Onity Group Inc (ONIT) 2004 Q4 法說會逐字稿

All points, please stand by. Today’s conference is about to begin. Good afternoon and thank you for standing by, and welcome to the Ocwen Fourth Quarter Earnings Announcement Call. At this time, all participants are in a listen-only mode. After the presentation, we will have a question-and-answer session. To ask a question, please press Star/one. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

And now, I will turn the meeting over to Mr. Bob Leist, Vice President and Chief Accounting Officer. Sir, and you may begin.

Thank you. Good afternoon, everyone. 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 on to our website at www.ocwen.com, select “Shareholder Relations” then “Conference Calls, Fourth Quarter 2004 Results” and then “View Slides.” Each viewer will be able to control a 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 a reference to a future period or by the use of forward-looking terminology. It 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 today’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-Q’s, 10-K’s, and other materials available to you via email. If you are not already receiving our materials by email and would like to be added to our distribution list, please email Linda Ludwig at Lludwig@ocwen.com.

As indicated on slide 3, joining us for today’s presentation are Bill Erbey, Chairman and CEO of Ocwen; Ron Faris, President; and Mark Zeidman, Senior Vice President and CFO. Our presentation will be answered 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 to Bill Erbey. Bill?

Thank you, Bob, and thanks to all of you for attending Ocwen’s Fourth Quarter Conference Call. I would like to cover four topics in my remarks today. First, an overview of our 2004 earnings; second, our asset efficiency goals for 2005; third, our debanking initiative; and fourth, our plans to enhance our business segment reporting in 2005. Following my remarks, Ron and Mark will provide more detailed information.

As shown on slide 4, we have grown from a net loss of $69 million in 2002 to net income of $5 million in 2003 and $59 million in 2004. Our 2004 results, as we reported last quarter, included a net tax benefit of $31 million. While we have made a great deal of progress, much remains to be accomplished.

As shown on slide 5, the pretax income of our Residential Loans Servicing business has declined from $32 million in 2002 to $31 million in 2003 and $16 million in 2004. These results reflect a continuing 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 this call.

Despite the disappointing results in Residential Servicing, our aggregate pretax income in our core businesses declined only 10 percent as compared to 2003, and improved by $14 million or 122 percent as compared to 2002.

As illustrated on slide 6, this reflects the important contribution earnings from our other core business lines -- those being Ocwen Realty Advisors, Ocwen Recovery Group, Business Process Outsourcing, Commercial Servicing, and OTX.

In the aggregate, these businesses improved from pretax losses of $21 million in 2002, $3 million in 2003, to pretax net income of $9 million of this year. It’s worth noting that our core business performance also includes a significant investment in our sales and marketing functions. We increased our overall spending in these areas by $2 million this year. As of year-end, the majority of our sales and marketing staff were in place.

The aggregate results of our non-core and corporate segments also show strong improvement as graphed on slide 7. Rising from pretax losses of $93 million in 2002 and $23 million in 2003, the pretax income was $3 million in 2004. A major initiative in 2005 is the more efficient utilization of our assets with a goal of increasing return on equity.

Residential Servicing accounts for 52 percent of our total assets, or $694 million, with 75 percent are effectively AAA-rated instruments. In contrast, assets in our other core businesses represent only $23 million, or 2 percent of our balance sheet, and represent 39 percent of revenues and 33 percent of pretax income. Thus, growing these businesses represents a major opportunity to enhance both profits and ROE.

Apart from the assets associated with our core businesses, we have $609 million of other assets. Included in this amount is $374 million of cash and investment-grade securities, which will decrease when we complete our debanking initiative.

We also have a residual trading portfolio of $40 million which, as I’ll cover shortly, we will move into a core business in 2005, and there is $28 million of non-core Commercial and Affordable Housing assets, most if not all of which we anticipate selling during the course of 2005.

Receivables for income taxes and installment sales of affordable housing properties comprised $81 million, and we currently anticipate that $63 million of our tax receivables, which are pending final approval by the Joint Committee on Taxation, will be collected during 2005, as will the next installment of approximately $5 million of the Affordable Housing receivables.

We are moving towards lease financing for a substantial portion of our $35 million of Premises(ph) and Equipment, and we’ve increased our focus on the remaining $51 million of assets with a view towards liquefying them wherever possible. The bottom line is that we intend to have a smaller and more efficient balance sheet that will provide Ocwen with increased flexibility to generate shareholder value.

As we previously announced, we have submitted a formal application to the OTS to turn in the thrift charter of Ocwen Federal Bank, which is currently our principle operating subsidiary. We believe that this change will eliminate certain limitations on the future growth of our servicing business. Mark will cover our financing efforts in this regard later in this call.

On the operations front, we have already established a new subsidiary, Ocwen Loan Servicing LLC, which is licensed in all 50 states as well as the District of Columbia and Puerto Rico, to engage in all of the core businesses that we currently conduct as a bank. While we cannot predict the exact date when the debanking initiative will be completed and receive regulatory approval, we’re actively working to accomplish that goal.

In the course of developing our new marketing strategies during 2004, we have reached the conclusion that we can best communicate our capability to relieve realignment of our core businesses by the markets they serve rather than the products and services they deliver.

As shown on slide 9, we have defined five core businesses that we will report beginning in the first quarter of 2005. In addition to continuing to report on Business Process Outsourcing and Ocwen Recovery Group, we have reorganized our remaining activities into three cores businesses as follows -- First, Residential Servicing, which will combine our current Residential Loan Servicing business with our REALServicing product. Second, Residential Origination Services, which will combine Ocwen Realty Advisors, REALTrans, our remaining residual and subordinate trading portfolio, our remaining residential loan assets and title activities we began during 2004. And third, Commercial Servicing, which will now include Real Synergy in addition to its existing components.

In addition, we will eliminate separate reporting of our non-core businesses beginning in the first quarter of 2005. We believe that -- we believe this is an appropriate time to make this change because as of December 31, 2004, we have reduced our non-core assets to under $68 million, 58 percent of which consists of our residual and subordinate trading portfolio. As I noted earlier, this portfolio will be combined into Residential Origination Services.

Given their immateriality and the prospect for future sales in 2005, we will include the remaining Commercial and Affordable Housing assets in our Corporate segment, consistent with our actions when the Residential Discount Loan business was closed.

Before turning the call over to my colleagues, I also want to mention our December purchase of a due diligence operation, including staff, facilities and systems from a major Wall Street mortgage conduit. This platform together with our existing capabilities will form an important part of our new Residential Origination Services business. We believe that the acquisition positions us to make significant progress in our ability to provide mortgage fulfillment and due diligence services.

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, Ocwen Recovery Group, Business Process Outsourcing, Ocwen Technology Exchange, and Commercial Loan Servicing.

For the year ending December 31, 2004, these core business lines generated $25 million in pretax income, a decrease of only $3 million or 10 percent over 2003, despite the $15 million decline in pretax income for the residential loan servicing business.

As reflected on slide 10, the Residential Servicing Business line reported $16 million in pretax income in 2004, as income to $31 million in 2003, a 48% decline. The reason for this decline will be discussed in a moment.

As shown on slide 11, our servicing portfolio’s unpaid principal balance at year-end was $35 billion, an 8 percent decline from the December 31, 2003 balance of $38 billion. Now, as of December 31, 2004, we were the servicer for 320,000 loans, as compared to 360,000 loans at year-end 2003. The decline in loan service during 2004 can be attributed to the continued high level of runoff due to prepayments.

Our balance of mortgage servicing rates at December 31, 2004 was $131 million, a 21 percent decline from the end of 2003, reflecting our increased rate of amortization due to the increase in actual projected prepayment speeds and the overall decline in the portfolio.

To explain the reasons for the decline in income, I would like to provide some details on both revenues and expenses. Net revenues in the servicing business were $109 million in 2004, a 9 percent increase compared to 2003 results. The increase in revenues from 2003 was primarily a result of fees generated from the new VA Property Management contract, partially offset by an increase in our rate of amortization of servicing rights and a decrease in base loan servicing fees.

Slide 12 shows the trend in prepayment speeds over the past eight quarters. As you can see, prepayment speeds remained high in the fourth quarter at a 42 percent annualized CPR. Fortunately, this was a steady decline from the second and the third quarters. We anticipate that prepayments will continue at high levels in the near future.

Slide 13 highlights the impact of interest rates on our float earnings. Despite the fact that float balances have increased by almost five times from 2001 to 2004, the interest earned on float balances has only slightly more than doubled. This is due to the significant decrease in short-term interest rates over the period. Put another way, had rates remained constant since 2001, we would have earned $38 million of annualized float income in 2004, as compared to the $16 million shown on this slide. Fortunately, the recent increases by the Federal Reserve Board in short-term interest rates has begun to have a positive impact on our net float income, and we continue to hope for a positive effect on prepayment speeds over time.

On the expense side, we saw a 35 percent increase in expenses in 2004 over 2003, primarily as a result of 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 certain servicing activities previously performed by third parties. Excluding these two items, we continue to make progress in reducing our average cost per loan service as a result of technology enhancements and the shifting of additional job functions to our India Servicing Centers.

As shown on slide 14, Ocwen Recovery Group, our unsecured collections business, posted pretax income of $4 million in 2004, as compared to $5 million during 2003, which decline can primarily be attributed to the fact that certain portfolios of assets which generated high levels of collections in 2003 have declined in size and have not been replaced. Although we are disappointed with these results, we remain optimistic that we can grow this business over time once we improve our recovery rate and further reduce our cost structure.

As reflected on slide 15, Ocwen Realty Advisors, our property evaluation division, reported pretax income of $6 million for 2004, a 19 percent improvement on the 2003 results. This increase is a direct result of Ocwen Realty Advisors having added a number of new clients this year.

Slide 16 shows our Business Process Outsourcing business generating $2.2 million in pretax income during 2004, a 16 percent improvement when compared to $1.9 million in pretax income for 2003. 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.

As reported in our press release today and as Bill mentioned, we are pleased to announce that we have expanded the range and scope of our Mortgage Origination Services. We have enhanced our ability to provide mortgage fulfillment and due diligence services through the purchase of a due diligence operation, including staff, facilities, and systems from a major Wall Street firm. We also earned -- entered into a one-year renewable contract to provide them these services. We believe that this acquisition, together with our existing origination services’ capabilities, will provide meaningful growth opportunities in the future.

Continuing on to slide 17, Ocwen Technology Exchange posted a loss of $4 million in 2004, which represents a 66 percent improvement over 2003. You will recall that OTX results for the second quarter of 2004 included the recognition of one-time documentation fees associated with our contract with Aegis Mortgage to use our REALServicing System. The implementation of the system at Aegis Mortgage has gone well and they continue to increase the volume of loan service on the system. We continue to make progress in attracting other potential new clients for the REALServicing System.

On slide 18, we are pleased to report that our Commercial Servicing Operations achieved profitability for the year, reflecting a $5 million improvement over the prior-year’s results. This improvement reflects the expansion of our servicing JV with Merrill Lynch and the addition of several new U.S.-based servicing clients.

In summary, it was a very difficult year for subprime loan servicing. I am pleased with the growth we saw in Ocwen Realty Advisors, OTX, and Commercial Loan Servicing. I remain positive that we can grow Ocwen Recovery Group and our Business Process Outsourcing business.

Thank you, everyone. I would now like to turn the call over the Mark Zeidman.

Thank you, Ron. I would like to focus on three areas -- First, the operating results of our non-core business segments and the progress we made during the year in disposing of our remaining non-core assets; second, the operating results of our Corporate segment and the progress we’ve made in reducing losses incurred in previous years and fully allocating out the costs of our Support Department in the business units; and third, the status of our efforts to obtain new sources of financing to replace the deposits that will be sold when we liquidate the thrift charter.

First, regarding our non-core business segments, the fourth quarter was the best quarter of the year in terms of disposing of non-core assets. During the fourth quarter, we reduced our non-core assets by approximately $62 million, or 48 percent. Included in this amount was the sale of our largest non-core asset, the Southland Mall, at a profit. Furthermore, our non-core business segments, which include our Commercial Asset, Affordable Housing, and Subprime Finance business units earned a net profit of $2 million in the fourth quarter.

Looking back over the year as a whole, I think that 2004 was a milestone in terms of the progress we made in reducing the Company’s exposure to loss from non-core assets. As presented on slide 19, for the year as a whole, our non-core business segments earned a pretax profit of $2.3 million as compared to a pretax loss of $10.1 million in 2003, and even more significant losses in prior years. Moreover, as you see on slide 20, we earned a profit on our non-core business segments in 2004, while reducing our total investment in non-core assets by 63% during the year, from $182 million at the end of 2003 to only $68 million at the end of 2004.

The remaining $68 million of non-core assets consists primarily of the following components -- First, non-investment grade securities of almost $40 million, or 58 percent of the total; second, investments in commercial loans and real estate of approximately $18 million, or 26 percent of the total; and third, an investment in and a loan to our remaining Affordable Housing asset, totaling approximately $9 million, or 13 percent of the total.

So on balance, I think we made substantial progress in reducing the Company’s exposure to loss from non-core assets. For example, the ratio of non-core assets to equity decreased from 57 percent at the beginning of the year to only 20 percent at the end of 2004. Similarly, remaining non-core assets of $68 million at the end of the year represent only 5 percent of total assets. Accordingly, as Bill mentioned earlier, we expect to realign our segment reporting in 2005 and cease separate reporting of our non-core businesses.

Regarding the operating results of our Corporate segment, let me start by defining what it is. The Corporate segment consists of any unallocated net interest income or expense, the results of business activities that are not individually significant, and certain general corporate expense and income items.

For the fourth quarter of 2004, the Corporate segment incurred a pretax loss of $952,000. Most of this loss represents interest expense on the 3.25 percent convertible senior unsecured notes that the Company issued in July of 2004. We decided not to allocate out the net interest expense incurred on the notes to the business units at this time. We felt that this was appropriate because the notes were issued to accumulate cash in preparation for debanking rather than to fund the current activities of our business units.

More importantly, as depicted on slide 21, for the year-ended 2004, the Corporate segment earned a net profit of $822,000. By contrast, for the year-ended 2003, the Company reported a pretax loss of $12.8 million in the Corporate segment.

The change in results of the Corporate segment year-over-year was primarily due to two factors -- First, in 2004, the Corporate segment earned $6.9 million of interest income on our Federal Income Tax receivable, related to income claims filed during the year. In 2003, we didn’t record any such interest income. Second, in 2003, the Corporate segment absorbed approximately $3.6 million of unallocated technology and communications expenses. In 2004, by contrast, all of technology and communications costs -- indeed all support costs of any type -- were allocated out to the business units.

Finally, I wanted to provide an update on efforts to obtaining new sources of financing in anticipation of liquidating the thrift charter. In November 2004, we executed a securitization of our servicing advances. The deal involved the issuance of a term note for $100 million and a one-year variable funding note for $75 million. This securitization provides several benefits to the Company. First, it provides up to $175 million in financing. Second, with term components to the notes, it provides us with longer term financing, which is an advantage over 364-day credit facilities. And third, the securitization provides cost-effective financing at a rate of one month LIBOR plus 53 basis points.

At the end of the year, we had approximately $427 million of deposits in escrows that will have to paid off when we liquidate the thrift charter. Towards that goal, we closed the year with approximately $374 million of cash and liquid short-term AAA-rated securities. Additionally, we are working on expanding our existing credit facilities and establishing new lines of credit for our purchase mortgage servicing rights and servicing advances. We expect that these efforts can generate enough cash to pay off all of our deposits in escrows.

I would now like to open up the call to questions.

Thank you. (OPERATOR INSTRUCTIONS). Thank you. And our first question comes from Brian Charles(ph) of FDR(ph).

Hi. Good afternoon, gentlemen. How are you?

Fine, thank you. Good afternoon.

I had one quick question. I’m just wondering if you’re giving any guidance regarding your purchase activity or anticipated purchase activity for MSR’s with a push in 2005?

You know, no -- not. Well, we’re not really providing any guidance on that at this point.

Okay. Okay. That’s all I’ve got for now. Thanks.

Our next question comes from Richard Shane of Jefferies & Co.

Hi, guys.

Good afternoon.

It seems like there was a fairly significant sequential increase in the legal expenses. Is that driven by regulatory stuff like Sarb-Ox(ph) or what was the catalyst there for that increase?

I guess there are two primary components of the increase. It’s partly audit and accounting fee related, and a component of that is Sarbanes-Oxley, and it’s also partly legal fee related. And I’d say we do accrue for float audits and Sarbanes-Oxley fees, and we’re anticipating that that is going to be a significant expense entirely new this year for Sarbanes-Oxley, and we are establishing appropriate reserves for legal fees and litigation.

Good. The speed fourth quarter run rate, is the run rate going forward? What would you expect--? Where would you expect that to trend going forward on a quarterly basis?

That’s very difficult to say, particularly as a component of it as it relates to litigation and legal fees. That’s very, very difficult to say from a trend point of view.

Okay. And what was the actual amortization expense on the MSR’s for the quarter?

Amortization expense was approximately $25 million -- a little less than $25 million for the quarter.

Thank you, guys.

Thank you. Our next question comes from John Heck(ph) of JMP Securities.

Hello, gentlemen. Can you just give me an update of the remaining deferred tax asset and other tax benefits you have?

Sure. The deferred tax asset at the end of the year before the valuation allowance was about $181 million, and we had about $165 million of valuation allowance against it. So, on a net basis, the balance sheet showed about $16 million of deferred tax asset. It’s a complex topic, but I guess the bottom line is that on a go-forward basis to the extent that we continued to earn a pretax profit, we do expect to be able to utilize our deferred tax assets to maintain our tax expense at the ultimate(ph) rate of approximately 20 percent.

Okay. Can you comment on the quit(ph) volume on the OTX line? And I guess we’ll talk about the refi(ph) slowdown versus penetration in the market?

Could you repeat the question?

The quit(ph) volume in your OTX business?

Okay?

I guess how much of it is impacted by the slowdown of the refi(ph) business and how much of it is affected by any penetration of new accounts or increase in penetration of current accounts?

Yes. Our quit(ph) volume in the fourth quarter in terms of dollars is about a million dollars -- $120,000. That’s up from a, you know, a run rate of around $900,000 a month in the earlier quarters. Part of -- we have had additional penetration in our accounts. Part of it relates to, you know, a slowdown in the overall level of origination. One of our accounts that we had was also acquired by a second account. We will -- we -- in that second, -- the acquiring company, we are doing all their residential -- all their retail business, but we’re not doing their wholesale yet. We hope to be able to do that this coming year. And the acquisition of our -- of the acquired company basically was put into their wholesale position. So we lost that volume there. We hope to reacquire that this year along with additional business from the acquiring company. So, very slow growth this year in the face of a reasonable slowdown in mortgage origination volume.

Okay. Thanks for the color. And then the last question -- Can you give us an update on the environment for purchasing MSR’s? You guys have expressed that you’re cautious buyers over the last several months. Is that changing? Are you seeing more supply or better pricing? Can you give us any update on that?

I think that -- I think we had commented last quarter that the fourth quarter -- some of which spilled over into the first quarter was a -- you know, we saw a lot of opportunities and we were able to acquire a reasonable amount in the fourth quarter, some of which is rolling over into the first quarter. So I think the demands for our type of services remains strong out there. We do continue to be cautious and then we still haven’t seen the kind of decline in prepayment speeds that we would have liked. We continue to have to manage our -- the amount of PSMR’s we have up until the point that we dethrift, so that is another thing that kind of, again, is something we have to manage up until that point. So, I think there is still a reasonable amount of demand for our services out there. And pricing -- I would not say as -- I would say that more recently we haven’t seen it increase at all and there may have been a slight softening in price but not to any, you know, material way.

Okay. Thank you very much.

You’re welcome.

Thank you. And our next question comes from Bob Nicoll(ph), Piper Jaffrey. And your line is open, Sir. Please un-mute your phone if you have it muted.

Hello?

Your line is open.

Yes. Hello? Can you hear me?

Yes.

A technical problem there I guess. A couple questions -- The Servicing business, the amortization number that you gave was a couple million higher than last quarter, but yet your chart showed that CPR’s had slowed a touch in the fourth quarter. You know, we kind of expected that in the fourth quarter we thought prepayment speed had slowed a little bit, and you are getting some benefit from higher rates. So we were -- you know, we were a little bit disappointed to see that -- that income number go down. I was wondering why the higher amortization expense, and if it’s one you expect in an environment like Rand(ph) did, -- that earnings should have bottomed in that business and, you know, we could see a potential major ramp up in ’05?

Well, Bob, one of the effects that you see when we calculate amortization really is somewhat of a lag and effect. It’s offset by two months.

Okay.

The fourth quarter is really a combination of September -- August, September, and October. Right, Ron?

Well, yes. I mean I think what Bill says is we base a lot of things based off of where we are in -- you know, fourth quarter results are driven highly by where we were in the third quarter. We do reevaluate things one month prior to the end of each quarter. And, you know, a lot -- you know, what that adds -- It’s really a function of what has happened in the recent quarter as well as what your future projections are. And I would say that our future projections -- you know, I don’t think running the 43 percent, 44 percent, 42 percent has given us any sort of -- you know, enough information to say that we should really start to break down our future projections of prepayment speeds, and that is part of what the driver is for how you would amortize in the quarter and going forward.

Okay. Looking forward, inevitably prepayment speeds have to slow down. I know we’ve all been saying that for two years or three years, but it seems to be starting to happen. Do you have a feel with the changes that you had with bringing some of those expenses back in-house with the environment around the servicing market and the competitive environment, what type--? And I think we talked in the past about pretax profitability as a percentage of UPB or average service loans. What level of profitability do you think you can generate? What would be a reasonable goal as prepayment speeds start to eventually normalize?

That’s certainly a fairly complex question, Bob, and I think that, you know, it’s pretty forward-looking in terms of our -- to forecast that. I mean we obviously are very sensitive to the level -- the level of prepayment speeds. So you would almost have to look at when you say “normalize,” what does that mean? But I think at that point, we would be really making projections as to what earnings would be.

Okay. When you dethrift, would you expect at that point in time--? And the constraints on growing your MSR’s is essentially removed. Would you expect at that point if the environment is like today that you would see significant growth of the mortgage servicing portfolio or would you still be cautious on purchases at that point?

Well, I guess there’s a -- again, that’s somewhat complex too because some of that depends on as we continue to line -- as we continue to line up financing for PSMR’s and Servicing advances, that’s part of what’s going to allow us to grow. And whether that will always be in place as soon as we dethrift, it may or may not be, but I think there is -- Like I said, there is plenty of demand for our services. So I think to the extent we want it to grow, the possibilities are definitely there. It does -- you know, it is difficult to grow when prepayment speeds are so fast because each quarter a lot of the portfolio runs off and you have to do significant new volume just to stay even. So that -- that will remain an issue as long as prepayment speeds are high. But there is -- you know, I would say that there tends to be more product out there right now than we have the appetite to bid on, both from some of the constraints and we have and both -- and because of our somewhat negative view of prepayment speeds at this point in time.

Bob, I think in one sense too when you look at it, slower prepayment speeds in many cases may enable us to grow faster. As Ron said, basically, because we have to sell off the hole in the bottom of the bucket.

Right.

What really is a driver of servicing in many respects is not so much this churn that you’re seeing right now by constantly refiing(ph) people as their equity increases in their home. What really drives is it what is the overall population size of subprime borrowers. So we happen to believe that the growth opportunities are much greater with a more moderate CPR growth rate than with ones we’re experiencing today.

How about the competitive environment? There are a couple of bigger players that have been knowing people to become pretty aggressive in the servicing side of the business. Is the competitive environment a lot more challenging or are a lot more big people bidding on these assets than you’ve seen through most of your -- the history of your company?

Well, I think your competition has shifted. One interesting thing about the mortgage business is wait a year or two and your competitors will change. You certainly have seen a shift away from independence to the larger banks and larger players. That’s Countrywide. That’s very clear within the marketplace that that shift is occurring. I think what Ron has been saying though is that we are not -- the competitive environment is not what is impinging upon our growth rate within the business. One is a sense of just limits on growth that we placed for a variety of reason -- environmental reasons in terms of how fast we think we can grow in our current structure; and, secondly, how prudent is it to continue to put assets on when most of the models out there as prepay speeds just simply aren’t working. So it’s really more of a -- it’s more of the level of bidding that we’re doing than it is so much that there isn’t product out there and we couldn’t achieve it in prices that we can make money at today, assuming the world stays where it stays today.

Okay. All right. Thanks. And one last question just on the tax asset -- I know it’s a complex issue. But what is the level of NOL remaining and how long can you stay at the 20 percent tax rate? What is the pretax income level that you can generate before you have to go to a full corporate tax rate?

Let’s see. I think --

We’re not dumb enough.

Yes. Most -- I believe most of the deferred tax asset represents tax credit carried forward as opposed to NOL. Most of the tax credit carried forward expire well into the future. I don’t have the schedule in front of me, but we’re talking longer than a decade -- significantly longer than a decade. So I think that -- and, again, complex topic. But, if one were to take the $181 million of gross deferred tax assets that I have before valuation allowance.

Okay.

Assume that that is entirely tax credits -- which it’s not, but make that assumption -- divide that by 20 percent. I think that gives you the level of pretax income that will be taxed at a 20 percent rate into the future.

$900 million.

Right. $900 million.

Okay. And how much of that money do you think would not qualify?

When you say--?

Would not be tax credit.

I don’t have that off the top of my head, Bob.

Less than half?

No. I believe --

You can say (multiple speakers)

Significantly more than half represents tax credit carried forward.

Okay.

So, yes. Less than half is NOL.

Okay. Thank you.

Thank you. Our next question comes from Richard Shane of Jefferies & Co.

Hi, guys. Sorry to come back to you with a couple more -- but, can you talk a little bit more about the business that you bought, what the rationale is and how you see that driving growth potentially? And then also, profitability in the BPO did decline in a quarter-over-quarter basis and has been -- it looks like there has been some margin pressure there in the last couple of quarters as well. What’s going on there and do you see that growth reaccelerating into ’05?

Why don’t I--? Yes. Let me answer the second question first. As far as the BPO business goes, I think we mentioned in our discussion that we have added during the year a lot of sales and marketing resources, and many of those we’ve stacked against that product line. We have also added some senior management level staff into that business line. All of which has added cost, and there is some lag in the amount of time it takes to add sales and marketing in order for new revenue to be generated. So --

Was there sequential revenue growth from the fourth quarter -- from the third quarter to the fourth in the BPO?

No. If there was, it was very minor. I don’t think there was.

Okay.

So we are -- so I think it’s not so much margin compression as the fact that we’ve added a number of costs in there. We also feel like Bob -- or like Mark said, we fully allocated out all of our corporate overhead costs and that business line picked up some of those costs this year that it may not have had in the fourth quarter of last year. So I think those -- those are the factors that drove what you asked in your second question.

On the first question, about the acquisition, I think what we like about this business is it’s process oriented, which is something that we feel we’re very good at.

We like to find what it is first.

Okay. Primarily it’s providing mortgage due diligence and what they call mortgage fulfillment services for conduit operations primarily, most of which of the Wall Street firms either have or are in the process of opening up. So if they buy loan by loan or small packages of loans from the broker in conduit community, they need to do certain due diligence functions on those loans prior to actually purchasing the loan. So we would provide that service to those mortgage conduits. So because it’s process oriented, we like it. We also like it because generally the same clients that we have on the mortgage servicing side and on our Ocwen Realty Advisor side are also the same people that are looking for these conduit services. So we already have very strong relationships with these players that are in this mortgage conduit business. So we felt that by acquiring an existing operation, it put us into that space much faster and gave us one -- one significant client right off the bat and puts us in a better position to grow that with other clients on a go-forward basis.

Is it profitable for you right away?

We’re still going through some of the accounting, but I think probably the safe bet is to say it -- it’s break even initially, but growth -- any growth in the -- any growth beyond what we have should be profitable.

So if you find -- when you sign up, you’re signing clients?

Correct. Or even grow the existing client.

The interesting thing environmentally about this is that the Wall Street firms have discovered there is a lot of money by trying to disaggregate, if you will, the aggregators -- the people that are the -- what are called -- you would call them the originators today. So you’re seeing a great deal of push by Wall Street to go down and try to bypass those aggregators and go directly to the brokers. They’re going to need processing capability by people like ourselves to be able to do that.

I guess the other thing I would like to say is when I said, “It’s break even,” it’s also break even today assuming that all of the work remains on shore -- which history would show that’s not necessarily the approach that we would take.

Okay. Understood. Thank you, guys.

Thank you. And our last question comes from Adrian Dawles(ph) of J&P Hartwell(ph).

Thanks very much. I wonder if you could talk about just conceptually what stats remain in the debanking, shall we say, of the Company, and sort of talk about that? And, secondly, just returning to your comments on the legal reserves, talk a little bit about whether that represents new issues that are coming up or just an escalation of existing ones that have been, you know, on the books for a while. Thank you.

With respect to dethrifting, as Mark commented, we have one or two things to put into place with respect to completing the funding required. And, secondly, the remaining part of that would be to sell the branch and to -- there is a number of, obviously, regulatory applications that need to be completed to affect the dethrifting process. Pardon me?

There’s nothing substantive though from a regulatory perspective? It’s more administrative and a structural approval that needs to be gleaned from the regulators?

Well, they -- it must be approved by the regulators. It’s not -- I mean there’s a -- there’s a formal process, regulatory process, that one goes through for selling a branch and turning in the charter.

Okay.

The second question -- I’m sorry? The second question that you asked with respect to -- most of those were with respect to -- there are no new major material suits(ph) of -- that I’m certainly aware of. These were just dealing with the issues that we dealt with in 2004 and carryover with the MDL into 2005.

Great. Thanks very much.

Welcome.

Thank you. At this time I show no questions.

Great. Thank you very much, everyone. Have a great evening. Goodbye.

And thank you for joining today’s conference call, and have a great day.