Onity Group Inc (ONIT) 2002 Q4 法說會逐字稿

Good afternoon and welcome to Ocwen fourth quarter year-end results earning announcements. All participants will be able to listen-only until the question and answer session of the conference. This conference is been recorded at the request of Ocwen Financial. If anyone has any objections, please disconnect at this time. I would like to introduce the host for today's conference Mr. Bob Leist, Vice President and Chief Accounting Officer. Mr. Leist you may begin.

Thank you. Good afternoon everyone and thank you for joining us today. As we have for the past several calls we prepared a slide presentation to accompany our remarks. To access the slides log on to our website at www.ocwen.com, select shareholder relations, then conference calls fourth quarter 2002 results. And then view slides. Each of you will be able to control the progression of the slides during the presentation. To move the slides ahead please clicks on the gray button pointing to the right. As indicated on the slide two, our presentation may contain certain forward-looking statements that are made pursuant to the Safe-Harbor provisions of the Federal Securities laws. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology. It may involve of risk and uncertainties that could cause the company actually results to differ materially from the results discussed in the forward-looking statements.

For an elaboration of the factors that may cause such a difference please refer to the risk disclosure statement in today's earnings release as well as the company’s filings with the Securities and Exchange Commission including OCN's 2001 10-K. We are happy to make our Ocwen's new releases, 10-Q's, 10-K's and other materials available to you via e-mail. If you are not already receiving our materials by e-mail and would like to be added to our distribution list, please e-mail [lindalegwig@llegwig@ocwen.com].

As indicated on slide 3, joining us in West Palm Beach for today’s presentation are Bill Erbey, Chairman and CEO of Ocwen, Art Ringwald, President and CEO of OTX, and Mark Zeidman, Senior Vice President and CFO. Ron Faris, President of Ocwen will be conferencing to the call from another location. This presentation will be followed by a question and answer period during which we will be taking questions from those of you attending the conference by telephone. Without further delay, I will now turn the call over Bill Erbey. Bill.

Thank you Bob. And thanks to all of you for attending Ocwen's fourth quarter conference call. I would like to open this meeting with my perspective on our performance for the fourth quarter and for the year 2002 after which Ron, Art, and Mark will provide more detailed information. As shown on slide four, I would like to cover three topics in my remarks today. One, an overview of our fourth quarter earnings, two the operating results of our strategic fee-based business, and three the status of selling our remaining non-core assets and the results of our non-core business.

Our fourth quarter earnings reflect progress in our transition from capital incentive to fee-based business. As core business earnings were once again profitable while our non-core business broke even and our corporate sector reflected a loss. I think it is important to note that out pre-tax loss of $6.1m for the quarter contained $6.5m of non-recurring and restructuring charges which will have a beneficial impact on our earnings in future period. As shown in slide 5, we recorded an expense of $2.5m to execute our debt reduction. This initiative will reduce annualized interest expense in 2003 by $8m. At OCX we recorded $2.8m of charges related to intangible assets consisting of intellectual property amortization of $600,000 and a write off of goodwill associated with real servicing of $2.2m. In addition, we made the final payment of $0.5m pursuant to contractual obligations related to our purchase of AMOS Inc. None of these costs will re-occur in 2003. Finally, as part of expense reduction initiative we recorded a severance charge of $700,000 in the fourth quarter, that we estimate will result in compensation and benefit savings of approximately $3m in 2003.

As shown in slide 6, the combined annual results of our core business showed strong in 2002. After adjusting results in all periods for severance and for nonrecurring amounts, the combined pre-tax earnings of these businesses in 2002 grew to $19m as compared to $4m in 2001 and loss of $25m in 2000, where increases of $15m and $44m respectively. I’m pleased to report that the residential loan servicing business under record $9.2m of pre-tax income in the fourth quarter despite the continuing challenges presented by the current low interest rate environment. In fact our interest revenue from forward balances would have been $8.9m higher in 2002 as the average -- as the annual average rate remained equal to 2001. Our strong fourth quarter results reflect in part the impact of our India operations, which continue to expand rapidly and yield high quality results.

As demonstrated in slide 7, the growth in our servicing portfolio continued as the unpaid principle balance of loan service increased by 40% since the end of last year. Ron will cover the servicing results in more detail later in the call.

OTX results have also improved this quarter as charted on slide eight. Reflecting the 21% decrease in losses compared to the fourth quarter of 2001, after adjusting for amounts related to intangible assets and nonrecurring payments in both periods. This primarily reflects the impact of ongoing cost reduction efforts. As the use of any resources in OTX continues to expand, we expect further improvements in 2003. As I mentioned earlier, our fourth quarter cost at OTX included a write-off of the remaining $2m of goodwill associated with REALServicing. While we remained positive regarding the future sales potential growth servicing, the absence of sales in 2002 and the probability that sales will not occur before late 2003 and 2004 led us to conclude that this was an appropriate decision under current accounting standards. We continue to be excited about the expansion of our REALTrans products.

REALTrans clicks totaled 471,000 in 2002 as compared to 286,000 in 2001, a 65% increase. Fixed volume increased 10% in the fourth quarter to 156,000 transactions from 142,000 transactions in the third quarter as we continued to see the impact of expanded use by our existing clients. Art will provide further information on developments at OTX in his remarks. Before turning to our non-core business results, I also wanted to highlight two emerging opportunities to grow our fee-based businesses in the future.

First, our international division continues to gain momentum. During the first quarter, we announced the formation of a new venture with Merrill Lynch called Global Servicing Solutions or GSS. That will service their nonperforming assets globally. As of year end our offices in Japan and Taiwan have been established and we foresee the potential for additional locations in the course of 2003. GSS is synergistic with OTX because GSS will rely on OTX’s commercial servicing software and will be a significant customer for this product.

Second, as our India location is matured we have begun to market our capability to provide cost effective outsource services to third parties in the mortgage and financial services industries. In the fourth we recorded the first revenue earned pursuant the contracts with third party for business process services. While modest at present we are optimistic that this business has the potential to become a significant source of future fee-based earnings, further leveraging the technology capacity communications network, and human capital that we have developed in India. As shown on slide 9, since December of 1999, our non-core assets to be sold have been reduced from $1.9b to $246m as of December 31, 2002, a decrease of 87%. During the fourth quarter, we reduced these assets by $39m or 14% from the balance at September 30th. With five mortgage assets accounting for 65% of the remaining total and was a strongest reserve levels we have ever had. We believe that we are in the final stages of achieving our goal.

As shown in slide 10, commercial assets comprised approximately 76% of the remaining non-core assets. We have reduced these assets by $23m or 11% since September 30th. We now have a total of 18 loans and properties remaining in this business. Pre-tax loses in this segment were $6m in the fourth quarter as compared to $3m in the third quarter reflecting $3.4m of reserves recorded in the fourth quarter. As shown on slide 11, reserve levels on loans and REO assets were at 24% as of December 31, as compared to 9% in December 31, 2001. We also continue to make progress in affordable housing, as our unsold assets declined by $15m or 47% from September 30. Of the remaining $17m of unsold assets, $6m are loans and $11m are properties. We also have $4m of affordable housing properties that are under contract but have not yet met all the qualifications for sales treatment.

Slide 12, illustrates that reserves on our affordable housing properties and loans rose from 16% at December 31, 2001 to 48% at December 31, 2002. I remain convinced with our strategy to liquidate our non-core assets and use the proceeds to reduce leverage and to continue to invest in out core fee based businesses is the best course for our stakeholders. I believe that our fourth quarter earnings demonstrate our progress towards the completion of that strategy as core businesses continue to be profitable; non-core businesses broke-even and our corporate sector reflected a loss.

Overall, as I noted at the outset, our pre-tax loss of $6.1m includes [6.5 minor] charges that will have beneficial impact on our earnings in future periods. Today, we have equity of $313m in cash and cash equivalent of a $192m. We are confident that the strong financial foundation will provide us with the ability to stay the course, and achieve our strategic objectives. I would now like to turn the call over to our President, Ron Faris.

Thank you Bill. My remarks today will cover the servicing business, Ocwen Realty Advisors, Unsecured Collections and Global outsourcing. Please turn to slide 14. As Bill mentioned, I am pleased to report that our serving business recorded a record quarter pre-tax net income of $9.2m for the fourth quarter compared to $7.2m last quarter, and $8.5m in the fourth quarter of 2001.

As shown on slide 15, we have continued to see strong new product flow in the residential serving business throughout 2002, as our portfolio grew from $21.9b at December 31, 2001 to $30.7b at December 31, 2002, a 40% increase. For the year, the servicing business reported net income of $32m as compared to pre-tax net income of $34.6m for 2001. Although, 2002 earnings in the servicing business remained strong, we continue to be impacted by lower earnings on [float] balances, as a result of lower short-term interest rate environment we have experienced since the first quarter of 2001. In fact, as Bill had mentioned, our interest revenue from [float] balances would have been $8.9m higher in 2002 had the annual average rate remained at the average rate we earned in 2001. With the fourth quarter 50 basis point decrease in the Fed funds rate we expect that our net [float] earnings will be further negatively impacted on an ongoing basis. On the expense side, we continue to make progress in reducing our per unit cost at service alone. During 2002, we continued to reduce our average per unit cost of service alone by over 22% while increasing the average number of loans we serviced by over 30% during the same period.

As illustrated in slide 16, we continue to transition job functions to India. During the fourth quarter, we added 67 staff members in India, as we decreased staff levels in the U.S. by an additional 134 positions. At December 31, 2002, we had approximately 621 active servicing staff in India, up from a 187 at the end of 2001, having reduced the U.S. staff levels by 487 during the year.

As shown on slide 17, as a result of implementing our REALServicing software in January 2001 and our initiative to migrate a portion of our labor force to India, we have reduced the average cost of service alone by 49% over the past two years. The pre-tax profit margin in the servicing business also remained strong at 35.4% for the fourth quarter. Before I move on from servicing, I would like to review some our key performance metrics for the servicing operation.

Slide 18 demonstrates that our key performance drivers for 2002 have improved in most categories. We achieved a pre-foreclosure resolution rate of 80% up from 77% in 2001. We increased our percentage of foreclosures completed ahead of Standard Agency time line to 90% from 88% in 2001. In addition, net proceeds received on REO sold as compared to the REO appraised market value remained stable at 92%.

As shown in slide 19, our unsecured collections or asset recovery business posted pre-tax income of $900,000 in the fourth quarter as compared to $600,000 profits during the same period in 2001. This represents the fifth quarter in a row that we have achieved positive earnings in this business line. Earnings for the full year were $4m representing a 180% or $9m increase over 2001. We continued to make progress in improving our collection capabilities and in attracting new fee-based collecting contracts.

Slide 20 shows that Ocwen Realty Advisors, our property valuation division, earned pre-tax income of $675,000 for the fourth quarter of 2002 compared to $516,000 in the fourth quarter of 2001, reflecting an improvement in margin from 14% to 21%. Ocwen Realty Advisors earn $2.6m during 2002 up $1.6m or a 175% in 2001. Both the asset recovery business, and Ocwen Realty Advisors complement our servicing business and provide additional value-added services to our core client base. Both business lines continue to make progress in reducing the cost structures, and improving their product quality through the use of our India labor force. At December 31, 2002, we had 52 staff in India associated with these two business lines. I am also excited to report that we continue to pursue new opportunities to leverage our technology and global capabilities. As Bill mentioned, we have successfully launched our global outsourcing business signing two contracts generating $206,000 in revenue in the fourth quarter. We anticipate numerous opportunities to grow this business over the coming months. Thank you everyone. I would now like to turn the call over to Art Ringwald.

Thanks Ron and good afternoon everyone. I am pleased to report that as shown on slide 22, we reduced OTX's normalized pre-tax operating loss for the seventh consecutive quarter to $4.5m in the fourth quarter of 2002 down from $7.8m in the first quarter of 2001, a 42% improvement. Said another way, the annualized pre-tax operating loss run rate has improved by $13.1m over the past four quarters. The major portion of this improvement has been achieved from reduced personal expenses, which as you can see on slide 23, have declined to $1.8m in the fourth quarter of 2002 down from $4.2m in the first quarter of 2001, nearly 60% reduction. This personal expense reduction was achieved primarily through the migration of a significant number of OTX positions in Bangalore, India. One obvious benefit of this expense reductions has been the significantly lower the revenue growth required to bring OTX to breakeven as planned for earlier this year.

As shown on slide 24, REALTrans volume grew 10% to 156,000 transactions in the fourth quarter up from 142,000 last quarter, generally reflecting the Mortgage Bankers Association Refinance Index. I am pleased to note that our first quarter run rate based on January's results is nearly 200,000 transactions per quarter. On the business development front, we continued to gain momentum having signed another top 30 vendors. We also made significant progress with regard to First American initiative. First American's VMS platform to be powered by REALTrans is scheduled to be integrated with at least one VMS client by the end of the first quarter and should significantly increase REALTrans transaction volumes.

As for the financial performance of REALTrans, the normalized annual fourth quarter pre-tax operating loss improved for the third consecutive quarter to $3m versus $4.8m last quarter, a $1.8m improvement. With regard to REALServicing, our focus remains on marketing both the default management model and the real estate own management model to both prime and sub-prime services. As we have stated several times in the past the sales cycle for products of this type has traditionally been a long one and we are not surprised by the length of time it is taking us to book a significant sale. Having said that we remain confident that we have a superior product for all the reasons articulated in prior calls and that our efforts to sell the product will bear fruits some time this year.

Moving on to the REALSynergy suite of products, [inaudible] Real Synergy's asset management model remains in development for deployment in Japan and Taiwan, through the global servicing solutions joint venture between Merrill Lynch and Ocwen financial corporation. This product is expected to go live in both countries at the end of March. We expect that [inaudible] will be deployed in additional countries throughout 2003. As I have noted on each call, I continue to be optimistic about OTX's future and believe that we are making very significant progress in positioning OTX to achieve breakeven. Now I'll turn the meeting over to Mark Zeidman.

Thank you Art. I would like to discuss three aspects of the company's performance during the fourth quarter and for the year ended December 2002. First, the $8.6m pre-tax loss in the corporate sector in the fourth quarter. Second, the progress made in strengthening the company's balance sheet and the third, the company's cash flow and cash position at the end of the year. As Bill previously mentioned our core businesses were profitable in the fourth quarter. Our non-core businesses were breakeven and the corporate sector incurred a loss. The $8.6m loss in the corporate sector consisted primarily of three components. First, approximately $3.6m of interest expense. Second, $2.5m of cost incurred in connection with our fourth quarter bond redemption and finally $2.4m of unallocated expenses in the technology services division. We are taking steps to reduce these costs.

The $2.5m cost incurred to redeem our bond is of course a nonrecurring charge. We estimate that we will reduce interest expense in 2003, by approximately $8m. Most of this saving will reduce the amount of corporate sector interest expense. Similarly the $2.4m loss in the technology service division includes $387,000 of severance expense. This cost was incurred in connection with reduction in staff size and will reduce the amount of compensation expense in this division in 2003. This action combined with reductions in capital expenditures and other actions already taken should reduce the unallocated cost of the technology services division in 2003.

Turning to the balance sheet, as you can see on slide no 26, total assets decreased by approximately $1.2b at the end of the 2002. A decrease of $489m or 29% since the end of 2001, this is significant because the largest component of the decrease was a unsold non-core assets, which declined by $297m or 55% during 2002. At the end of the year, unsolved non-core assets of $246m represented only 20% of total assets as compared to 32% of total assets at the end of the prior year. The component of our strategy has been to strengthen the balance sheet by using the proceeds from the sale of non-core assets to reduce our debt burden. As you can see on slide 27, we made significant progress in reducing the amount of high-yield bonds outstanding during the year, including the redemption of $73.5m in November of 2002.

For the year as a whole the company's high-yield debt was reduced by $82m or 38% to approximately $133m remaining at the end of the year. Similarly the company had high cost certificates of deposit of $483m at the end of 2001, at an average interest rate in excess of 6.5%. We paid down over $285m or almost 60% of these deposits and had only $198m remaining on the books at the end of 2002. In addition through reducing the company's interest expense and negative spread, these actions resulted in the significant strengthening of the company's leverage ratios during the year. As you can see slide number 28 shows that the ratio of equity to assets improved from 22.2% at the end of 2001 to 25.6% at the end of 2002.

At Ocwen Federal Bank our largest operating entity, this strategy helped us to maintain regulatory capital ratios significantly higher than those required by the OTS. As pictured on slide number 29, the bank's [inaudible] core capital ratio of 15.5% was well above the 9% required by the OTS. And its total risk base capital of 21.5% was in excess of the 13% required by the OTS. Finally, I would like to provide an update on the company’s cash flow and the cash position for the fourth quarter and for the year. As you can see at the bottom of slide number 30, the company closed the year with $192m of cash, of this amount approximately $124m was at the bank and $68m was at the holding company. From the sources and uses of cash prospective, the company's operating activities were cash flow positive during the fourth quarter and for the year as a whole. Operating activities were cash flow positive in the fourth quarter, despite the $7.8m net loss reported. Primarily because of $21m of non-cash depreciation and amortization recorded against net income during the fourth quarter and $35m of cash generated from the securities portfolio.

Investing activities were also cash flow positive during both the fourth quarter and for the year as a whole. Investing activities primarily reflects cash generated from non-core assets, less cash used to purchase mortgage servicing rights. In the fourth quarter investing activities generated cash because the company received cash of $42m from non-core assets, but spent only $23m to acquire new servicing rights. Financing activities used fully $132m of cash in the fourth quarter. Financing activities represents the company’s efforts to either raise new debt or to pay back its debt. As you know our strategy has been to de-leverage the balance sheet and reduce our interest expense in order to improve our bottom line.

The significant out flow of cash in the fourth quarter primarily reflects the redemption of the $73.5m of high-yield bonds, which I previously mentioned and the maturity of approximately $50m of high cost deposits in the fourth quarter. I’d now like to turn the call back over to Bill Erbey.

Thank you Mark. And Allison at this time we are prepared to take questions.

Thank you. At this time we are ready to begin the question and answer session. If you would like to ask a question, please press " " "1". You will be announced prior to asking your question. To withdraw your question, press " " "2". Once again to ask a question, please press " " "1". One moment please. Our first question comes from Bob Napoli with U.S. Bancorp Piper Jaffray. Mr. Napoli you may ask your question.

Good afternoon. Question on the OTX business and the trends in the quarter going into next year little bit more clarity on profitability expectations and going from 142,000-156,000 in transaction volumes, that the mortgage market itself was up about 20% in the quarter, but seeing the quarter one run rate at much higher levels, just wondering what’s going on, what’s driving the quarter one run rate up? Why wasn’t 4Q much stronger, given the mortgage market, and then I also like an update I guess on Washington Mutual and kind of your trend towards profitability? I know its lot of questions, but.

[inaudible] just you had. Bob, I'll answer your question in two parts. First of all you think about the trends in market share, it is important to understand that how much of real [inaudible] volume comes from loan originators.

Yeah.

Also a very significant portion of customer, other sources that are directly correlated to the originations activity, for example we have certain customers who for whatever reasons over a large batches of appraisals in one squad related to do due diligence activities are doing for a variety of reasons and unrelated to what’s really going on in the mortgage market. We also received orders or deliver orders from servicing systems with regard to fore closures and defaults and things that like where appraisals need to be made, create a report on that sort of thing. Those were also not correlated, well, what's happening in the residential mortgage originations markets. So it's hard to correlate what we are doing to mortgage origination activity and part for that reason.

Secondly, well 2002 was a record year for the industry in general. Certain players, as always, certainly excelled. As an example, Washington Mutual, who, as you know, has selected us their platform for vendor management, took enormous market share. But during the year for variety of reasons that we have just discussed on prior conference calls, they didn't roll out our Real Trans as quickly as we had anticipated. Had that happened, obviously, we would have participated by virtue of relationship with them in their taking very significant market share. Then our numbers would have been quite a bit higher. We have been informed within the last 3 or 4 weeks that they are now ready to continue to roll out the new platform and that REALTrans will be fully deployed here within a reasonable period of time. So I hope that answers you question. There's two parts to it -- one is, its not as simple to make a connection as it might seem, and secondly, had we been rolled out a little faster with some of our key players, I think, you would have seen us move our volumes up rather dramatically. It looks like that will happen in 2003.

But how confident are you -- do you going to get the profitability in 2003 and should we see a very strong -- I mean -- you still have a long way to go to get the profitability, and how confident are you going to get there and when?

Let me say this. That’s a forward-looking statement. Unfortunately, we [have to] find answer. Let me say this, though; with our new reduced cost structure, our estimate is we need some place between 425 and 450,000 clips, a quarter, to get roughly into break-even range. We are already -- as I said -- running a 200,000 in the first quarter with prospects of relationships, we have already talked about i.e. First American, [Wimble] etc.; I think you run the math and think about that and see how likely you might feel, does it allows making any statements that I shouldn't.

Have you lost any customers or have any customers used your product less than you anticipated?

We have not lost any customers to my knowledge. And less than we anticipated usage -- I am not aware of anything like that. We tend to get -- when people woke up they just continue to use us and if there's been any sort on the volumes, I think they related more to individual customer’s volume issues than anything related to REALTrans as a general statement.

Okay. A question on the corporate expense; just to try to understand what the run rate is there going into 2003? You plucked it out real nicely into difference pieces to get you $8.6m; the $2.5m disappears, the cost of redeeming the debt, $3.6m of interest -- you are going to save $8m -- how much of that $3.6m goes way because you closed -- you bought back a debt during the quarter. Do you lose $2m per quarter out of that $3.6 or…?

Well, we lose, I guess about $2m per quarter in total. Most of that will be a reduction to corporate division interest expense. Some of that is actually charged debt different business units. How much of the $2m per quarter was savings and interest expense -- you will reflected in the reduction of corporate division as it's little hard to say -- I say at least half, may be two-third.

Now, when was that deal closed? When did you buyback the debt?

It was the end of November.

Okay.

Keep in mind too -- I believe of the $3.6m of interest expenses -- our corporate expense, part of the $2.5m of the bond reduction expense was in that number.

It was in the $8.6m total corporate expenses.

Rather in $3.6m.

Rather in $3.6. Yeah. Okay and do you intend to buy back more, can you? And do you intend to buy back more of the -- your high cost debt in 2003 and will that be directly tied to reducing the non core assets?

Again a little bit of forward-looking statement, I guess, we have remaining outstanding a little over $43m of the OCM 11 and 7-8 senior notes. That will mature in early October of 2003. Given the call redemption premium, it probably is not worthwhile to buy those back early in the year. We -- so, at least at the moment we do not have plans to buyback significant amounts of additional debt.

How much of that October 2003?

40 -- it's a little over $43m phase.

At what interest rate?

11 and [7 As].

Okay. Can we buyback more debt?

Yes. But, you know, as I said at this point given the call premium on the -- at least the 11 and [7 As], we are not currently planning to do that.

Last question. From today your growth rates slow down on the servicing business, the servicing portfolio in the fourth quarter; I was just wondering what your outlook is for the growth of that servicing portfolio in '03 and what your goals would be for that business; servicing portfolio and profitability on a longer term basis?

Bob, would you like to handle that?

Sure. I mean, I think, again we really can't give forward-looking statements and we did grow our volume more than, you know, it was a very good year and it was -- we grew at actually faster and more than we had thought. So, I don't know that the fourth quarter was anything of any significance more than it may be just came back towards the levels that we had anticipated earlier in the year. I think, we continue to expect to see growth in the portfolio. And, you know, we are optimistic that with what we are doing in India and our six Sigma initiatives and other things, that will continue to be able to keep our margins where they are and hopefully even, you know, if things go right, even expand those.

And the pricing in the market today for new servicing doesn’t hinder that, you know, that goal?

I think the pricing today is competitive, but not -- you know, somewhat similar to what it was in the second half of the year.

And given that 40% is a very big growth rate, but do you think a more normalized growth rate; you would expect somewhere in the half that level into '03 and '04? And just, Bob, part -- kind of what your goals would be, not as much in forward-looking statement per se, but just a kind of general goal growth oriented?

Probably, we have a little bit on that. I think that you can look at us having far greater focus on our operations in terms of expense levels and as well as quality than really trying to grow the volume of the portfolio extensively during 2003. So, we are going to try to continue to work on our cost structures. And Ron did excellent job last year, reducing unit cost by an excess of 20%. I am not sure we will be able to replicate that feet but we are going to continue to try to push our cost of servicing down, at the same time improving our performance metrics; far more than pushing volume at this point and the interest rate cycle.

Would you [inaudible] back some growth in that portfolio in '03?

I give you an A for tenacity here. Well -- I wouldn’t expect huge growth. I wouldn’t expect significant growth in that portfolio during 2003. One thing to, Bob, just go back to your second next -- your penultimate question; I think that one other thing in the interest expense you might look at is really the CDs and the impact of those running down. The CDs are, as Mark pointed out, were averaged, I believe, in the excess of 6.5% of those CDs that they matured have a fairly beneficial impact on our bottom line. If you look at the thing on interest income and expense in the press release, it's interesting that our net interest margin, our net interest expense deteriorated fairly meaningfully in 2002 versus 2001, even though we were reducing our liabilities faster than our assets. Though the interest rate differential was pretty adverse as these rates have continued to come down. As the CDs run off that should be ameliorated to some extent. In addition, just the paying off the funded, you know, the high cost funded day.

Okay. Thank you.

Mr. Peter Flora (ph) with Borrow (ph) Partners. You may ask your question.

Art, I couldn't tell, if you mentioned anything about REALServicing, on the call. I think you did it quickly in one sentence and I -- what I was trying to get out is whether or not you made the statement that you anticipate getting the client using REALServicing this year or did you say something else?

That is essentially what I said. The sales cycle as I have indicated in the past calls are fairly long for servicing sale. We’ve had a couple of volumes, we wanted some things. The system is being well received. We are guardedly optimistic that we'll get a sale before the year is over. I think we are going to see something kind of a [vision]. The good news as I have stated before is we don't have to sell very much of that product to make it profitable. We have very small market share. So we will be aggressively out there selling it this year more so than last year as the product has matured and proven itself in [inaudible] world to be very good product.

Thanks.

Mr. [Jim Fowler] with IMP Securities. You may ask your question.

Hello a question for Ron please. Ron could you give me some idea on what you are seeing in terms of trends in the workout area. Your matrix have continued to attract very nicely, but I’m wondering if you are seeing any differences in the loss severities workout times or anything on those lines?

Nothing of any significance, the only thing that we've seen, the only area that we really didn't see any improvement in from 2001 to 2002 was the time line to sell REO. In the second half of the year we did see that it was taking about 30-40 days longer to sell REO. We believe that's a component of two things. One is some softening in the market that is slowing sales a little bit as well as the [Refi] boom it is taking longer for people to buy REO to actually get their mortgage and close the mortgage. The [Refi] boom, which is causing instead of loans closing in 30 days they are closing in 60 to 75 days. So that also extended out our sales cycle, but besides this little bit of a slow down in the sale of REO there is nothing else of real significance that we have seen in the portfolio.

And then against your expectations for savings and efficiencies and technology and moving operations to India where would you say you are in terms of achieving form, fully both in those. Are you midway, most of the way or some where in the continuing?

Well I think we are still somewhat in the continuing. The fourth quarter I think was the first quarter where we really started to feel like we were making -- we were getting meaningful benefits from the move to India and so I think we'll instead of just getting one quarter of those more meaningful benefits we will be getting that for the entire year next year. We still do have some additional reductions in US staff that will occur during 2003 and growth in India, which will also add to the benefits. But I think-- we are really pleased with where we are today and the fourth quarter was really sort of the first real quarter where we really got some significant savings.

Great. Thanks Ron. Good to hear you Bill.

Bye-bye.

Mr. [Andrew Canham] with Whitehouse Partners. You may ask your question.

Mark, I was just wondering what the quarterly run off for the CDs. It’s going to be -- in 2003?

Let's see. We had about a $198m remaining at the end of 2002. I know in 2003 as a whole there is $100m that runoff. Quarter-by-quarter they probably bulk up in the first quarter and the last quarter but I don't recall the numbers off hand.

Okay, fair enough. And then [inaudible]

Mark S. Zeidman That's [inaudible].

Okay and Art I was just kind of -- your comments on First America are somewhat surprising to me, considering that [inaudible] has been such a long process, [BFA], and Citibank haven't come to the table either. What makes you so confident that First America is going to get quicker implementation rates than you've seen across the board?

The deal we struck with them to become the engine for the VMS platform. The VMS platform exists in a number of vendors today. So what we will be doing in effect is like it would be equivalent to swapping I mentioned in the [inaudible]. The impact is very quick; they have scheduled that first activity to correlate in the first quarter or early in the second quarter of the year. That's why I am confident, because if that happens and that has been their schedule and they have asked us to gear up and we are working daily to get this accomplished. And when we accomplish it, the impact will be immediate.

What is breakout on REALTrans, I mean, you are averaging $3 per product, but now do you have to split that with First America or how are the economics?

The First American deal is [inaudible] and there was some discounting rate and I don't feel comfortable describing this actually how that works, but the deal has a floor in it, below which we don’t go and we anticipate a certain number of quick score. They would be forward-looking. All in all, it would be a very good deal for both sides I believe.

Do you thing, I mean, we know it’s forward looking, but -- I just don't know where [inaudible] with the question to try to get you to answer. It was [inaudible] participating in any of the clicks this past quarter?

Yes, we are deployed in some other facilities not the majority. The bulk of the roll out is yet to happen.

So it is like 10% that you have gone to?

While let's put this way [inaudible] was not anywhere close to our largest client in the quarter and they will be…

[inaudible] implemented there would be.

Okay. And they are still using the five products -- the five applications?

I think they are using three products. I don't think we ever said five, two or three.

At that time…

As far as to my knowledge.

Okay. So it is three.

I think it's two, going to three. But I’m -- I think that's right.

Two going to three.

I think that is correct as we said here.

And [BVA] they would provide any clicks or how many products are they using?

[Inaudible] is using one product and we are getting ready to expand that relationship. We are going to ask to go into integration there. That will increase our volumes with them significantly.

So they are going to go up to one another product. Or they are going to go up to three products. How many do you think?

They actually – sooner we’re ordering the products through. They are connecting us with an additional vendor who does about 50% of the volume and the product suite that were in. So our volume through [BVA] should directly roughly. Well it was forward looking, but should that double in future within the next – by the end of the quarter. That's my guess.

Okay and then.

[Inaudible] look forward [Eddy]. I mean it’s [inaudible] so, but I have to quiet down here.

I understand in Citibank, how many applications or products are they using?

I should have said this before I came up here. I think three or four.

Three or four, okay. That's all I have right now.

Thank you.

Once again to ask a question please press " " "1". Mr. Andrew [Canham] with [Whitehouse Partners]. Your line is open.

Yes, Art again on REALServicing. I saw that framework. Actually not, it's actually on REALTrans. I saw that framework was purchased by Washington Mutual. I was just kind of wondering what your thoughts are in that acquisition since they are the loan origination system that you are backing into at [BVA] and then at Washington Mutual. Do they give you some concern that things could be further delayed?

Actually, [BVA] bought framework.

Yes.

Not Washington Mutual.

I am sorry. Yes [inaudible].

And there the indications are that they intend to run on those as a freestanding business. [BVA] has no corollary to REALTrans of their own. So there will be no reason for them to try to take a side of the picture effect they use us that may give us strong references. And they don't have a corollary product. We’re already integrated with the framework. I’m not aware of any reason at this point why we should be concerned about the acquisition and actually strengthen the financial position of framework. I see that not knowing a lot about framework but certainly [BVA] is probably a lot bigger than framework. And we have a good relationship with the new owners and the existing framework management team. So I don't anticipate any issues from our side with regard to that acquisition. It may actually help us by making framework stronger. I don't know.

Okay. And then on REALServicing the thought was that you were going to be able to get in REO module or default module before the loan servicing modules complete. And you had five customers that are coming down to test or kick the tires in Orlando last quarter. Are the people put off assessing your products until the loan-servicing module is complete?

No we actually have two of those readings. Both of the companies were very pleased and complementary of the product. What happened I think ultimately was each of them was along way standing at the road doing some internal work on their own systems. And so they were sort of 70% vested. One of them had actually hired someone to build a custom system that was 70% done by the time they came to see us. So the timing wasn't right. We got there a little bit late. Having said that we walked away still very encouraged, because of the feedback on the product was very positive and very constructive. And we are now ready to go to a second round of demonstrations, which we'll be starting on presently. So that's why there’s optimism, you read in my notes.

Okay great. You said you know Washington Mutual has decided go with their -- when they purchased household, I believe or home side?

Home side.

Home side. They decided to go with that servicing technology. And now that FNF has bought Alltel's AIS. You know the playing field is changing very quickly. And it seems that the loan servicing portfolios get pushed out and there is 800-pound gorilla now in there. Is it kind of sapping your enthusiasm? Or is it -- maybe, teaming up with someone else would be beneficial with this product?

Let me comment on the FNF acquisition of Alltel. We have commented before on these calls about why we think REALServicing is a superior product to the Alltel product. The prior owners of Alltel, from what I can tell, had plenty of capital to do whatever they wanted with the Alltel servicing system. Being acquired by FNF doesn't change any of that. So basically the system is still the same system it used to be. To the best of my knowledge, FNF, at least [inaudible], has not been developing any sort of a new servicing platform. So they inherit all of the same problems that the old Alltel had, including I believe Washington Mutual's announced intention to migrate to their own system. So I don’t find that in any way, shape, or form discouraging. And I don’t think that from our point of view its changed the landscape much. Only time will tell, but I do know this having done it, it takes a long time to develop a really good servicing system, even if you have a lot of money. So if they haven’t started one, it's going to be a while before they can give on in place. I think that our prospects remain exactly as good as they did in last call. I don't see any significant reason for concern at this point in time.

Andrew, I think you should consider too that they just raised their cost basis, given the fact they have a billion dollars of capital in it. So their flexibility in dealing with the customers is -- be a little bit more constrained perhaps than the prior owner.

Okay, fair enough. What is the projected date of the loan-servicing modules being completed?

Well the [ORW] and REO modules, which we are renaming Real resolution are basically ready to be deployed in the marketplace today. Real servicing as it relates to sub prime servicing runs everyday of the week. And so that's ready to be deployed now. And we are working on finalizing our plans for REALServicing for the a-paper players. But I don’t have a definitive date for you today.

Okay, thank you very much.

At this time we have no further questions.

Thank you very much everyone, have a great day.