $ (6,776) (5)%
Total liabilities ..................................... $ 944,821 $ 1,250,894 $ (306,073) (24)%
Match funded liabilities .......................... $ 284,822 $ 244,327 $ 40,495 17%
Servicer liabilities .............................. $ 310,369 $ 291,266 $ 19,103 7%
Lines of credit and other secured borrowings ...... $ 52,525 $ 50,612 $ 1,913 4%
Debt securities ................................... $ 231,249 $ 231,249 $ -- --%
Deposits .......................................... $ -- $ 290,507 $ (290,507) (100)%
Escrow deposits ................................... $ -- $ 86,084 $ (86,084) (100)%
Stockholders' equity .................................. $ 336,084 $ 330,108 $ 5,976 2%
For the Three Months Ended June 30,
---------------------------------------------------------
Favorable/(Unfavorable)
---------------------------
Operations Data 2005 2004 $ %
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Net income (loss) ..................................... $ 2,908 $ 9,092 $ (6,184) (68)%
Non-interest revenue .................................. $ 59,543 $ 58,415 $ 1,128 2%
Net interest income (expense) ......................... $ (2,308) $ (1,134) $ (1,174) (104)%
Provision for loan losses ............................. $ (16) $ (287) $ (271) (94)%
Non-interest expense .................................. $ 52,078 $ 48,421 $ (3,657) (8)%
Income tax expense (benefit) .......................... $ 2,265 $ 55 $ (2,210) (4,018)%
Net income (loss) per share:
Basic ............................................. $ 0.05 $ 0.13 $ (0.08) (62)%
Diluted ........................................... $ 0.05 $ 0.13 $ (0.08) (62)%
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
For the Six Months Ended June 30,
---------------------------------------------------------
Favorable/(Unfavorable)
---------------------------
Operations Data 2005 2004 $ %
- ------------------------------------------------------- ------------ ------------ ------------ ------------
Net income (loss) ..................................... $ 5,295 $ 15,854 $ (10,559) (67)%
Non-interest revenue .................................. $ 116,251 $ 117,302 $ (1,051) (1)%
Net interest income (expense) ......................... $ (4,416) $ (4,331) $ (85) (2)%
Provision for loan losses ............................. $ (12) $ (819) $ (807) (99)%
Non-interest expense .................................. $ 103,737 $ 97,870 $ (5,867) (6)%
Income tax expense (benefit) .......................... $ 2,815 $ 66 $ (2,749) (4,165)%
Net income (loss) per share:
Basic ............................................. $ 0.08 $ 0.23 $ (0.15) (65)%
Diluted ........................................... $ 0.08 $ 0.23 $ (0.15) (65)%
RESULTS OF OPERATIONS
Overview. Net income declined $6,184 or 68% to $2,908 in the second
quarter of 2005, compared with $9,092 in the second quarter of 2004. For the
first six months of 2005, net income declined $10,559 or 67% to $5,295, compared
with $15,854 in the first six months of 2004. The decrease in our earnings
primarily reflects a decline in pre-tax income of the Residential Servicing and
Residential Origination Services segments, an increase in non-interest expenses
in both the Ocwen Recovery Group and Business Process Outsourcing segments and
an increase in income tax expense.
o Residential Servicing's pre-tax income declined $4,841 and $7,386 in
the second quarter and first six months of 2005, respectively, as
compared to the same periods in 2004. The declines in pre-tax income
of this segment reflects the net impact of declines in the results of
our servicing for the United States Department of Veteran's Affairs
("VA") due to reduced transaction volumes and the absence of one-time
REALServicing fees of $2,900 recorded in the second quarter of 2004,
offset in part by an improvement in the results of our Loan Servicing
group.
o Residential Origination Services' pre-tax income declined $2,632 and
$2,833 in the second quarter and first six months of 2005,
respectively, as compared to the same periods in 2004. Results for
this segment reflect unrealized losses on unrated subprime residual
securities of $(1,380) and $(2,708) in the second quarter and first
six months of 2005, respectively, compared with unrealized gains of
$1,110 and $325 in the same periods of 2004. An increase in revenues
associated with the mortgage fulfillment center and due diligence
operation that we acquired in December 2004 was offset by an increase
in related staffing and other operating expenses.
o Despite growth in revenue in 2005, costs in both the Ocwen Recovery
Group and Business Process Outsourcing segments increased, reflecting
increased staffing levels.
o Results for the second quarter and first six months of 2005 are net of
income tax expense of $2,265 and $2,815, respectively, as compared to
$55 and $66 for the same periods of 2004. Income tax expense for 2005
includes a $1,124 provision recorded in the second quarter to
recognize the tax effect of recapturing base year bad debt reserves at
the Bank as a result of debanking.
We discuss the results of our segments in detail in the Segment Results
section, which follows.
Segment Results. In general, we have ceased conducting any new
business activities related to our non-core businesses, although we are actively
engaged in the sale or other resolution of the remaining non-core assets. These
assets are comprised of loans, real estate and an affordable housing property.
The following is a discussion of income (loss) before income taxes for
each of our business segments.
CORE BUSINESSES
Residential Servicing. Through this business we earn fees for
providing loan servicing, including asset management and resolution services, to
third party owners of subprime and "high loan to value" residential mortgage
loans. Subprime residential mortgages comprise the vast majority of loans we
service. We acquire the rights to service loans by purchasing them outright or
by entering into sub-servicing contracts. Increases in short-term interest rates
have had a positive impact on float earnings in 2005; however, mortgage interest
rates remain low, and as a result prepayments in our servicing portfolio remain
high. Not only do prepayments result in the loss of future servicing fees, they
also result in increases to the rate at which we amortize the balance of our
servicing rights. Prepayments also create an obligation for us to pay
compensating interest expense to investors for the full month of interest on
loans that are repaid before the end of a calendar month.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Selected information 2005 2004
- ------------------------------------------------------------ ------------ ------------
Number of loans at June 30 ................................. 346,708 333,722
Unpaid principal balance at June 30 ........................ $ 38,662,177 $ 34,768,367
Average unpaid principal balance for the following periods:
Three months ended June 30 ............................. $ 37,624,152 $ 35,676,776
Six months ended June 30 ............................... $ 37,210,939 $ 36,370,943
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Pre-tax income (loss) ................................. $ 2,599 $ 7,440 $ 5,547 $ 12,933
Net interest income (expense) ......................... $ (5,208) $ (5,390) $ (9,312) $ (10,662)
Non-interest revenue:
Servicing and related fees:
Fees ............................................ $ 62,952 $ 64,301 $ 125,607 $ 132,279
Amortization of servicing rights ................ (24,930) (23,009) (50,045) (48,669)
Compensating interest expense ................... (6,158) (8,899) (11,814) (17,111)
---------- ---------- ---------- ----------
Total servicing and related fees .................. 31,864 32,393 63,748 66,499
Vendor management fees ............................ 1,753 2,117 3,841 4,227
Other ............................................. 775 3,934 1,510 4,791
---------- ---------- ---------- ----------
Total non-interest revenue ............................ $ 34,392 $ 38,444 $ 69,099 $ 75,517
========== ========== ========== ==========
Non-interest expense .................................. $ 26,585 $ 25,614 $ 54,240 $ 51,922
o The decline in fees in the 2005 periods, as compared to 2004, reflects
declines in servicing fees, prepayment penalties and late charges,
offset in large part by an increase in interest on float balances (see
below). The decline in servicing fees was due in large part to a
decline in fees associated with our contract with the VA, as discussed
below.
o Earnings on funds that we have received from borrowers that are held
on deposit with an unaffiliated bank (float balances) amounted to
$6,558 and $13,065 for the second quarter and first six months of
2005, respectively, as compared to $2,750 and $5,763 for the same
periods of 2004. The increase in earning is primarily due to an
increase in short-term interest rates. The yield we earned on float
balances averaged 2.07% and 2.29% during the second quarter and first
six months of 2005, respectively, as compared to 0.85% and 0.90% for
the same periods of 2004.
o Servicing fees for the second quarter of 2005 and 2004 include $3,405
and $5,994, respectively, of real estate property management fees
associated with our contract with the VA. VA servicing fees for the
first six months of 2005 and 2004 were $7,361 and $10,412,
respectively. The decline in fees in 2005 is primarily due to reduced
transaction volumes.
o The decline in other non-interest revenue in the 2005 periods as
compared to 2004 is primarily the result of $2,900 of one-time fees
recognized in the second quarter of 2004 in connection with a service
contract for the use of our REALServicing system.
See "Non-Interest Revenue - Servicing and Related Fees" for a detail
of the principal components of servicing and related fees.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Residential Origination Services. This business provides various loan
origination services, including residential property valuation services,
mortgage due diligence, title services, loan refinancing for Residential
Servicing customers and our internet-based vendor management system (REALTrans).
This segment also includes the results of our subprime residual trading
securities.
Selected information
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Pre-tax income (loss) ................................. $ 1,725 $ 4,357 $ 4,558 $ 7,391
Non-interest income (expense):
Servicing and related fees ........................ $ 3,850 $ 345 $ 7,311 $ 441
Vendor management fees ............................ 9,020 9,372 17,805 20,271
Gain (loss) on trading securities ................. (1,380) 1,110 (2,708) 325
Other ............................................. 602 7 618 961
---------- ---------- ---------- ----------
Total non-interest revenue ............................ $ 12,092 $ 10,834 $ 23,026 $ 21,998
========== ========== ========== ==========
Net interest income (expense) ......................... $ 2,891 $ 3,354 $ 5,851 $ 6,090
Non-interest expense .................................. 13,258 9,831 24,319 20,697
o Servicing and related fees for this business are primarily comprised
of mortgage due diligence fees and loan refinancing fees related to
loans held for resale. We acquired a mortgage fulfillment center and
due diligence operation in December 2004. Our loan refinancing program
for Residential Servicing customers began earning fees in the second
quarter of 2004. See "Non-Interest Revenue - Servicing and Related
Fees" for a detail of the principal components of servicing and
related fees.
o Vendor management fees are primarily comprised of fees for residential
property valuation services. Also includes title services and other
fees earned across the business groups in this segment from vendors in
our REALTrans network. See "Non-Interest Revenue - Vendor Management
Fees" for a detail of the principal components of vendor management
fees.
o Gains (losses) on trading securities during the periods primarily
represent unrealized gains and losses on unrated residual securities
backed by subprime residential loans originated in the U.K.
o The increase in non-interest expense in the 2005 periods is in large
part due to increased staffing and other operating expenses associated
with the mortgage fulfillment center and due diligence operation we
acquired in December 2004.
Commercial Servicing. This segment includes the results of both our
domestic and international servicing of commercial assets, as well as our
commercial loan servicing system product (REALSynergy). International servicing
is conducted through GSS, our joint servicing venture with Merrill Lynch. We
have established servicing offices in Tokyo, Japan, Taipei, Taiwan and Toronto,
Canada. We have also established consulting operations in the U. K., Germany and
China. At June 30, 2005, this segment serviced a total of 8,842 loans with an
aggregate unpaid principal balance of $13,006,830, of which our office in Japan
serviced 8,093 loans with an unpaid principal balance of $11,669,561.
Selected information
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Pre-tax income (loss) ................................. $ 335 $ (511) $ 357 $ (553)
Net interest income (expense) ......................... $ (7) $ (1) $ (51) $ (2)
Non-interest revenue:
Servicing and related fees ........................ $ 2,700 $ 2,103 $ 5,774 $ 4,632
Other ............................................. 2,057 1,805 3,731 3,168
---------- ---------- ---------- ----------
Total non-interest revenue ............................ $ 4,757 $ 3,908 $ 9,505 $ 7,800
========== ========== ========== ==========
Non-interest expense .................................. $ 4,415 $ 4,418 $ 9,097 $ 8,351
o The majority of servicing and related fees recorded by this segment
were earned through our international offices of GSS, primarily Japan.
See "Non-Interest Revenue - Servicing and Related Fees".
o Other non-interest revenue is primarily comprised of fees for
providing due diligence and underwriting services in Germany as well
as fees and cost reimbursements related to our international
consulting operations. See "Non-Interest Revenue - Other Income".
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Business Process Outsourcing. Business Process Outsourcing provides
outsourcing services to third parties, including mortgage underwriting, data
entry, call center services and mortgage research.
Selected information
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Pre-tax income (loss) ................................. $ 264 $ 708 $ 361 $ 1,103
Net interest income (expense) ......................... $ (19) $ (5) $ (52) $ (8)
Servicing and related fees ............................ $ 2,858 $ 2,193 $ 5,443 $ 4,348
Non-interest expense .................................. $ 2,575 $ 1,480 $ 5,030 $ 3,237
o The increase in non-interest expense for the 2005 periods as compared
to 2004 reflects our continued investment in this business. Sales and
marketing costs are higher in 2005, and staffing levels have also
increased.
Ocwen Recovery Group. This core business conducts collection
activities for third party owners of unsecured receivables and for a portfolio
of unsecured credit card receivables that we acquired at a discount in 1999 and
2000. On collections for third party owners, we generally earn a fee based upon
a percentage of the amount collected.
Selected information
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Pre-tax income (loss) ................................. $ 244 $ 889 $ 749 $ 2,290
Non-interest revenue:
Servicing and related fees ........................ $ 2,906 $ 2,655 $ 6,361 $ 5,630
Other ............................................. 390 524 829 1,028
---------- ---------- ---------- ----------
Total non-interest revenue ............................ $ 3,296 $ 3,179 $ 7,190 $ 6,658
========== ========== ========== ==========
Non-interest expense .................................. $ 3,052 $ 2,290 $ 6,441 $ 4,368
o Pre-tax income declined in the second quarter of 2005 in spite of an
increase in non-interest revenue, reflecting both a reduction in
collections on our aging portfolio of receivables, which yielded high
margins, and increased staffing costs.
o Servicing and related fees for this business represent fees earned for
collection activities on behalf of third party owners of unsecured
receivables. Other revenue is primarily comprised of recoveries of
unsecured credit card receivables we own.
o The increase in non-interest expense in 2005 is largely due to an
increase in staffing levels, primarily in India.
Corporate Items and Other. Pre-tax results for this segment include
certain items of revenue and expense that are not directly related to a
business, including business activities that are individually insignificant,
interest income on short-term investments of cash and the related costs of
financing these investments and certain other corporate expenses. The table
below presents the more significant amounts included in each of the periods
indicated.
Selected information
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Pre-tax income (loss) ................................. $ 6 $ (2,739) $ (3,462) $ (2,035)
Net interest income (expense) ......................... 35 868 (852) 914
Non-interest revenue .................................. 2,148 (412) 1,988 3,006
Non-interest expense .................................. 2,193 3,228 4,610 5,981
o Net interest expense for the 2005 periods includes a portion of
interest on the $175,000 of 3.25% Convertible Notes that we issued in
July 2004.
o Non-interest revenue includes $554 and $71 of interest income
recognized during the second quarter of 2005 and 2004, respectively,
on federal income tax refund claims. Year to date, $951 and $3,746 of
interest income was recognized on the refund claims for 2005 and 2004,
respectively. See "Changes in Financial Condition - Receivables" for
additional information regarding these claims.
o Non-interest revenue for 2005 also includes a gain of $1,750 we
recognized in the second quarter in connection with the assumption of
our customer deposit liabilities on June 30, 2005 by Marathon National
Bank.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
NON-CORE BUSINESSES
Based on the relative insignificance of the assets remaining in the
following segments, the remaining assets of these businesses and any related
income or loss arising from their resolution have been included in the Corporate
Items and Other segment beginning January 1, 2005.
Commercial Assets. Results for this segment reflect our continuing
exit from the commercial loan and real estate businesses. We have not purchased
any commercial assets since 2000. Since then, this business has consisted of the
management, repositioning and resolution of the remaining non-core assets. At
December 31, 2004 the $21,560 of non-core assets remaining in this business
consisted of four real estate assets (a shopping center, parcel of land and two
partnership interests) and one unrated subordinate security.
Selected information
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Pre-tax income (loss) ................................. $ -- $ 190 $ -- $ (3,050)
Net interest income (expense) ......................... -- 512 -- 219
Provision for loan losses ............................. -- (255) -- (764)
Non-interest revenue .................................. -- 252 -- (2,042)
Non-interest expense .................................. -- 829 -- 1,991
Affordable Housing. Historically, we invested in affordable housing
properties primarily through a series of limited partnerships. Except to
complete those projects in which an investment had already been made, we ceased
making investments in properties in 2000 as part of our shift in strategy to
fee-based businesses and because the volume of tax credits being generated was
exceeding our ability to utilize them effectively. Since that time, we have been
marketing these properties for sale. Our investment in affordable housing
properties at December 31, 2004 consisted of one limited partnership property
with a carrying value of $5,641. In addition, this segment had $3,198 of loans
outstanding at December 31, 2004 to the one remaining limited partnership
property that we do not consolidate in our financial statements.
Selected information
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Pre-tax income (loss) ................................. $ -- $ (1,187) $ -- $ (2,159)
Net interest income (expense) ......................... -- (472) -- (882)
Provision for loan losses ............................. -- 1 -- (29)
Non-interest expense .................................. -- 731 -- 1,323
See Note 6 to the Interim Consolidated Financial Statements, for
additional information related to our segments.
Non-Interest Revenue. The following table sets forth the principal
components of non-interest income during the periods indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Servicing and related fees ............................ $ 44,161 $ 39,460 $ 88,548 $ 80,782
Vendor management fees ................................ 10,783 11,487 21,665 24,490
Gain (loss) on trading securities, net ................ (1,269) 2,503 (2,667) 1,860
Valuation gains (losses) on real estate ............... 4 (1,974) 93 (3,825)
Gain (loss) on sales of real estate ................... 13 81 48 (460)
Operating income (losses) from real estate ............ (165) 565 (339) 573
Other income .......................................... 6,016 6,293 8,903 13,882
---------- ---------- ---------- ----------
$ 59,543 $ 58,415 $ 116,251 $ 117,302
========== ========== ========== ==========
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Servicing and Related Fees. Our servicing and related fees are
primarily comprised of fees we earned from investors for servicing residential
mortgage loans on their behalf. The following table sets forth the principal
components of servicing and related fees by segment for the periods indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Residential Servicing:
Servicing fees (1) ................................ $ 44,142 $ 45,522 $ 87,650 $ 91,638
Late charges ...................................... 8,624 10,179 17,750 21,548
Earnings on custodial accounts (2) ................ 6,558 2,750 13,065 5,763
Compensating interest expense (3) ................. (6,158) (8,899) (11,814) (17,111)
Amortization of servicing rights .................. (24,930) (23,009) (50,045) (48,669)
Prepayment and collection related fees............. 2,217 4,110 4,442 8,813
Other fees, net ................................... 1,411 1,740 2,700 4,517
---------- ---------- ---------- ----------
31,864 32,393 63,748 66,499
---------- ---------- ---------- ----------
Residential Origination Services:
Mortgage due diligence fees (4) ................... 2,176 -- 3,989 --
Loan refinancing fees (4) ......................... 1,296 342 2,556 438
Other ............................................. 378 3 766 3
---------- ---------- ---------- ----------
3,850 345 7,311 441
---------- ---------- ---------- ----------
Commercial Servicing:
International servicing fees ...................... 1,942 1,297 3,672 2,657
Domestic servicing fees ........................... 758 806 2,102 1,975
---------- ---------- ---------- ----------
2,700 2,103 5,774 4,632
---------- ---------- ---------- ----------
Business Process Outsourcing .......................... 2,858 2,193 5,443 4,348
Ocwen Recovery Group .................................. 2,906 2,655 6,361 5,630
Corporate Items and Other ............................. (17) (229) (89) (768)
---------- ---------- ---------- ----------
$ 44,161 $ 39,460 $ 88,548 $ 80,782
========== ========== ========== ==========
(1) The decline in residential loan servicing fees in 2005 as compared to 2004
primarily reflects a decline in fees associated with our contract with the
V.A. See "Segment Results - Residential Servicing".
(2) Earnings on float balances during the holding period between collection of
borrower payments and remittance to investors. These custodial accounts
are held at an unaffiliated bank and are excluded from our balance sheet.
The average balances held in these custodial accounts were approximately
$1,270,400 and $1,336,700 for the second quarter of 2005 and 2004,
respectively. Year to date, the balances in these accounts averaged
approximately $1,140,200 and $1,208,300 for 2005 and 2004, respectively.
The increase in earnings during the second quarter of 2005 and the first
half of 2005 as compared to the same periods in 2004 is primarily due to
an increase in short-term interest rates. See "Segment Results -
Residential Servicing". The underlying servicing agreements restrict the
investment of float balances to certain types of instruments. We are
responsible for any losses incurred on the investment of these funds,
although to date, we have not incurred any such losses.
(3) A servicer of securitized loans is typically obligated to pay the
securitization trust the difference between a full month of interest and
the interest collected on loans that are repaid before the end of a
calendar month.
(4) We acquired a mortgage fulfillment center and due diligence operation in
December 2004. Our loan refinancing program for Residential Servicing
customers began earning fees in the second quarter of 2004.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
The following table sets forth information regarding loans and real
estate we serviced at the dates indicated.
Loans (1) (2) (3) Real Estate (4) Total
-------------------------- ------------------------- --------------------------
Amount Count Amount Count Amount Count
------------ ----------- ----------- ----------- ------------ -----------
Residential Loan Servicing
June 30, 2005:
Performing ......................... $ 33,325,997 282,574 $ -- -- $ 33,325,997 282,574
Non-performing ..................... 4,214,079 49,828 1,122,101 14,306 5,336,180 64,134
------------ ----------- ----------- ----------- ------------ -----------
$ 37,540,076 332,402 $ 1,122,101 14,306 $ 38,662,177 346,708
============ =========== =========== =========== ============ ===========
December 31, 2004:
Performing ......................... $ 29,227,341 253,617 $ -- -- $ 29,227,341 253,617
Non-performing ..................... 3,971,439 48,711 1,325,711 17,857 5,297,150 66,568
------------ ----------- ----------- ----------- ------------ -----------
$ 33,198,780 302,328 $ 1,325,711 17,857 $ 34,524,491 320,185
============ =========== =========== =========== ============ ===========
Commercial Servicing (5)
June 30, 2005:
Performing ......................... $ 1,232,663 323 $ -- -- $ 1,232,663 323
Non-performing (5) ................. 11,629,411 8,430 144,756 89 11,774,167 8,519
------------ ----------- ----------- ----------- ------------ -----------
$ 12,862,074 8,753 $ 144,756 89 $ 13,006,830 8,842
============ =========== =========== =========== ============ ===========
December 31, 2004:
Performing ......................... $ 847,811 365 $ -- -- $ 847,811 365
Non-performing (5) ................. 12,537,631 9,398 121,210 35 12,658,841 9,433
------------ ----------- ----------- ----------- ------------ -----------
$ 13,385,442 9,763 $ 121,210 35 $ 13,506,652 9,798
============ =========== =========== =========== ============ ===========
(1) At June 30, 2005 we serviced 274,677 subprime loans with a total unpaid
principal balance of $32,156,955, as compared to 238,105 subprime loans
with an unpaid principal balance of $28,374,493 at December 31, 2004.
Subprime loans represent residential loans we service which were made by
others to borrowers who generally did not qualify under guidelines of
Fannie Mae and Freddie Mac ("nonconforming loans").
(2) Non-performing loans serviced for others have been delinquent for 90 days
or more. Performing loans serviced for others are current or have been
delinquent for less than 90 days.
(3) Under sub-servicing contracts we serviced approximately 75,174 residential
loans with an unpaid principal balance of $8,898,609. This compares to
approximately 58,776 residential loans with an unpaid principal balance of
$7,063,232 serviced under sub-servicing contracts at December 31, 2004.
(4) Includes $665,107 and $839,654 of foreclosed residential properties
serviced for the VA at June 30, 2005 and December 31, 2004, respectively.
(5) At June 30, 2005, our international offices, primarily Japan, serviced a
total of 8,392 loans with an unpaid principal balance of $12,310,900. This
compares to 9,267 loans with an unpaid principal balance of $12,826,411 at
December 31, 2004. Non-performing loans serviced by the Commercial
Servicing segment include unsecured charged-off loans and deficiency
loans.
Vendor Management Fees. Vendor management fees are primarily comprised
of property valuation fees earned by the Residential Origination Services
segment. The following table sets forth the principal components of vendor
management fees by segment for the periods indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Residential Servicing (1) ............................. $ 1,753 $ 2,117 $ 3,841 $ 4,227
Residential Origination Services (2) .................. 9,020 9,372 17,805 20,271
Corporate Items and Other ............................. 10 (2) 19 (8)
---------- ---------- ---------- ----------
$ 10,783 $ 11,487 $ 21,665 $ 24,490
========== ========== ========== ==========
(1) Includes $865 and $1,228 of fees earned from vendors in the REALTrans
network during the second quarter of 2005 and 2004, respectively. These
fees amounted to $2,107 and $2,572 during the year to date periods of 2005
and 2004, respectively.
(2) Includes residential property valuation fees of $7,497 and $7,401 earned
during the second quarter of 2005 and 2004, respectively. For the year to
date periods, property valuation fees of $14,302 and $16,597 were earned
during 2005 and 2004, respectively. The higher fees in 2004 primarily
relates to the initial boarding of the VA portfolio of properties in 2004
and a decline in transaction volume in 2005. Also includes title service
and other fees earned from vendors in the REALTrans network of $1,523 and
$1,971 during the second quarter of 2005 and 2004, respectively. For the
year to date periods, such fees amounted to $3,502 and $3,674 during 2005
and 2004, respectively.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Gain (Loss) on Trading Securities, Net. The following table sets forth
unrealized and realized gains (losses) on trading securities for the periods
indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Unrealized gains (losses):
Residential Origination Services (1)............... $ (1,380) $ 1,061 $ (2,708) $ 269
Commercial Assets (2).............................. -- 1,366 -- 1,366
Corporate Items and Other ......................... 106 28 36 168
---------- ---------- ---------- ----------
(1,274) 2,455 (2,672) 1,803
---------- ---------- ---------- ----------
Realized gains (losses):
Residential Origination Services .................. -- 48 -- 57
Corporate Items and Other ......................... 5 -- 5 --
---------- ---------- ---------- ----------
5 48 5 57
---------- ---------- ---------- ----------
$ (1,269) $ 2,503 $ (2,667) $ 1,860
========== ========== ========== ==========
(1) Primarily represents unrealized gains (losses) on unrated residual
securities backed by subprime residential loans originated in the U.K.
(2) Represents unrealized gains on a commercial unrated subordinate security.
See "Changes in Financial Condition - Trading Securities."
Valuation Gains (Losses) on Real Estate. We regularly assess the value
of our remaining real estate assets and provide valuation allowances or record
impairment charges as appropriate. Valuation gains (losses) on real estate
amounted to $4 and $93 during the second quarter and first six months of 2005,
respectively, as compared to $(1,974) and $(3,825) for the same periods of 2004.
The losses in the 2004 periods consist primarily of impairment charges and
provisions for losses in fair value on three commercial assets, two of which
were subsequently sold. See "Changes in Financial Condition - Real Estate."
Other Income. The following table sets forth the principal components
of other income by segment for the periods indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Consulting fees (1) ................................... $ 1,669 $ 1,309 $ 2,776 $ 2,278
Technology and related revenue (2) .................... 972 4,254 1,954 5,083
Interest on federal tax refund claims (3) ............. 554 71 952 3,746
Collections of credit card receivables (4) ............ 363 492 712 965
Gain on sale on deposits (5) .......................... 1,750 -- 1,750 --
Other ................................................. 708 167 759 1,810
---------- ---------- ---------- ----------
$ 6,016 $ 6,293 $ 8,903 $ 13,882
========== ========== ========== ==========
(1) Consulting fees and cost reimbursements earned by the international group
of our Commercial Servicing segment.
(2) Represents service contract fees, maintenance fees, consulting revenue and
other fees earned through our technology products - REALServicing,
REALSynergy and REALTrans. Revenue for 2004 includes $2,900 of one-time
fees (primarily documentation fees) earned during the second quarter
associated with a service contract for the use of the REALServicing
system.
(3) Interest income on federal tax refund claims due from the Internal Revenue
Service ("IRS"). Our policy is to recognize interest income on income tax
receivable balances upon receipt of a written finding from the IRS agent
that validates our claim. See "Changes in Financial Condition -
Receivables".
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
(4) Comprised of collections of credit card receivables accounted for under
the cost recovery method. See "Segment Results - Ocwen Recovery Group".
(5) As disclosed in Note 5 to the Interim Consolidated Financial Statements,
Marathon National Bank assumed the Bank's customer deposit liabilities on
June 30, 2005. We earned $1,750 as consideration for the sale of these
deposits.
Net Interest Income (Expense). Net interest income (expense) is the
difference between the interest income earned from our interest-earning assets
and the interest expense incurred on our interest-bearing liabilities. Our net
interest income has been negative (i.e., net interest expense) since 2001
because the operations of our core businesses require a significant investment
in non-interest-earning assets, primarily advances on loans serviced for others
and mortgage servicing rights, that are funded by interest-bearing liabilities.
In addition to interest income reported in this caption, we also earn interest
on the custodial accounts we hold in connection with our Residential Servicing
business. These amounts are reported as a component of servicing fees and are
not included in the following information. The following table presents the
components of net interest income (expense) for each category of our
interest-earning assets and interest-bearing liabilities for the periods
indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Interest income:
Interest earning cash and other ................... $ 544 $ 225 $ 1,159 $ 339
Federal funds sold and repurchase agreements ...... 155 350 399 742
Trading securities
Investment grade (1) ............................ 1,571 15 3,115 30
Subordinates and residuals ...................... 4,187 4,300 8,104 7,523
---------- ---------- ---------- ----------
5,758 4,315 11,219 7,553
---------- ---------- ---------- ----------
Match funded loans ................................ 140 362 140 763
Loans ............................................. 167 710 179 1,170
---------- ---------- ---------- ----------
Total interest income ............................. 6,764 5,962 13,096 10,567
---------- ---------- ---------- ----------
Interest expense:
Match funded liabilities
Advances on loans serviced for others (2) ....... 3,688 958 6,336 1,860
Loans ........................................... 140 111 140 236
---------- ---------- ---------- ----------
3,828 1,069 6,476 2,096
---------- ---------- ---------- ----------
Lines of credit and other secured borrowings ...... 493 820 1,160 2,028
Debt securities
3.25% Convertible Notes (3) ..................... 1,760 -- 3,531 --
10.875% Capital Securities ...................... 1,529 1,529 3,059 3,059
---------- ---------- ---------- ----------
3,289 1,529 6,590 3,059
---------- ---------- ---------- ----------
Deposits (4) ...................................... 1,462 3,678 3,286 7,715
Total interest expense ............................ 9,072 7,096 17,512 14,898
---------- ---------- ---------- ----------
Net interest income (expense) before provision for
loan losses ....................................... $ (2,308) $ (1,134) $ (4,416) $ (4,331)
========== ========== ========== ==========
(1) The increase in interest income on investment grade securities in the 2005
periods as compared to 2004 resulted primarily from our increased
investment in CMOs to meet the Qualified Thrift Lender requirements of the
Bank prior to debanking.
(2) The increase in interest expense on match funded advances in the 2005
periods is primarily due to an increase in the outstanding balance of
match funded liabilities as a result of a servicing advance securitization
that we executed in November 2004. See "Changes in Financial Condition -
Match Funded Liabilities".
(3) In July 2004, we issued $175,000 of 3.25% Contingent Convertible Senior
Unsecured Notes that are due in 2024. See "Changes in Financial Condition
- Debt Securities".
(4) The decrease in interest expense on deposits in the 2005 periods is
primarily due to a decline in the balance of deposits outstanding as a
result of maturing certificates of deposit, reflecting reduced reliance on
deposits as a source of financing our operations prior to debanking.
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Non-Interest Expense. The following table sets forth the principal
components of our non-interest expense during the period indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Compensation and employee benefits .................... $ 24,355 $ 20,897 $ 48,727 $ 42,930
Occupancy and equipment ............................... 4,571 4,021 8,813 8,018
Technology and communication costs .................... 7,862 6,616 15,261 13,285
Loan expenses ......................................... 6,084 6,783 11,796 14,710
Professional services and regulatory fees ............. 5,656 7,994 10,377 13,819
Loss (gain) on investments in affordable housing
properties ........................................... (118) (41) 524 (79)
Other operating expenses .............................. 3,668 2,151 8,239 5,187
---------- ---------- ---------- ----------
$ 52,078 $ 48,421 $ 103,737 $ 97,870
========== ========== ========== ==========
Compensation and Employee Benefits. The following table presents the
principal components of compensation and benefits we incurred for the period
indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Salaries (1) .......................................... $ 16,673 $ 14,592 $ 33,385 $ 28,697
Bonuses (2) ........................................... 2,812 2,514 5,421 5,209
Payroll taxes ......................................... 1,045 968 2,836 2,702
Commissions ........................................... 1,783 1,328 3,100 2,567
Insurance ............................................. 793 702 1,595 1,227
Severance ............................................. 236 70 236 978
Other (3) ............................................. 1,013 723 2,154 1,550
---------- ---------- ---------- ----------
$ 24,355 $ 20,897 $ 48,727 $ 42,930
========== ========== ========== ==========
(1) Salaries include fees paid for the services of temporary employees.
(2) Bonus expense includes compensation related to employee incentive awards
of restricted stock and stock options.
(3) Other consists primarily of recruiting expenses, matching contributions to
our 401(K) plan, other benefits and payments to independent contractors.
The increase in compensation and benefits in the second quarter and
first six months of 2005 as compared to the same periods of 2004 is primarily
due to increases in salaries. The increase in salaries has occurred primarily
because of an increase in the average number of our full-time employees, both in
the U.S. and our India offices. Our total combined workforce (domestic and
international) averaged 3,278 employees in the second quarter of 2005 as
compared to 2,733 for the second quarter of 2004. For the year to date periods,
our total combined workforce averaged 3,218 and 2,603 during 2005 and 2004,
respectively. An average of 2,286 and 1,624 employees were based in our India
locations during the second quarter of 2005 and 2004, respectively. For the
first six months of 2005 and 2004, our India workforce averaged 2,173 and 1,553,
respectively. Severance for the first quarter of 2004 includes a one-time
payment of $750 to the former president of OTX in accordance with the terms of
his employment agreement.
Occupancy and Equipment. The following table presents the principal
components of occupancy and equipment costs for the period indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Postage and mailing ................................... $ 1,581 $ 1,284 $ 2,761 $ 2,843
Rent .................................................. 938 679 1,837 1,388
Depreciation .......................................... 617 671 1,333 1,368
Other ................................................. 1,435 1,387 2,882 2,419
---------- ---------- ---------- ----------
$ 4,571 $ 4,021 $ 8,813 $ 8,018
========== ========== ========== ==========
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Technology and Communication Costs. The following table presents the
principal components of technology and communication costs for the years
indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Depreciation:
Hardware .......................................... $ 1,649 $ 1,522 $ 3,128 $ 3,095
Software .......................................... 860 728 1,705 1,434
Other ............................................. 184 146 370 288
---------- ---------- ---------- ----------
2,693 2,396 5,203 4,817
---------- ---------- ---------- ----------
Telecommunications .................................... 1,929 1,803 3,497 3,290
Document imaging ...................................... 759 411 1,482 894
Maintenance and other ................................. 2,481 2,006 5,079 4,284
---------- ---------- ---------- ----------
$ 7,862 $ 6,616 $ 15,261 $ 13,285
========== ========== ========== ==========
Loan Expenses. Loan expenses for the second quarter of 2005 and 2004
included $4,951 and $5,015, respectively, of appraisal fees incurred in
connection with property valuation services we provided through the Residential
Origination Services segment. Year to date, such appraisal fees amounted to
$9,005 and $12,110 for 2005 and 2004, respectively. The decline in appraisal
fees in 2005 primarily relates to the initial boarding of the VA portfolio of
properties in 2004 and reduced transaction volumes in 2005. Loan expenses also
include other miscellaneous expenses incurred in connection with the refinancing
and servicing of loans for others.
Professional Services and Regulatory Fees. The following table
presents the principal components of professional services and regulatory fees
for the periods indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Legal fees and settlements (1) ........................ $ 2,876 $ 5,673 $ 5,090 $ 9,007
Consulting fees (non-technology) ...................... 1,040 656 1,571 1,258
Audit and accounting fees (2) ......................... 854 578 1,755 1,132
Insurance ............................................. 328 526 874 962
Other ................................................. 558 561 1,087 1,460
---------- ---------- ---------- ----------
$ 5,656 $ 7,994 $ 10,377 $ 13,819
========== ========== ========== ==========
(1) Legal fees for 2004 include $4,000 ($2,000 recorded during the second
quarter) to establish a reserve for multiple breach fees that were charged
to borrowers but may no longer be collectible.
(2) The increase in audit and accounting fees in the 2005 periods is primarily
due to additional fees incurred in connection with our compliance with
Section 404 of the Sarbanes-Oxley Act of 2002.
Other Operating Expenses. The following table presents the principal
components of other operating expenses for the periods indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Bad debt expense (1) .................................. $ 828 $ 119 $ 3,032 $ 1,769
Travel, lodging, meals and entertainment .............. 1,118 955 2,192 1,617
Amortization of deferred costs ........................ 33 160 321 424
Deposit related expense ............................... 212 127 437 324
Other ................................................. 1,477 790 2,257 1,053
---------- ---------- ---------- ----------
$ 3,668 $ 2,151 $ 8,239 $ 5,187
========== ========== ========== ==========
(1) Bad debt expense primarily represents provisions for estimated
uncollectible servicing advances and other receivables related to our
Residential Servicing segment. The provision recorded during the first six
months of 2004 includes $1,000 recorded in the first quarter to establish
an allowance for forbearance fees that we are no longer collecting
directly from borrowers.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Income Tax Expense (Benefit). The following table provides details of
our income tax expense for the periods indicated:
Three Months Six Months
----------------------- ------------------------
For the periods ended June 30, 2005 2004 2005 2004
- ------------------------------------------------------- ---------- ---------- ---------- ----------
Income tax expense (benefit) on income (loss) before
taxes ................................................ $ 1,141 $ 2,642 $ 1,691 $ 4,417
Provision for (reversal of) valuation allowance on
deferred tax asset (1)................................ (843) (2,587) (843) (4,351)
Provision for recapture of base year bad debt
reserves(1) .......................................... 1,967 -- 1,967 --
---------- ---------- ---------- ----------
Total income tax expense (benefit) .................... $ 2,265 $ 55 $ 2,815 $ 66
========== ========== ========== ==========
(1) Represents a one-time provision, net of a related reversal of the valuation
allowance on the deferred tax asset, to recognize a deferred tax liability
arising from the recapture of bad debt reserves in connection with our
termination of the Bank's status as a federal savings bank.
We maintain a valuation allowance in an amount sufficient to reduce
our deferred tax asset to the amount that is more likely than not to be
realized. The valuation allowance amounted to $165,083 and $165,927 at June 30,
2005 and December 31, 2004, respectively. Our assessment of the amount of the
valuation allowance was based on consideration of all available evidence, both
positive and negative, including our recent earnings history, current tax
position and estimates of future taxable income. The tax character (ordinary
versus capital) and the carry forward and carry back periods of certain tax
attributes (e.g., capital losses and tax credits) were also considered. Reversal
of all or a portion of the valuation allowance may be appropriate in the future
based on the results of our operations.
Income tax expense (benefit) on income (loss) before income taxes
differs from amounts that would be computed by applying the Federal corporate
income tax rate of 35% because of the effect of foreign taxes, non-economic tax
residual payments, changes in the valuation allowance and low-income housing tax
credits. Income tax expense for the first six months of 2005 and 2004 reflects
tax credits of $734 and $1,197, respectively. Although we have substantial
unused tax credits available to reduce the liability arising from income taxes
on our current year income, tax credits can be used to reduce income tax expense
only to the corporate alternative minimum tax rate of 20% of taxable income.
CHANGES IN FINANCIAL CONDITION
Trading Securities. The following table sets forth the fair value of
our trading securities at the dates indicated:
June 30, December 31,
2005 2004
------------ ------------
Investment grade (1):
U.S. Treasury .......................................... $ 595 $ 1,594
Collateralized mortgage obligations (AAA-rated) ........ -- 81,466
Bonds and debentures (2) ............................... 2,347 3,155
------------ ------------
$ 2,942 $ 86,215
============ ============
Subordinates and residuals (3):
Single family residential
BB-rated subordinates ................................ $ 252 $ 256
B-rated subordinates ................................. 389 435
Unrated subordinates ................................. 193 217
Unrated residuals .................................... 41,907 35,276
------------ ------------
42,741 36,184
Commercial unrated subordinates ........................ 2,602 3,343
------------ ------------
$ 45,343 $ 39,527
============ ============
(1) Investment grade securities declined by $83,273 during the first six
months of 2005 primarily due to maturities, sales and principal repayments
on CMOs. Prior to debanking we invested in CMOs as needed to meet the
Qualified Thrift Lender requirements of the Bank.
(2) These securities were acquired in connection with our acquisition of BOK
on September 30, 2004.
(3) During the first six months of 2005, our subordinate and residual trading
securities increased by $5,816. This change was primarily due to the
purchase of $11,766 of unrated residual securities on June 30, 2005,
offset in part by a decline in fair value of our unrated subprime residual
securities.
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Subordinate and residual interests in mortgage-related securities
provide credit support to the more senior classes of the mortgage-related
securities. Principal from the underlying mortgage loans generally is allocated
first to the senior classes, with the most senior class having a priority right
to the cash flow from the mortgage loans until its payment requirements are
satisfied. To the extent that there are defaults and unrecoverable losses on the
underlying mortgage loans, resulting in reduced cash flows, the most subordinate
security will be the first to bear this loss. Because subordinate and residual
interests generally have no credit support, to the extent there are realized
losses on the mortgage loans comprising the mortgage collateral for such
securities, we may not recover the full amount or, indeed, any of our remaining
investment in such subordinate and residual interests.
Subordinate and residual interests are affected by the rate and timing
of payments of principal (including prepayments, repurchase, defaults and
liquidations) on the mortgage loans underlying a series of mortgage-related
securities. The rate of principal payments may vary significantly over time
depending on a variety of factors, such as the level of prevailing mortgage loan
interest rates and economic, demographic, tax, legal and other factors.
Prepayments on the mortgage loans underlying a series of mortgage-related
securities are generally allocated to the more senior classes of
mortgage-related securities. Although in the absence of defaults or interest
shortfalls all subordinates receive interest, amounts otherwise allocable to
residuals generally are used to make payments on more senior classes or to fund
a reserve account for the protection of senior classes until over
collateralization or the balance in the reserve account reaches a specified
level. For residual interests in residential mortgage-backed securities, over
collateralization is the amount by which the collateral balance exceeds the sum
of the bond principal amounts. Over collateralization is achieved by applying
monthly a portion of the interest payments of the underlying mortgages toward
the reduction of the senior class certificate principal amounts, causing them to
amortize more rapidly than the aggregate loan balance. Over collateralization
represents the first tier of loss protection afforded to the non-residual
holders. To the extent not consumed by losses on more highly rated bonds, over
collateralization is remitted to the residual holders. In periods of declining
interest rates, rates of prepayments on mortgage loans generally increase, and
if the rate of prepayments is faster than anticipated, then the yield on
subordinates will be positively affected and the yield on residuals will be
negatively affected.
We periodically assess the carrying value of our subordinate
securities and residual securities retained. There can be no assurance that our
estimates used to determine the value of subordinate securities and residual
securities retained will remain appropriate for the life of each securitization.
If actual loan prepayments or defaults exceed our estimates, the carrying value
of our subordinate securities and residual securities retained may be decreased
during the period in which we recognized the disparity.
The following table presents information regarding our subordinate and
residual trading securities summarized by classification and rating at June 30,
2005:
ANTICIPATED ANTICIPATED ANTICIPATED
YIELD TO YIELD TO WEIGHTED
PERCENT MATURITY AT MATURITY AT AVERAGE
OWNED PURCHASE 6/30/2005 REMAINING
RATING/DESCRIPTION (1) BY OCWEN (2) (3) (2) (4) COUPON LIFE (2) (5)
- ----------------------------------- ------------ ------------ ------------ ------------ ------------
Single family residential:
BB-rated subordinates ......... 100.00% 19.23% 12.00% 6.75% 3.79
B-rated subordinates .......... 100.00% 17.01% 15.55% 6.02% 1.96
Unrated subordinates .......... 100.00% 13.96% 41.90% 6.53% 0.19
Unrated residuals ............. 100.00% 17.28% 11.39% N/A 4.14
Commercial:
Unrated subordinates .......... 25.00% 15.84% 10.94% N/A 0.86
(1) Refers to the credit rating designated by the rating agency for each
securitization transaction. Classes designated "A" have a superior claim
on payment to those rated "B." Additionally, multiple letters have a
superior claim to designations with fewer letters. Thus, for example,
"BBB" is superior to "BB," which in turn is superior to "B." The lower
class designations in any securitization will receive interest payments
after senior classes and will experience losses before any senior class.
The lowest potential class designation is "unrated" which, if included in
a securitization, will always receive interest last and experience losses
first.
(2) Subordinate and residual securities do not have a contractual maturity but
are paid down over time as cash distributions are received. Because they
do not have a stated maturity, we disclose the weighted average life of
these securities.
(3) Represents the effective yield from inception to maturity based on the
purchase price and anticipated future cash flows under pricing
assumptions.
33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
(4) Represents the effective yield based on the purchase price, actual cash
flows received from inception until the respective date, and the then
current estimate of future cash flows under the assumptions at the
respective date. Changes in the June 30, 2005 anticipated yield to
maturity from that originally anticipated are due to differences between
estimated and actual cash flows. Each quarter we update the assumptions
used to estimate future cash flows based on the actual results to date.
The primary assumptions include prepayment speeds, loss rates and the
discount rate.
(5) Represents the weighted average life in years based on the June 30, 2005
book value.
The mortgages that underlie our trading subordinate and residual
securities, which totaled $184,727 at June 30, 2005, are secured by properties
located in forty-nine states and the United Kingdom. The largest aggregate value
of mortgages in any one state or country is $41,997.
Match Funded Assets. Match funded assets are comprised of the
following at the dates indicated:
June 30, December 31,
2005 2004
---------- ------------
Match funded advances on loans serviced for others:
Principal and interest .......................... $ 134,803 $ 107,102
Taxes and insurance ............................. 120,564 107,710
Other ........................................... 75,970 61,814
---------- ------------
331,337 276,626
Commercial loans .................................... 3,352 4,134
---------- ------------
$ 334,689 $ 280,760
========== ============
Match funded advances on loans serviced for others resulted from the
transfers of certain residential loan servicing related advances to qualified
special purpose entities ("SPE") in exchange for cash. These advances are owned
by the SPEs and are, therefore, not available to satisfy claims of our general
creditors. These transfers did not qualify as sales under generally accepted
accounting principles because we retained effective control of the advances.
Accordingly, we report the amount of proceeds we received from the sales as
secured borrowings with pledges of collateral (match funded liabilities). See
"Match Funded Liabilities".
Commercial match funded loans held by our GSS subsidiary in Japan
resulted from the transfer, on a non-recourse basis, of an undivided 100%
participation interest in certain real estate loans to a Japanese subsidiary of
Merrill Lynch in exchange for cash. The transfer did not qualify as a sale under
generally accepted accounting principles as we did not meet all of the
conditions for surrender of control over the transferred loans. Accordingly, we
report the amount of proceeds we received from the transfer as a secured
borrowing with pledge of collateral (match funded liabilities). See "Match
Funded Liabilities".
Advances on Loans and Loans Serviced for Others. Advances related to
our loan portfolios and loans we serviced for others consisted of the following
at the dates indicated:
June 30, December 31,
2005 2004
---------- ------------
Loans serviced for others:
Principal and interest .......................... $ 22,797 $ 51,782
Taxes and insurance ............................. 83,234 94,926
Other ........................................... 81,064 93,375
---------- ------------
187,095 240,083
Loans ............................................... 328 347
---------- ------------
$ 187,423 $ 240,430
========== ============
During any period in which the borrower is not making payments, we are
required under certain servicing agreements to advance our own funds to meet
contractual principal and interest remittance requirements for investors, pay
property taxes and insurance premiums and process foreclosures. We generally
recover such advances from borrowers for reinstated and performing loans and
from investors for foreclosed loans. We record a charge to the extent that we
estimate that advances are uncollectible, taking into consideration the age and
nature of the advance and our historical loss experience, among other factors.
Advances on loans serviced for others are net of reserves of $3,375 and $5,212
as of June 30, 2005 and December 31, 2004, respectively. The reserve balance at
June 30, 2005 includes $3,131 to provide for forbearance plan fees and multiple
breach fees that may no longer be collectible. See "Results of Operations -
Non-Interest Revenue - Segment Results - Residential Servicing".
34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Advances on loans serviced for others do not include match funded
advances that were transferred to a third party in transactions that did not
qualify as sales for accounting purposes and that we account for as secured
borrowings. See "Match Funded Assets" for information regarding these advances.
Mortgage Servicing Rights. The unamortized balance of our mortgage
servicing rights is primarily related to residential assets. Our investment
increased by $924 during the six months ended June 30, 2005 as purchases
exceeded amortization. The rate of amortization reflects high rates of actual
and projected prepayments on subprime residential mortgage loans due to low
interest rates. Purchases for the six months ended June 30, 2005 reflects the
more cautious acquisition strategy that we adopted given the uncertainty of
prepayment speeds in the current environment. In addition, prior to debanking,
we had commitments with the OTS to maintain our investment in mortgage servicing
rights at certain levels. See "Results of Operations - Segment Results -
Residential Servicing". The following table sets forth the activity in our
mortgage servicing rights during the first six months of 2005:
Balance at December 31, 2004 ................ $ 131,409
Purchases ................................... 50,969
Amortization ................................ (50,045)
----------
Balance at June 30, 2005 .................... $ 132,333
==========
At June 30, 2005, we serviced loans under approximately 411 servicing
agreements for 22 investors. Purchases during the six months ended June 30, 2005
were all for residential assets.
Receivables. Receivables consisted of the following at the dates
indicated:
June 30, December 31,
2005 2004
------------- -------------
Residential Servicing (1) ................... $ 13,076 $ 24,012
Residential Origination Services ............ 5,614 3,455
Commercial Servicing ........................ 2,700 2,736
Business Process Outsourcing ................ 1,225 1,532
Ocwen Recovery Group ........................ 715 341
Commercial Assets (2) ....................... -- 192
Affordable Housing (3) ...................... -- 18,308
Corporate Items and Other (4) ............... 96,613 76,143
------------- -------------
$ 119,943 $ 126,719
============= =============
(1) Includes $6,522 and $12,801 at June 30, 2005 and December 31, 2004,
respectively, of receivables representing fees earned from the servicing
of loans and real estate. The remaining balance consists principally of
reimbursable expenses due from loan servicing investors. The total
balance of receivables for this segment is net of reserves of $5,201 and
$3,395 at June 30, 2005 and December 31, 2004, respectively.
(2) Based on the relative insignificance of the non-core assets remaining in
this segment, the remaining assets of this business have been included in
the Corporate Items and Other segment beginning January 1, 2005.
(3) Based on the relative insignificance of the non-core assets remaining in
this segment, the remaining assets of this business have been included in
the Corporate Items and Other segment beginning January 1, 2005. The
balance primarily represents payments to be received in future years
(through June 2014) from the sale of investments in affordable housing
properties. On June 30, 2005 the balance included in the Corporate Items
and Other segment was $18,259, net of an unaccreted discount of $1,870 and
a reserve for doubtful accounts of $5,799. The December 31, 2004 balance
of $18,308 is net of discount and reserves of $2,346 and $5,596,
respectively.
(4) Includes $60,586 and $61,591 of income taxes receivable at June 30, 2005
and December 31, 2004, respectively. As of June 30, 2005, income taxes
receivable includes $56,526 of federal tax refund claims, the payment of
which has been approved by the Joint Committee on Taxation of the U.S.
Congress. The receivable balance a June 30, 2005 and December 31, 2004
also included $7,823 and $6,872, respectively, of accrued interest on the
federal tax refund claims. The increase in the balance of receivables in
the Corporate Items and Other segment in 2005 is primarily due to the
transfer of Affordable Housing assets to this segment effective January 1,
2005, as noted in (3) above.
35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Real Estate. Our investment in real estate declined from $18,732 at
December 31, 2004 to $9,314 at June 30, 2005. This decline of $9,418 is
primarily due to the sale of our consolidated subsidiary that owned a retail
shopping center located in Halifax, Nova Scotia. This property had a net
carrying value of $8,827 at December 31, 2004. Our investment in real estate at
June 30, 2005 consists primarily of interests in two limited partnerships
operating as multi-family real estate ventures with a net carrying value of
$8,238. In July 2005, the majority of the assets owned by one of the
partnerships were sold and our share of the cash proceeds resulted in a gain of
approximately $1,800.
Loans, Net. Our net investment in loans amounted to $8,725 and $3,792
at June 30, 2005 and December 31, 2004, respectively. The balance at June 30,
2005 consists primarily of two loans - a loan with a carrying value of $3,275 to
our one remaining affordable housing property, in which we have invested as a
limited partner but do not consolidate in our financial statements and a loan
with a carrying value of $4,898 that we made during the first quarter of 2005 to
facilitate the sale of our investment in a consolidated subsidiary that owned a
shopping center located in Halifax, Nova Scotia. This new loan is the primary
reason for the $5,499 increase in loans during the first six months of 2005. See
"Real Estate" above.
Loans are net of an allowance for losses of $4,334 and $4,546 at June
30, 2005 and December 31, 2004, respectively. We maintain an allowance for loan
losses for each of our loans at a level that we consider adequate to provide for
probable losses based upon an evaluation of known and inherent risks. The
following table sets forth an analysis of activity in the allowance for loan
losses during the first six months of 2005:
Balance at December 31, 2004 ................ $ 4,546
Provision for loan losses ................... (12)
Charge-offs ................................. (200)
----------
Balance at June 30, 2005 .................... $ 4,334
==========
The allowance for loan losses at June 30, 2005 and December 31, 2004
included $4,269 and $4,468, respectively, related to a loan to our one remaining
affordable housing property.
Other Assets. Other assets consisted of the following at the dates
indicated:
June 30, December 31,
2005 2004
------------ ------------
Deferred tax assets, net (1) ..................... $ 16,576 $ 17,683
Deferred debt related costs, net ................. 11,220 11,216
Interest earning collateral deposits (2) ......... 15,063 8,905
Loans held for resale (3) ........................ 14,716 8,437
Interest earning debt service accounts (4) ....... 16,026 5,850
Goodwill, net .................................... 5,312 5,312
Prepaid expenses ................................. 3,127 4,069
Mutual fund and stocks (5) ....................... 33 2,886
Capitalized software development costs, net ...... 518 1,147
Other ............................................ 3,590 3,471
------------ ------------
$ 86,181 $ 68,976
============ ============
(1) Deferred tax assets are net of valuation allowances totaling $165,083 and
$165,927 at June 30, 2005 and December 31, 2004, respectively. See
"Results of Operations - Income Tax Expense (Benefit)".
(2) The balance at June 30, 2005 and December 31, 2004 includes $8,864 and
$8,905, respectively, of deposits that were required in order to obtain
surety bonds for affordable housing properties that we sold before the end
of the fifteen-year tax credit amortization period and on which we have
previously claimed tax credits on our income tax returns. The surety bond
is necessary in order to avoid the recapture of those tax credits
previously claimed. The balance at June 30, 2005 also includes a $5,000
cash collateral account required under a guaranty we entered into in
connection with debanking. See Note 5 to the Interim Consolidated
Financial Statements.
(3) Loans originated in response to requests from Residential Servicing
customers to refinance their mortgage. Only loans with sales commitments
prior to closing are originated under this program. The loans outstanding
at June 30, 2005 were all sold during July 2005.
36
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
(4) The balances at June 30, 2005 and December 31, 2004 include amounts set
aside from the proceeds of one of our match funded advance facilities to
provide for possible shortfalls in the funds available to pay certain
expenses and interest. The balance at June 30, 2005 also includes
collections on match funded advances related to our other advance facility
that were forwarded to the trustee prior to the scheduled payment
application date.
(5) The balance at December 31, 2004 primarily represents an investment by the
Bank in a mutual fund that invests in assets that meet the requirements of
the Community Reinvestment Act. This investment was sold during the second
quarter of 2005 in connection with debanking.
Match Funded Liabilities. Match funded liabilities represent proceeds
received from transfers of loans and advances on loans serviced for others.
Because we retained effective control over the assets transferred, these
transfers did not qualify as sales for accounting purposes and, therefore, we
report them as secured borrowings with pledges of collateral. See "Match Funded
Assets" for additional details regarding these transactions. Match funded
liabilities were comprised of the following at the dates indicated:
June 30, December 31,
Collateral (Interest Rate) Interest Rate 2005 2004
- --------------------------------------------- ------------------------------ ---------- ------------
Advances on loans serviced for others (1) ... See (1) below $ 175,000 $ 149,342
Advances on loans serviced for others (2) ... LIBOR plus 175 basis points 106,470 90,851
Commercial loans (3) ........................ 3,352 4,134
---------- ------------
$ 284,822 $ 244,327
========== ============
(1) In November 2004, we executed a servicing advance securitization. This
transaction involved the issuance of a term note for $100,000 and a
one-year variable funding note for a maximum of $75,000. On March 31,
2005, we executed an indenture supplement to the November 2004
securitization with a closing date of April 6, 2005. This supplement
included the issuance of a second term note for $75,000. In addition, the
maximum amount of the variable funding note was increased to $100,000. The
original term note bears interest at LIBOR plus 50 basis points, and the
second term note bears interest at LIBOR plus 40 basis points. The
variable funding note bears interest at a commercial paper rate plus a
margin that approximates LIBOR plus 50 basis points. The original term
note under this facility has a stated maturity of October 2013, and the
second term note has a stated maturity of March 2014. The variable funding
note has a stated maturity of November 2010.
(2) Under the terms of the agreement, we are eligible to finance additional
advances on loans serviced for others up to a maximum balance of $200,000.
This facility will mature in January 2006.
(3) Represents a 100% participation interest held by a third party.
The lending agreements for our match funded liabilities contain
various qualitative and quantitative covenants that, among other things,
establish requirements for the monitoring and reporting of specified financial
transactions and reporting on defined events affecting the collateral underlying
the agreements. We are currently in compliance with these covenants.
Servicer Liabilities. Servicer Liabilities represent amounts we have
collected, primarily from Residential Servicing borrowers, that will either be
deposited in collections accounts held at an unaffiliated bank and excluded from
our balance sheet, paid directly to an investment trust, or refunded to
borrowers. Previously, we had included the majority of these balances as a
reduction of our cash balances, while others were included within escrow
deposits. Reclassifications have been made to the prior periods to conform to
this presentation. The following table sets forth the principal components of
servicer liabilities at the dates indicated:
June 30, December 31,
2005 2004
---------- ------------
Borrower payments due to collection accounts ........ $ 249,434 $ 255,040
Escrow payments due to collection accounts .......... 11,100 3,786
Partial payments and other unapplied balances........ 49,835 32,440
---------- ------------
$ 310,369 $ 291,266
========== ============
37
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Lines of Credit and Other Secured Borrowings. We have obtained secured
borrowings from unaffiliated financial institutions as follows:
June 30, December 31,
Borrowing Type Collateral Maturity Interest Rate (1) 2005 2004
- --------------------- ------------------------ ----------------------- -------------------- --------- ------------
Senior secured credit Purchased mortgage April 2006 LIBOR + 162.5 or 225 $ 37,728 $ 24,218
agreement servicing rights and basis points
advances on loans
serviced for others (2)
Senior secured credit Purchased mortgage December 2005 LIBOR + 250 basis -- 11,458
agreement servicing rights points
Mortgage note Office building (3) October 2014 5.62% 14,797 14,936
--------- ------------
$ 52,525 $ 50,612
========= ============
(1) 1-month LIBOR was 3.34% and 2.40% at June 30, 2005 and December 31, 2004,
respectively.
(2) The maximum amount of borrowing under this facility was increased from
$70,000 to $140,000 effective July 1, 2005. See "Liquidity, Commitments
and Off-Balance Sheet Risks".
(3) Collateral represents our loan servicing call center located in Orlando,
Florida. We entered into this mortgage in October 2004.
Each of our lines contains qualitative and quantitative covenants that
establish, among other things, the maintenance of specified net worth and
restrictions on future indebtedness, as well as the monitoring and reporting of
various specified transactions or events. We are currently in compliance with
these covenants. While we have not historically paid dividends, our covenants,
by establishing net worth requirements, in effect limit the amount of dividends
that could be paid. As of June 30, 2005, the most restrictive limitation of all
the covenants would limit dividends that could be paid to $78,615.
Debt Securities. Debt securities consisted of the following at the
dates indicated:
June 30, December 31,
2005 2004
------------- -------------
3.25% Convertible Notes due August 1, 2024 ..... $ 175,000 $ 175,000
10.875% Capital Securities due August 1, 2027 .. 56,249 56,249
------------- -------------
$ 231,249 $ 231,249
============= =============
In addition to the specific requirements discussed below, each of our
debt securities contain qualitative and quantitative covenants that establish,
among other things, the maintenance of specified net worth and restrictions on
future indebtedness, as well as the monitoring and reporting of various
specified transactions or events. We are currently in compliance with these
covenants.
Convertible Notes. In July 2004, OCN issued $175,000 aggregate
principal amount of 3.25% Contingent Convertible Senior Unsecured Notes due 2024
("Convertible Notes") in a private placement as permitted by the Securities Act
of 1933, as amended. We filed with the Securities and Exchange Commission a
registration statement, which was declared effective March 15, 2005, covering
resales by holders of the Convertible Notes and the common stock issuable upon
conversion of the Convertible Notes. The Convertible Notes are senior unsecured
obligations of Ocwen Financial Corporation and bear interest at the rate of
3.25% per year. Interest is payable on February 1 and August 1 of each year,
beginning on February 1, 2005. The Convertible Notes will mature on August 1,
2024.
Holders may convert all or a portion of their notes into shares of our
common stock under the following circumstances: (1) at any time during any
calendar quarter commencing after December 31, 2004, if the closing sale price
of our common stock for at least 20 trading days in a period of 30 consecutive
trading days ending on the last trading day of the calendar quarter prior to
such quarter is greater than 125% of the conversion price per share of common
stock on such last day; (2) subject to certain exceptions, during the five
business day period after any five-consecutive-trading-day period in which the
trading price per $1 principal amount of the notes for each day of the
five-consecutive-trading-day period was less than 98% of the product of the
closing sale price of our common stock and the number of shares issuable upon
conversion of $1 principal amount of the notes; (3) if the notes have been
called for redemption; (4) upon the occurrence of specified corporate
transactions; or (5) if we elect at our sole discretion to permit conversion
following the implementation of EITF Issue 04-8. We elected not to permit
conversion following the implementation of EITF 04-8 in the fourth quarter of
2004.
38
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
The conversion rate will be 82.1693 shares of our common stock per $1
principal amount of the notes, subject to adjustment. Events that may cause the
conversion rate to be adjusted, as more fully described in the related indenture
agreement, primarily relate to cash dividends or other distributions to holders
of our common stock. Upon conversion, we may at our option choose to deliver, in
lieu of our common stock, cash or a combination of cash and common stock as
described herein.
Beginning August 1, 2009, we may redeem all or a portion of the notes
for cash for a price equal to 100% of the principal amount of the notes to be
redeemed plus accrued and unpaid interest, if any.
Holders may require us to repurchase all or a portion of their notes
for cash on August 1, 2009, August 1, 2014, and August 1, 2019 or upon the
occurrence of a "fundamental change" at a repurchase price equal to 100% of the
principal amount of the notes to be repurchased plus accrued and unpaid
interest, if any. A "fundamental change", as further defined in the indenture
agreement, is deemed to have occurred upon a change of control or a termination
of trading in our common stock.
Capital Securities. In August 1997, Ocwen Capital Trust ("OCT") issued
$125,000 of 10.875% Capital Securities (the "Capital Securities"). OCT invested
the proceeds from issuance of the Capital Securities in 10.875% Junior
Subordinated Debentures issued by OCN. The Junior Subordinated Debentures, which
represent the sole assets of OCT, will mature on August 1, 2027.
Holders of the Capital Securities are entitled to receive cumulative
cash distributions accruing from the date of original issuance and payable
semiannually in arrears on February 1 and August 1 of each year, commencing on
February 1, 1998, at an annual rate of 10.875% of the liquidation amount of $1
per Capital Security. OCN guarantees payment of distributions out of moneys held
by OCT, and payments on liquidation of OCT or the redemption of Capital
Securities, to the extent OCT has funds available. If Ocwen Financial
Corporation does not make principal or interest payments on the Junior
Subordinated Debentures, OCT will not have sufficient funds to make
distributions on the Capital Securities, in which event the guarantee shall not
apply to such distributions until OCT has sufficient funds available therefor.
We have the right to defer payment of interest on the Junior
Subordinated Debentures at any time or from time to time for a period not
exceeding 10 consecutive semiannual periods with respect to each deferral
period, provided that no extension period may extend beyond the stated maturity
of the Junior Subordinated Debentures. Upon the termination of any such
extension period and the payment of all amounts then due on any interest payment
date, we may elect to begin a new extension period. Accordingly, there could be
multiple extension periods of varying lengths throughout the term of the Junior
Subordinated Debentures. If we defer interest payments on the Junior
Subordinated Debentures, distributions on the Capital Securities will also be
deferred, and we may not, nor may any of our subsidiaries, (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, their capital stock or (ii) make any
payment of principal, interest or premium, if any, on or repay, repurchase or
redeem any debt securities that rank pari passu with or junior to the Junior
Subordinated Debentures. During an extension period, interest on the Junior
Subordinated Debentures will continue to accrue at the rate of 10.875% per
annum, compounded semiannually.
We may redeem the Junior Subordinated Debentures before maturity at
our option, subject to the receipt of any necessary prior regulatory approval,
(i) in whole or in part on or after August 1, 2007, at a redemption price equal
to 105.438% of the principal amount thereof on August 1, 2007, declining ratably
on each August 1 thereafter to 100% on or after August 1, 2017, plus accrued
interest thereon, or (ii) at any time, in whole (but not in part), upon the
occurrence and continuation of a special event (defined as a tax event,
regulatory capital event or an investment company event) at a redemption price
equal to the greater of (a) 100% of the principal amount thereof or (b) the sum
of the present values of the principal amount and premium payable with respect
to an optional redemption of such Junior Subordinated Debentures on August 1,
2007, together with scheduled payments of interest from the prepayment date to
August 1, 2007, discounted to the prepayment date on a semiannual basis at the
adjusted Treasury rate plus accrued interest thereon to the date of prepayment.
The Capital Securities are subject to mandatory redemption, in whole or in part,
upon repayment of the Junior Subordinated Debentures at maturity or their
earlier redemption, in an amount equal to the amount of the related Junior
Subordinated Debentures maturing or being redeemed and at a redemption price
equal to the redemption price of the Junior Subordinated Debentures, plus
accumulated and unpaid distributions thereon to the date of redemption.
For financial reporting purposes, we treat OCT as a subsidiary and,
accordingly, the accounts of OCT are included in our consolidated financial
statements. We eliminate intercompany balances and transactions with OCT,
including the balance of Junior Subordinated Debentures outstanding, in our
consolidated financial statements.
39
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Deposits. In connection with debanking, on June 30, 2005, Marathon
National Bank assumed the customer deposits associated with the Bank's branch
facility. As a result of our termination of the Bank's status as a federal
savings bank, we are no longer able to take deposits in the United States. See
Note 5 to the Interim Consolidated Financial Statements for additional
information regarding debanking. Total customer deposits amounted to $290,507 at
December 31, 2004.
Other Liabilities. Other liabilities consisted of the following at the
dates indicated:
June 30, December 31,
2005 2004
------------- -------------
Accrued expenses (1) .......................... $ 32,545 $ 35,343
BOK bank deposits (2) ......................... 11,135 10,792
Deferred income ............................... 9,061 6,179
Other ......................................... 13,115 4,535
------------- -------------
$ 65,856 $ 56,849
============= =============
(1) Consists primarily of accruals for incentive compensation awards, audit
fees, interest on debt securities and operating expenses.
(2) Represents funds of third parties held on deposit by our German bank
subsidiary.
Escrow Deposits. Escrow deposits amounted to $86,084 at December 31,
2004 and consisted of custodial deposit balances representing funds collected
from borrowers for the payment of taxes and insurance premiums on mortgage
properties underlying loans that we serviced for others. In connection with
debanking, these custodial deposits were transferred from the Bank to an
unaffiliated bank and are now excluded from our balance sheet.
Stockholders' Equity. Stockholders' equity amounted to $336,084 at
June 30, 2005 as compared to $330,108 at December 31, 2004. The $5,976 increase
in stockholders' equity during the first six months of 2005 was primarily due to
net income of $5,295 and the issuance of vested restricted stock to employees as
part of our annual incentive awards. See the Consolidated Statements of Changes
in Stockholders' Equity in the Interim Consolidated Financial Statements for
additional information regarding changes in stockholders' equity during the
first six months of 2005.
We did not purchase any shares of our own common stock during the six
months ended June 30, 2005. A total of 5,568,900 shares may be purchased under a
plan we announced on May 9, 2000 to repurchase up to 6,000,000 shares of our
issued and outstanding common stock.
LIQUIDITY, COMMITMENTS AND OFF-BALANCE SHEET RISKS
Our primary sources of funds for liquidity are:
o Lines of credit and other secured borrowings o Servicing fees
o Match funded debt o Payments
received on
loans and
securities
o Debt securities o Proceeds from
sales of assets
We closely monitor our liquidity position and ongoing funding
requirements. At June 30, 2005, we had $308,837 of unrestricted cash and $2,942
of short-term investment grade securities. Unrestricted cash and short-term
investment grade securities combined represented 24% of total assets at June 30,
2005. Under certain of our credit facilities, we are required to maintain
minimum liquidity levels. Among the risks and challenges associated with our
funding activities are the following:
o As a result of debanking, we are no longer able to take deposits in
the United States, and we made a net cash payment of $164,212 to
Marathon National Bank on June 30, 2005 in connection with their
assumption of our customer deposits.
o Cash requirements to fund our acquisition of additional servicing
rights and related advances.
o The maturity of existing senior secured credit agreements with an
outstanding balance of $37,728 within the next twelve months.
o Ongoing cash requirements to fund operations.
In the last several years, our Residential Servicing business has
grown through the purchase of servicing rights. Servicing rights entitle us as
the owner to earn servicing fees and other types of ancillary income, but they
also impose on us various obligations as the servicer. Among these are the
obligations to advance our own funds to meet contractual principal and interest
payments for certain investors and to pay taxes, insurance and various other
items that are required to preserve the assets being serviced.
40
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Our ability to expand our Residential Servicing business depends in
part on our ability to obtain additional financing to purchase new servicing
rights and to fund servicing advances. We currently use a variety of sources of
debt to finance these assets, including match funded agreements, credit
facilities and seller financing. Our credit facilities provide financing to us
at amounts that are less than the full value of the related servicing assets
that serve as collateral for the credit facilities. If we cannot replace or
renew these sources as they mature or obtain additional sources of financing, we
may be unable to acquire new servicing rights or make the associated advances.
Credit facilities directly related to our Residential Servicing business are
summarized as follows:
o Under a match funding agreement that we entered into on December 20,
2001, we are eligible to sell advances on loans serviced for others up
to a maximum debt balance of $200,000 at any one time. At June 30,
2005, we had $106,470 of match funded liabilities outstanding under
this facility, which will mature in January 2006. The sales of
advances do not qualify as sales for accounting purposes; therefore,
we report them as secured borrowings with pledges of collateral.
o In April 2003, we also entered into a secured credit agreement that
may be used to fund servicing advances and acquisitions of servicing
rights. The agreement matured in April 2005 and has been renewed
through April 2006. In April 2005 we concluded a syndication of this
credit line that increased our borrowing capacity under this agreement
by $70,000 for a total of $140,000. The syndication formally closed
effective July 1, 2005. At June 30, 2005, we had a balance outstanding
under this agreement of $37,728.
o On November 17, 2004, we entered into a match funded agreement under
which we transferred certain of our advances on loans serviced for
others. As of June 30, 2005, proceeds received in connection with this
transfer of advances were $175,000. The transfers of advances under
this agreement do not qualify as sales for accounting purposes because
we retain effective control of the advances. Accordingly, we report
the advances transferred as match funded assets and the amount of
proceeds we receive from the transfers as a secured borrowing with
pledge of collateral. The two term notes of $100,000 and $75,000 under
this facility have stated maturities of October 2013 and March 2014,
respectively. The variable funding note, which has a maximum amount of
$100,000, has a stated maturity of November 2010.
We believe that our existing sources of liquidity, including
internally generated funds, will be adequate to fund our planned activities for
the foreseeable future, although there can be no assurances in this regard. As
discussed above, we continue to evaluate other sources of liquidity, such as
debt securities, lines of credit from unaffiliated parties, match funded debt
and other secured borrowings.
Our operating activities provided (used) $152,702 and $154,072 of cash
flows during the six months ended June 30, 2005 and 2004, respectively.
Operating cash flow declined in 2005 primarily as a result of lower net income,
a decline in net collections on advances and match funded advances on loans
serviced for others and slower growth in the amount of borrower payments held by
us prior to their being transferred to collection accounts, offset in large part
by an increase in cash provided by trading securities. The increase in cash
provided by trading securities in 2005 is primarily due to maturities, sales and
principal repayment on CMOs, which we invested in prior to debanking to meet the
Qualified Thrift Lender requirements of the Bank.
Our investing activities provided (used) cash flows totaling $(52,719)
and $6,592 during the six months ended June 30, 2005 and 2004, respectively. The
decline in cash flows provided by investing activities in 2005 is largely the
result of an increase in purchases of mortgage servicing rights, coupled with a
decline in proceeds from the sale of real estate and a decline in principal
payments received on loans. These increased cash outflows were partly offset by
declines in acquisitions of match funded loans and originations of loans in
2005.
Our financing activities provided (used) cash flows of $(332,641) and
$(36,273) during the six months ended June 30, 2005 and 2004, respectively. Cash
flows used by financing activities increased principally because of the decline
in deposits in 2005 as a result of maturing certificates of deposit and the cash
payment to Marathon National Bank on June 30, 2005 in connection with their
assumption of our customer deposits. Partially offsetting this increase in cash
outflows, match funded agreements provided additional net cash in 2005 as a
result of increased borrowing capacity. Also, a line of credit collateralized by
servicing advances matured in 2004 resulting in a significant cash outflow.
See the Consolidated Statements of Cash Flows in the Interim
Consolidated Financial Statements for additional details regarding cash flows
during the six months ended June 30, 2005 and 2004.
Commitments. We believe that we have adequate resources to fund all
unfunded commitments to the extent required and meet all contractual obligations
as they come due. Such contractual obligations include our Convertible Notes,
Capital Trust Securities, lines of credit and other secured borrowings and
operating leases. See Note 7 to the Interim Consolidated Financial Statements
for additional information regarding commitments and contingencies.
41
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - (Continued)
(Dollars in thousand, except share data)
Off-Balance Sheet Risks. In addition to commitments to extend credit,
we are party to various off-balance sheet financial instruments in the normal
course of our business to manage our foreign currency exchange rate risk. See
Note 4 to the Interim Consolidated Financial Statements and "Quantitative and
Qualitative Disclosures about Market Risk."
We conduct business with a variety of financial institutions and other
companies in the normal course of business, including counterparties to our
off-balance sheet financial instruments. We are subject to potential financial
loss if the counterparty is unable to complete an agreed upon transaction. We
seek to limit counterparty risk through financial analysis, dollar limits and
other monitoring procedures.
REGULATORY MATTERS
See Note 5 to the Interim Consolidated Financial Statements.
RECENT ACCOUNTING DEVELOPMENTS
For information relating to the effects of our adoption of recent
accounting standards, see Note 2 to the Interim Consolidated Financial
Statements.
42
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (Continued)
(Dollars in thousands)
Market risk includes interest rate risk, foreign currency exchange
rate risk and liquidity risk. We are exposed to interest rate risk to the degree
that our interest-bearing liabilities mature or reprice at different speeds, or
different bases, than our interest-earning assets. We are exposed to foreign
currency exchange rate risk in connection with our investment in non-U.S. dollar
functional currency operations and to the extent our foreign exchange positions
remain unhedged. Market risk also reflects the risk of declines in the valuation
of trading securities, mortgage servicing rights and in the value of the
collateral underlying loans and the value of real estate held.
We are also exposed to liquidity risk primarily because of the highly
variable daily cash requirements to support the Residential Servicing business,
including acquisitions of mortgage servicing rights, the requirement to make
advances pursuant to servicing contracts and the process of remitting borrower
payments to the custodial accounts. In general, we finance our operations
through operating cash flows and various other sources, including long-term debt
and financing facilities. See "Liquidity, Commitments and Off-Balance Sheet
Risks" for additional discussion regarding liquidity.
The primary risk associated with mortgage servicing rights is that
they will lose a portion of their value as a result of higher than anticipated
prepayments occasioned by declining interest rates or because of higher than
anticipated delinquency rates occasioned by deteriorating credit conditions.
Interest rates, prepayment speeds and the payment performance of the underlying
loans significantly affect both our initial and ongoing valuations and the rate
of amortization of mortgage servicing rights. In general, the value of mortgage
servicing assets is affected by increased mortgage refinance activity that is
influenced by changes in borrowers' credit ratings, shifts in value in the
housing market and interest rates. While such assets tend to decrease in value
as interest rates decrease, they tend to increase in value as interest rates
increase. Increases in prepayment speeds result in increases in the amortization
expense of our mortgage servicing rights. As of June 30, 2005 and December 31,
2004, we held $132,333 and $131,409, respectively, of mortgage servicing rights.
We perform an interest rate sensitivity analysis of our mortgage
servicing rights portfolio every quarter. We currently estimate that the fair
value of the portfolio increases by approximately 5% for every 50 basis point
(bps) increase in interest rates and reduces by approximately 7% for every 50
bps decline in interest rates. Mortgage servicing rights are carried at the
lower of amortized cost or fair value by strata. To the extent that fair value
were to decline below amortized cost, we would record an impairment charge to
earnings and establish a valuation allowance. A subsequent increase in fair
value could result in the recovery of some or all of a previously established
valuation allowance. However, an increase in fair value of a particular stratum
above its amortized cost would not be reflected in current earnings.
Our Residential Servicing business is characterized by non-interest
earning assets financed by interest-bearing liabilities. Among the more
significant non-interest earning assets are servicing advances and mortgage
servicing rights. At June 30, 2005, we had servicing advances of $518,432
consisting of advances on loans serviced for others of $187,095 and match funded
advances on loans serviced for others of $331,337. See "Changes in Financial
Condition - Match Funded Assets and - Advances on Loans and Loans serviced for
Others".
We are also exposed to interest rate risk because earnings on float
balances are affected by short-term interest rates. These float balances, which
are not included in our financial statements, amounted to $1,020,725 and
$867,884 at June 30, 2005 and December 31, 2004, respectively. We report these
earnings as a component of servicing and related fees. See "Results of
Operations - Segment Results - Residential Loan Servicing" and "Non-Interest
Revenue - Servicing and Related Fees" for additional information regarding float
earnings and yields for the reported periods.
At June 30, 2005, the combined balance of our match funded
liabilities, debt securities, lines of credit and other secured borrowings
totaled $568,596. Of this amount $322,550 was variable rate debt, and therefore
sensitive to changes in interest rates, and $246,046 was fixed rate debt. See
"Changes in Financial Condition - Match Funded Liabilities, Lines of Credit and
Other Secured Borrowings and Debt Securities" for information regarding debt
maturities.
Our Asset/Liability Management Committee is authorized to utilize a
wide variety of off-balance sheet financial techniques to assist it in the
management of interest rate risk and foreign currency exchange rate risk. These
techniques include interest rate exchange contracts or "swap" agreements,
interest rate caps and floors, U.S. Treasury interest rate futures contracts,
foreign currency futures contracts, foreign currency forwards and European
swaptions and put options.
We have entered into foreign currency futures to hedge our net
investment in the foreign subsidiary that owns our U.K. suprime residual
securities and the short-term Canadian-Dollar-denominated loan that we made to
facilitate the sale of our investment in the foreign subsidiary that owned the
shopping center in Halifax, Nova Scotia. Our principal exposure to foreign
currency exchange rates exists with the British Pound versus the U.S. dollar and
the Canadian Dollar versus the U.S. Dollar. See Note 4 to our Interim
Consolidated Financial Statements for additional information regarding these
hedges.
43
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer
and principal financial officer, evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) under the securities
Exchange Act) as of June 30, 2005. Based on this evaluation, our chief executive
officer and principal financial officer concluded that, as of June 30, 2005 our
disclosure controls and procedures were (1) designed to ensure that material
information relating to the Company, including its consolidated subsidiaries, is
made known to our chief executive officer and acting principal officer by others
within those entities, particularly during the period in which this report was
being prepared and (2) effective, in that they provide reasonable assurance that
information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms.
No change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d -15(f) under the Exchange Act) occurred during the
fiscal quarter ended June 30, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, including, but not
limited to the following:
o projections for growth of the residential loan servicing business and
business opportunities in other core businesses;
o assumptions related to the sources of liquidity and the adequacy of
financial resources;
o estimates regarding interest rates and foreign currency transactions;
and
o expectations related to pending litigation.
Forward-looking statements are not guarantees of future performance,
and involve a number of assumptions, risks and uncertainties that could cause
actual results to differ materially. Important factors that could cause actual
results to differ materially from those suggested by the forward-looking
statements include, but are not limited to, the following:
o general economic and market conditions,
o prevailing interest or currency exchange rates,
o availability of servicing rights for purchase,
o governmental regulations and policies,
o international political and economic uncertainty,
o availability of adequate and timely sources of liquidity,
o uncertainty related to dispute resolution and litigation, and
o real estate market conditions and trends.
Further information on the risks specific to our business are detailed within
this report and our other reports and filings with the Securities and Exchange
Commission, including our periodic reports on Form 10-K for the year ended
December 31, 2004, Form 10-Q for the quarter ended March 31, 2005 and Form 8-K.
The forward-looking statements speak only as of the date they are made and
should not be relied upon. OCN undertakes no obligation to update or revise the
forward-looking statements.
44
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See "Note 17 Commitments and Contingencies" of Ocwen Financial
Corporation's Interim Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At OCN's Annual Meeting of Shareholders held on May 17, 2005, the
following individuals were elected to the Board of Directors:
Votes For Votes Withheld
--------------- ---------------
William C. Erbey ....................... 57,586,356 129,099
Ronald M. Faris ........................ 55,563,524 2,151,931
Ronald J. Korn ......................... 57,606,900 108,555
William H. Lacy ........................ 57,607,030 108,425
W. Michael Linn ........................ 56,285,436 1,430,019
W.C. Martin ............................ 57,606,775 108,680
Barry N. Wish .......................... 53,589,949 4,125,506
Ratification of PricewaterhouseCoopers LLP as the independent auditors
of OCN for the fiscal year ending December 31, 2005 was also voted on and
approved by the shareholders. The votes were as follows:
Votes for ................................... 57,681,793
Votes against ............................... 13,813
Abstentions ................................. 19,849
ITEM 6. EXHIBITS.
2.1 Agreement of Merger dated as of July 25, 1999 among Ocwen Financial
Corporation, Ocwen Asset Investment Corp. and Ocwen Acquisition
Company (1)
3.1 Amended and Restated Articles of Incorporation (2)
3.2 Amended and Restated Bylaws (3)
4.0 Form of Certificate of Common Stock (2)
4.1 Certificate of Trust of Ocwen Capital Trust I (4)
4.2 Amended and Restated Declaration of Trust to Ocwen Capital Trust I
(4)
4.3 Form of Capital Security of Ocwen Capital Trust I (Included in
Exhibit 4.2) (4)
4.4 Form of Indenture relating to 10.875% Junior Subordinated Debentures
due 2027 of OCN (4)
4.5 Form of 10.875% Junior Subordinated Debentures due 2027 of OCN
(Included in Exhibit 4.4) (4)
4.6 Form of Guarantee of OCN relating to the Capital Securities of Ocwen
Capital Trust I (4)
4.7 Registration Rights Agreement dated as of July 28, 2004, between OCN
and Jeffries & Company Inc. (10)
4.8 Indenture dated as of July 28, 2004, between OCN and the Bank of New
York Trust Company, N.A., as trustee (10)
10.1 Ocwen Financial Corporation 1996 Stock Plan for Directors, as
amended (5)
10.2 Ocwen Financial Corporation 1998 Annual Incentive Plan (6)
10.3 Compensation and Indemnification Agreement, dated as of May 6, 1999,
between OAC and the independent committee of the Board of Directors
(7)
10.4 Indemnity agreement, dated August 24, 1999, among OCN and OAC's
Board of Directors (8)
10.5 Amended Ocwen Financial Corporation 1991 Non-Qualified Stock Option
Plan, dated October 26, 1999 (8)
10.6 First Amendment to Agreement, dated March 31, 2000, between HCT
Investments, Inc. and OAIC Partnership I, L.P. (8)
10.7 Ocwen Financial Corporation Deferral Plan for Directors, dated March
7, 2005 (9)
10.8 Collateral Trust Agreement, dated June 28, 2005, between OCN and the
Bank of New York Trust Company, N.A. (filed herewith)
10.9 Guaranty, dated June 28, 2005, from OCN to the Guaranteed Parties
(filed herewith)
10.10 Cash Collateral Agreement, dated June 28, 2005 among OCN, Bank of
New York Trust Company, N.A. as Collateral Trustee and Bank of New
York Trust Company N.A. as Account Bank (filed herewith)
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2 Certification of the Principal Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith)
45
PART II - OTHER INFORMATION
32.1 Certification of the Chief Executive Officer pursuant to U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
32.2 Certification of the Principal Financial Officer pursuant to U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
(1) Incorporated by reference from the similarly described exhibit included
with the Registrant's Current Report on Form 8-K filed with the Commission
on July 26, 1999.
(2) Incorporated by reference from the similarly described exhibit in
connection with the Registrant's Registration Statement on Form S-1 (File
No. 333-5153), as amended, declared effective by the Commission on
September 25, 1996.
(3) Incorporated by reference from the similarly described exhibit included
with the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998.
(4) Incorporated by reference from the similarly described exhibit filed in
connection with Ocwen Financial Corporation's Registration Statement on
Form S-1 (File No. 333-28889), as amended, declared effective by the
Commission on August 6, 1997.
(5) Incorporated by reference from the similarly described exhibit filed in
connection with the Registrant's Registration Statement on Form S-8 (File
No. 333-44999), effective when filed with the Commission on January 28,
1998.
(6) Incorporated by reference from the similarly described exhibit to Ocwen
Financial Corporation's Definitive Proxy Statement with respect to Ocwen
Financial Corporation's 1998 Annual Meeting of Shareholders filed with the
Commission on March 31, 1998.
(7) Incorporated by reference from OAC's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999.
(8) Incorporated by reference from the similarly described exhibit included
with Registrant's Quarterly Report of Form 10-Q for the quarterly period
ended March 31, 2000.
(9) Incorporated by reference from the similarly described exhibit included
with the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2004.
(10) Incorporated by reference from the similarly described exhibit included
with Registrant's Quarterly Report on Form10-Q for the quarterly period
ended June 30, 2004.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
OCWEN FINANCIAL CORPORATION
By: /s/ ROBERT J LEIST, JR
----------------------------------------
Robert J Leist, Jr ,
Senior Vice President & Principal
Financial Officer
(On behalf of the Registrant and as its
principal financial officer)
Date: August 9, 2005
47
EXHIBIT 10.8
EXECUTION COPY
COLLATERAL TRUST AGREEMENT
Dated June 28, 2005
by and between
OCWEN FINANCIAL CORPORATION
and
THE BANK OF NEW YORK TRUST COMPANY, N.A.
as Collateral Trustee
TABLE OF CONTENTS
SECTION Page
- -------------------------------------------------------------------------------------- ----
ARTICLE I 1
Section 1.01 . Certain Defined Terms 1
Section 1.02 . Certain References 2
ARTICLE II 2
Section 2.01 . Cash Collateral 2
ARTICLE III 2
Section 3.01 . Direction by OTS 2
Section 3.02 . Right to Initiate Judicial Proceedings, Etc 2
Section 3.03 . Remedies Not Exclusive 3
Section 3.04 . Waiver of Certain Rights 3
Section 3.05 . Limitation on Collateral Trustee's Duties in Respect of Cash Collateral 3
Section 3.06 . Limitation by Law 3
Section 3.07 . Absolute Rights of Guaranteed Parties 3
ARTICLE IV 4
Section 4.01 . Disbursement of Amounts in Cash Collateral Account 4
Section 4.02 . Full Release of Cash Collateral Upon Termination Date 4
Section 4.03 . Effect of Release of Cash Collateral 5
ARTICLE V 5
Section 5.01 . Delivery of Agreements 5
Section 5.02 . Compensation and Expenses 5
Section 5.03 . Stamp and Other Similar Taxes 5
Section 5.04 . Filing Fees, Excise Taxes, Etc. 5
Section 5.05 . Indemnification 6
Section 5.06 . Further Assurances 6
ARTICLE VI 6
Section 6.01 . Declaration of Trust 6
Section 6.02 . Exculpatory Provisions 6
Section 6.03 . Delegation of Duties 7
Section 6.04 . Reliance by Collateral Trustee 7
Section 6.05 . Limitations on Duties of the Trustee 7
Section 6.06 . Moneys to Be Held in Trust 8
Section 6.07 . Resignation and Removal of Collateral Trustee 8
Section 6.08 . Status of Successors to Trustee 8
Section 6.09 . Merger of the Collateral Trustee 8
Section 6.10 . Additional Co-Trustees; Separate Trustees 9
Section 6.11 . Trustee Appointed Attorney-in-Fact 9
Section 6.12 . Ordinary Care 10
ARTICLE VII 10
Section 7.01 . Amendments, Supplements and Waivers 10
Section 7.02 . Additional Actions 10
Section 7.03 . Notices 10
Section 7.04 . Headings 10
Section 7.05 . Severability 11
Section 7.06 . Dealings with the Grantor 11
Section 7.07 . Claims Against Trustee 11
Section 7.08 . Binding Effect 11
Section 7.09 . Governing Law 11
Section 7.10 . Effectiveness 11
Section 7.11 . Effect on Guaranty 11
Section 7.12 . Counterparts 11
Exhibit A - Guaranty
Exhibit B - Form of Certificate of Demand
COLLATERAL TRUST AGREEMENT
COLLATERAL TRUST AGREEMENT, dated June 28, 2005, by and between OCWEN
FINANCIAL CORPORATION, Florida corporation (the "Grantor"), THE BANK OF NEW YORK
TRUST COMPANY, N.A., a national banking association (together with any successor
collateral trustee appointed pursuant to Article 6, the "Collateral Trustee"),
as trustee for the Guaranteed Parties (as defined below). Certain capitalized
terms used herein are defined in Article 1 of this Agreement.
PRELIMINARY STATEMENTS:
(1) The Grantor has executed and delivered to the Office of Thrift
Supervision (together with any governmental agency succeeding to any of its
principal functions in the event that the Office of Thrift Supervision ceases to
exist, the "OTS"), for the benefit of the Guaranteed Parties (as defined
therein), a Guaranty (the "Guaranty") dated as of the date hereof in respect of
the Guaranteed Obligations (as defined therein). Capitalized terms used but not
defined herein are used herein as defined in the Guaranty, a copy of which is
attached hereto as Exhibit A.
(2) In order to secure the Guaranteed Obligations, the Grantor has
executed and delivered to the OTS, for the benefit of the Guaranteed Parties, a
Cash Collateral Agreement (the "Cash Collateral Agreement") dated the date
hereof.
(3) Pursuant to the terms of the Guaranty and the Cash Collateral
Agreement, the Grantor has opened a non-interest bearing cash collateral account
(the "Cash Collateral Account"), in the name of the Grantor but under the sole
control and dominion of the Collateral Trustee.
NOW, THEREFORE, in consideration of the premises, the Grantor hereby
agrees with the Collateral Trustee for its benefit and the equal and ratable
benefit of the Guaranteed Parties as follows:
ARTICLE I
DEFINITIONS
Section 1.01. Certain Defined Terms. The following terms shall have the
following meanings as used herein (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
"Account Bank" has the meaning specified in the Cash Collateral
Agreement.
"Affiliate" means, with respect to a particular Person, (a) any Person
which, directly or indirectly, controls, is controlled by, or is under common
control with such particular Person, or (b) any Person who is a director or
officer of such particular Person. For purposes of this definition, control of a
Person shall mean the power, direct or indirect, (i) to vote 5% or more of the
securities having ordinary voting power for the election of directors of such
Person, or (ii) to direct or cause the direction of the management and policies
of such Person whether by contract or otherwise.
"Authorized Officer" means the Chairman, the President, any Vice
President, the Secretary or the Treasurer of a Person or any other officer
designated as an "Authorized Officer" by the Board of Directors (or equivalent
governing body) of such Person. "Bankruptcy Code" means Title 11 of the United
States Code entitled "Bankruptcy", as amended from time to time. "Business Day"
means a day of the year on which banks are not required or authorized by law to
close in New York City or the city in which the Collateral Trustee maintains its
corporate trust office.
"Cash Collateral" has the meaning specified in the Cash Collateral
Agreement.
"Cash Collateral Account" has the meaning specified in the Preliminary
Statements.
"Cash Collateral Agreement" has the meaning specified in the Preliminary
Statements.
"Certificate of Demand" means a certificate substantially in the form of
Exhibit B executed by a Guaranteed Party and delivered to the Collateral Trustee
pursuant to Section 4.01.
1
"Certified Claim" means an unpaid and unsatisfied, or partially paid and
partially satisfied, Claim (as defined in the Guaranty) in respect of any
Guaranteed Obligations (a) that is a present right to payment, (b) has been
reduced to judgment and/or is otherwise due and payable and enforcement thereof
has not been effectively stayed, (c) with respect to which demand has been made
upon the Grantor under the Guaranty and (d) with respect to which a true,
correct and complete Certificate of Demand has been executed and delivered to
the Collateral Trustee and the Grantor.
"Collateral Trust Estate" means all of the right, title and interest of
the Collateral Trustee, whether now owned or hereafter acquired, in and to the
Cash Collateral.
"Collateral Trustee" has the meaning specified in the recital of parties
to this Agreement.
"Collateral Trustee's Fees" means the fees and other amounts payable to
the Collateral Trustee pursuant to Sections 5.02, 5.03 and 5.04 and amounts
claimed and unpaid pursuant to Section 5.05.
"Guaranteed Obligations" has the meaning specified in the Guaranty.
"Guaranteed Parties" has the meaning specified in the Guaranty.
"Guaranty" has the meaning specified in the Preliminary Statements.
"OTS" has the meaning specified in the Preliminary Statements.
"Person" means an individual, partnership, corporation (including a
business trust), limited liability company, joint stock company, trust,
unincorporated association, joint venture or other entity, or a government or
any political subdivision or agency thereof.
"Subsidiary" of any Person means any corporation, partnership, joint
venture, limited liability company, trust or estate of which (or in which) more
than 50% of (a) the issued and outstanding capital stock having ordinary voting
power to elect a majority of the Board of Directors of such corporation
(irrespective of whether at the time capital stock of any other class or classes
of such corporation shall or might have voting power upon the occurrence of any
contingency), (b) the interest in the capital of such partnership, joint venture
or limited liability company, or (c) the beneficial interest in such trust or
estate is at the time directly or indirectly owned or controlled by such Person,
by such Person and one or more of its other Subsidiaries or by one or more of
such Person's other Subsidiaries.
Section 1.02. Certain References. In this Agreement, the words "hereof,"
"herein" and "hereunder", and words of similar import, shall refer to this
Agreement as a whole and not to any particular provision of this Agreement. All
section, schedule and exhibit references set forth in this Agreement are, unless
otherwise specified, references to such section in, or schedule or exhibit to,
this Agreement.
ARTICLE II
CONFIRMATION OF SECURITY INTERESTS
Section 2.01. Cash Collateral. The Grantor hereby confirms that,
pursuant to the terms of the Cash Collateral Agreement, the Grantor has pledged
and assigned to the Collateral Trustee for its benefit and in trust for the
ratable benefit of the Guaranteed Parties, and has granted the Collateral
Trustee for its benefit and in trust for the ratable benefit of the Guaranteed
Parties a lien on and security interest in, the Cash Collateral described
therein.
ARTICLE III
ACTIONABLE DEFAULTS; REMEDIES
Section 3.01. Direction by OTS. As to any matters not expressly provided
for under this Agreement, the Guaranty or the Cash Collateral Agreement, the
Collateral Trustee shall not be required to exercise any discretion or to take
any action under this Agreement, the Guaranty or the Cash Collateral Agreement
or in respect of the Cash Collateral, but shall be required to act or to refrain
from acting (and shall be fully protected in acting or refraining from acting)
in accordance with the instructions of the OTS.
2
Section 3.02. Right to Initiate Judicial Proceedings, Etc. (a) Upon the
occurrence of and during the continuance of any Event of Default under the
Guaranty, the Collateral Trustee (i) shall have the right and power to institute
and maintain such suits and proceedings as it or the OTS may deem appropriate to
protect and enforce the rights vested in it by this Agreement and the Cash
Collateral Agreement and (ii) may either, after entry or without entry, proceed
by suit or suits at law or in equity to enforce such rights and to foreclose
upon the Cash Collateral and to dispose of, collect or otherwise realize upon,
all or any portion of the Collateral Trust Estate under the judgment or decree
of a court of competent jurisdiction.
(b) If a receiver of the Collateral Trust Estate shall be appointed
in judicial proceedings, the Collateral Trustee may be appointed as such
receiver. Notwithstanding the appointment of a receiver, the Collateral Trustee
shall be entitled to retain possession and control of all cash held by or
deposited with it or its agents or co-trustees pursuant to any provision of this
Agreement or the Cash Collateral Agreement.
Section 3.03. Remedies Not Exclusive. (a) No remedy conferred upon or
reserved to the Collateral Trustee herein or in the Cash Collateral Agreement is
intended to be a limitation exclusive of any other remedy or remedies, but every
such remedy shall be cumulative and shall be in addition to every other remedy
conferred herein or in the Cash Collateral Agreement or now or hereafter
existing at law or in equity or by statute.
(b) No delay or omission of the Collateral Trustee to exercise any
right, remedy or power hereunder or under the Cash Collateral Agreement shall
impair any such right, remedy or power or shall be construed to be a waiver of
any Event of Default under the Guaranty or any acquiescence therein; and every
right, power and remedy given by this Agreement or the Cash Collateral Agreement
to the Collateral Trustee may be exercised from time to time and as often as may
be deemed expedient by the Collateral Trustee.
(c) In case the Collateral Trustee shall have proceeded to enforce
any right, remedy or power under this Agreement or the Cash Collateral Agreement
and the proceeding for the enforcement thereof shall have been discontinued or
abandoned for any reason or shall have been determined adversely to the
Collateral Trustee, then and in every such case the Grantor, the Collateral
Trustee and the Guaranteed Parties shall, subject to any determination in such
proceeding, severally be restored to their former positions and rights hereunder
and under the Cash Collateral Agreement with respect to the Collateral Trust
Estate, the Cash Collateral Account and in all other respects, and thereafter
all rights, remedies and powers of the Collateral Trustee shall continue as
though no such proceeding had been taken.
(d) The Grantor expressly agrees that all rights of action and
rights to assert claims upon or under this Agreement and the Cash Collateral
Agreement may be enforced by the Collateral Trustee without the possession of
any debt instrument or the production thereof in any trial or other proceeding
relative thereto, and any such suit or proceeding instituted by the Collateral
Trustee shall be brought in its name as Collateral Trustee and any recovery of
judgment shall be held as part of the Cash Collateral.
Section 3.04. Waiver of Certain Rights. The Grantor, on behalf of itself
and all who may claim through or under it, including, without limitation, any
and all subsequent Affiliates, creditors, vendees, assignees and lienors,
expressly waives and releases, to the fullest extent permitted by law, any,
every and all rights to demand or to have any marshalling of the Collateral
Trust Estate upon any enforcement of the Cash Collateral Agreement, including,
without limitation, upon any sale, whether made under any power of sale herein
granted or pursuant to judicial proceedings or upon any foreclosure or any
enforcement of the Cash Collateral Agreement or this Agreement and consents and
agrees that all the Collateral Trust Estate and any such sale may be offered and
sold as an entirety.
Section 3.05. Limitation on Collateral Trustee's Duties in Respect of
Cash Collateral. Beyond the duties set forth in this Agreement and the Cash
Collateral Agreement, the Collateral Trustee shall not have any duty to the
Grantor, the OTS or the Guaranteed Parties as to any Cash Collateral in the
Collateral Trustee's possession or control or in the possession or control of
any agent or nominee of the Collateral Trustee or any income thereon or as to
the preservation of rights against prior parties or any other rights pertaining
thereto, except that the Collateral Trustee shall be liable for its failure to
exercise ordinary care in the handling of moneys and securities actually
received by it.
Section 3.06. Limitation by Law. All rights, remedies and powers
provided by this Article 3 may be exercised only to the extent that the exercise
thereof does not violate any applicable provision of law, and all the provisions
of this Article 3 are intended to be subject to all applicable mandatory
provisions of law which may be controlling and to be limited to the extent
necessary so that they will not render this Agreement invalid, unenforceable in
whole or in part.
Section 3.07. Absolute Rights of Guaranteed Parties. Notwithstanding any
other provision of this Agreement or the Cash Collateral Agreement, each of the
Guaranteed Parties has an absolute and unconditional right to receive payment of
all of the Guaranteed Obligations owing to such Guaranteed Party when the same
becomes due and payable and at the time and place and otherwise in the manner
set forth in the Guaranty, and the right of each such Guaranteed Party to
institute proceedings for the enforcement of such
3
payment on or after the date such payment becomes due and to assert its position
as a secured creditor in a proceeding under the Bankruptcy Code in which the
Grantor is a debtor, and the obligation of the Grantor to pay all of the
Guaranteed Obligations owing to each of the Guaranteed Parties as, when and to
the extent payable, shall not be impaired or affected without the consent of
such Guaranteed Party. In addition, the right of any Guaranteed Party to receive
payment or security from sources other than the Cash Collateral shall not be,
and is not hereby, impaired or affected in any manner. Without limiting the
generality of the foregoing provisions of this Section 3.07, no Guaranteed Party
shall be obligated to share with any other Guaranteed Party any proceeds of any
Cash Collateral other than pursuant to, and to the extent expressly required
under, this Agreement, the Guaranty and the Cash Collateral Agreement; nor shall
any Guaranteed Party's right to receive its ratable share of any amounts
maintained in the Cash Collateral Account, if any, or any proceeds of any of the
Cash Collateral, or any part thereof, under the terms of this Agreement or the
Cash Collateral Agreement be diminished or affected in any way by its right to
receive proceeds of any other collateral or right of setoff, or payment upon a
guaranty or from any other source.
ARTICLE IV
DISBURSEMENTS; RELEASE OF CASH COLLATERAL
Section 4.01. Disbursement of Amounts in Cash Collateral Account. (a) No
earlier than five days (but no later than seven days) following receipt by the
Collateral Trustee of a Certificate of Demand (together with such other
certifications or documentation evidencing the related Certified Claim as the
Collateral Trustee may reasonably request), the Collateral Trustee shall
instruct the Account Bank to pay to the applicable Guaranteed Party the full
amount of the Certified Claim described in such Certificate of Demand from the
amounts on deposit in the Cash Collateral Account. Notwithstanding the
foregoing, if within five days following receipt by the Collateral Trustee of a
Certificate of Demand with respect to any Certified Claim the Grantor shall have
presented to the Collateral Trustee (i) a cancelled check or (ii) proof of
payment by wire transfer evidencing, in each case, the payment in full of such
Certified Claim, then the Collateral Trustee shall not instruct the Account Bank
to pay the applicable Guaranteed Party.
(b) If, upon receipt of any Certificate of Demand, the Collateral
Trustee shall have reason to believe that such Certificate of Demand is
incorrect, false or fraudulent, the Collateral Trustee shall be entitled to
consult with independent counsel or seek instructions from a court of competent
jurisdiction, all as provided in Section 6.04(b). Notwithstanding the foregoing,
the Collateral Trustee may conclusively rely without independent verification on
any Certificate of Demand and shall have no duty to make any independent inquiry
or investigation before instructing the Account Bank to pay any Certified Claim
pursuant to subsection (a) above.
(c) If at any time (i) there shall be more than one unpaid and
outstanding Certified Claim in respect of which the Collateral Trustee shall
have received a Certificate of Demand and (ii) the amounts on deposit in the
Cash Collateral Account at such time shall be insufficient to pay all such
Certified Claims, the Collateral Trustee shall make payments to each applicable
Guaranteed Party ratably in accordance with such Guaranteed Party's Certified
Claim, regardless of the order in which such Certificates of Demand were
submitted to the Collateral Agent. Nothing in the foregoing sentence shall be
construed to limit the obligation of the Grantor to maintain the Minimum Cash
Collateral Account pursuant to the Guaranty and the Cash Collateral Agreement.
(d) If at any time the amount on deposit in the Cash Collateral
Account is less than the Minimum Cash Collateral Amount (whether as a result of
disbursements pursuant to this Section 4.01 or otherwise), the Collateral
Trustee shall promptly send a written notice to the Grantor and the OTS setting
forth the total amount of moneys in the Cash Collateral Account at such time.
Section 4.02. Full Release of Cash Collateral Upon Termination Date. (a)
The Collateral Trustee shall promptly release the Cash Collateral upon the
fulfillment of the conditions set forth in, and in accordance with the
provisions of, Section 4.02(c).
(b) Upon the occurrence of the Termination Date, the Grantor shall
deliver to the OTS and the Collateral Trustee a certificate of an Authorized
Officer of the Grantor certifying that, to the best of the Grantor's knowledge,
both of the following have been indefeasibly paid in full in cash: (i) all
Guaranteed Obligations with respect to which a Claim (as defined in the
Guaranty) was asserted (whether under the Guaranty or otherwise) on or prior to
the sixth anniversary of the date on which the FSB's federal bank charter was
cancelled and (ii) all other amounts payable by the Grantor under the Guaranty
(whether in respect of enforcement costs, indemnification payments or
otherwise).
(c) The Collateral Trustee shall, upon the request of the Grantor
accompanied by (i) the certificate described in subsection (b) above and (ii) a
written notice of non-objection from the OTS (a "Notice of Non-Objection") (upon
which, in each case, the Collateral Trustee may conclusively rely without
independent verification) release all the Cash Collateral from the security
interest in its favor and deliver to the Grantor all Cash Collateral in the
possession of the Collateral Trustee, provided that the Grantor shall have made
adequate provision for the expenses of the Collateral Trustee associated with
such release of Cash Collateral and all other expenses of, or payable
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to, the Collateral Trustee hereunder. If the Collateral Trustee shall not have
received a Notice of Non-Objection from the OTS, or if the OTS shall have
notified the Collateral Trustee that it has reason to believe that the
Termination Date has not occurred, the Collateral Trustee shall not release the
Cash Collateral unless and until the OTS or a court of competent jurisdiction
pursuant to a final, non-appealable judgment (including a judgment that becomes
non-appealable by reason of expiration of any period of time limiting the right
to appeal therefrom) so directs the Collateral Trustee.
(d) Any Notice of Non-Objection delivered to the Collateral Trustee
by the OTS pursuant to subsection (c) above shall be conclusive and binding on
all parties (including, without limitation, the Guaranteed Parties). The OTS
shall incur no liability whatsoever to any Guaranteed Party in connection with
the delivery of a Notice of Non-Objection on the basis of any good-faith belief
(without any requirement that the OTS independently investigate the same or make
an independent determination with respect thereto) that the Termination Date has
occurred.
Section 4.03. Effect of Release of Cash Collateral. Upon the
effectiveness of the release of the Cash Collateral pursuant to Section 4.02,
all right, title and interest of the Collateral Trustee and the Guaranteed
Parties in, to and under the Collateral Trust Estate, the Cash Collateral and
the Cash Collateral Agreement shall terminate and shall revert to the Grantor
and its successors and assigns, and the estate, right, title and interest of the
Collateral Trustee therein shall thereupon cease; and in such case, upon the
written request of the Grantor, its successors or assigns, and at the cost and
expense of the Grantor, its successors or assigns, the Collateral Trustee shall
execute and deliver a satisfaction of the Cash Collateral Agreement and such
other instruments provided to it as are necessary or desirable to terminate and
remove of record any documents constituting public notice of the Cash Collateral
Agreement and the security interests granted thereunder and shall transfer, or
cause to be transferred, and shall deliver or cause to be delivered to the
Grantor, all property, including all moneys, instruments and securities of the
Grantor then held by the Collateral Trustee. The cancellation and satisfaction
of the Cash Collateral Agreement shall be without prejudice to the rights of the
Collateral Trustee or any successor trustee or trustees to charge and be
reimbursed for any expenditures which it may thereafter incur in connection
therewith.
ARTICLE V
AGREEMENTS WITH THE COLLATERAL TRUSTEE
Section 5.01. Delivery of Agreements. The Grantor has delivered to the
Collateral Trustee a true and complete copy of the Guaranty as in effect on the
date hereof. The Grantor agrees that, promptly upon the execution thereof, the
Grantor will deliver to the Collateral Trustee a true and complete copy of any
and all amendments, modifications or supplements to the Guaranty entered into
subsequent to the date hereof.
Section 5.02. Compensation and Expenses. The Grantor agrees to pay to
the Collateral Trustee and any co-trustees or successor trustees appointed
hereunder, from time to time upon demand, (a) reasonable compensation for their
services hereunder and under the Cash Collateral Agreement and for administering
the Collateral Trust Estate and the Cash Collateral Account and (b) all the
fees, costs and expenses incurred by any of them (including, without limitation,
the reasonable fees and disbursements of counsel) (i) arising in connection with
the preparation, execution, delivery, modification and termination of this
Agreement, the Guaranty and the Cash Collateral Agreement or the enforcement of
any of the provisions hereof or thereof or (ii) incurred or required to be
advanced in connection with the administration of the Collateral Trust Estate,
the Cash Collateral Account, the sale or other disposition of Cash Collateral
pursuant to the Cash Collateral Agreement and the preservation, protection or
defense of their rights under this Agreement and in and to the Cash Collateral,
the Cash Collateral Account and the Collateral Trust Estate. As security for
such payment, the Collateral Trustee shall have a prior lien upon all Cash
Collateral and other property and funds held or collected by the Collateral
Trustee as part of the Collateral Trust Estate. The Grantor's obligations under
this Section 5.02 shall survive the termination of the other provisions of this
Agreement.
Section 5.03. Stamp and Other Similar Taxes. The Grantor agrees to
indemnify and hold harmless the Collateral Trustee and each Guaranteed Party
from any present or future claim for liability for any stamp or other similar
tax and any penalties or interest with respect thereto, which may be assessed,
levied or collected by any jurisdiction in connection with this Agreement, the
Guaranty or the Cash Collateral Agreement. The obligations of the Grantor under
this Section 5.03 shall survive the termination of the other provisions of this
Agreement.
Section 5.04. Filing Fees, Excise Taxes, Etc. The Grantor agrees to pay
or to reimburse the Collateral Trustee for any and all amounts in respect of all
search, filing, recording and registration fees, taxes, intangible taxes, excise
taxes and other similar imposts which may be payable or determined to be payable
in respect of the execution, delivery, performance and enforcement of this
Agreement and the Cash Collateral Agreement. The obligations of the Grantor
under this Section 5.04 shall survive the termination of the other provisions of
this Agreement.
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Section 5.05. Indemnification. (a) The Grantor agrees to pay, indemnify,
and hold harmless the Collateral Trustee and each of the agents thereof from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever (including, without limitation, the costs and expenses of
defending any claim against any of them) with respect to the execution,
delivery, enforcement, performance and administration of this Agreement, the
Guaranty and the Cash Collateral Agreement unless and to the extent arising from
the gross negligence or willful misconduct of the Collateral Trustee or such of
the agents thereof as are seeking indemnification or any failure of the
Collateral Trustee or any such agent to exercise ordinary care in the handling
of moneys and securities actually received by the Collateral Trustee or any such
agent. As security for such payment, the Collateral Trustee shall have a prior
lien upon all Cash Collateral and other property and funds held or collected by
the Collateral Trustee as part of the Collateral Trust Estate.
(b) In any suit, proceeding or action brought by the Collateral
Trustee under or with respect to the Cash Collateral Agreement or the Cash
Collateral for any amount owing thereunder, or to enforce any provisions
thereof, the Grantor will save, indemnify and hold harmless the Collateral
Trustee, the OTS and the Guaranteed Parties from and against all expense, loss
or damage suffered by reason of any defense, set-off, counterclaim, recoupment
or reduction of liability whatsoever of the obligee thereunder (unless and to
the extent that such expense, loss or damage is caused by the gross negligence
or willful misconduct of the Collateral Trustee or the failure of the Collateral
Trustee to exercise ordinary care in the handling of moneys and securities
actually received by the Collateral Trustee), arising out of a breach by the
Grantor of any obligation thereunder or arising out of any other agreement,
indebtedness or liability at any time owing to or in favor of such obligee or
its successors from the Grantor and all such obligations of the Grantor shall be
and remain enforceable against and only against the Grantor and shall not be
enforceable against the Collateral Trustee, the OTS or any Guaranteed Party. The
agreements in this Section 5.04 shall survive the termination of the other
provisions of this Agreement.
Section 5.06. Further Assurances. (a) The Grantor agrees, from time to
time, at its own expense to execute, acknowledge, deliver, record, re-record,
file, re-file, register and re-register, and cause any of its Subsidiaries, if
any, to promptly execute, acknowledge, deliver, record, re-record, file,
re-file, register and re-register any and all such further acts, mortgages,
financing statements and continuations thereof, notices of assignment,
transfers, certificates, assurances and other instruments as may be necessary or
desirable, or as the Collateral Trustee or the OTS may reasonably request from
time to time in order (i) to carry out more effectively the purposes of this
Agreement, (ii) to subject to the liens and security interests created by the
Cash Collateral Agreement any of the properties, rights or interests of the
Grantor covered or now or hereafter intended to be covered by the Cash
Collateral Agreement, (iii) to perfect and maintain the validity, effectiveness
and priority of the Cash Collateral Agreement and the liens and security
interests intended to be created thereby, (iv) to better assure, convey, grant,
assign, transfer, preserve, protect and confirm unto the Collateral Trustee, the
OTS and the Guaranteed Parties the rights granted or now or hereafter intended
to be granted to the Collateral Trustee, the OTS and the Guaranteed Parties
under the Cash Collateral Agreement or under any other instrument executed in
connection with the Cash Collateral Agreement, and (v) to enable the Collateral
Trustee to exercise and enforce its rights and remedies hereunder and under the
Cash Collateral Agreement with respect to any Cash Collateral; provided,
however, that this Section 5.06 shall not be construed to require the Grantor to
grant any interest in Cash Collateral other than pursuant to this Agreement or
the Cash Collateral Agreement. Without limiting the generality of the foregoing,
the Grantor will take any such action required to be taken by it pursuant to the
Cash Collateral Agreement.
(b) The Grantor hereby authorizes the Collateral Trustee to file one
or more financing or continuation statements, and amendments thereto, relative
to all or any part of the Cash Collateral without the signature of the Grantor
where permitted by law. A photocopy or other reproduction of this Agreement, the
Cash Collateral Agreement or any financing statement covering the Cash
Collateral or any part thereof shall be sufficient as a financing statement
where permitted by law.
(c) The Grantor will furnish such information about the Cash
Collateral as the Collateral Trustee may reasonably request from time to time.
ARTICLE VI
THE COLLATERAL TRUSTEE
Section 6.01. Declaration of Trust. The Collateral Trustee, for itself
and its successors, hereby accepts the trusts created by this Agreement upon the
terms and conditions hereof, including those contained in this Article 6.
Further, the Collateral Trustee, for itself and its successors, does hereby
declare that it will hold all of the estate, right, title and interest in the
Collateral Trust Estate and the Cash Collateral Account for the ratable benefit
of the Guaranteed Parties as provided herein.
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Section 6.02. Exculpatory Provisions. (a) The Collateral Trustee shall
not be responsible in any manner whatsoever for the correctness of any recitals,
statements, representations or warranties contained herein or in the Cash
Collateral Agreement, all of which are made solely by the Grantor. The
Collateral Trustee make no representations as to the value or condition of the
Collateral Trust Estate, the Cash Collateral Account or any part thereof, or as
to the title of the Grantor thereto or as to the security afforded by the Cash
Collateral Agreement or this Agreement, or as to the validity, execution (except
its own execution), enforceability, legality or sufficiency of this Agreement,
the Cash Collateral Agreement or the Guaranty, and the Collateral Trustee shall
incur no liability or responsibility in respect of any such matters. The
Collateral Trustee shall not be responsible for insuring the Collateral Trust
Estate, filing financing or continuation statements, or for the payment of
taxes, charges, assessments or liens upon the Collateral Trust Estate or
otherwise as to the maintenance of the Collateral Trust Estate or the Cash
Collateral Account, except that in the event that any Collateral Trustee enters
into possession of a part or all of the Collateral Trust Estate or the Cash
Collateral Account the Collateral Trustee shall preserve the part in its
possession.
(b) The Collateral Trustee shall not be required to ascertain or
inquire as to the performance by the Grantor of any of the covenants or
agreements contained herein or in the Cash Collateral Agreement or the Guaranty.
Section 6.03. Delegation of Duties. The Collateral Trustee may execute
any of the trusts or powers hereof and perform any duty hereunder either
directly or by or through agents or attorneys-in-fact (which shall not include
officers and employees of the Grantor or any Affiliate of the Grantor). The
Collateral Trustee shall be entitled to rely upon advice of counsel concerning
all matters pertaining to such trusts, powers and duties. The Collateral Trustee
shall not be responsible for the negligence or misconduct of any agents or
attorneys-in-fact reasonably selected by it in good faith.
Section 6.04. Reliance by Collateral Trustee. (a) Whenever in the
administration of the trusts of this Agreement the Collateral Trustee shall deem
it necessary or desirable that a matter be proved or established in connection
with the taking, suffering or omitting any action hereunder by the Collateral
Trustee unless otherwise provided herein, such matter (unless other evidence in
respect thereof be herein specifically prescribed) may be deemed to be
conclusively proved or established by a certificate of an Authorized Officer of
the Grantor delivered to the Collateral Trustee and the OTS, and such
certificate shall constitute a full warranty to the Collateral Trustee for any
action taken, suffered or omitted in reliance thereon unless (i) the Collateral
Trustee shall have actual knowledge of an inaccuracy therein or (ii) the OTS
shall provide contrary information with respect to such matter within 30 days of
receipt thereof by the OTS, in which case the Collateral Trustee may
conclusively rely on the information provided by the OTS.
(b) The Collateral Trustee may consult with independent counsel
(including, without limitation, counsel to or any employee of the Collateral
Trustee, the Grantor or any Affiliate of the Grantor), and any opinion of such
counsel shall be full and complete authorization and protection in respect of
any action taken or suffered by it hereunder in accordance therewith unless the
Collateral Trustee has actual knowledge of a reason to question the validity or
accuracy of such opinion or of any assumptions expressed therein as the basis
for such opinion. The Collateral Trustee shall have the right at any time to
seek instructions concerning the administration of the Collateral Trust Estate
or the Cash Collateral Account from any court of competent jurisdiction.
(c) The Collateral Trustee may rely, and shall be fully protected in
acting, upon any resolution, statement, certificate, instrument, opinion,
report, notice, request, consent, order, bond or other paper or document which
they reasonably believe to be genuine and to have been signed or presented by
the proper party or parties or, in the case of telecopies and telexes, to have
been sent by the proper party or parties. In the absence of its gross negligence
or willful misconduct, the Collateral Trustee may conclusively rely, as to the
truth of the statements and the correctness of the opinions expressed therein,
upon any notices, certificates or opinions furnished to the Collateral Trustee
that conform to the requirements of this Agreement, the Guaranty or the Cash
Collateral Agreement.
Section 6.05. Limitations on Duties of the Trustee. (a) The Collateral
Trustee undertakes to perform only the duties expressly set forth herein and no
implied covenant or obligation shall be read into this Agreement against the
Collateral Trustee.
(b) The Collateral Trustee may exercise the rights and powers
granted to it by this Agreement and the Cash Collateral Agreement, but only
pursuant to the terms of this Agreement, and the Collateral Trustee shall not be
liable with respect to any action taken or omitted by it in accordance with the
direction of the OTS.
(c) Except as herein otherwise expressly provided, the Collateral
Trustee shall not be under any obligation to take any action which is
discretionary with the Collateral Trustee under the provisions hereof or under
the Cash Collateral Agreement except upon the written request of the OTS and
subject to the provisions of Section 3.03(b) hereof. The Collateral Trustee
shall make available for inspection and copying by the OTS each certificate or
other paper furnished to the Collateral Trustee by the Grantor or by any other
Person, under or in respect of this Agreement, the Cash Collateral Agreement or
any of the Collateral Trust Estate.
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Section 6.06. Moneys to Be Held in Trust. All moneys received by the
Collateral Trustee under or pursuant to any provision of this Agreement or the
Cash Collateral Agreement shall be segregated and held in trust for the purposes
for which they were paid or are held and the Collateral Trustee shall exercise
ordinary care in the handling of any such moneys actually received by it.
Section 6.07. Resignation and Removal of Collateral Trustee. (a) The
Collateral Trustee may at any time, by giving 30 days' prior written notice to
the Grantor and the OTS, resign and be discharged of its responsibilities hereby
created, such resignation to become effective upon the appointment of a
successor trustee or trustees by the OTS, the acceptance of such appointment by
such successor trustee or trustees and, unless an Event of Default under the
Guaranty has occurred and is continuing, the consent to the appointment of such
successor trustee or trustees by the Grantor. The Collateral Trustee may be
removed at any time (with or without cause) and a successor trustee or trustees
appointed by the OTS, subject to, unless an Event of Default under the Guaranty
has occurred and is continuing, the consent of the Grantor, provided that the
Collateral Trustee shall be entitled to its fees and expenses accrued to the
date of removal. If the Collateral Trustee resigns or is removed as provided in
this Section 6.07 the consent to the appointment of a successor trustee or
trustees shall not be unreasonably withheld and shall be deemed to have been
given if the Grantor shall not have reasonably objected to any proposed
successor trustee or trustees within 10 Business Days of receipt of notice of
the identity thereof from the OTS. If no successor trustee or trustees shall be
appointed and approved within 30 days from the date of the giving of the
aforesaid notice of resignation or within 30 days from the date of such vote for
removal, the Collateral Trustee shall, or the OTS may, apply, at the expense of
the Grantor, to any court of competent jurisdiction to appoint a successor
trustee or trustees to act until such time, if any, as a successor trustee or
trustees shall have been appointed as above provided. Any successor trustee or
trustees so appointed by such court shall immediately and without further act be
superseded by any successor trustee or trustees approved by the Grantor and OTS
as above provided.
(b) If at any time the Collateral Trustee shall become incapable of
acting, or if at any time a vacancy shall occur in the office of the Collateral
Trustee for any other cause, a successor trustee or trustees shall be appointed
by the OTS, subject to, unless an Event of Default under the Guaranty has
occurred and is continuing, the consent of the Grantor, which consent shall not
be unreasonably withheld, and the powers, duties, authority and title of the
predecessor trustee or trustees terminated and cancelled without procuring the
resignation of such predecessor trustee or trustees, and without any formality
(except as may be required by applicable law) other than appointment and
designation of a successor trustee or trustees in writing, duly acknowledged,
delivered to the predecessor trustee or trustees and the Grantor and filed for
record in each public office, if any, in which this Agreement is required to be
filed.
(c) The appointment and designation referred to in Section 6.07(b)
shall, after any required filing, be full evidence of the right and authority to
make the same and of all the facts therein recited, and this Agreement shall
vest in such successor trustee or trustees, without any further act, deed or
conveyance, all of the estate and title of its predecessor, and upon such filing
for record the successor trustee or trustees shall become fully vested with all
the estates, properties, rights, powers, trusts, duties, authority and title of
its predecessor; but such predecessor shall, nevertheless, on the written
request of the OTS, the Grantor or its successor trustee or trustees, execute
and deliver an instrument transferring to such successor all the estates,
properties, rights, powers, trusts, duties, authority and title of such
predecessor hereunder and shall deliver all securities and moneys held by it or
them to such successor trustee or trustees. Should any deed, conveyance or other
instrument in writing from the Grantor be required by any successor trustee or
trustees for more fully and certainly vesting in such successor trustee or
trustees the estates, properties, rights, powers, trusts, duties, authority and
title vested or intended to be vested in the predecessor trustee or trustees,
any and all such deeds, conveyances and other instruments in writing shall, on
request of such successor trustee or trustees, be executed, acknowledged and
delivered by the Grantor.
(d) Any required filing for record of the instrument appointing a
successor trustee or trustees as hereinabove provided shall be at the expense of
the Grantor. The resignation of any trustee or trustees and the instrument
removing any trustee or trustees, together with all other instruments, deeds and
conveyances provided for in this Article 6 shall, if permitted by law, be
forthwith recorded, registered and filed by and at the expense of the Grantor,
wherever this Agreement is recorded, registered and filed.
Section 6.08. Status of Successors to Trustee. Every successor to the
Collateral Trustee appointed pursuant to Section 6.07 shall be a bank or trust
company in good standing and having power so to act, incorporated under the laws
of the United States or any State thereof or the District of Columbia and having
its principal corporate trust office within the State of Delaware, the State of
New York, or another state acceptable to the OTS, and shall also have capital,
surplus and undivided profits of not less than $100,000,000, if there be such an
institution with such capital, surplus and undivided profits willing, qualified
and able to accept the trust upon reasonable or customary terms.
Section 6.09. Merger of the Collateral Trustee. Any corporation into
which the Collateral Trustee may be merged, or with which it may be
consolidated, or any corporation resulting from any merger or consolidation to
which the Collateral Trustee shall be a party, shall be the Collateral Trustee
under this Agreement without the execution or filing of any paper or any further
act on the part of the parties hereto.
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Section 6.10. Additional Co-Trustees; Separate Trustees. (a) If at any
time or times it shall be necessary or prudent in order to conform to any law of
any jurisdiction in which any of the Cash Collateral shall be located, or the
Collateral Trustee shall be advised by counsel satisfactory to it that it is so
necessary or prudent in the interest of the Guaranteed Parties, or the OTS shall
in writing so request by notice to the Collateral Trustee and the Grantor, or
the Collateral Trustee shall deem it desirable for its own protection in the
performance of its duties hereunder, or the Grantor shall in writing so request
by notice to the Collateral Trustee with the consent of the OTS, the Collateral
Trustee and the Grantor shall execute and deliver all instruments and agreements
necessary or proper to constitute another bank or trust company, or one or more
persons approved by the Collateral Trustee, the Grantor and the OTS, either to
act as co-trustee or co-trustees of all or any of the Cash Collateral, jointly
with the Collateral Trustee originally named herein or any successor, or to act
as separate trustee of any such property. In the event the Grantor shall not
have joined in the execution of such instruments and agreements within 10 days
after the receipt of a written request from the Collateral Trustee so to do, or
in case an Event of Default under the Guaranty shall have occurred and be
continuing, the Collateral Trustee may act under the foregoing provisions of
this Section 6.10 without the concurrence of the Grantor (but with the
concurrence of the OTS), and the Grantor hereby appoints the Collateral Trustee
as its agent and attorney to act for it under the foregoing provisions of this
Section 6.10 in either of such contingencies.
(b) Any separate trustee and any co-trustee (other than any trustee
which may be appointed as successor to the Collateral Trustee pursuant to
Section 6.07) shall, to the extent permitted by law, be appointed and act and be
such, subject to the following provisions and conditions, namely:
(i) all rights, powers, duties and obligations conferred upon the
trustees in respect of the custody, control and management of moneys, papers
or securities shall be exercised solely by the Collateral Trustee originally
named herein or its successors appointed pursuant to Section 6.07;
(ii) all rights, powers, duties and obligations conferred or imposed
upon the Collateral Trustee hereunder shall be conferred or imposed and
exercised or performed by the Collateral Trustee and such separate trustee
or co-trustee, jointly, as shall be provided in the instrument appointing
such separate trustee or co-trustee, except to the extent that under any law
of any jurisdiction in which any particular act or acts are to be performed
the Collateral Trustee shall be incompetent or unqualified to perform such
act or acts, in which event such rights, powers, duties and obligations
shall be exercised and performed by such separate trustee or co-trustee;
(iii) no power given hereby to, or which it is provided hereby may be
exercised by, any such co-trustee or separate trustee, shall be exercised
hereunder by such co-trustee or separate trustee, except jointly with, or
with the consent in writing of, the Collateral Trustee, anything herein
contained to the contrary notwithstanding;
(iv) no trustee hereunder shall be personally liable by reason of any
act or omission of any other trustee hereunder; and
(v) the Grantor and the Collateral Trustee, at any time, by an
instrument in writing, executed by them jointly, may accept the resignation
of or remove any such separate trustee, and in that case, by an instrument
in writing executed by the Grantor and the Collateral Trustee jointly, may
appoint a successor (who shall be acceptable to the OTS) to such a separate
trustee or co-trustee, as the case may be, anything herein contained to the
contrary notwithstanding. In the event that the Grantor shall not have
joined in the execution of any such instrument within 10 days after the
receipt of a written request from the Collateral Trustee so to do, or in
case an Event of Default under the Guaranty shall have occurred and be
continuing, the Collateral Trustee shall have the power to accept the
resignation of or remove any such separate trustee or co-trustee and to
appoint (with the consent of the OTS) a successor without the concurrence of
the Grantor and the Grantor hereby appoints the Collateral Trustee its agent
and attorney to act for it in such connection in either of such
contingencies. In the event that the Collateral Trustee shall have appointed
a separate trustee or co-trustee or as above provided, they may at any time,
by an instrument in writing, accept the resignation of or remove any such
separate trustee, the successor to any such separate trustee to be appointed
by the Grantor and the Collateral Trustee, or by the Collateral Trustee
alone, as hereinbefore provided in this Section 6.10.
Section 6.11. Trustee Appointed Attorney-in-Fact. The Grantor hereby
irrevocably constitutes and appoints the Collateral Trustee and any officer or
agent thereof, with full power of substitution, as its true and lawful
attorney-in-fact with full power and authority in the name of the Grantor or its
own name and in the place and stead of the Grantor and in the name of the
Grantor, from time to time at the direction of the OTS, to take any action and
to execute any instrument which the same may deem necessary or advisable to
accomplish the purposes of this Agreement, including, without limitation, to
receive, endorse and collect all instruments made payable to the Grantor
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representing any dividend, interest payment or other distribution in respect of
the Cash Collateral or any part thereof and to give full discharge for the same.
The Grantor acknowledges and agrees that the foregoing power of attorney is
coupled with an interest and may not be revoked or modified except with the
consent of the Collateral Trustee or as otherwise provided herein.
Section 6.12. Ordinary Care. The Collateral Trustee shall be deemed to
have exercised ordinary care in the custody and preservation of the Cash
Collateral in its possession if the Cash Collateral is accorded treatment
substantially equal to that which the Collateral Trustee accords its own
property and reasonable care is exercised by the Collateral Trustee in handling
any moneys or securities actually received by it, it being understood that the
Collateral Trustee shall not have any responsibility for (i) ascertaining or
taking action with respect to calls, conversions, exchanges, maturities, tenders
or other matters relative to any Cash Collateral, whether or not the Collateral
Trustee has or is deemed to have knowledge of such matters, or (ii) taking any
necessary steps to preserve rights against any parties with respect to any Cash
Collateral.
ARTICLE VII
MISCELLANEOUS
Section 7.01. Amendments, Supplements and Waivers. (a) With the written
consent of the OTS and the Collateral Trustee, the Grantor may, from time to
time, enter into written agreements supplemental hereto for the purpose of
adding to or waiving any provision of this Agreement or the Cash Collateral
Agreement or changing in any manner the rights of the Collateral Trustee, the
Guaranteed Parties and the Grantor hereunder or thereunder; provided, however,
that no such supplemental agreement shall amend, modify or waive any provision
of this Section 7.01. Any such supplemental agreement shall be binding upon the
Grantor, the Guaranteed Parties and the Collateral Trustee and their respective
successors. The Collateral Trustee shall not enter into any such supplemental
agreement unless it shall have received a certificate of an Authorized Officer
of the Grantor to the effect that such supplemental agreement will not result in
a breach of any provision or covenant contained in the Guaranty.
(b) The Collateral Trustee may, from time to time, enter into
amendments to the Cash Collateral Agreement as provided in Section 25 thereof;
provided that the Collateral Trustee shall not, without the prior written
consent of the OTS, enter into any amendment of the Cash Collateral Agreement
that could reasonably be expected to be adverse in any material respect to the
rights and interests of the OTS or the Guaranteed Parties.
Section 7.02. Additional Actions. Whether or not an Event of Default
under the Guaranty has occurred and is continuing, the Collateral Trustee shall
comply and shall be fully protected in complying with any reasonable request of
the OTS, to take or refrain from taking certain actions with respect to the Cash
Collateral, the Cash Collateral Account or the Guaranteed Parties, provided, in
each case, that the Collateral Trustee shall not take or refrain from taking
such actions if to do so would violate applicable law or the terms of this
Agreement, the Cash Collateral Agreement or the Guaranty or if the Collateral
Trustee shall not be indemnified as provided in Section 5.05(b).
Section 7.03. Notices. All notices and other communications provided for
hereunder shall be in writing (including telegraphic, telecopy or electronic
communication) and mailed, telegraphed, telecopied or delivered to it:
(a) If to the Grantor, to its address at 1661 Worthington Road, Suite
100, West Palm Beach, FL 33401, Attention: Secretary (telecopy no. (561)
692-8177) or at such other address as shall be designated by it in a written
notice to the OTS and the Collateral Trustee;
(b) If to the Collateral Trustee, at 10161 Centurion Parkway,
Jacksonville, FL, 32256, Attention: Corporate Trust Administration, or at
such other address as shall be designated by it in a written notice to the
Grantor and the OTS; and
(c) If to the OTS, to its address at Harborside Financial Center, Plaza
Five, Suite 1600, Jersey City, New Jersey 07311, Attention: Regional
Director (telecopy no. (201) 413-7543), or at such other address as shall be
designated by it in a written notice to the Grantor and the Collateral
Trustee.
All such notices and other communications shall, when mailed,
telegraphed, telecopied, or e-mailed, be effective when deposited in the mails,
delivered to the telegraph company, transmitted by telecopier or sent by
electronic communication, respectively.
Section 7.04. Headings. Section, subsection and other headings used in
this Agreement are for convenience only and shall not affect the construction of
this Agreement.
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Section 7.05. Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall not invalidate the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. Delivery by telecopier of an executed counterpart of a
signature page to any amendment or waiver of any provision of this Agreement
shall be effective as delivery of an original executed counterpart thereof.
Section 7.06. Dealings with the Grantor. Upon any application or demand
by the Grantor to the Collateral Trustee to take or permit any action under any
of the provisions of this Agreement, the Grantor shall (unless otherwise waived
by the Collateral Trustee in writing) furnish to the Collateral Trustee a
certificate signed by an Authorized Officer stating that all conditions
precedent, if any, provided for in this Agreement relating to the proposed
action have been complied with, except that in the case of any such application
or demand as to which the furnishing of such documents is specifically required
by any provision of this Agreement relating to such particular application or
demand, no additional certificate or opinion need be furnished.
Section 7.07. Third Party Beneficiaries. This Agreement is made for the
benefit of the Guaranteed Parties, and the Guaranteed Parties may from time to
time enforce their rights as explicit beneficiaries hereunder.
Section 7.08. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of each of the parties hereto and shall inure to the
benefit of the Guaranteed Parties and their respective successors and assigns
and nothing herein or in the Cash Collateral Agreement or the Guaranty is
intended or shall be construed to give any other Person any right, remedy or
claim under, to or in respect of this Agreement, the Cash Collateral Agreement,
the Cash Collateral, the Cash Collateral Account or the Collateral Trust Estate
or any part thereof.
Section 7.09. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York.
Section 7.10. Effectiveness. This Agreement shall become effective on
the execution and delivery hereof and shall remain in effect so long as the
Collateral Trustee shall have any obligations hereunder.
Section 7.11. Effect on Guaranty. Nothing in this Agreement shall
operate or be deemed to prevent any amendment, modification or waiver of the
Guaranty by the parties thereto in accordance with the terms thereof.
Section 7.12. Counterparts. This Agreement may be executed in separate
counterparts, each of which shall be an original and all of which taken together
shall constitute one and the same instrument.
[Remainder of this page intentionally left blank]
11
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
caused this Agreement to be duly executed by their respective officers thereunto
duly authorized as of the day and year first above written.
OCWEN FINANCIAL CORPORATION
By: /s/ WILLIAM C. ERBEY
-----------------------------
Title: Chairman and CEO
THE BANK OF NEW YORK TRUST
COMPANY, N.A., as Collateral Trustee
By: /s/ CRAIG A. KAYE
-----------------------------
Title: Assistant Vice President
12
Exhibit A
to the
Collateral Trust Agreement
GUARANTY
Exhibit B
to the
Collateral Trust Agreement
FORM OF CERTIFICATE OF DEMAND
The Bank of New York Trust Company, N.A.,
as Collateral Trustee under the
Collateral Trust Agreement
referred to below
10161 Centurion Parkway
Jacksonville, FL 32256
Attention: Corporate Trust Administration
Ocwen Financial Corporation
1661 Worthington Road, Suite 100
West Palm Beach, FL 33401
Attention: Secretary
Date:
The undersigned (the "Guaranteed Party") hereby certifies, pursuant to
the Collateral Trust Agreement dated June 28, 2005 (the "Collateral Trust
Agreement") by and between Ocwen Financial Corporation ("Ocwen"), as Grantor,
and The Bank of New York Trust Company, N.A., as Collateral Trustee (the
"Collateral Trustee"), as follows:
1. The undersigned has a claim for the present payment of money
(the "Claim") in respect of obligations guaranteed by Ocwen pursuant to the
Guaranty dated as of June 28, 2005 (the "Guaranty"). A description of the Claim
is attached hereto.
2. The Claim, the full amount of which is $__________, [has been
reduced to judgment [and enforcement thereof has not been effectively stayed]
and] is otherwise due and payable. A true and correct copy of the [judgment]
[invoice] [etc.] evidencing the Claim is attached hereto.
3. The undersigned has made written demands for payment (true and
correct copies of which are attached hereto) upon (a) the primary obligor with
respect to the Claim and (b) Ocwen, under the Guaranty (collectively, the
"Demands for Payment"). Not less than five business days have elapsed since the
date of each such Demand for Payment.
4. As of the date hereof, (a) the primary obligor has [paid to the
Guaranteed Party the amount of $__________] [made no payment whatsoever] and (b)
Ocwen has [paid to the Guaranteed Party the amount of $__________] [made no
payment whatsoever], in each case, in respect of the Demands for Payment
attached hereto.
5. The unsatisfied amount currently due and payable with respect to
such Demands for Payment is $__________. Pursuant to the terms of the Collateral
Trust Agreement, the undersigned hereby requests that the Collateral Trustee pay
such amount to the following account:
______________________
______________________
______________________
By
----------------------
Name:
EXHIBIT 10.9
EXECUTION COPY
GUARANTY
Dated as of June 28, 2005
From
OCWEN FINANCIAL CORPORATION
as Guarantor
in favor of
THE GUARANTEED PARTIES (AS DEFINED HEREIN)
TABLE OF CONTENTS
Section Page
- ---------------------------------------------------------------------- ----
Section 1. Guaranty.................................................. 1
Section 2. Guaranty Absolute......................................... 1
Section 3. Waivers and Acknowledgments............................... 2
Section 4. Subrogation............................................... 2
Section 5. Cash Collateral Account................................... 3
Section 6. Representations and Warranties............................ 3
Section 7. Affirmative Covenants..................................... 4
Section 8. Negative Covenants........................................ 4
Section 9. Amendments, Etc........................................... 6
Section 10. Notices Generally; Notice of Claims....................... 6
Section 11. No Waiver; Remedies....................................... 6
Section 12. Indemnification........................................... 6
Section 13. Subordination............................................. 7
Section 14. Continuing Guaranty; Assignments.......................... 7
Section 15. Third-Party Beneficiaries; Enforcement.................... 7
Section 16. Independent Counsel....................................... 8
Section 17. No Liability.............................................. 8
Section 18. Execution of counterparts................................. 8
Section 19. Governing Law; Jurisdiction; Waiver of Jury Trial, Etc.... 8
GUARANTY
GUARANTY dated as of June 28, 2005 made by Ocwen Financial Corporation,
a Florida corporation (the "Guarantor"), in favor of the Guaranteed Parties
(this term and certain other capitalized terms are defined in Schedule 1).
PRELIMINARY STATEMENTS.
(1) Ocwen Federal Bank FSB (the "FSB"), a federal savings bank chartered
and regulated by the Office of Thrift Supervision (together with any
governmental authority succeeding to any of its principal functions in the event
that the Office of Thrift Supervision ceases to exist, the "OTS") pursuant to
the Home Owners' Loan Act, is wholly owned by the Guarantor and certain of the
wholly-owned subsidiaries of the Guarantor.
(2) The FSB desires to dissolve its corporate existence and terminate
its federal bank charter (the "Dissolution") and has submitted a Plan of
Voluntary Dissolution to OTS, duly approved by the FSB's board of directors,
pursuant to Section 546.4 of the rules and regulations of OTS, 12 C.F.R. Section
546.4 (the "Plan").
(3) The Plan provides for (a) the sale of the FSB's deposit liabilities
and certain assets used by the FSB at its sole branch location in Fort Lee, New
Jersey (the "Branch") or in connection with the business of the Branch (the
"Branch Sale") to Marathon National Bank of New York or its designee
("Marathon"), and (b) the subsequent transfer to Ocwen Loan Servicing, LLC, a
Delaware limited liability company ("OLS"), a wholly-owned subsidiary of the
Guarantor, of all remaining assets and liabilities of the FSB pursuant to the
Assignment and Assumption Agreement dated as of the date hereof among the
Guarantor, OLS and certain other parties thereto.
(4) OTS desires to protect the interests of the Guaranteed Parties after
the Dissolution.
(5) The Guarantor wishes to demonstrate to OTS its commitment to
ensuring that the FSB's obligations to the Guaranteed Parties that remain after
the Dissolution will be satisfied.
NOW, THEREFORE, in consideration of the premises and in order to induce
the OTS to approve the Plan, the Guarantor hereby agrees as follows:
Section 1. Guaranty. The Guarantor hereby absolutely, unconditionally
and irrevocably guarantees the punctual payment when due of all of the Assumed
Liabilities arising on or prior to the date hereof (regardless of whether any
Claim has been asserted with respect thereto as of the date hereof), whether
direct or indirect, absolute or contingent, and whether for principal, interest,
premiums, fees, indemnities, contract or tort causes of action, costs, expenses
or otherwise (collectively, the "Guaranteed Obligations"), and agrees to pay any
and all expenses (including, without limitation, fees and expenses of counsel)
incurred by OTS or any Guaranteed Party in enforcing any rights under this
Guaranty. Without limiting the generality of the foregoing, the Guarantor's
liability shall extend to all amounts that constitute part of the Guaranteed
Obligations and would be owed by the FSB or OLS to any Guaranteed Party but for
the fact that they are unenforceable or not allowable due to the existence of a
bankruptcy, conservatorship, receivership, reorganization or similar proceeding
involving the FSB or OLS.
Section 2. Guaranty Absolute. The Guarantor guarantees that the
Guaranteed Obligations will be paid strictly as, when and to the extent payable
by the FSB or OLS. The obligations of the Guarantor under or in respect of this
Guaranty are independent of the Guaranteed Obligations, and a separate action or
actions may be brought and prosecuted against the Guarantor to enforce this
Guaranty, irrespective of whether any action is brought against the FSB or OLS
or whether the FSB or OLS is joined in any such action or actions. The liability
of the Guarantor under this Guaranty shall be irrevocable, absolute and
unconditional irrespective of, and the Guarantor hereby irrevocably waives any
defenses it may now have or hereafter acquire in any way relating to, any or all
of the following:
(a) any lack of validity or enforceability of the Cash Collateral
Agreement or any agreement or instrument relating thereto;
(b) any compromise or settlement of, or any change in the time, manner
or place of payment of, or in any other term of, all or any of the
Guaranteed Obligations;
(c) any taking, exchange, release or non-perfection of any Cash
Collateral or any other collateral, or any taking, release or amendment or
waiver of, or consent to departure from, any other guaranty, for all or any
of the Guaranteed Obligations;
1
(d) any manner of application of Cash Collateral or any other
collateral, or proceeds thereof, to all or any of the Guaranteed
Obligations, or any manner of sale or other disposition of any Cash
Collateral or any other collateral for all or any of the Guaranteed
Obligations or any other assets of the Guarantor, the FSB, OLS or any of
their respective Subsidiaries;
(e) any change, restructuring or termination of the corporate structure
or existence of the Guarantor, the FSB, OLS or any of their respective
Subsidiaries;
(f) any failure of OTS or any Guaranteed Party to disclose to the
Guarantor any information relating to the business, condition (financial or
otherwise), operations, performance, properties or prospects of the FSB or
OLS now or hereafter known to such OTS or such Guaranteed Party (the
Guarantor waiving any duty on the part of OTS and the Guaranteed Parties to
disclose such information);
(g) the failure of any other Person to execute or deliver any other
guaranty or agreement or the release or reduction of liability of any other
guarantor or surety with respect to the Guaranteed Obligations; or
(h) any other circumstance (including, without limitation, any statute
of limitations) or any existence of or reliance on any representation by OTS
or any Guaranteed Party that might otherwise constitute a defense available
to, or a discharge of, the Guarantor or any other guarantor or surety.
This Guaranty shall continue to be effective or be reinstated, as the case may
be, if at any time any payment of any of the Guaranteed Obligations is rescinded
or must otherwise be returned by any Guaranteed Party or any other Person upon
the insolvency, bankruptcy or reorganization of the FSB, OLS or the Guarantor or
otherwise, all as though such payment had not been made.
Section 3. Waivers and Acknowledgments. (a) The Guarantor hereby
unconditionally and irrevocably waives promptness, diligence, notice of
acceptance, presentment, demand for performance, notice of nonperformance,
default, acceleration, protest or dishonor and any other notice with respect to
any of the Guaranteed Obligations and this Guaranty and any requirement that any
Guaranteed Party protect, secure, perfect or insure any Lien or any property
subject thereto or exhaust any right or take any action against any other Person
or any Cash Collateral or other collateral.
(b) The Guarantor hereby unconditionally and irrevocably waives any
right to revoke this Guaranty and acknowledges that this Guaranty is continuing
in nature and applies to all Guaranteed Obligations, regardless of whether any
Claim has been asserted with respect thereto as of the date hereof.
(c) The Guarantor hereby unconditionally and irrevocably waives (i) any
defense arising by reason of any claim or defense based upon an election of
remedies by OTS or any Guaranteed Party that in any manner impairs, reduces,
releases or otherwise adversely affects the subrogation, reimbursement,
exoneration, contribution or indemnification rights of the Guarantor or other
rights of the Guarantor to proceed against the FSB, OLS or any other guarantor
or any other Person or any Cash Collateral and (ii) any defense based on any
right of set-off or counterclaim against or in respect of the obligations of the
Guarantor hereunder.
(d) The Guarantor hereby unconditionally and irrevocably waives any duty
on the part of any Guaranteed Party or OTS to disclose to the Guarantor any
matter, fact or thing relating to the business, condition (financial or
otherwise), operations, performance, properties or prospects of the Guarantor,
the FSB, OLS or any of their Subsidiaries now or hereafter known by such
Guaranteed Party or OTS.
(e) The Guarantor waives any and all notice of the creation, renewal,
extension or accrual of any of the Guaranteed Obligations and notice or proof of
reliance by the Guaranteed Parties upon this Guaranty or acceptance of this
Guaranty. The Guaranteed Obligations shall be conclusively deemed to have been
created, contracted or incurred, or renewed, extended or amended in reliance
upon this Guaranty.
(f) The Guarantor acknowledges that it will receive substantial direct
and indirect benefits from the consummation of the Dissolution contemplated by
the Plan and that the waivers set forth in Section 2 and this Section 3 are
knowingly made in contemplation of such benefits.
Section 4. Subrogation. The Guarantor hereby unconditionally and
irrevocably agrees not to exercise any rights that it may now have or hereafter
acquire against the FSB, OLS or any other insider guarantor that arise from the
existence, payment, performance or enforcement of the Guarantor's obligations
under or in respect of this Guaranty or the Cash Collateral Agreement,
including, without limitation, any right of subrogation, reimbursement,
exoneration, contribution or indemnification and any right to participate in any
claim or
2
remedy of OTS or any Guaranteed Party against the FSB, OLS or any other insider
guarantor or any Cash Collateral, whether or not such claim, remedy or right
arises in equity or under contract, statute or common law, including, without
limitation, the right to take or receive from the FSB, OLS or any other insider
guarantor, directly or indirectly, in cash or other property or by set-off or in
any other manner, payment or security on account of such claim, remedy or right,
until the Termination Date. If any amount shall be paid to the Guarantor in
violation of the immediately preceding sentence at any time prior to the
Termination Date, such amount shall be received and held in trust for the
benefit of the Guaranteed Parties, shall be segregated from other property and
funds of the Guarantor and shall forthwith be deposited into the Cash Collateral
Account in the same form as so received (with any necessary endorsement or
assignment) to be credited and applied to the Guaranteed Obligations and all
other amounts payable under this Guaranty, whether matured or unmatured, or to
be held as Cash Collateral (in accordance with the terms of the Cash Collateral
Agreement) for any Guaranteed Obligations or other amounts payable under this
Guaranty thereafter arising. If (i) the Guarantor shall make payment to any
Guaranteed Party of all or any part of the Guaranteed Obligations and (ii) the
Termination Date shall have occurred, the Guaranteed Parties will, at the
Guarantor's request and expense, execute and deliver to the Guarantor
appropriate documents, without recourse and without representation or warranty,
necessary to evidence the transfer by subrogation to the Guarantor of an
interest in the Guaranteed Obligations resulting from such payment made by the
Guarantor pursuant to this Guaranty.
Section 5. Cash Collateral Account. Pursuant to the terms of the Cash
Collateral Agreement, the Guarantor shall establish and maintain the Cash
Collateral Account (as defined therein). On the date hereof, the Guarantor shall
fund the Cash Collateral Account with cash or Cash Equivalents (as defined in
the Cash Collateral Agreement) in an amount not less than the Minimum Cash
Collateral Amount. If, at any time prior to the Termination Date, the balance of
the Cash Collateral Account shall fall below the Minimum Cash Collateral Amount,
the Guarantor shall within five business days deposit into the Cash Collateral
Account the difference between the balance of the Cash Collateral Account at
such time and the Minimum Cash Collateral Amount.
Section 6. Representations and Warranties. The Guarantor hereby
represents and warrants as follows:
(a) The Guarantor (i) is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation and
(ii) has the requisite corporate power and authority and the legal right to own
and operate its property, to lease the property it operates and to conduct the
business in which it is currently engaged.
(b) The execution, delivery and performance by the Guarantor of this
Guaranty and the Cash Collateral Agreement, are within the Guarantor's corporate
power, have been duly authorized by all necessary corporate action, and do not
(i) contravene the Guarantor's charter or bylaws, (ii) violate any law, rule,
regulation, order, writ, judgment, injunction, decree, determination or award,
(iii) conflict with or result in the breach of, or constitute a default or
require any payment to be made under, any contract, loan agreement, indenture,
mortgage, deed of trust, lease or other instrument binding on or affecting the
Guarantor, any of its Subsidiaries or any of their properties or (iv) except for
the Liens created under the Cash Collateral Agreement, result in or require the
creation or imposition of any Lien upon or with respect to any of the properties
of the Guarantor or any of its Subsidiaries.
(c) No governmental authorization, and no notice to or filing with, any
Governmental Authority or any other third party is required for (i) the due
execution, delivery or performance by the Guarantor of this Guaranty or the Cash
Collateral Agreement, (ii) the grant by the Guarantor of the Liens granted by it
pursuant to the Cash Collateral Agreement, (iii) the perfection or maintenance
of the Liens created under the Cash Collateral Agreement (including the first
priority nature thereof) or (iv) the exercise by OTS or any Guaranteed Party of
its rights under the Guaranty or the remedies in respect of the Cash Collateral
pursuant to the Cash Collateral Agreement.
(d) This Guaranty and the Cash Collateral Agreement have been duly
executed and delivered by the Guarantor. Each of this Guaranty and the Cash
Collateral Agreement is the legal, valid and binding obligation of the
Guarantor, enforceable against the Guarantor in accordance with its terms,
subject to the effect of applicable bankruptcy, insolvency, reorganization,
receivership, moratorium and other similar laws relating to or affecting
creditors' rights generally.
(e) There are no conditions precedent to the effectiveness of this
Guaranty that have not been satisfied or waived.
(f) The Guarantor has, independently and without reliance upon any other
Person and based on such documents and information as it has deemed appropriate,
made its own credit analysis and decision to enter into this Guaranty and the
Cash Collateral Agreement, and the Guarantor has established adequate means of
obtaining from the FSB and OLS on a continuing basis information pertaining to,
and is now and on a continuing basis will be completely familiar with, the
business, condition (financial or otherwise), operations, performance,
properties and prospects of the FSB and OLS.
3
Section 7. Affirmative Covenants. The Guarantor covenants and agrees
that, until the Termination Date, the Guarantor will:
(a) Cash Collateral Account. Maintain the Cash Collateral Account,
perform and observe all of the terms of the Cash Collateral Agreement, and
maintain at all times the Minimum Cash Collateral Amount.
(b) Reporting Requirements. Furnish to OTS:
(i) Default Notice. As soon as possible and in any event within five
days after the occurrence of each Default hereunder, a statement of the
chief financial officer of the Guarantor setting forth details of such
Default and the action that the Guarantor has taken and proposes to take
with respect thereto.
(ii) Annual Financials. As soon as available and in any event within
90 days after the end of each fiscal year, a copy of the annual audit
report for such year for the Guarantor and its Subsidiaries, including
therein a Consolidated balance sheet of the Guarantor and its
Subsidiaries as of the end of such fiscal year and a Consolidated
statement of income and a Consolidated statement of cash flows of the
Guarantor and its Subsidiaries for such fiscal year, in each case
accompanied by (A) an opinion as to such audit report of
PricewaterhouseCoopers LLP or other independent public accountants of
recognized standing and (B) a certificate of the chief financial officer
of the Guarantor stating that no Default has occurred and is continuing
or, if a Default has occurred and is continuing, a statement as to the
nature thereof and the action that the Guarantor has taken and proposes
to take with respect thereto.
(iii) Quarterly Financials. As soon as available and in any event
within 60 days after the end of each of the first three quarters of each
fiscal year, a Consolidated balance sheet of the Guarantor and its
Subsidiaries as of the end of such quarter and a Consolidated statement
of income and a Consolidated statement of cash flows of the Guarantor
and its Subsidiaries for the period commencing at the end of the
previous fiscal quarter and ending with the end of such fiscal quarter
and a Consolidated statement of income and a Consolidated statement of
cash flows of the Guarantor and its Subsidiaries for the period
commencing at the end of the previous fiscal year and ending with the
end of such quarter, setting forth in each case in comparative form the
corresponding figures for the corresponding date or period of the
preceding fiscal year, all in reasonable detail and duly certified
(subject to normal year-end audit adjustments) by the chief financial
officer of the Guarantor as having been prepared in accordance with
GAAP, together with a certificate of said officer stating that no
Default has occurred and is continuing or, if a Default has occurred and
is continuing, a statement as to the nature thereof and the action that
the Guarantor has taken and proposes to take with respect thereto.
(iv) Litigation. Promptly after the commencement thereof, notice of
all actions, suits, investigations, litigation and proceedings before
any Governmental Authority affecting the Guarantor or any of its
Subsidiaries that could be reasonably likely to have a material adverse
effect on the business, condition (financial or otherwise), operations,
performance, properties or prospects of the Guarantor or OLS.
(c) Transactions with Affiliates. Conduct, and cause each of its
Subsidiaries to conduct, all transactions with any of their Affiliates on terms
that are fair and reasonable and no less favorable to the Guarantor or such
Subsidiary than it would obtain in a comparable arm's-length transaction with a
Person not an Affiliate.
(d) Preservation of Existence, etc. Preserve, renew and maintain, and
cause each of its Subsidiaries to preserve, renew and maintain, in full force
and effect their legal existence and good standing under the laws of their
jurisdiction of organization, except in a transaction permitted by Section 8(b).
(e) Unencumbered Financial Assets. The Guarantor shall maintain at all
times Financial Assets with a fair market value of not less than $35,000,000
that are (i) free and clear of any Lien and (ii) not the subject of any
transaction restricted under Section 8(c).
Section 8. Negative Covenants. The Guarantor covenants and agrees that,
until the Termination Date, the Guarantor will not, at any time:
(c) Debt. Create, incur or assume, or permit any of its Subsidiaries to
create, incur or assume, any Debt, except that the Guarantor or any Subsidiary
may create, incur or assume Debt if, immediately after giving effect to such
creation, incurrence or assumption, the ratio of (x) the Consolidated Debt of
the Guarantor and its Subsidiaries at such time to (y) the tangible net worth
(shareholders' equity less intangible assets, all determined in accordance with
GAAP, it being understood and agreed that servicing assets shall be considered
intangible assets for purposes of this calculation) of the Guarantor and its
Subsidiaries for the fiscal quarter most recently ended does not exceed 7.25 :
1.00 (the "Leverage Ratio").
4
(d) Mergers, Etc. Merge into or consolidate with any Person or permit
any Person to merge into it, or transfer all or substantially all of its assets,
or permit any of its Subsidiaries to merge into or consolidate with any Person
or permit any Person to merge into it, or transfer all or substantially all of
its assets, except that, so long as no Default exists or would result therefrom:
(i) any Subsidiary of the Guarantor (other than OLS) may merge into
or consolidate with any other Subsidiary of the Guarantor; provided
that, in the case of any such merger or consolidation, the Person formed
by such merger or consolidation shall be a wholly-owned Subsidiary of
the Guarantor;
(ii) any Subsidiary of the Guarantor (other than OLS) may transfer
all or substantially all of its assets to the Guarantor or to a
wholly-owned Subsidiary of the Guarantor; and
(iii) the Guarantor may merge into or consolidate with, or permit to
merge into it, or transfer all or substantially all of its assets to, a
Qualifying Entity; provided, that the tangible net worth of the
Guarantor (or the surviving entity or transferee, as applicable) after
giving effect to such merger, consolidation or transfer and any related
transactions is (x) at least $350,000,000 and (y) no less than the
tangible net worth of the Guarantor as reflected in the most recent
financial statements of the Guarantor delivered pursuant to Section
7(b)(ii) or (iii). "Qualifying Entity" means a corporation or limited
liability company that (A) is organized under the laws of the United
States of America, any state thereof or the District of Columbia, (B)
has, immediately prior to such merger, consolidation or transfer, a
rating for its unsecured, non-credit-enhanced Debt of at least Baa2 from
Moody's or BBB from S&P, in each case, with a "stable" or "positive"
outlook (each, a "Minimum Rating") (and if the unsecured,
non-credit-enhanced Debt of such Person is rated by both Moody's and
S&P, Minimum Ratings from both for such Debt) and (C) assumes all of the
Guarantor's obligations under this Guaranty, the Cash Collateral
Agreement and the Collateral Trust Agreement pursuant to a writing, and
accompanied by such supporting corporate documents and opinions, in each
case as is acceptable to OTS, if the Guarantor is not the surviving
entity of any such merger or if there is any such transfer.
(c) Sales, Etc., of Assets. Sell, lease, transfer or otherwise dispose
of, or permit any of its Subsidiaries to sell, lease, transfer or otherwise
dispose of, any assets, or grant any option or other right to purchase, lease or
otherwise acquire, or permit any of its Subsidiaries to grant any option or
other right to purchase, lease or otherwise acquire, any assets, except for
sales, transfers or other dispositions of assets (i) for consideration
consisting of at least 85% cash and (ii) for fair value; provided that the
Guarantor shall be in compliance with the Leverage Ratio on a pro forma basis
after giving effect to any such sale, transfer or other disposition.
Notwithstanding the foregoing, the requirement set forth in subsection (c)(i)
above shall not apply to sales, transfers or other dispositions of any of the
assets listed on Schedule II hereto.
(d) Restricted Payments. Declare or pay any dividends, purchase, redeem,
retire, defease or otherwise acquire for value any of its capital stock or other
ownership or profit interests (or warrants, rights or options with respect
thereto) (collectively, the "Equity Interests") now or hereafter outstanding,
return any capital to its stockholders, partners or members (or the equivalent
Persons thereof) as such, make any distribution of assets, Equity Interests,
obligations or securities to its stockholders, partners or members (or the
equivalent Persons thereof) as such, or permit any of its Subsidiaries to do any
of the foregoing, or permit any of its Subsidiaries to purchase, redeem, retire,
defease or otherwise acquire for value any Equity Interests in the Guarantor,
except that, so long as no Default shall have occurred and be continuing at the
time of any action described below or would result therefrom:
(i) the Guarantor may (A) declare and pay dividends and distributions
payable only in common stock of the Guarantor (or rights to acquire the
same), (B) purchase, redeem, retire, defease or otherwise acquire (x) shares
of its capital stock with the proceeds received contemporaneously from the
issue of new shares of its capital stock with equal or inferior voting
powers, designations, preferences and rights or (y) any or all of its 3.25%
Contingent Convertible Senior Unsecured Notes due 2024, or (C) consistent
with Section 563.141 of the rules and regulations of the OTS, as if such
Section 563.141 were applicable to the Guarantor, declare, pay, purchase,
redeem, retire, defease or otherwise acquire any Equity Interests (each, a
"Capital Distribution"), provided that (x) the total amount of Capital
Distributions during any calendar year, inclusive of any proposed Capital
Distributions, does not exceed the Guarantor's consolidated net income for
such calendar year plus its retained earnings for the two preceding calendar
years, (y) the Guarantor's net worth is not less than $333,000,000 after
giving effect to any Capital Distribution and (z) the Guarantor's unsecured,
non-credit-enhanced Debt has a rating of at least B2 from Moody's and B-
from S&P at the time of any Capital Distribution, in each case, with a
"stable" or "positive" outlook.
(ii) any Subsidiary of the Guarantor may declare and pay cash dividends
to the Guarantor or to any wholly-owned Subsidiary of the Guarantor of which
it is a Subsidiary.
5
(e) Partnerships, Etc. Become a general partner in any general or
limited partnership, or permit any of its Subsidiaries to do so, other than any
Subsidiary the sole assets of which consist of its interest in such partnership.
Section 9. Amendments, Etc. No amendment or waiver of any provision of
this Guaranty and no consent to any departure by the Guarantor therefrom shall
in any event be effective unless the same shall be in writing and signed by OTS,
and then such waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.
Section 10. Notices Generally; Notice of Claims. (a) All notices and
other communications provided for hereunder shall be in writing (including
telegraphic, telecopy or electronic communication) and mailed, telegraphed,
telecopied or delivered to it, if to the Guarantor, the FSB or OLS, addressed to
the Guarantor, the FSB or OLS, as applicable, at:
1661 Worthington Road, Suite 100
West Palm Beach, FL 33401
Fax: (561) 692-8177
Attn: Secretary;
if to OTS, at:
Office of Thrift Supervision
Harborside Financial Center
Plaza Five, Suite 1600
Jersey City, New Jersey 07311
Fax: (201) 413-7543
Attn: Regional Director;
or, as to any party, at such other address as shall be designated by
such party in a written notice to each other party. All such notices and other
communications shall, when mailed, telegraphed, telecopied, or e-mailed, be
effective when deposited in the mails, delivered to the telegraph company,
transmitted by telecopier or sent by electronic communication, respectively.
Delivery by telecopier of an executed counterpart of a signature page to any
amendment or waiver of any provision of this Guaranty shall be effective as
delivery of an original executed counterpart thereof.
(b) The Guarantor will publicly disclose the existence of this Guaranty,
the Cash Collateral Agreement and the Collateral Trust Agreement, and will make
publicly available, through a notice that is conspicuously displayed on its web
site, (i) information regarding the purpose of this Guaranty and (ii)
instructions for making a claim hereunder and under the Collateral Trust
Agreement, including, without limitation, the name, address and contact
information of (A) its contact for purposes of making claims in respect of this
Guaranty and (B) the Collateral Trustee. Such information and instructions may,
upon notice posted to such web site, be changed from time to time by the
Guarantor, provided that such information and instructions remain conspicuously
displayed on such web site.
Section 11. No Waiver; Remedies. No failure on the part of OTS or any
Guaranteed Party to exercise, and no delay in exercising, any right hereunder
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right hereunder preclude any other or further exercise thereof or the
exercise of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
Section 12. Indemnification. (a) Without limitation on any other
obligations of the Guarantor or remedies of OTS or the Guaranteed Parties under
this Guaranty, the Guarantor shall, to the fullest extent permitted by law,
indemnify, defend and save and hold harmless each Guaranteed Party and OTS and
each of their Affiliates and any of their respective officers, directors,
employees, agents and advisors (each, an "Indemnified Party") from and against,
and shall pay on demand, any and all claims, damages, losses, liabilities and
expenses (including, without limitation, reasonable fees and expenses of
counsel) that may be incurred by or asserted or awarded against any Indemnified
Party in connection with or as a result of any failure of any Guaranteed
Obligations to be the legal, valid and binding obligations of the Guarantor,
enforceable against the Guarantor in accordance with their terms.
(b) The Guarantor hereby also agrees that none of OTS or any of OTS's
officers, employees, agents or advisors shall have any liability (whether direct
or indirect, in contract, tort or otherwise) to the Guarantor or any of its
Affiliates or any of their respective officers, directors, employees, agents and
advisors, and the Guarantor hereby agrees not to assert any claim against OTS or
any of OTS's officers, employees, agents or advisors on any theory of liability,
for (without limitation) special, indirect, consequential or punitive damages
arising out of or otherwise relating to this Guaranty, the Cash Collateral
Agreement, the Dissolution, or any of the transactions contemplated in
connection therewith.
6
Section 13. Subordination. The Guarantor hereby subordinates any and all
debts, liabilities and other obligations owed to the Guarantor by the FSB or OLS
(the "Subordinated Obligations") to the Guaranteed Obligations to the extent and
in the manner hereinafter set forth in this Section 13:
(a) Prohibited Payments, Etc. Except (i) during the continuance of a
Default or (ii) upon the commencement and during the continuance of any
proceeding under any Bankruptcy Law relating to the FSB or OLS, the
Guarantor may receive regularly scheduled payments from the FSB or OLS on
account of the Subordinated Obligations. After the occurrence and during the
continuance of any Default, or upon the commencement and during the
continuance of any proceeding under any Bankruptcy Law relating to the FSB
or OLS, however, unless OTS otherwise agrees, the Guarantor shall not
demand, accept or take any action to collect any payment on account of the
Subordinated Obligations.
(b) Prior Payment of Guaranteed Obligations. In any proceeding under any
Bankruptcy Law relating to the FSB or OLS, the Guarantor agrees that the
Guaranteed Parties shall be entitled to receive payment in full in cash of
all Guaranteed Obligations (including all interest and expenses accruing
after the commencement of a proceeding under any Bankruptcy Law, whether or
not constituting an allowed claim in such proceeding ("Post Petition
Interest")) before the Guarantor receives payment of any Subordinated
Obligations.
(c) Turn-Over. After the occurrence and during the continuance of any
Default, or upon the commencement and during the continuance of any
proceeding under any Bankruptcy Law relating to the FSB or OLS, the
Guarantor shall, if OTS so requests, collect, enforce and receive payments
on account of the Subordinated Obligations as trustee for the Guaranteed
Obligations and deposit such payments into the Cash Collateral Account on
account of the Guaranteed Obligations (including all Post Petition
Interest), together with any necessary endorsements or other instruments of
transfer, but without reducing or affecting in any manner the liability of
the Guarantor under the other provisions of this Guaranty.
(d) OTS Authorization. After the occurrence and during the continuance
of any Default, OTS is authorized and empowered (but without any obligation
to so do), in its discretion, (i) in the name of the Guarantor, to collect
and enforce, and to submit claims in respect of, Subordinated Obligations
and to apply any amounts received thereon to the Guaranteed Obligations
(including any and all Post Petition Interest), and (ii) to require the
Guarantor (A) to collect and enforce, and to submit claims in respect of,
Subordinated Obligations and (B) to deposit any amounts received on such
obligations into the Cash Collateral Account for application to the
Guaranteed Obligations (including any and all Post Petition Interest).
Section 14. Continuing Guaranty; Assignments. This Guaranty is a
continuing guaranty and shall (a) remain in full force and effect until the
Termination Date (except that the last sentence of Section 2 shall continue to
remain in effect after the Termination Date), (b) be binding upon the Guarantor,
its successors and assigns and (c) inure to the benefit of and be enforceable by
the Guaranteed Parties and the OTS and their successors, transferees and
assigns. Without limiting the generality of clause (c) of the immediately
preceding sentence, any Guaranteed Party may assign or otherwise transfer all or
any portion of its rights and obligations under this Guaranty to any other
Person, and such other Person shall thereupon become vested with all the
benefits in respect thereof granted to such Guaranteed Party herein or
otherwise. The Guarantor shall not have the right to assign its rights hereunder
or any interest herein without the prior written consent of OTS.
Section 15. Third-Party Beneficiaries; Enforcement. (a) The Guarantor
and OTS acknowledge that each Guaranteed Party is an intended third party
beneficiary of this Guaranty, and shall have the right to: (i) make any demand
for payment hereunder with respect to (I) any Guaranteed Obligation that (A) has
been reduced to judgment and enforcement thereof has not been effectively stayed
or (B) that is otherwise matured and fixed and presently due and payable, and
(II) any other amount payable hereunder and (ii) enforce such rights directly
against the Guarantor. The rights and remedies provided in this subsection (a)
shall be the sole rights and remedies available to Guaranteed Parties other than
(x) Substantial Guaranteed Parties, who shall have the additional rights and
remedies set forth in subsection (b) below and (y) OTS, which may enforce the
terms and conditions of this Guaranty directly against the Guarantor as provided
in subsections (b) and (c) below and in any other manner provided or permitted
by law.
(b) The Guarantor acknowledges and agrees that if any Substantial
Guaranteed Party or OTS has good cause to believe that the Guarantor or any of
its Affiliates has taken or is about to take any action, including, without
limitation, any action that would constitute a breach of the covenants set forth
in Sections 7 or 8 above, that would impair the ability of the Guarantor to
perform its obligations under this Guaranty, such Substantial Guaranteed Party
and/or OTS will have the right to pursue an action against the Guarantor for
injunction or other appropriate relief. This subsection (b) confers additional
rights upon Substantial Guaranteed Parties and shall not be construed to limit
their rights as Guaranteed Parties in any way.
7
(c) The Guarantor hereby acknowledges and agrees that OTS is relying
upon this Guaranty in connection with its approval of the FSB's application
under Section 546.4 of the rules and regulations of OTS, and that this Guaranty
shall be deemed to be a "written agreement" for purposes of Section 1818 of the
Federal Deposit Insurance Act, 12 U.S.C. Section 1818, fully enforceable as such
by OTS.
(d) The Guarantor will not challenge the jurisdiction or venue of any
United States District Court in any action to enforce the terms of this
Guaranty. Nothing in this subsection (d) shall affect any right that any party
may otherwise have to bring any action or proceeding relating to this Guaranty
in the courts of any jurisdiction or the Guarantor's right, if any, to seek
removal of any such action or proceeding from state court to federal court.
Section 16. Independent Counsel. The Guarantor will pay on demand the
amount of any and all reasonable fees and expenses incurred in connection with
retention by the OTS of legal counsel, consultants, and other advisers deemed
necessary or appropriate by the OTS in connection with the administration or
enforcement of this Guaranty, the Cash Collateral Agreement, and the Collateral
Trust Agreement.
Section 17. No Liability. (a) OTS shall not be required to take any
action under the Guaranty, the Cash Collateral Agreement or the Collateral Trust
Agreement, and neither OTS nor any of its agents or employees shall be liable
for any action taken or omitted to be taken by it or them under or in connection
with the Guaranty, the Cash Collateral Agreement or the Collateral Trust
Agreement. Without limitation of the generality of the foregoing, OTS: (i) may
consult with and rely on legal counsel (including counsel for the Guarantor or
any of its Affiliates), independent public accountants and other experts
selected by it and shall not be liable for any action taken or omitted to be
taken in good faith by it in accordance with the advice of such counsel,
accountants or experts; (ii) makes no warranty or representation to any
Guaranteed Party and shall not be responsible to any Guaranteed Party for any
statements, warranties or representations (whether written or oral) made in or
in connection with the Guaranty, the Cash Collateral Agreement or the Collateral
Trust Agreement; (iii) shall not have any duty to ascertain or to inquire as to
the performance, observance or satisfaction of any of the terms, covenants or
conditions of the Guaranty, the Cash Collateral Agreement or the Collateral
Trust Agreement on the part of the Guarantor or the existence at any time of any
Default under the Guaranty; (iv) shall not be responsible to any Guaranteed
Party for the due execution, legality, validity, enforceability, genuineness,
sufficiency or value of, or the perfection or priority of any lien or security
interest created or purported to be created under or in connection with, the
Guaranty or the Cash Collateral Agreement or any other instrument or document
furnished pursuant thereto; and (v) shall incur no liability under or in respect
of the Guaranty, the Cash Collateral Agreement or the Collateral Trust Agreement
by acting upon any notice, consent, certificate or other instrument or writing
(which may be by telegram, telecopy or electronic communication) believed by it
to be genuine and signed or sent by the proper party or parties.
(b) Any Notice of Non-Objection delivered to the Collateral Trustee by
the OTS pursuant to Section 4.02(c) of the Collateral Trust Agreement shall be
conclusive and binding on all parties (including, without limitation, the
Guaranteed Parties). Without limitation of subsection (a) above, the OTS shall
incur no liability whatsoever to any Guaranteed Party in connection with the
delivery of such a Notice of Non-Objection on the basis of any good-faith belief
(without any requirement that the OTS independently investigate the same or make
an independent determination with respect thereto) that the Termination Date has
occurred.
Section 18. Execution in Counterparts. This Guaranty and each amendment,
waiver and consent with respect hereto may be executed in any number of
counterparts and by different parties thereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement. Delivery of an executed
counterpart of a signature page to this Guaranty by telecopier shall be
effective as delivery of an original executed counterpart of this Guaranty.
Section 19. Governing Law; Jurisdiction; Waiver of Jury Trial, Etc. (a)
This Guaranty shall be governed by, and construed in accordance with, the laws
of the State of New York.
(b) The Guarantor hereby irrevocably and unconditionally submits, for
itself and its property, to the nonexclusive jurisdiction of any federal court
of the United States of America sitting in New York City, and any appellate
court thereof, or, if any such court refuses jurisdiction, the Supreme Court of
the State of New York in and for New York County, in any action or proceeding
arising out of or relating to this Guaranty, the Cash Collateral Agreement or
the Collateral Trust Agreement, or for recognition or enforcement of any
judgment, and the Guarantor hereby irrevocably and unconditionally agrees that
all claims in respect of any such action or proceeding may be heard and
determined, to the extent permitted by law, in such federal court or, if such
federal court refuses jurisdiction, in the Supreme Court of the State of New
York in and for New York County. The Guarantor agrees that a final judgment in
any such action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Nothing in this Guaranty shall affect any right that any party may otherwise
have to bring any action or proceeding relating to this Guaranty in the courts
of any jurisdiction.
8
(c) The Guarantor irrevocably and unconditionally waives, to the fullest
extent it may legally and effectively do so, any objection that it may now or
hereafter have to the laying of venue of any suit, action or proceeding arising
out of or relating to this Guaranty, the Cash Collateral Agreement or the
Collateral Trust Agreement in any federal court. The Guarantor hereby
irrevocably waives, to the fullest extent permitted by law, the defense of an
inconvenient forum to the maintenance of such suit, action or proceeding in any
such court.
(d) THE GUARANTOR HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY
IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR
OTHERWISE) ARISING OUT OF OR RELATING TO THIS GUARANTY, THE CASH COLLATERAL
AGREEMENT OR THE COLLATERAL TRUST AGREEMENT OR THE ACTIONS OF OTS OR ANY
GUARANTEED PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT
OF ANY THEREOF.
[Remainder of this page intentionally left blank]
9
IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly
executed and delivered by its officer thereunto duly authorized as of the date
first above written.
OCWEN FINANCIAL CORPORATION
By /s/ WILLIAM C. ERBEY
-------------------------
Name: William C. Erbey
Title: Chairman and CEO
SCHEDULE I
Certain Defined Terms
All accounting terms not specifically or completely defined herein shall
be construed in conformity with, and all financial data (including financial
ratios and other financial calculations) required to be submitted pursuant to
this Agreement shall be prepared in conformity with, GAAP applied on a
consistent basis, as in effect from time to time, applied in a manner consistent
with that used in preparing the financial statements required to be delivered
pursuant to Sections 7(b)(ii) and (iii), except as otherwise specifically
prescribed herein.
As used in this Guaranty, the following terms shall have the following
meanings (such meanings to be equally applicable to both the singular and plural
forms of the terms defined):
"Action" means any claim, action, suit, arbitration, inquiry, proceeding
or investigation by or before any Governmental Authority.
"Affiliate" means, with respect to a particular Person, (a) any Person
which, directly or indirectly, controls, is controlled by, or is under common
control with such particular Person, or (b) any Person who is a director or
officer of such particular Person. For purposes of this definition, control of a
Person shall mean the power, direct or indirect, (i) to vote 5% or more of the
securities having ordinary voting power for the election of directors of such
Person, or (ii) to direct or cause the direction of the management and policies
of such Person whether by contract or otherwise.
"Assumed Liabilities" means all Liabilities of the FSB (other than
Liabilities assumed by Marathon in connection with the Branch Sale).
"Bankruptcy Law" means Title 11, U.S. Code, 12 U.S.C. 1464(d)(2), or any
similar federal or state law for the relief of debtors.
"Cash Collateral" has the meaning specified in the Cash Collateral
Agreement.
"Cash Collateral Account" has the meaning specified in the Cash
Collateral Agreement.
"Cash Collateral Agreement" means that certain Cash Collateral Agreement
dated the date hereof by and among the Guarantor, the Collateral Trustee and the
Account Bank described therein, in substantially the form of Exhibit A.
"Claim" means (a) any right to payment, whether or not such right is
reduced to judgment, liquidated, unliquidated, fixed, contingent, matured,
unmatured, disputed, undisputed, legal, equitable, secured, or unsecured, or (b)
any right to an equitable remedy for breach of performance if such breach gives
rise to a right to payment, whether or not such right to an equitable remedy is
reduced to judgment, fixed, contingent, matured, unmatured, disputed,
undisputed, secured, or unsecured.
"Collateral Trust Agreement" means that certain Collateral Trust
Agreement dated the date hereof between the Guarantor and the Collateral
Trustee.
"Collateral Trustee" has the meaning specified in the Collateral Trust
Agreement.
"Consolidated" refers to the consolidation of accounts in accordance
with GAAP.
"Contracts" means all contracts, subcontracts, agreements, leases,
licenses, commitments, sales or purchase orders, and other instruments,
arrangements or understandings of any kind.
"Debt" of any Person means, without duplication, (a) all indebtedness of
such Person for borrowed money, (b) all obligations of such Person for the
deferred purchase price of property or services, (c) all obligations of such
Person evidenced by notes, bonds, debentures or other similar instruments, (d)
all obligations of such Person created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such Person
(even though the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property), (e) all obligations of such Person as lessee under leases that have
been or should be, in accordance with GAAP, recorded as capital leases, (f) all
obligations of such Person under acceptance, letter of credit or similar
facilities, (g) all obligations of such Person to purchase, redeem, retire,
defease or otherwise make any payment in respect of any Equity Interests in such
Person or any other Person or any warrants, rights or options to acquire such
Equity
1
Interests, (h) all Debt of other Persons referred to in clauses (a) through (g)
above or clause (i) below and other payment obligations guaranteed directly or
indirectly in any manner by such Person, or in effect guaranteed directly or
indirectly by such Person and (i) all indebtedness and other payment obligations
referred to in clauses (a) through (h) above of another Person secured by (or
for which the holder of such Debt has an existing right, contingent or
otherwise, to be secured by) any Lien on property (including, without
limitation, accounts and contract rights) owned by such Person, even though such
Person has not assumed or become liable for the payment of such indebtedness or
other payment obligations.
"Default" means any failure by the Guarantor to perform or observe any
term, covenant or agreement contained in this Guaranty or the Cash Collateral
Agreement on its part to be performed or observed.
"Equity Interests" has the meaning specified in Section 8(d).
"Event of Default" means a Default that remains unremedied for 10 days
after the earlier of the date on which (a) any officer of the Guarantor becomes
aware of such Default or (b) written notice of such Default has been given to
the Guarantor by OTS or any Substantial Guaranteed Party.
"Financial Asset" shall have the meaning set forth in Article 8 of the
Uniform Commercial Code as in effect from time to time in the State of New York.
"GAAP" means generally accepted accounting principles in the United
States set forth in the opinions and pronouncements of the Accounting Principles
Board and the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or such other
principles as may be approved by a significant segment of the accounting
profession in the United States, that are applicable to the circumstances as of
the date of determination, consistently applied.
"Governmental Authority" means any nation or government, any state,
province, city, municipal entity or other political subdivision thereof, and any
governmental, executive, legislative, judicial, administrative or regulatory
agency, department, authority, instrumentality, commission, board, bureau or
similar body, whether federal, state, provincial, territorial, local or foreign.
"Guaranteed Obligations" has the meaning specified in Section 1.
"Guaranteed Party" means (a) any holder of any Claim with respect to the
Assumed Liabilities and (b) the OTS.
"Liability" means any debt, liability, commitment or obligation of every
kind and description, whether accrued or fixed, absolute or contingent, matured
or unmatured, determined or determinable, known or unknown, including those
arising under any law or order of any Governmental Authority and those arising
under any Contract or in connection with any Action.
"Lien" means any lien, security interest or other charge or encumbrance
of any kind, or any other type of preferential arrangement, including, without
limitation, the lien or retained security title of a conditional vendor and any
easement, right of way or other encumbrance on title to real property.
"Minimum Cash Collateral Amount" means (a) so long as no Event of
Default has occurred and is continuing, $5,000,000, and (b) upon the occurrence
and during the continuance of an Event of Default, $20,000,000.
"Moody's" means Moody's Investors Service, Inc. and any successor
thereto.
"Person" means an individual, partnership, corporation (including a
business trust), limited liability company, joint stock company, trust,
unincorporated association, joint venture or other entity, or a government or
any political subdivision or agency thereof.
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., and any successor thereto.
"Subsidiaries" of any Person means any corporation, partnership, joint
venture, limited liability company, trust or estate of which (or in which) more
than 50% of (a) the issued and outstanding capital stock having ordinary voting
power to elect a majority of the Board of Directors of such corporation
(irrespective of whether at the time capital stock of any other class or classes
of such corporation shall or might have voting power upon the occurrence of any
contingency), (b) the interest in the capital of such partnership, joint venture
or limited liability company or (c) the beneficial interest in such trust or
estate is at the time directly or indirectly owned or controlled by such Person,
by such Person and one or more of its other Subsidiaries or by one or more of
such Person's other Subsidiaries.
2
"Substantial Guaranteed Party" means (a) any authorized representative
of the Guaranteed Parties party to the action pending 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,
provided that the plaintiffs in such action are certified as a class; (b) any
Guaranteed Party that has obtained a judgment against the FSB or OLS for an
aggregate amount of $5,000,000 or more, regardless of whether such judgment has
been stayed pending appeal; and (c) any other creditor of the FSB and/or OLS
holding matured, fixed, and presently due and payable Claims in respect of any
Guaranteed Obligations in an aggregate amount in excess of $5,000,000.
"Termination Date" means the later of (a) the sixth anniversary of the
date on which the FSB's federal bank charter is cancelled and (b) the date on
which both of the following have been indefeasibly paid in full in cash: (i) all
Guaranteed Obligations with respect to which a Claim has been asserted (whether
under this Guaranty or otherwise) on or prior to the sixth anniversary of the
date on which the FSB's federal bank charter is cancelled and (ii) all other
amounts payable by the Guarantor under this Guaranty (whether in respect of
enforcement costs, indemnification payments or otherwise).
3
EXHIBIT 10.10
EXECUTION COPY
CASH COLLATERAL AGREEMENT
Dated as of June 28, 2005
Among
OCWEN FINANCIAL CORPORATION
as Grantor,
THE BANK OF NEW YORK TRUST COMPANY, N.A.,
as Collateral Trustee,
and
THE BANK OF NEW YORK TRUST COMPANY, N.A.,
as Account Bank
TABLE OF CONTENTS
SECTION PAGE
- --------------------------------------------------------------------------------------- ----
SECTION 1. Grant of Security........................................................ 1
SECTION 2. Security for Obligations................................................. 1
SECTION 3. Delivery of Cash Collateral.............................................. 1
SECTION 4. The Cash Collateral Account.............................................. 1
SECTION 5. Control by Collateral Trustee............................................ 2
SECTION 6. Grantor's Rights in Cash Collateral Account.............................. 2
SECTION 7. Priority of Security Interest............................................ 2
SECTION 8. Statements, Confirmations, and Notices of Adverse Claims................. 2
SECTION 9. Maintaining the Cash Collateral Account; Minimum Cash Collateral Amount.. 3
SECTION 10. Investing of Amounts in the Cash Collateral Account...................... 3
SECTION 11. Release of Amounts....................................................... 3
SECTION 12. Representations and Warranties........................................... 3
SECTION 13. Further Assurances....................................................... 3
SECTION 14. Transfers and Other Liens................................................ 4
SECTION 15. Collateral Trustee Appointed Attorney-in-Fact............................ 4
SECTION 16. Collateral Trustee May Perform........................................... 4
SECTION 17. Account Bank's and Collateral Trustee's Duties........................... 4
SECTION 18. The Account Bank's Responsibility........................................ 4
SECTION 19. Remedies upon Event of Default........................................... 4
SECTION 20. Expenses................................................................. 5
SECTION 21. Indemnity................................................................ 5
SECTION 22. Continuing Security Interest............................................. 5
SECTION 23. Termination; Survival.................................................... 5
SECTION 24. Entire Agreement......................................................... 5
SECTION 25. Amendments............................................................... 6
SECTION 26. Financial Assets......................................................... 6
SECTION 27. Notices.................................................................. 6
SECTION 28. Binding Effect........................................................... 6
SECTION 29. Execution in Counterparts................................................ 6
SECTION 30. Governing Law; Terms..................................................... 6
SECTION 31. Counterparts............................................................. 6
CASH COLLATERAL AGREEMENT
CASH COLLATERAL AGREEMENT, dated as of June 28, 2005, among OCWEN
FINANCIAL CORPORATION (the "Grantor"), THE BANK OF NEW YORK TRUST COMPANY, N.A.
("BONY"), a national banking association (together with any successor trustee
appointed pursuant to Article 6 of the Collateral Trust Agreement, as defined
below, the "Collateral Trustee"), as trustee for the Guaranteed Parties (as
defined below), and BONY, as securities intermediary and depository bank (the
"Account Bank").
PRELIMINARY STATEMENTS:
(1) The Grantor has executed and delivered to the Office of Thrift
Supervision, for the benefit of the Guaranteed Parties, a Guaranty dated as of
the date hereof in respect of the Guaranteed Obligations (as defined therein).
Capitalized terms used but not defined herein are used herein as defined in the
Guaranty.
(2) In order to secure the Guaranteed Obligations, the Grantor has
deposited the Minimum Cash Collateral Amount in a non-interest bearing cash
collateral account (the "Cash Collateral Account") with the Account Bank at its
office at 10161 Centurion Parkway, Jacksonville, FL 32256, Account No. 174351,
in the name of the Grantor but under the sole control and dominion of the
Collateral Trustee and subject to the terms of this Agreement and the Collateral
Trust Agreement dated June 28, 2005 between the Grantor and the Collateral
Trustee (the "Collateral Trust Agreement").
(3) Terms defined in Article 8 or 9 of the Uniform Commercial Code in
effect in the State of New York (the "Code") are used in this Agreement as such
terms are defined in such Article 8 or 9.
NOW THEREFORE, in consideration of the premises, the Grantor, the
Collateral Trustee and the Account Bank hereby agree as follows:
SECTION 1. Grant of Security. The Grantor hereby pledges, assigns
and grants to the Collateral Trustee, for the benefit of the Guaranteed Parties,
a security interest (collectively, the "Security Interest") in the Grantor's
right, title and interest to the following, whether now or hereafter existing or
arising (the "Cash Collateral"):
(a) the Cash Collateral Account and all funds and financial assets from
time to time credited thereto (including, without limitation, all
Investments and Cash Equivalents, as defined herein, and all investment
property), and all certificates and instruments, if any, from time to time
representing or evidencing the Cash Collateral Account;
(b) all promissory notes, certificates of deposit, deposit accounts,
checks and other instruments from time to time delivered to or otherwise
possessed by the Collateral Trustee or the Account Bank for or on behalf of
the Grantor in substitution for or in addition to any or all of the then
existing Cash Collateral;
(c) all interest, dividends, distributions, cash, instruments and other
property from time to time received, receivable or otherwise distributed in
respect of or in exchange for any or all of the then existing Cash
Collateral; and
(d) all proceeds of any and all of the foregoing Cash Collateral.
SECTION 2. Security for Obligations. This Agreement secures the
payment of all amounts, now or hereafter existing, consisting of any of the
following: (i) the Guaranteed Obligations, (ii) all other amounts payable under
or in respect of the Guaranty and (iii) all amounts payable under or in respect
of this Agreement or the Collateral Trust Agreement.
SECTION 3. Delivery of Cash Collateral. All certificates or
instruments, if any, representing or evidencing the Cash Collateral shall be
delivered to and held by or on behalf of the Collateral Trustee pursuant hereto
and shall be in suitable form for transfer by delivery, or shall be accompanied
by duly executed instruments of transfer or assignment in blank, all in form and
substance satisfactory to the Collateral Trustee. In addition, the Collateral
Trustee shall have the right at any time to exchange certificates or instruments
representing or evidencing Cash Collateral for certificates or instruments of
smaller or larger denominations.
SECTION 4. The Cash Collateral Account. The Grantor and the Account
Bank represent and warrant to, and agree with, the Collateral Trustee that:
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(a) The Account Bank maintains the Cash Collateral Account for the
Grantor, and all property (including, without limitation, all funds and
financial assets) held by the Account Bank for the account of the Grantor
are, and will continue to be, credited to the Cash Collateral Account in
accordance with instructions given by the Grantor (unless otherwise provided
herein).
(b) To the extent that funds are credited to the Cash Collateral
Account, the Cash Collateral Account is a deposit account; and to the extent
that financial assets are credited to the Cash Collateral Account, the Cash
Collateral Account is a securities account. The Account Bank is (i) the bank
with which the Cash Collateral Account is maintained and (ii) the securities
intermediary with respect to financial assets held in the Cash Collateral
Account. The Grantor is (x) the Account Bank's customer with respect to the
Cash Collateral Account and (y) the entitlement holder with respect to all
financial assets credited from time to time to the Cash Collateral Account.
(c) Notwithstanding any other agreement to the contrary, the Account
Bank's jurisdiction with respect to the Cash Collateral Account for purposes
of the Code is, and will continue to be for so long as the Security Interest
shall be in effect, the State of New York.
(d) The Grantor and the Account Bank do not know of any claim to or
interest in the Cash Collateral Account or any property (including, without
limitation, funds and financial assets) credited to the Cash Collateral
Account, except for claims and interests of the parties referred to in this
Agreement.
SECTION 5. Control by Collateral Trustee. The Account Bank will
comply with (i) all instructions directing disposition of the funds in the Cash
Collateral Account, (ii) all notifications and entitlement orders that the
Account Bank receives directing it to transfer or redeem any financial asset in
the Cash Collateral Account and (iii) all other directions concerning the Cash
Collateral Account, including, without limitation, directions to distribute to
the Collateral Trustee proceeds of any such transfer or redemption or interest
or dividends on financial assets in the Cash Collateral Account (any such
instruction, notification or direction referred to in clause (i), (ii) or (iii)
above being an "Account Direction"), in each case of clauses (i), (ii) and (iii)
above originated by the Collateral Trustee without further consent by the
Grantor.
SECTION 6. Grantor's Rights in Cash Collateral Account. (a)
The Account Bank will not comply with instructions or directions from the
Grantor with respect to Account Directions or any other instructions or
directions whatsoever concerning the Cash Collateral Account except as provided
below in Section 6(b).
(b) Until the Account Bank receives a notice from the Collateral Trustee
that the Collateral Trustee will exercise exclusive control over the Cash
Collateral Account (a "Notice of Exclusive Control"), the Account Bank may
at the direction of the Grantor distribute to the Grantor all interest and
regular cash dividends on property (including, without limitation, funds and
financial assets) in the Cash Collateral Account (but not any other amounts)
to the extent that, after giving effect to any such proposed distribution,
the amount remaining in the Cash Collateral Account is not less than the
Minimum Cash Collateral Amount.
(c) If the Account Bank receives from the Collateral Trustee a Notice of
Exclusive Control, the Account Bank will cease distributing to the Grantor
all interest and dividends on property (including, without limitation, funds
and financial assets) in the Cash Collateral Account until the Account Bank
receives written notice from the Collateral Trustee withdrawing the Notice
of Exclusive Control.
SECTION 7. Priority of Security Interest. (a) The Account Bank (i)
subordinates to the Security Interest and in favor of the Collateral Trustee and
the Guaranteed Parties any security interest, lien or right of recoupment or
setoff that the Account Bank may have, now or in the future, against the Cash
Collateral Account or any funds and financial assets credited to the Cash
Collateral Account and (ii) agrees that it will not exercise any right in
respect of any such security interest or lien or any such right of recoupment or
setoff until the Security Interest is terminated, except that the Account Bank
(A) will retain its prior security interest and lien on funds and financial
assets credited to the Cash Collateral Account, (B) may exercise any right in
respect of such security interest or lien, and (C) may exercise any right of
recoupment or setoff against the Cash Collateral Account, in the case of clauses
(A), (B) and (C) above, to secure or to satisfy payment (x) of the purchase
price for financial assets credited to the Cash Collateral Account and (y) for
its customary fees and expenses for the routine maintenance and operation of the
Cash Collateral Account.
(b) The Account Bank will not enter into any other agreement with any
Person relating to Account Directions or other directions with respect to
the Cash Collateral Account.
SECTION 8. Statements, Confirmations, and Notices of Adverse Claims.
(a) The Account Bank will send copies of all statements and confirmations for
the Cash Collateral Account simultaneously to the Collateral Trustee and the
Grantor.
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(b) The Account Bank will promptly notify the Collateral Trustee and the
Grantor if at any time the amount on deposit in the Cash Collateral Account is
less than $5,000,000.
(c) When the Account Bank receives written notice of any claim or
interest in the Cash Collateral Account or any funds or financial assets
credited to the Cash Collateral Account other than the claims and interests of
the parties referred to in this Agreement, the Account Bank will promptly notify
the Collateral Trustee and the Grantor of such claim or interest.
SECTION 9. Maintaining the Cash Collateral Account; Minimum Cash
Collateral Amount. Until the Termination Date shall have occurred:
(a) The Grantor will maintain the Cash Collateral Account with the
Account Bank.
(b) The Grantor will maintain the Minimum Cash Collateral Amount at all
times, in accordance with the terms of the Guaranty.
SECTION 10. Investing of Amounts in the Cash Collateral Account. The
Account Bank will (as directed in writing by the Grantor), subject to the
provisions of Section 11 and Section 19, from time to time (a) invest amounts on
deposit in the Cash Collateral Account in such Cash Equivalents as the Grantor
may select, and (b) invest interest paid on the property referred to in clause
(a) above, and reinvest other proceeds of any such property that may mature or
be sold, in each case in such Cash Equivalents as the Grantor may select, so
long as all such (the Cash Equivalents referred to in clauses (a) and (b) above
being collectively "Investments"). Interest and proceeds that are not invested
or reinvested in Investments as provided above shall be deposited and held in
the Cash Collateral Account. The Collateral Trustee and the Grantor agree that
all Investments shall be treated as financial assets under Article 8 of the
Code. As used herein, "Cash Equivalents" means any of the following, to the
extent owned by the Grantor free and clear of all Liens other than Liens created
under this Agreement and having a maturity of not greater than 90 days from the
date of issuance thereof: (i) readily marketable direct obligations of the
Government of the United States or any agency or instrumentality thereof or
obligations unconditionally guaranteed by the full faith and credit of the
Government of the United States, (ii) insured certificates of deposit of or time
deposits with any FDIC-insured depository institution, provided that the full
amount of such certificates of deposit or time deposits is covered by FDIC
insurance, and (iii) investments, classified in accordance with GAAP as Current
Assets of the Grantor, in money market funds that are registered under the
Investment Company Act of 1940, as amended, that are administered by financial
institutions that have the highest rating obtainable from either Moody's or S&P
and the portfolios of which are limited solely to investments of the character,
quality and maturity described in clauses (i) and (ii) of this definition.
SECTION 11. Release of Amounts. Except as provided in Sections
6 and 19, the Collateral Trustee will direct the Account Bank to pay and release
to the Grantor or at its order, except as provided in Sections 6 and 19, at the
request of the Grantor, all Cash Collateral to the extent that the remaining
balance in the Cash Collateral Account exceeds the then Minimum Cash Collateral
Amount.
SECTION 12. Representations and Warranties. The Grantor represents and
warrants as follows:
(a) The Grantor is the legal and beneficial owner of the Cash Collateral
free and clear of any lien, security interest, option or other charge or
encumbrance except for the security interest created by this Agreement.
(b) This Agreement creates in favor of the Collateral Trustee, for the
benefit of the Guaranteed Parties, a valid security interest in the Cash
Collateral granted by the Grantor, securing the payment of the Guaranteed
Obligations.
(c) No authorization or approval or other action by, and no notice to or
filing with, any governmental authority or regulatory body or any other
third party is required for (i) the grant by the Grantor of the security
interest granted hereunder or for the execution, delivery or performance of
this Agreement by the Grantor, (ii) the perfection or maintenance of the
security interest created hereunder (including the first priority nature of
such security interest) or (iii) for the exercise by the Collateral Trustee
of its rights and remedies hereunder.
(d) There are no conditions precedent to the effectiveness of this
Agreement that have not been satisfied or waived.
(e) The amount deposited in the Cash Collateral Account is not less than
the Minimum Cash Collateral Amount.
SECTION 13. Further Assurances. The Grantor agrees that at any time
and from time to time, at the expense of the Grantor, the Grantor will promptly
execute and deliver all further instruments and documents, and take all further
action, that may be necessary or desirable, or that the Collateral Trustee may
reasonably request, in order to perfect and protect any security interest
granted or purported to be granted hereby or to enable the Collateral Trustee to
exercise and enforce its rights and remedies hereunder with respect to any Cash
Collateral.
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SECTION 14. Transfers and Other Liens. The Grantor agrees that it
will not sell, assign (by operation of law or otherwise), or otherwise dispose
of, or grant any option with respect to, any of the Cash Collateral.
SECTION 15. Collateral Trustee Appointed Attorney-in-Fact. The
Grantor hereby appoints the Collateral Trustee as its attorney-in-fact, acting
with full authority in the place and stead of the Grantor and in the name of the
Grantor or otherwise, from time to time in the Collateral Trustee's discretion
to take any action and to execute any instrument that the Collateral Trustee may
deem necessary or advisable to accomplish the purposes of this Agreement,
including, without limitation, to receive, indorse and collect all instruments
made payable to the Grantor representing any interest payment, dividend or other
distribution in respect of the Cash Collateral or any part thereof and to give
full discharge for the same.
SECTION 16. Collateral Trustee May Perform. If the Grantor fails to
perform any agreement contained herein, the Collateral Trustee, acting for
itself and on behalf of the Guaranteed Parties, may itself perform, or cause
performance of, such agreement, and the expenses of the Collateral Trustee
incurred in connection therewith shall be payable by the Grantor under
Section 20.
SECTION 17. Account Bank's and Collateral Trustee's Duties. The
powers conferred on the Collateral Trustee hereunder are solely to protect the
interest of the Guaranteed Parties in the Cash Collateral and shall not impose
any duty upon it to exercise any such powers. Except for the safe custody of any
Cash Collateral in its possession and the accounting for moneys actually
received by it hereunder, the Account Bank shall have no duty as to any Cash
Collateral, as to ascertaining or taking action with respect to calls,
conversions, exchanges, maturities, tenders or other matters relative to any
Cash Collateral, whether or not the Collateral Trustee or the Account Bank is
deemed to have knowledge of such matters, or as to the taking of necessary steps
to preserve rights against any parties or any other rights pertaining to any
Cash Collateral. The Account Bank shall be deemed to have exercised reasonable
care in the custody and preservation of any Cash Collateral in its possession if
such Cash Collateral is accorded treatment substantially equal to that which the
Account Bank accords it own property.
SECTION 18. The Account Bank's Responsibility. (a) The Account Bank
will not be liable to the Grantor or the Collateral Trustee for complying with a
Notice of Exclusive Control or with an Account Direction or other direction
concerning the Cash Collateral Account originated by the Collateral Trustee,
even if the Grantor notifies the Account Bank that the Collateral Trustee is not
legally entitled to issue the Notice of Exclusive Control or Account Direction
or such other direction unless the Account Bank takes the action after it is
served with an injunction, restraining order or other legal process enjoining it
from doing so, issued by a court of competent jurisdiction, and had a reasonable
opportunity to act on the injunction, restraining order or other legal process.
(b) This Agreement does not create any obligation of the Account Bank
except for those expressly set forth in this Agreement and, to the extent the
Cash Collateral Account is a securities account, in Part 5 of Article 8 of the
Code and, to the extent the Cash Collateral Account is a deposit account, in
Article 4 of the Code. In particular, the Account Bank need not investigate
whether the Collateral Trustee is entitled under the Collateral Trustee's
agreements with the Grantor to give an Account Direction or other direction
concerning the Cash Collateral Account or a Notice of Exclusive Control. The
Account Bank may rely on notices and communications it believes given by the
appropriate party.
SECTION 19. Remedies upon Event of Default. If any Event of Default
under the Guaranty shall have occurred and be continuing:
(a) In addition to, and not in limitation of, the rights of the
Collateral Trustee under Section 4.01 of the Collateral Trust Agreement, the
Collateral Trustee may, upon notice to the Grantor and from time to time,
direct the Account Bank to pay and release all or any part of the amount on
deposit in the Cash Collateral Account at such time either to the Collateral
Trustee (for application pursuant to Section 19(b) and (c) below) or to a
Guaranteed Party that has submitted a Certificate of Demand, as defined in
the Collateral Trust Agreement, in accordance with Section 4.01 thereof, to
be applied against the Guaranteed Obligations then due and payable or any
part thereof. Upon such payment and release by the Account Bank, the Grantor
shall forthwith deposit an amount in the Cash Collateral Account equal to
the amount by which the Minimum Cash Collateral Amount exceeds the amount on
deposit in the Cash Collateral Account following any such application.
(b) The Collateral Trustee, for itself and on behalf of the Guaranteed
Parties, may also exercise in respect of the Cash Collateral, in addition to
other rights and remedies provided for herein or otherwise available to it,
all the rights and remedies of a secured party on default under the Code
(whether or not the Code applies to the affected Cash Collateral), and may
also, without
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notice except as specified below, sell the Cash Collateral or any part
thereof in one or more parcels at public or private sale, at any of the
Collateral Trustee's offices or elsewhere, for cash, on credit or for future
delivery, and upon such other terms as the Collateral Trustee may deem
commercially reasonable. The Grantor agrees that, to the extent notice of
sale shall be required by law, at least ten days' prior written notice to
the Grantor of the time and place of any public sale or the time after which
any private sale is to be made shall constitute reasonable notification. The
Collateral Trustee shall not be obligated to make any sale of Cash
Collateral regardless of notice of sale having been given. The Collateral
Trustee may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale may,
without further notice, be made at the time and place to which it was so
adjourned.
(c) Any cash held by the Collateral Trustee pursuant to clause (b)
above, and all cash proceeds received by the Collateral Trustee in respect
of any sale of, collection from, or other realization upon all or any part
of the Cash Collateral may, in the discretion of the Collateral Trustee, be
held by the Collateral Trustee as collateral for, and/or then or at any time
thereafter be applied (after payment of any amounts payable to the
Collateral Trustee pursuant to Section 20) in whole or in part by the
Collateral Trustee against, all or any part of the Guaranteed Obligations in
such order as the Collateral Trustee shall elect.
SECTION 20. Expenses. The Grantor will upon demand pay to the
Collateral Trustee the amount of any and all reasonable expenses, including the
reasonable fees and expenses of its counsel and of any experts and agents, that
the Collateral Trustee may incur in connection with (a) the administration of
this Agreement, (b) the custody or preservation of, or the sale of, collection
from, or other realization upon, any of the Cash Collateral, (c) the exercise or
enforcement of any of the rights of the Collateral Trustee hereunder or (d) the
failure by the Grantor to perform or observe any of the provisions hereof.
SECTION 21. Indemnity. The Grantor will indemnify the Account Bank,
the Collateral Trustee, and their respective officers, directors, employees and
agents against claims, liabilities and expenses arising out of this Agreement
(including, without limitation, reasonable attorney's fees and disbursements),
except to the extent the claims, liabilities or expenses are caused by the gross
negligence or willful misconduct of the Account Bank or the Collateral Trustee,
as applicable, as found by a court of competent jurisdiction in a final,
non-appealable judgment.
SECTION 22. Continuing Security Interest. This Agreement shall
create a continuing security interest in the Cash Collateral and shall (a)
remain in full force and effect until the Termination Date, (b) be binding upon
the Grantor, its successors and assigns, and (c) inure to the benefit of, and be
enforceable by, the Collateral Trustee and its successors, transferees and
assigns. Upon the occurrence of the Termination Date, the security interest
granted hereby shall terminate and all rights to the Cash Collateral shall
revert to the Grantor. Upon any such termination, the Collateral Trustee will,
in accordance with the provisions of Section 4.02 of the Collateral Trust
Agreement and at the Grantor's expense, return to the Grantor such of the Cash
Collateral as shall not have been sold or otherwise applied pursuant to the
terms hereof and execute and deliver to the Grantor such documents as the
Grantor shall reasonably request to evidence such termination. It is hereby
acknowledged that, unless and until applied in accordance with Section 19, and
subject to the terms of this Agreement, the Cash Collateral shall remain the
property of the Grantor. For the avoidance of doubt, nothing in this Agreement
shall constitute an obligation on the part of the Collateral Trustee to extend
credit to the Grantor, but is solely intended to provide security for, and for
the repayment of, the Guaranteed Obligations.
SECTION 23. Termination; Survival. (a) The Collateral Trustee may
terminate this Agreement in accordance with the terms of the Collateral Trust
Agreement by notice to the Account Bank and the Grantor. If the Collateral
Trustee notifies the Account Bank that the Security Interest has terminated
pursuant to Section 4.02 of the Collateral Trust Agreement, this Agreement will
immediately terminate.
(b) The Account Bank may terminate this Agreement on 60 days' prior
notice to the Collateral Trustee and the Grantor, provided that before such
termination the Account Bank and the Grantor shall make arrangements to
transfer the property (including, without limitation, all funds and
financial assets) credited to the Cash Collateral Account to another Account
Bank satisfactory to the Collateral Trustee in its sole discretion that
shall have executed, together with the Grantor, a control agreement in favor
of the Collateral Trustee in respect of such property in substantially the
form of this Agreement or otherwise in form and substance satisfactory to
the Collateral Trustee.
(c) Sections 18 and 21 will survive termination of this Agreement.
SECTION 24. Entire Agreement. This Agreement is the entire agreement,
and supersedes any prior agreements, and contemporaneous oral agreements, of
the parties concerning its subject matter.
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SECTION 25. Amendments. No amendment of, or waiver of a right under,
this Agreement will be binding unless it is in writing and signed by the party
to be charged.
SECTION 26. Financial Assets. The Account Bank agrees with the
Collateral Trustee and the Grantor that, to the fullest extent permitted by
applicable law, all property (other than funds) credited from time to time to
the Cash Collateral Account will be treated as financial assets under Article 8
of the Code.
SECTION 27. Notices. A notice or other communication to a party
under this Agreement will be in writing, will be sent to the party's address set
forth under its name below or to such other address as the party may notify the
other parties and will be effective on receipt.
SECTION 28. Binding Effect. This Agreement shall become effective
when it shall have been executed by the Grantor, the Collateral Trustee and the
Account Bank, and thereafter shall be binding upon and inure to the benefit of
the Grantor, the Collateral Trustee and the Account Bank and their respective
successors and assigns.
SECTION 29. Execution in Counterparts. This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement. Delivery of an executed counterpart of a signature page to this
Agreement by telecopier shall be effective as delivery of an original executed
counterpart of this Agreement.
SECTION 30. Governing Law; Terms. This Agreement and the Cash
Collateral Account will be governed by the law of the State of New York. The
Account Bank and the Grantor may not change the law governing the Cash
Collateral Account without the Collateral Trustee's express prior written
agreement.
SECTION 31. Counterparts. A facsimile or other electronically
transmitted copy of this Agreement shall have the same force and effect as an
original hereof personally delivered to the intended recipient. This Agreement
may be executed in one or more counterparts, each of which when so executed
shall be deemed to be an original and all of which together shall constitute one
and the same instrument.
[Remainder of this page intentionally left blank]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
OCWEN FINANCIAL CORPORATION
By /s/ WILLIAM C. ERBEY
-----------------------------
Name: William C. Erbey
Title: Chairman and CEO
Address:
1661 Worthington Road, Suite 100
West Palm Beach, FL 33401
Attention: Secretary
THE BANK OF NEW YORK TRUST
COMPANY, N.A., as Collateral Trustee
By /s/ CRAIG A. KAYE
-----------------------------
Name: Craig A. Kaye
Title: Assistant Vice President
Address:
10161 Centurion Parkway
Jacksonville, FL 32256
Attention: Corporate Trust
Administration
THE BANK OF NEW YORK TRUST
COMPANY, N.A., as Account Bank
By /s/ CRAIG A. KAYE
-----------------------------
Name: Craig A. Kaye
Title: Assistant Vice President
Address:
10161 Centurion Parkway
Jacksonville, FL 32256
Attention: Corporate Trust
Administration
EXHIBIT 31.1
CERTIFICATION PURSUANT TO 15 U.S.C. SECTION 7241,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, William C. Erbey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ocwen Financial
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 15(e) and 15d - 15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a - 15(f) and 15d - 15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d) Disclosed in this report any changes in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(e) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
(f) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 9, 2005 /s/ WILLIAM C. ERBEY
------------------------------------
William C. Erbey
Chairman and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION PURSUANT TO 15 U.S.C. SECTION 7241,
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Robert J. Leist, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ocwen Financial
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 15(e) and 15d - 15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a - 15(f) and 15d - 15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d) Disclosed in this report any changes in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 9, 2005 /s/ ROBERT J. LEIST, JR.
------------------------------------
Robert J. Leist, Jr.,
Senior Vice President &
Principal Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES OXLEY ACT OF 2002
I, William C. Erbey, state and attest that:
1. I am the Chief Executive Officer of Ocwen Financial Corporation (the
"Registrant").
2. I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
o the Quarterly Report on Form 10-Q of the Registrant for the quarter
ended June 30, 2005 (the "periodic report") containing financial
statements fully complies with the requirements of Section 13(a) or
15(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or
78o(d)); and
o the information contained in the periodic report fairly represents,
in all material respects, the financial condition and results of
operations of the Registrant for the periods presented.
Name: /s/ WILLIAM C. ERBEY
------------------------------------
Title: Chairman and Chief Executive Officer
Date: August 9, 2005
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES OXLEY ACT OF 2002
I, Robert J. Leist, Jr., state and attest that:
1. I am the Principal Financial Officer of Ocwen Financial Corporation (the
"Registrant").
2. I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
o the Quarterly Report on Form 10-Q of the Registrant for the quarter
ended June 30, 2005 (the "periodic report") containing financial
statements fully complies with the requirements of Section 13(a) or
15(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or
78o(d)); and
o the information contained in the periodic report fairly represents,
in all material respects, the financial condition and results of
operations of the Registrant for the periods presented.
Name: /s/ ROBERT J. LEIST, JR.
---------------------------
Title: Senior Vice President &
Principal Financial Officer
Date: August 9, 2005