Onity Group Inc (ONIT) 2004 Q2 法說會逐字稿

Good afternoon, and good morning and thank everyone for holding. I would like to welcome everybody to today's conference call. And remind all participants that your lines will be on a listen-only line until the question-and-answer session of today's program when your speakers will address your questions. I would also like to remind all participants that today's call is being recorded; if you have any objections you would disconnect at this time. And at this time it is my pleasure to introduce your first speaker for this afternoon, Mr. Bob Leist, Vice President and Chief Accounting Officer. Sir, you may begin.

Thank you. Good morning everyone, and thank you for joining us today. Before we begin I want to remind you that a slide presentation is available to accompany our remarks. To access the slides log onto our website at www.Ocwen.com, select "shareholder relations" then "conference calls" second-quarter 2004 results. And then view slides. Each viewer will be able to control the progression of the slides during the presentation. To move the slides ahead, please click on the gray button pointing to the right.

As indicated on slide 2, 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 future periods or by use of forward-looking terminology. They may involve risks and uncertainties that could cause the Company's actual 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 yesterday's earnings release, as well as the company's filings with the Securities and Exchange Commission, including OCN's 2003 10-K.

We are happy to make Ocwen news releases, 10-Qs, 10-Ks 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 Linda Ludwig at LLudwig@Ocwen.com.

As indicated on slide three joining us for today's presentation are Bill Erbey, Chairman and CEO of Ocwen, Ron Faris, President; Mark Zeidman, Senior Vice President and CFO; and Paul Koches who serves as our general counsel. This presentation will be followed by a question-and-answer period during which we will be taking questions from those of you are attending the conference by telephone.

Without further delay I will now turn the call over to Bill Erbey.

Thank you, Bob, and thanks to all of you for attending Ocwen's second quarter conference call. In my remarks today I will provide an overview of our second quarter earnings which we believe demonstrates that our repositioning strategy is yielding positive results. Following my remarks, Ron and Mark will provide more detailed information. I open my comments by noting that we are reporting our fifth consecutive quarter of income. Net income in 2004 would have been $10.1 million and $16.8 million for the second-quarter and year-to-date, before considering the $9.3 million provision for the adverse jury verdict that we announced yesterday and that I will cover later in my remarks.

Our second quarter performance continues our improving trend in earnings. As shown on slide 4, we have grown from average quarterly losses of 31.2 million in 2001 to an average pretax income of 3.7 million in 2003 and pretax income of 6.8 million and 10.1 million in the first two quarters of this year. Our 2004 year-to-date results reflect year-over-year improvements across the board in our core, non-core and corporate segments.

The aggregate earnings of our core businesses reflect continuing improvements as shown on slide 5. Increasing from an average quarterly loss of $1.7 million in 2001 to $8 million (inaudible) and $9.1 million in the first two quarters of this year. It is worth noting that thus far this year our newer core businesses, those being ORA, unsecured collections, business process outsourcing and commercial servicing posted aggregate pretax income of $6.9 million, an increase of $4.1 million or 154 percent over the first six months of last year.

This improvement in core earnings is particularly significant in light of the substantial ongoing challenges faced by our residential loan servicing business. As graphed on slide 6, our average quarterly income in this business has declined from 8.3 million in 2003 to 5.7 million and 4.6 million in the first two quarters of this year. These results reflect the continued negative impact of low interest rates and high prepayment speeds on this business. Ron will provide more details on the impact of these factors later in the call. Although I do want to note that we are encouraged by the recent Federal Reserve Board action in raising the short-term interest rate which we believe will bring short-term improvement in our float earnings and hopefully in the medium-term dilutatory effect on prepayment speeds as well.

As shown in slide 7, we are reporting pretax income at Ocwen for this quarter. Let me say that again. We are reported pretax income at Ocwen for the second quarter at OTX in the second quarter. Our results this quarter include onetime documentation fee revenues associated with our ASP contract with Aegis Mortgage for the use of the REALServicing system. This is truly a milestone event. Not only because of the earnings impact, but also because we have now closed our first major third-party contract. We believe this will provide a major boost to our future sales efforts and in fact, are actively discussing additional contracts with a number of other potential customers.

As depicted on slide 8, our non-core businesses also reflect a positive trend. Improving from the substantial quarterly losses during the years of our restructuring to a pretax loss of 1.7 million in the first quarter, and pretax income of 2.6 million this quarter. These results include interest income and trading gains on our commercial and subprime residual securities, fueled by substantial positive cash flows on these securities. Non-core results also reflect reduced interest expense as a result of the declining balance of non-core assets.

Partially offsetting these gains were impairment charges on two of our remaining commercial non-core assets. As graphed on slide 9 our corporate sector reported a pretax loss of $1.7 million in the second quarter as adjusted for the adverse jury verdict, and pretax income of 0.5 million in the first quarter. These results in the corporate sector also reflect substantial improvement over the average quarterly losses of $7.4 million and $3.7 million in the preceding two years. In large part because corporate technology and interest expenses were reduced substantially from 2003 levels.

As I mentioned last quarter, one of our goals is to substantially enhance our return on equity by more efficiently utilizing and funding of our assets. One of the reasons that we focus on growing our newer core businesses is that they require virtually no assets and hence generate very robust returns on equity. As illustrated on slide 10, the assets of these businesses shown in yellow represent well under 1 percent of our total assets.

The assets of the residential loan servicing business shown in green are 52 percent of the total and are largely comprised of AAA rated servicing advances which we have had success in funding. Apart from cash, our non-core and corporate assets combined represent 22 percent of the total and we are actively seeking to reduce these balances.

Before turning the call over to my colleagues, I want to comment briefly on the jury verdict we received last Friday. This verdict relates to litigation brought by Cartel Asset Management Inc., a company that had provided real estate valuation services to the Company and its subsidiaries in 1997 through the first quarter of 2001. I think it is important to note that this lawsuit in no way relates to the practices of our residential loan servicing business.

In keeping with accounting standards we've established a reserve for the full amount of the jury verdict. It is our opinion and that of our legal counsel that this verdict is contrary to the facts and law relevant to this case. And we intend to vigorously challenge this result in post-trial motions and if necessary in an appeal to the U.S. Court of Appeals through the Tenth Circuit.

I believe that our continued profitability in the second quarter, the growth in profitability of our core businesses, the pretax income in our non-core businesses in 2004 and a reduction in losses in our corporate segment, all demonstrate that we are continuing to achieve the benefits we anticipated from our strategy, and I remain optimistic about the earnings outlook for the second half of the year.

I would now like to turn the call over to our President, Ron Faris.

Thank you, Bill. My remarks today will cover the residential servicing business, Ocwen Realty Advisors, unsecured collections, business process outsourcing and Ocwen Technology Xchange. These core business lines, along with commercial servicing generated $9.1 million in pretax income. A 15 percent increase over the second quarter of 2003 and the first quarter of this year.

Turning to slide 12, you will see that our residential servicing business reported pretax income of 4.6 million in the second quarter compared to $8.8 million in the second quarter of 2003 and 5.7 million for the first quarter of 2004.

As shown on slide 13, our servicing portfolio's unpaid principal balance at the end of the second quarter was 34.8 million, a 5 percent decline from the first quarter of 2004. And an 8 percent decline from the December 31, 2003 balance. The decline in loan service during 2004 can be attributed to the continued high level of runoff due to prepayment and to our having adopted a more cautious acquisition strategy as a result of the uncertainty of prepayment speeds in this current environment.

Net revenues in the servicing business were $28.3 million in the second quarter, an 18.5 percent increase compared to the same quarter last year. The increase in revenues from 2003 was a result of the higher average balance of loan service in 2004 and revenues generated from the new VA property management contract. We also continue to make progress in our ability to capture some of the refinance activity in our servicing portfolio through our loan origination efforts.

During the quarter we originated over $45 million of loans. Despite this growth in overall revenues, however, we have steadily increased our rate of amortization on servicing rights to reflect increased projected prepayment volumes. Slide 14 shows the trend in prepayment speeds over the past six quarters. As you can see prepayment speeds increased to a record high of 43.2 percent annualized CPR in the second quarter compared to 36.2 percent in the same quarter last year, and 35.4 percent in the first quarter of 2004.

We anticipate that prepayments will continue at high levels in the near future. The profit impact of prepayments in the form of PMSR amortization and compensating interest due on prepayments increased by $2.4 million or 8 percent in the second quarter of 2004 over the same quarter last year. Slide 15 presents the adverse trend of prepayments over the past three and one half years. Amortization and compensating interest expense absorbed 54 percent of related gross revenue in the second quarter compared to 49 percent during the second quarter of 2003.

As we have reported today and in the past, this business continues to be adversely impacted by the current interest rate environment through faster than anticipated prepayment speeds and low net earnings on float balances. Slide 16 highlights the average balance and earnings from our collection account balances over the past 3.5 years. We are obviously pleased that the Federal Reserve Board has finally begun the process of raising short-term interest rates, which will have an immediate positive impact on our net float income and hopefully over time a positive effect on prepayment speeds.

Turning to slide 17, you can see that gross revenues for the residential servicing business have increased by over 173 percent during the past 3.5 years in comparison to only a 44 percent increase in net revenues during the same period. As I previously stated, this reflects a relative increase in amortization of mortgage servicing rights and compensating interest expense caused by the increase in prepayment activity due to lower interest rates and tighter subprime mortgage spreads.

On the expense side, we saw a 58 percent increase in expenses in the second quarter of 2004 over the second quarter of 2003, primarily as a result of an increase in the number of loans serviced, costs related to the new VA property management contract and the increase in certain costs due to bringing in-house in the fourth quarter of last year of certain servicing activities previously performed by third parties.

As shown on slide 18 our unsecured collections or asset recovery business posted pretax income of $889,000 in the second quarter as compared to $965,000 during the same period in 2003. Although we are disappointed with these results during the quarter, we remain optimistic that we can grow this business. We have several Six Sigma initiatives under way to improve our collection capabilities and expect to continue to grow our offshore operations through the remainder of the year. We have also recently strengthened our management team in this area.

Slide 19 shows that Ocwen Realty Advisors, our property valuation division, reported pretax income of $1.6 million for the second quarter of 2004 which was equal to that of the second quarter of 2003. For the first half of the year we generated 3.5 million of net income compared to net income of $2.6 million during the same period last year. I am also pleased to report that Ocwen Realty Advisors has recently added a number of new clients.

Our business process outsourcing business generated $2.2 million dollars in revenue during the second quarter compared to $401,000 during the second quarter of 2003, and $2.1 million in the first quarter of 2004. As shown on slide 21, this business generated $707,000 in profit during the second quarter. A $784,000 increase over the second quarter of 2003 and a $397,000 or 78 percent increase over the first quarter of this year.

We continue to invest in this business, including expanding our sales and marketing activities to acquire new clients and to expand our relationships with our existing clients. We anticipate additional opportunity to increase our client base over the coming quarters. We have also recently enhanced our management team in this business line, as well.

As shown on slide 23, I am very pleased to report that Ocwen Technology Xchange generated a profit of $1.5 million during the second quarter. Overall OTX improved its results by 3.9 million versus the second quarter of last year, reflecting an addition to cost reductions, the recognition of onetime documentation fees associated with our contract with Aegis Mortgage to use our REALServicing system.

(inaudible) Savings were achieved through a number of initiatives, including reduced technology costs, marketing savings through the implementation of a centralized marketing function, occupancy savings through the centralization of U.S. staff in Florida and some savings in compensation.

On the revenue front OTX revenues grew 164 percent or $4.2 million from the second quarter of 2003. REALServicing revenues rose by $3.9 million on the strength of the Aegis Mortgage contract we just discussed and improved performance from other licensing arrangements.

REALSynergy revenue increased by 60 percent or $174,000 in comparison to the second quarter of 2003; principally as the result of increased fees earned from our Global Servicing Solutions venture with Merrill Lynch.

REALTrans revenues increased by 6 percent or $58,000 over the same period last year in spite of the significant drop in prime mortgage refinancings. All of these businesses capitalize on our core competencies and provide additional value added services to our core client base. These business lines continue to make progress in reducing our cost structures and improving their product quality through Six Sigma initiatives through better use of technology and globalization.

The main focus for 2004 continues to be expanding our sales and marketing efforts to accelerate the growth of the smaller, newer business lines. Thank you, everyone. I would now like to turn the call over to Mark Zeidman.

Thank you, Ron. I am going to keep my comments brief so that we can open the call up to questions. I think that in the second quarter the company continued to make progress on strengthening its financial situation in several important respects. First, as you can see on slide number 23, we continue to maintain a significant amount of liquidity. We closed the quarter with cash balances of 282 million. This represented almost 24 percent of total assets. Of this amount, 83 million of the cash was at the Holding Company and 199 million was at Ocwen Federal Bank.

Second, as you can see on slide 24, we continue to reduce our exposure to loss from non-core assets. At the end of June, non-core assets totaled 130 million, down by 29 percent from 182 million at the start of the year. As such, total non-cor assets represented only 40 percent of consolidated equity as compared to 57 percent at the beginning of the year. Additionally our remaining non-core business segments were profitable in the second quarter, earning net income of 2.6 million. Accordingly, our non-core businesses are profitable on the year-to-date basis, and earned approximately 918,000 for the six months ended June 30, 2004.

Of our remaining non-core assets, about 78 million or 60 percent of the total represented commercial assets. This included five investments in real estate, one commercial loan and one investment in a commercial mortgage-backed security.

Finally, as you can see on slide number 25, we continue to reduce leverage. Our ratio of equity to assets increased 27.6 percent at the end of June from 25.4 percent at the beginning of the year. Since the beginning of the year we have reduced total liabilities by over 62 million while simultaneously increasing our cash balances by 66 million. I think that this is a strong positive sign as a basic health of our core business results, our success in reducing non-core assets and of our general operating strategy.

That concludes our remarks. I would now like to open the call up to questions.

(OPERATOR INSTRUCTIONS) (indiscernible) of Hartwell.

A couple questions. In terms of prepayment speeds, can you talk a little bit about the typical lag between prime and subprime and what your expectations are for the prepayment speeds in the second half of the year, obviously it spiked in Q2, as you alluded to. That is question 1. Question 2 is to talk a little bit more about the lawsuit and the elements of surprise I think that certainly came to me from reading the press releases yesterday. Thank you.

I'll comment on the prepayment speeds. I don't know that I can give you exact figures, but historically when rates were coming down, subprime rates were very sticky and came down much slower than prime rates did. But eventually after a period of time they did start to come down. We would expect to see the same type of thing as rates rise. The other thing that is occurring in the market is there is a lot of capital that has flowed into the subprime origination market. Many of the players are actively trying to keep their volumes up and continue to generate record volumes by reducing spreads that they are willing to earn.

So there is this pressure even in a rising interest rate environment that we're in, subprime originators are keeping rates low and in fact in some cases even continuing to reduce them so that they can generate more volume. They will only be able to do that for a period of time especially if rates continue to rise, so hopefully at some point we will see a slowdown in prepayment speeds. But we are still cautious in our view of when that is going to occur, and as I mentioned in my discussion, we continue to be conservative in our bidding process right now in light of the current prepayment speeds that are occurring.

I will turn the call over to Paul Koches to give you some more insight on the litigation settlement.

Thanks, Ron. We, too, were surprised and disappointed obviously with the results of the trial in Denver in the Cartel case. Again, we believe we have meritorious motions to file with the judge to either satisfy or greatly reduce the verdict, and then failing that we intend to pursue fully our appellate rights. With respect to the surprise element, let me say that the amount in controversy in this case had not been crystallized until very shortly before the trial. It was not until early June when we were able to obtain a deposition of the plaintiffs proffered damage expert, in which he described a new theory of damages that had not been advanced before that point.

We had attempted through various motions to exclude that proffered evidence and damage study and not until literally days before the trial commenced did we complete that with unfortunately adverse rulings from the court which let the damage studies actually into evidence and be considered by the jury. We continue to believe that that damage position is legally deficient, unduly speculative and will be one of the many subjects of our post-trial motion practice.

But in summary the issues before the court relate to damages for terminating the contract or practices that happened before the end of the termination?

The damage study was based upon a theory of alleged misappropriation of trade secrets. Again, we believe there is no evidence; there is sufficient evidence on liability as a threshold matter, and then above and beyond that we believe the damage study that was, we believe improvidently allowed by the court, is defective for legal and factual reasons.

(inaudible) I think you might want to give a little more clarity as to trade secrets. The allegation of trade secrets was that the brokers -- their list of brokers -- real estate brokers -- with whom they did business was in fact proffered as a trade secret as opposed to (technical difficulty).

That is correct. Again, this plaintiff is an aggregator of what we call, BPOs, broker price opinions, which the Bank had purchased during the timeframe 1997 through the first quarter of 2000 from Cartel. Cartel's position was that notwithstanding the fact that we had purchased outright these documents which contain data, part of which is the identification of the brokers who actually perform the BPOs that somehow the name of the broker constituted a trade secret or was otherwise confidential information in which Cartel claimed a proprietary interest.

We frankly took the position that we bought the BPO and all of the data contained therein, including the brokers names. Obviously the jury disagreed with that but we believe that is a fundamental flaw in their case.

You talk in the press release about reviewing the Bank, and can you talk a little bit about that review process, the length of it and what potentially some of the outcomes of that review could be?

If I may clarify, you say reviewing the Bank, you mean the discussion in there with respect to whether or not we would remain a federal depository institution?

Correct.

There is no timetable set for completion of that review at this time. It is something we felt we should make known to investment public with regard to the fact that it was under consideration. But at this time we are not prepared to either give a probability assessment or timing as to the culmination of that.

Thanks so much.

Jim Fowler from JMP Securities.

A couple questions. First, Ron, could you hazard a number on the mix in your current portfolio, of 228 mortgages versus fully amortizing fixed-rate?

The fully amortizing fixed-rate would be about 30 percent of the portfolio. The rest of the portfolio is primarily 228 and 327 and then some six-month LIBOR and a few other things mixed in there but predominantly 228 and 327, so 30 percent is straight fixed.

Got it, so as I'm looking at prepayment data in the market it seems as though the hybrids are prepaying much faster than the fixed-rate, so if you're not really adding as much UPB as you might otherwise, it would seem like there would be a natural slowing to some degree of prepayment speeds. Would that be a reasonable assessment?

Except for the fact that when your early months, if you are bringing on new business and growing, those early months in any type of product tend to have lower prepayment speeds than product that is one year, two years, three years old. So I mean over time that will occur potentially, but in the short term it may actually be the opposite.

If I could comment, too, it is really not per say the actual rate of prepayment, so that's how we express it. It is really the rate of prepayment vis-a-vis our initial projections when we put those assets on the books. You would see a natural, because we are not putting as much product on the books, you will see a natural upward drift in your prepayment speeds as your growth rates slows or actually stops. And as it goes down, as it speeds up again you'll see prepayment speeds tend to diminish just by the operation of the average age of that asset.

Very good. Any thoughts on where you might be right now in terms of valuing marginal servicing acquisitions relative to what the market is valuing them? Are we a couple of percentage points off or a wide margin off?

I am not sure I went to kind of comment on where we are bidding in the market. It is fair to say that we are not -- we are bidding on transactions. We are winning some, we are not winning as high a percentage of deals as we bid on as we did in the past. So I think it is fair to say we are not significantly off the market, but we are -- we are clearly not winning as many deals as we did in the past.

I think one of the things, Jim, one of the assumptions (indiscernible) without giving too much of the strategy away -- one of the critical assumptions with any bidding is the shape of the forward curve and to put it mildly we may have a very conservative assumptions with respect to that shape of the forward curve at the present time for a variety of reasons. So the value of servicing obviously with an upward sloping yield curve goes up fairly significantly. So that is one of the reasons pricing can be in a state of flux at a turning point such as this.

And in a way on another note, I'm wondering I'm presuming that the 630 on June 30th or by June 30th you had your OTS plan submitted. I am wondering if your staffing the component of that plan has been commented on by them or approved? I think you commented that we should be thinking about the current expense level as being stable from here. Is that in fact the case?

Your question was with respect to the additions we would be making to increase the staff to come up with to comply with our 15 point plan?

Right.

There were certain areas of the agreement which required that we had some staff not significantly -- no significant numbers, and there is a few things that we are still waiting for comment on from the regulators related to that, but nothing that I think will cause any great increase in expenses.

As an aside we had one of, a subprime lender post their monthly production numbers this morning, the latest to do so and their mortgage coupons were up 12 basis points for the month and up 35 for the last 2 months so at least it looks like the industry might be heading in the right direction for us here.

I think, Jim, too you are seeing probably the prices of subprime loans as whole loans be under significant pressure in the last several months.

That's right. Thank you, everybody. Appreciate it. Good job.

Bob Napoli from Piper Jaffray.

A couple questions. On your servicing portfolio, can you tell me how much you actually did purchase in the quarter, how much new servicing, UPB?

Give me a second here.

While you are looking for that, just on OTX, the contract, the new contract you got from Aegis and the revenue that it contributed to the quarter, would it be fair to expect that going into next quarter that OTX would go back to a loss on a gradual trend to sustaining profitability, or is that not the way to think about that? Is there more of a sustainable improvement in the OTX numbers immediately than I may think?

I think that you would see that. We did say that it was a onetime event. We are seeing continual improvement every quarter in the OTX revenue and bottom line. We would expect that. We have no reason to believe that trend would not continue, but it will probably result in a smaller loss than we had in the first quarter.

Okay, and with regard to -- I guess on your -- thinking about the Thrift and changing -- what are your thoughts on timing of that issue and is there any reason why you need to be out of Thrift charter at any certain point in time? And how much of your NOLs are embedded within that Thrift, and is there any risk to the NOLs or change in the way you can utilize those NOLs and if you were to forego your Thrift charter.

As I said previously, Bob, we're not prepared to comment at this time or the probability of that event occurring. We can tell you that, with respect to NOLs, that in fact no longer having the charter would not in fact impair the NOLs. We would still have those NOLs. There could be an impact in the extent from a tax perspective on the bad debt reserves that one has, but that's fairly nominal compared to the NOLs.

Did you come up with the numbers for the (indiscernible) --

It is a little bit complicated. We added net only about $1 billion of product during the quarter. We actually brought on new about 2.5 billion, but we had certain portfolios that were brought on in prior quarters that were moved off. And that occurs normally. Sometimes we board from new originators, and they may sell whole loans or something like that, and the buyer may want to take control of the servicing. So net net is about a billion. We did have -- I want to say about 700 million that actually boarded July 1st, so that is not reflected in these numbers. So there was some additional business that came on the day after the quarter.

Can you effectively grow the servicing portfolio much until you do something with the Thrift charter, or are you kind of constrained around the current level?

Bob, I would refer you basically to our 10-K with respect to our disclosures with respect to percentage of capital that we can employ within the servicing business.

It looks a little bit like you are right on those constraints. Is that fair?

Yes.

Okay. And within the other businesses, is there anything other than the OTX, the good news on Aegis assigning, anything else significant to report on the other sectors and trends that you would expect that would thin the other sectors on a go forward basis?

We speaking about OTX?

No. Excluding OTX. I think you've got some decent color on OTX.

I don't know that there is anything that we really -- at this time looking to kind of report on that. As I mentioned, with having a number of these new business lines, one of our keys to success is going to be having a strong effective sales and marketing effort. We announced earlier in the year that we brought Mickey Linn to head those efforts and he is in the process of building that organization. So I think that is one of the primary keys to our success in those smaller, newer business lines. But I wouldn't say that there is anything at this time that we are looking to report on.

Great. Thank you very much.

Richard Kato (ph) from Life Science Capital.

Bill, a long time no talk. I wanted to ask regarding tax law and carryback losses, haven't there been some recent changes which might affect Ocwen?

There has been a change with the new tax code that has been proposed that would extend the carryback earnings from 2001 and 2002 from two years back to five years. And without trying to put a fine point or quantify what that number might be, we did have reasonably significant earnings during that period, during that extension period from two years to five years.

Good. Thank you.

Thomas Stevens from SAC.

Just a follow-up on that NOL question so you are implying that this proposed tax law would therefore potentially be a negative before the NOL because it would offset the losses you've had in some of the years?

It would be the opposite. The tax code would permit the carryback of NOLs to prior periods to be able to be utilized. Extension of the carryback period from two years to five years is a positive, not a negative.

At this time I show no further questions.

Make one other, just one clarification there with respect to the expenses and the question that Jim Fowler had asked, there should be no meaningful future increases in expenses with respect to those matters. As well as we understand the circumstances today. (technical difficulty) a change in anything that we would be required to do, there would be a change in expenses but as of today we believe we are accepted fairly reflect what's going on.

(indiscernible)

Can we talk a little bit about some of the growth initiatives in OTX, the success of Aegis, and as we look forward what kind of growth opportunity there is for that piece of the business? And indeed the BPO business and talk a little bit about the market opportunities you see it over the next two to three years for those pieces of the business? Thank you.

It's a little difficult in some respects because it tends to turn out to be forward-looking statements with regard to those business lines.

On the BPO market it is a big market. We have done quite well with our own initiatives and moving work offshore. We think we are well-positioned in that marketplace. And it is a big market, but I guess we're not prepared to make any kind of forward-looking statements as to how -- what that's going to mean out in the future.

The Aegis contract was a very significant contract. It was the first major commercial contract we had. In terms of any introduction of any new products getting your first client and satisfying that client is obviously a critical element of attracting further business. That's particularly true of products that require extensive implementation associated with that. So we are very pleased with that. We think -- we're going to try very, very hard to make them a rating fan. (ph) We think that's an important part of our business moving forward.

The two areas that are probably the most significant opportunities for us, however, I believe happen to be our business process outsourcing as we have stated before. That is a very large and very rapidly growing market, as well as the unsecured collection business, which is a very large and certainly rising, extremely large and with rising interest rates should be a fairly rapidly growing business, as well, opportunity as well.

Great. Final question, on the Aegis one off revenue contribution should we think of it as sort of 2 to 3 million of revenue that came in for the one off nature?

Yes.

Thank you very much, and congratulations on the quarter.

David Dusenbury (ph) from Dianus (ph) Capital.

I want to go back and talk about the tax loss carryback just for a second. If I understand your answers to the question, it is because you'll be able to move it back, you will utilize that from two years back to five years, and there was substantial income in that extra three years, you will be able to recognize more of the income to the bottom line in those prior years. That will help book value, but you will have less to utilize going forward. Is that right?

If you utilize an NOL, that is correct. You will in fact will get cash and depending on the treatment of that NOL, you will get income. But we are not -- the comments we made were strictly to point out that in response to the question that the tax law had in fact changed, and as you are all well aware, we do have a big NOL.

Right, but as I look at estimates going out into next year, they do assume that you are able to utilize that NOL going forward, so that does bring in the question whether or not that will be the case.

The price of the NOL today is north of $200 million.

Of which 123 is operating loss, right?

Besides the NOL, before any valuation allowances, there is approximately $200 million, and the change in the -- and that is largely fully reserved because of uncertainty from an accounting point of view as to whether we will be able to realize that in the future. To the extent that the change in the tax laws permits us to realize that receivable by recovering prior years' taxes, there is assuming that the IRS concurs that we can in fact carry these losses back, that eliminates the uncertainty as to our ability to utilize this receivable, which means that we do not need as large a reserve or valuation allowance against the assets as we currently have, which could lead to a reversal of some of this reserve into income.

But we are not projecting that at all in terms of that statement. We were just simply making -- confirming a factual statement that the tax code has changed and it could have an impact on us.

Thank you for clarifying that for me, and then I want to go back to the --

We're not proposing that the carrybacks would result in $123 million either.

Right, I understand.

That is good news, though.

Yes. The second question is also a clarifying question, which is MSRs as a percent of core capital of the Bank, I just want to -- I know you took us almost all the way there, but given the constraints that you have with your agreement with the OTF, I should say, my question is -- where are you as MSRs as a percent of core capital of the Bank are you at or above the 60 percent level?

Historically we had always been somewhat above that level. My information is, and it is -- my information is we are now below the 60 percent level, we are at approximately 57 percent.

Okay, thank you.

Bob (indiscernible).

Thank you very much, gentlemen. My first question has to do with the 9.3 million provision. Is there any other situation similar to the Cartel Asset Management situation? Any other arrangements that existed back then or now that you may be concerned about in light of this adverse result here?

No.

Okay. And the second question also a legal question. In light of the settlement with the OTS, is it far enough along for you to understand whether or not there will be any reserving for that? And has anything been reserved?

We do not comment on any of -- we do not comment with respect to the OTS and what might or might not occur.

And I show no further questions at this time.

Thank you, everyone. Have a great day.

That concludes today's conference. Have a good day.