Secured lines of credit and other borrowings are as follows at December 31:
Under this agreement, we borrowed funds each month under a revolving demand note equal to the projected average float balance and invested those funds in certain permitted investments, including auction rate securities. The custodial funds comprising most of the float balance remained on deposit in bank accounts that meet the requirements of each trust. The terms of the investment line required that we sell the investments and repay the associated borrowings prior to the end of each quarter.
As a result of failed auctions in the first quarter of 2008, we were unable to liquidate our investment in auction rate securities. We recognized these securities and a corresponding liability on our balance sheet in the first quarter of 2008.
On July 10, 2008, we amended the investment line to create a term note maturing on June 30, 2009 that was secured by our investment in the auction rate securities. Interest on the term note was 0.35% to the extent that we had available balances on deposit with the lender. For any portion of the outstanding balance of the term note that was in excess of the available balances, the interest rate was 1-month LIBOR plus 35 bps. In the event that the 0.35% rate did not fairly reflect the cost to the lender in providing the funds, the lender could, with notice, adjust the rate upward to a rate not exceeding 3.35%.
Under the term note, we receive the interest on the auction rate securities while the proceeds from the redemption or sale of auction rate securities are applied to the outstanding balance. If the proceeds are below the then-effective maximum borrowing percentage, we are required to make up the shortfall. On April 30, 2009, we negotiated a one-year extension of the term note maturity to June 30, 2010. This agreement was renewed under terms substantially similar to the previous agreement. However, in lieu of quarterly advance rate reductions, we now make monthly amortization payments of $3,000. During 2009, we made payments totaling $43,751 that reduced the investment line obligation to $156,968.
See Note 34 for a subsequent event relating to the investment line.
| |
NOTE 18 | SERVICER LIABILITIES |
Servicer liabilities represent amounts we have collected, primarily from residential borrowers, whose loans we service, that will be deposited in custodial accounts and paid directly to an investment trust or refunded to borrowers. The following table sets forth the components of servicer liabilities at December 31:
| | | | | | | |
| | 2009 | | 2008 | |
| | | | | |
Borrower payments due to custodial accounts | | $ | 3,185 | | $ | 67,227 | |
Escrow payments due to custodial accounts | | | 6,225 | | | 5,488 | |
Partial payments and other unapplied balances | | | 29,262 | | | 63,036 | |
| | | | | | | |
| | $ | 38,672 | | $ | 135,751 | |
| | | | | | | |
Our debt securities consisted of the following at December 31:
| | | | | | | |
| | 2009 | | 2008 | |
| | | | | |
3.25% Convertible Notes due August 1, 2024 | | $ | 56,435 | | $ | 79,988 | |
10.875% Capital Trust Securities due August 1, 2027 | | | 39,129 | | | 53,379 | |
| | | | | | | |
| | $ | 95,564 | | $ | 133,367 | |
| | | | | | | |
Convertible Notes. In July 2004, OCN issued $175,000 aggregate principal amount of 3.25% Convertible Notes due 2024. The Convertible Notes are senior general unsecured obligations not guaranteed by any of our subsidiaries and bear interest at the rate of 3.25% per year. We amortized the debt discount over the period from the date of issuance to August 1, 2009, the first date at which holders could require us to repurchase their notes.
The principal outstanding on December 31, 2008 of $82,355 is reported net of the unamortized debt discount of $2,367. Interest expense on the Convertible Notes for the years ended December 31, 2009, 2008 and 2007 respectively, includes amortization of debt discount of $1,735, $3,886 and $4,069 and cash interest expense of $1,948, $2,825 and $3,149 at the contractual rate. We recognized interest on the debt at an effective annual rate of 8.25% from the date of issuance to August 1, 2009. Since August 1, 2009, the effective interest rate on the debt is the coupon rate of 3.25%.
In February 2009, we repurchased $25,910 of our 3.25% Convertible Notes in the open market at a price equal to 95% of the principal amount. We recognized a gain of $534 on these repurchases, net of the write-off of unamortized issuance costs and debt discount. During 2008, we repurchased $14,545 of the Convertible Notes in the open market resulting in total losses of $86, including the write-off of unamortized issuance costs and debt discount.
Holders may convert all or a portion of their notes into shares of our common stock under the following circumstances: (1) at any time during any calendar quarter (and only during such calendar quarter) commencing after December 31, 2004, if the closing sale price of our common stock for at least 20 consecutive trading days in a period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than 125% of the conversion price per share of common stock on such last day; (2) subject to certain exceptions, during the five business day period after any five-consecutive-trading-day period in which the trading price per $1 principal amount of the notes for each day of the five-consecutive-trading-day period was less than 98% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1 principal amount of the notes; (3) if the notes have been called for redemption; or (4) upon the occurrence of specified corporate transactions.
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The conversion rate is 82.1693 shares of our common stock per $1,000 (actual dollars) principal amount of the notes, subject to adjustment. Events that may cause the conversion rate to be adjusted primarily relate to cash dividends or other distributions to holders of our common stock. Upon conversion, we may, at our option, choose to deliver, in lieu of our common stock, cash or a combination of cash and common stock. At December 31, 2009 and 2008, the if-converted value of the Convertible Notes was $44,378 and $62,106, respectively.
On June 26, 2009, we provided notice to holders of the Convertible Notes of their right to request that we repurchase all or a portion of their notes for cash on August 3, 2009 at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest, if any. There were no material redemptions on August 3, 2009. Holders that did not choose to exercise their repurchase right on August 3, 2009 will receive the same right to request that we repurchase all or a portion of their notes for cash on August 1, 2014 and August 1, 2019. A similar right is also available to holders of the Convertible Notes in the event of a “fundamental change.” A “fundamental change” is a change of control or a termination of trading in our common stock.
Beginning August 1, 2009, we may redeem all or a portion of the notes for cash for a price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest, if any.
Each convertible noteholder participated in the distribution of Altisource shares, without converting, receiving Altisource shares equal to the conversion ratio of the convertible notes times the distribution ratio (one (1) Altisource share for three (3) Ocwen shares). Accordingly, upon the separation of Altisource and Ocwen, there was no adjustment to the conversion ratio of the Convertible Notes.
Capital Trust Securities. In August 1997, Ocwen Capital Trust (OCT) issued $125,000 of 10.875% Capital Securities (the Capital Trust Securities). OCT invested the proceeds from issuance of the Capital Trust Securities in 10.875% Junior Subordinated Debentures issued by OCN. The Junior Subordinated Debentures, which represent the sole assets of OCT, will mature on August 1, 2027. For financial reporting purposes, we treat OCT as a subsidiary and, accordingly, the accounts of OCT are included in our consolidated financial statements. We consolidate OCT because we own all of the Common Securities that were issued by OCT and have repurchased 69% of the Capital Trust Securities that were originally issued. We eliminate intercompany balances and transactions with OCT, including the balance of Junior Subordinated Debentures outstanding, in our consolidated financial statements.
During the fourth quarter of 2009, we repurchased $14,250 of the Capital Securities and recognized a gain of $882 on these repurchases, net of the write-off of unamortized issuance costs.
Holders of the Capital Trust Securities are entitled to receive cumulative cash distributions accruing from the date of original issuance and payable semiannually in arrears on February 1 and August 1 of each year at an annual rate of 10.875% of the liquidation amount of $1,000 (actual dollars) per Capital Security. OCN guarantees payment of distributions out of moneys held by OCT and payments on liquidation of OCT or the redemption of Capital Trust Securities to the extent OCT has funds available. If OCN does not make principal or interest payments on the Junior Subordinated Debentures, OCT will not have sufficient funds to make distributions on the Capital Trust Securities in which event the guarantee shall not apply to such distributions until OCT has sufficient funds available. Accumulated distributions payable on the Capital Trust Securities amounted to $1,773 and $2,419 at December 31, 2009 and 2008, respectively, and are included in other liabilities.
We have the right to defer payment of interest on the Junior Subordinated Debentures at any time or from time to time for a period not exceeding 10 consecutive semiannual periods with respect to each deferral period provided that no extension period may extend beyond the stated maturity of the Junior Subordinated Debentures. Upon the termination of any such extension period and the payment of all amounts then due on any interest payment date, we may elect to begin a new extension period. Accordingly, there could be multiple extension periods of varying lengths throughout the term of the Junior Subordinated Debentures. If we defer interest payments on the Junior Subordinated Debentures, distributions on the Capital Trust Securities will also be deferred, and we may not, nor may any of our subsidiaries, (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, their capital stock or (ii) make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt securities that rank pari passu with or junior to the Junior Subordinated Debentures. During an extension period, interest on the Junior Subordinated Debentures will continue to accrue at the rate of 10.875% per annum, compounded semiannually.
F-35
We may redeem the Junior Subordinated Debentures before maturity at our option subject to the receipt of any necessary prior regulatory approval, in whole or in part at the redemption prices (expressed as a percentage of the principal amount) set forth below, plus accrued interest thereon, if redeemed during the twelve-month period beginning on August 1 of the years indicated below:
| | | |
| | Percentages | |
| | |
2009 | | 104.350 | % |
2010 | | 103.806 | |
2011 | | 103.263 | |
2012 | | 102.719 | |
2013 | | 102.175 | |
2014 | | 101.631 | |
2015 | | 101.088 | |
2016 | | 100.544 | |
2017 to maturity | | 100.000 | |
We may also redeem the Junior Subordinated Debentures at any time upon the occurrence and continuation of a special event (defined as a tax event, regulatory capital event or an investment company event) at 100%. The Capital Trust Securities are subject to mandatory redemption upon repayment of the Junior Subordinated Debentures in an amount equal to the amount of the related Junior Subordinated Debentures maturing or being redeemed and at a redemption price equal to the redemption price of the Junior Subordinated Debentures, plus accumulated and unpaid distributions thereon to the date of redemption.
The following table sets forth the components of other liabilities at December 31:
| | | | | | | |
| | 2009 | | 2008 | |
| | | | |
Accrued expenses | | $ | 21,381 | | $ | 33,362 | |
Deferred income | | | 13,599 | | | 2,551 | |
Checks held for escheat | | | 12,827 | | | 13,162 | |
Payable to Altisource | | | 10,655 | | | — | |
Liability for selected tax items | | | 15,326 | | | 2,042 | |
Accrued interest payable | | | 3,588 | | | 4,649 | |
Servicing liability | | | 2,878 | | | 3,239 | |
Customer deposits (BOK) | | | — | | | 5,820 | |
Other | | | 10,528 | | | 13,988 | |
| | | | | | | |
| | $ | 90,782 | | $ | 78,813 | |
| | | | | | | |
On May 9, 2000, we announced that our Board of Directors authorized the repurchase of up to 6,000,000 of our issued and outstanding shares of common stock. To date, we have repurchased 431,100 shares under this plan (all in 2004). We may still purchase a total of 5,568,900 shares under this plan. On May 1, 2007, we purchased an additional 1,000,000 shares from two companies controlled by a member of OCN’s Board of Directors at a price of $14.52 per share. We did not purchase any of our common shares during 2008.
In a private placement transaction that closed on April 3, 2009, OCN sold 5,471,500 shares of its common stock for a price of $11.00 per share. We realized $60,165 in proceeds from this issuance. In addition to making customary representations, warranties and covenants, the purchasers agreed to certain restrictions on the sale of the shares for a one-year period following the closing date.
On April 3, 2009, OCN repurchased from William C. Erbey, its Chairman of the Board and Chief Executive Officer, 1,000,000 shares of its common stock at a per-share price of $11.00. We used a portion of the proceeds received from the above-described private placement transaction to acquire the shares from Mr. Erbey. In addition to making customary representations and warranties, Mr. Erbey agreed to certain restrictions on the sale or transfer of the remainder of his shares for a one-year period following the closing date.
On August 18, 2009, OCN completed the public offering of 32,200,000 shares of common stock at a per share price of $9.00, including 4,200,000 shares of common stock purchased by the underwriters pursuant to the full exercise of the over-allotment option granted under the underwriting agreement. We received net proceeds of $274,964 from the offering after deducting underwriting fees and other offering costs.
F-36
| |
NOTE 22 | DERIVATIVE FINANCIAL INSTRUMENTS |
Because our current derivative agreements are not exchange-traded, we are exposed to credit loss in the event of nonperformance by the counterparty to the agreements. We control this risk through credit monitoring procedures, including financial analysis, dollar limits and other monitoring procedures. The notional amount of our contracts does not represent our exposure to credit loss.
Foreign Currency Exchange Rate Risk Management
In June 2008, we entered into foreign currency futures contracts to hedge our net investment in BOK against adverse changes in the value of the Euro versus the U.S. Dollar. We designated these derivatives as a foreign-currency net investment hedge. Net gain (losses) on these foreign currency futures were $740 and $1,038 for 2009 and 2008, respectively. We initially recorded these gains and losses as part of the net change in unrealized foreign currency translation adjustment in accumulated other comprehensive income. In November 2009, in connection with the sale of BOK, we closed this hedge and recognized accumulated gains of $298 on the hedge as part of the gain on the sale.
Our operations in India and Canada also expose us to foreign currency exchange rate risk, but we consider this risk to be insignificant.
Interest Rate Management
In our Servicing segment, we have entered into interest rate caps to hedge our exposure to rising interest rates. In connection with our issuance of a match funded variable funding note in December 2007 with a variable rate of interest and a $250,000 maximum borrowing capacity, we entered into interest rate caps with a notional amount of $250,000. We designated this cap as a cash flow hedge but de-designated it as of March 31, 2008 because of ineffectiveness. As a result, we reclassified to earnings the unrealized loss of $239 included in other comprehensive income at December 31, 2007. In connection with our renewal and upsizing of a match funded variable funding note in February 2008 that carried a variable interest rate and a maximum borrowing capacity of $200,000, we entered into an interest rate cap with a notional amount of $200,000. This cap began amortizing at the rate of $8,333 per month in February 2009. We did not designate this cap as a hedge.
The following table summarizes our use of derivative financial instruments during 2009:
| | | | | | | |
| | Notional Amounts | |
| | | |
| | Interest Rate Caps | | Euro Currency
Futures | |
| | | | | |
Notional balance at December 31, 2008 | | $ | 450,000 | | $ | 10,125 | |
Additions | | | — | | | 31,289 | |
Maturities | | | (91,667 | ) | | (41,414 | ) |
| | | | | | | |
Notional balance at December 31, 2009 | | $ | 358,333 | | $ | — | |
| | | | | | | |
| | | | | | | |
Fair value (1): | | | | | | | |
December 31, 2009 | | $ | 781 | | $ | — | |
| | | | | | | |
December 31, 2008 | | $ | 193 | | $ | (726 | ) |
| | | | | | | |
| | | | | | | |
Maturity | | January 2011 and December 2013 | | | — | |
Net realized and unrealized gains (losses) included in other income (expense), net related to derivative financial instruments were $587, $2,151 and $4,670 for 2009, 2008 and 2007, respectively, including in 2008 the $239 loss related to the interest rate cap that we de-designated as a cash flow hedge. In addition, we recorded unrealized (losses) gains of $(3,149) and $(4,944) in 2008 and 2007, respectively, that represented fair value basis adjustments on the $165,000 fixed-rate match funded term note that we had designated as part of a fair value hedging relationship. The fair value hedge was established in 2007 using an interest rate swap that we subsequently terminated in the first quarter of 2008.
F-37
| |
NOTE 23 | SERVICING AND SUBSERVICING FEES |
The following table presents the components of servicing and subservicing fees for the years ended December 31:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | |
Loan servicing and subservicing fees | | $ | 175,691 | | $ | 215,817 | | $ | 233,688 | |
Receivables management and recovery fees | | | 29,207 | | | 56,186 | | | 35,536 | |
Late charges | | | 28,292 | | | 45,985 | | | 39,665 | |
Loan collection fees | | | 7,569 | | | 11,336 | | | 12,817 | |
Custodial accounts (float earnings) (1) | | | 4,803 | | | 11,005 | | | 29,318 | |
Other | | | 18,905 | | | 27,697 | | | 28,253 | |
| | | | | | | | | | |
| | $ | 264,467 | | $ | 368,026 | | $ | 379,277 | |
| | | | | | | | | | |
| |
(1) | For 2009, 2008 and 2007, float earnings included $4,745, $10,696 and $12,998, respectively, of interest income from our investment in auction rate securities. |
The following table presents the components of interest income for each category of our interest-earning assets for the years ended December 31:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | |
Interest earning cash and short-term investments | | $ | 1,543 | | $ | 2,011 | | $ | 2,153 | |
Trading securities: | | | | | | | | | | |
Investment grade | | | — | | | 598 | | | 4,412 | |
Subordinates and residuals | | | 2,600 | | | 4,259 | | | 10,445 | |
Certificates of deposit | | | — | | | — | | | 2,200 | |
Loans | | | 4,643 | | | 7,828 | | | 10,441 | |
| | | | | | | | | | |
| | $ | 8,786 | | $ | 14,696 | | $ | 29,651 | |
| | | | | | | | | | |
The following table presents the components of interest expense for each category of our interest-bearing liabilities for the years ended December 31:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | |
Match funded liabilities | | $ | 47,561 | | $ | 57,985 | | $ | 41,541 | |
Lines of credit and other secured borrowings | | | 2,668 | | | 13,987 | | | 20,661 | |
Investment line | | | 2,618 | | | 1,055 | | | — | |
Debt securities: | | | | | | | | | | |
Convertible Notes | | | 3,898 | | | 7,238 | | | 7,812 | |
Capital Trust Securities | | | 5,728 | | | 5,805 | | | 5,808 | |
Other | | | 481 | | | 504 | | | 764 | |
| | | | | | | | | | |
| | $ | 62,954 | | $ | 86,574 | | $ | 76,586 | |
| | | | | | | | | | |
For income tax purposes, the domestic and foreign components of income from continuing operations before taxes were as follows:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | |
Domestic | | $ | 89,847 | | $ | 23,649 | | $ | 45,149 | |
Foreign | | | 3,414 | | | 7,333 | | | 9,405 | |
| | | | | | | | | | |
| | $ | 93,261 | | $ | 30,982 | | $ | 54,554 | |
| | | | | | | | | | |
F-38
The components of income tax expense (benefit) were as follows for the years ended December 31:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | |
Current: | | | | | | | | | | |
Federal | | $ | 51,341 | | $ | 9,959 | | $ | 16,237 | |
State | | | 300 | | | 1,581 | | | 3,064 | |
Foreign | | | 933 | | | 1,304 | | | 2,880 | |
| | | | | | | | | | |
| | | 52,574 | | | 12,844 | | | 22,181 | |
| | | | | | | | | | |
Deferred: | | | | | | | | | | |
Federal | | | 40,067 | | | (1,424 | ) | | (4,032 | ) |
State | | | 4,564 | | | (325 | ) | | (481 | ) |
Foreign | | | (1,095 | ) | | (482 | ) | | (1,939 | ) |
Provision for (reversal of) valuation allowance on deferred tax assets | | | — | | | 1,393 | | | (543 | ) |
| | | | | | | | | | |
| | | 43,536 | | | (838 | ) | | (6,995 | ) |
| | | | | | | | | | |
Total | | $ | 96,110 | | $ | 12,006 | | $ | 15,186 | |
| | | | | | | | | | |
Income tax expense (benefit) differs from the amounts computed by applying the U.S. Federal corporate income tax rate of 35% as follows for the years ended December 31:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | |
Expected income tax expense (benefit) at statutory rate | | $ | 32,641 | | $ | 10,844 | | $ | 19,094 | |
Differences between expected and actual income tax expense (benefit): | | | | | | | | | | |
Indefinite deferral on earnings of non-U.S. affiliates | | | (1,006 | ) | | (2,566 | ) | | (3,292 | ) |
State tax (after Federal tax benefit) | | | 5,274 | | | 918 | | | 1,731 | |
Low-income housing tax credits | | | (23 | ) | | (59 | ) | | (1,326 | ) |
Tax effect of Altisource Separation | | | 48,577 | | | — | | | — | |
Provision for selected tax items | | | 11,196 | | | — | | | — | |
Deferred tax asset valuation allowance benefit | | | — | | | 1,393 | | | (543 | ) |
Foreign tax | | | (161 | ) | | 822 | | | 941 | |
Capital loss utilization | | | — | | | — | | | (1,586 | ) |
Equity-based compensation tax expense | | | (510 | ) | | 435 | | | — | |
Other | | | 122 | | | 219 | | | 167 | |
| | | | | | | | | | |
Actual income tax expense (benefit) | | $ | 96,110 | | $ | 12,006 | | $ | 15,186 | |
| | | | | | | | | | |
F-39
Net deferred tax assets were comprised of the following at December 31:
| | | | | | | |
| | 2009 | | 2008 | |
| | | | | |
Deferred tax assets: | | | | | | | |
Tax residuals and deferred income on tax residuals | | $ | 3,415 | | $ | 3,725 | |
State taxes | | | 3,311 | | | 9,780 | |
Accrued incentive compensation | | | 3,739 | | | 4,208 | |
Valuation allowance on real estate | | | 1,712 | | | 3,502 | |
Bad debt and allowance for loan losses | | | 7,220 | | | 8,296 | |
Mortgage servicing rights amortization | | | 50,065 | | | 79,658 | |
Net operating loss carryforward | | | 22,098 | | | 31,281 | |
Partnership losses and low-income housing tax credits | | | 10,245 | | | 23,963 | |
Foreign deferred assets | | | 3,211 | | | 1,458 | |
Net unrealized gains and losses on securities | | | 16,742 | | | 20,883 | |
Foreign basis differences | | | 8,489 | | | — | |
Other | | | 2,511 | | | 2,744 | |
| | | | | | | |
| | | 132,758 | | | 189,498 | |
| | | | | | | |
Deferred tax liabilities: | | | | | | | |
Deferred interest income on loans | | | 75 | | | 75 | |
Intangibles amortization | | | — | | | 12,533 | |
| | | | | | | |
| | | 75 | | | 12,608 | |
| | | | | | | |
| | | 132,683 | | | 176,890 | |
Valuation allowances | | | — | | | (1,745 | ) |
| | | | | | | |
Net deferred tax assets | | $ | 132,683 | | $ | 175,145 | |
| | | | | | | |
We conduct periodic evaluations of positive and negative evidence to determine whether it is more likely than not that the deferred tax asset can be realized in future periods. Among the factors considered in this evaluation are estimates of future taxable income, future reversals of temporary differences, tax character and the impact of tax planning strategies that may be implemented if warranted. As a result of this evaluation, we included in the tax provision an increase of $1,393 to the valuation allowance for 2008 and no change to the valuation allowance in 2009.
At December 31, 2008, the deferred tax asset valuation allowance of $1,745 related to certain NCI-related state net operating losses that are not likely to be realized in future periods. In 2009, we transferred certain deferred tax assets and liabilities and our remaining valuation allowance to Altisource as part of the Separation. See Note 2.
We adopted ASC 740 effective January 1, 2007. We recognized total interest and penalties of $278 in 2009, while the cumulative post-adoption interest and penalties through December 31, 2009 were $751. We decided to classify interest and penalties as a component of income tax expense. We recognized a $1,483 increase in the liability for selected tax items that was accounted for as a reduction to the January 1, 2007 balance of retained earnings. As of December 31, 2009 and 2008, we had a total liability for selected tax items of approximately $15,326 and $2,042, respectively, all but $2,088 of which if recognized would affect the effective tax rate. The increase in the 2009 balance was due to a reserve against the full amount of recognized deferred tax assets arising from deductibility of losses in a finance vehicle.
Our major jurisdiction tax years that remain subject to examination are our U.S. federal tax return for the years ended December 31, 2005 through the present and our India corporate tax returns for the years ended March 31, 2003 through the present. A reconciliation of the beginning and ending amount of the liability for selected tax items is as follows for the years ended December 31:
| | | | | | | |
| | 2009 | | 2008 | |
| | | | | |
Balance at January 1 | | $ | 2,042 | | $ | 1,759 | |
Additions based on tax positions related to current year | | | 11,196 | | | — | |
Additions for tax positions of prior years | | | 2,088 | | | 1,068 | |
Reductions for tax positions of prior years | | | — | | | (540 | ) |
Lapses in statutes of limitation | | | — | | | (245 | ) |
| | | | | | | |
Balance at December 31 | | $ | 15,326 | | $ | 2,042 | |
| | | | | | | |
At December 31, 2009, we had net operating loss carryforwards of $22,097 that related to realized built-in losses from the acquisition of Ocwen Asset Investment Corporation. Utilization of these carryforwards is subject to an annual IRC section 382 limitation of $5,700. We no longer had any remaining capital loss carryforwards or any tax credit carryforwards related to our low-income housing tax credits.
F-40
| |
NOTE 27 | BASIC AND DILUTED EARNINGS PER SHARE |
Basic EPS excludes common stock equivalents and is calculated by dividing net income (loss) attributable to OCN by the weighted average number of common shares outstanding during the year. We calculate diluted EPS by dividing net income attributable to OCN, as adjusted to add back interest expense net of income tax on the Convertible Notes, by the weighted average number of common shares outstanding including the potential dilutive common shares related to outstanding stock options, restricted stock awards and the Convertible Notes. The following is a reconciliation of the calculation of basic EPS to diluted EPS for the years ended December 31:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | |
Basic EPS: | | | | | | | | | | |
Net income attributable to OCN | | $ | 297 | | $ | 13,250 | | $ | 36,104 | |
| | | | | | | | | | |
| | | | | | | | | | |
Weighted average shares of common stock | | | 78,252,000 | | | 62,670,957 | | | 62,712,076 | |
| | | | | | | | | | |
| | | | | | | | | | |
Basic EPS | | $ | — | | $ | 0.21 | | $ | 0.58 | |
| | | | | | | | | | |
| | | | | | | | | | |
Diluted EPS: | | | | | | | | | | |
Net income attributable to OCN | | $ | 297 | | $ | 13,250 | | $ | 36,104 | |
Interest expense on Convertible Notes, net of income tax (1) | | | — | | | — | | | — | |
| | | | | | | | | | |
Adjusted net income attributable to OCN | | $ | 297 | | $ | 13,250 | | $ | 36,104 | |
| | | | | | | | | | |
| | | | | | | | | | |
Weighted average shares of common stock | | | 78,252,000 | | | 62,670,957 | | | 62,712,076 | |
Effect of dilutive elements: | | | | | | | | | | |
Convertible Notes (1) | | | — | | | — | | | — | |
Stock options (2) | | | — | | | 241,205 | | | 709,855 | |
Common stock awards | | | — | | | 23,152 | | | 74,408 | |
| | | | | | | | | | |
Dilutive weighted average shares of common stock | | | 78,252,000 | | | 62,935,314 | | | 63,496,339 | |
| | | | | | | | | | |
| | | | | | | | | | |
Diluted EPS | | $ | — | | $ | 0.21 | | $ | 0.57 | |
| | | | | | | | | | |
| |
(1) | The effect of our Convertible Notes on diluted EPS is computed using the if-converted method. Interest expense and related amortization costs applicable to the Convertible Notes, net of income tax, are added back to net income. Conversion of the Convertible Notes into shares of common stock has not been assumed for purposes of computing diluted EPS for the three years because the effect would be anti-dilutive. The effect is anti-dilutive whenever interest expense on the Convertible Notes, net of income tax, per common share obtainable on conversion exceeds basic EPS. |
(2) | An average of 557,080; 3,062,166 and 1,208,391 options have been excluded from the computation of diluted EPS for 2009, 2008 and 2007, respectively. These options were anti-dilutive because their exercise price was greater than the average market price of our stock. Excluded from the computation of diluted EPS were 1,710,000 of the 5,130,000 options that we granted on July 14, 2008, for shares that are issuable upon the achievement of certain performance criteria related to OCN’s stock price and an annualized rate of return to investors. On August 10, 2009, the market performance criterion was met for 3,420,000 of these options. Also excluded were 78,750 options granted with similar conditions on November 4, 2009. |
| |
NOTE 28 | EMPLOYEE COMPENSATION AND BENEFIT PLANS |
We maintain a defined contribution plan to provide post retirement benefits to our eligible employees. We also maintain additional compensation plans for certain employees. We designed these plans to facilitate a pay-for-performance policy, further align the interests of our officers and key employees with the interests of our shareholders and assist in attracting and retaining employees vital to our long-term success. These plans are summarized below.
Retirement Plan
We maintain a defined contribution 401(k) plan. We match 50% of each employee’s contributions, limited to 2% of the employee’s compensation. Our contributions to the 401(k) plan were $403, $469 and $453 for the years ended December 31, 2009, 2008 and 2007, respectively.
Annual Incentive Plan
The Ocwen Financial Corporation Amended 1998 Annual Incentive Plan (the AIP) is our primary incentive compensation plan for executives and other key employees. Under the terms of the AIP, participants can earn cash and equity-based awards as determined by the Compensation Committee of the Board of Directors. The awards are generally based on objective performance criteria established by the Committee which includes corporate profitability, growth in our core businesses, meeting budget objectives and achieving cost savings through Six Sigma initiatives. The Committee may at its discretion adjust performance measurements to reflect significant unforeseen events. In 2007, the stockholders approved the 2007 Equity Incentive Plan (the 2007 Equity Plan) to replace the 1991 Non-Qualified Stock Option Plan. The 2007 Equity Plan authorizes the grant of stock options, restricted stock or other equity-based awards to employees.
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For service years 2009, 2008 and 2007, we awarded annual incentive compensation entirely in cash. However, in July 2008 and November 2009, we awarded stock options to members of senior management under the 2007 Equity Plan. The vesting schedule for these options has a time-based component in which 25% of the options vest in equal increments over four years. The vesting schedule also has a market-based component in which up to 75% of the options will vest in four equal increments commencing upon the achievement of certain performance criteria related to OCN’s stock price and the annualized rate of return to investors. Upon meeting the market performance criteria, one-fourth of the market-based options immediately vest. Thereafter, one-fourth of these options vests on each of the three consecutive anniversaries of the initial vesting. Two-thirds of the market-based options begin to vest if the stock price realizes a compounded annual gain of at least 20% over the exercise price, so long as the stock price is at least double the exercise price. The remaining third of the market-based options begin to vest if the stock price realizes a 25% gain, so long as it is at least triple the exercise price. On August 10, 2009, the market performance criterion was met for 3,420,000 of the market-based options awarded in July 2008.
Stock option activity for the years ended December 31:
| | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | |
| | Number of
Options | | Weighted
Average
Exercise
Price | | Number of
Options | | Weighted
Average
Exercise
Price | | Number of
Options | | Weighted
Average
Exercise
Price | |
| | | | | | | | | | | | | |
Outstanding at beginning of year | | | 9,428,952 | | $ | 8.14 | | | 3,230,526 | | $ | 9.50 | | | 3,212,031 | | $ | 8.42 | |
Granted | | | 415,000 | | | 8.68 | | | 6,530,000 | | | 8.00 | | | 475,999 | | | 11.88 | |
Exercised | | | (526,749 | ) | | 6.37 | | | (3,008 | ) | | 2.30 | | | (263,398 | ) | | 5.80 | |
Forfeited | | | (38,622 | ) | | 12.12 | | | (328,566 | ) | | 18.82 | | | (194,106 | ) | | 18.01 | |
| | | | | | | | | | | | | | | | | | | |
Outstanding at end of year | | | 9,278,581 | | | 4.97 | | | 9,428,952 | | | 8.14 | | | 3,230,526 | | | 9.50 | |
| | | | | | | | | | | | | | | | | | | |
Exercisable at end of year | | | 3,486,405 | | | 4.98 | | | 2,585,799 | | | 8.20 | | | 2,567,886 | | | 9.20 | |
| | | | | | | | | | | | | | | | | | | |
See Note 2 for information regarding the effect of the Separation on our employee compensation programs.
Stock options outstanding at December 31, 2009:
| | | | | | | | | | | | | | | | |
| | | | Options Outstanding | | Options Exercisable | |
| | | | | | | | |
Award Year | | Exercise
Price Range | | Number | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Contractual
Life | | Number | | Weighted
Average
Exercise
Price | |
| | | | | | | | | | | | | | |
2009 | | $4.82 - 10.97 | | 415,000 | | $ | 6.30 | | 10 | | | 58,125 | | $ | 4.82 | |
2008 | | 4.82 | | 6,530,000 | | | 4.82 | | 9 | | | 1,224,374 | | | 4.82 | |
2006 | | 7.16 | | 398,597 | | | 7.16 | | 7 | | | 324,921 | | | 7.16 | |
2005 | | 5.81 | | 276,362 | | | 5.81 | | 6 | | | 220,363 | | | 5.81 | |
2004 | | 2.96 – 6.39 | | 253,731 | | | 5.01 | | 4 | | | 253,731 | | | 5.01 | |
2003 | | 3.72 – 6.47 | | 222,095 | | | 5.97 | | 4 | | | 222,095 | | | 5.97 | |
2002 | | 1.13 – 1.69 | | 214,426 | | | 1.49 | | 3 | | | 214,426 | | | 1.49 | |
2001 | | 3.49 – 7.56 | | 667,664 | | | 5.61 | | 2 | | | 667,664 | | | 5.61 | |
2000 | | 2.46 – 4.46 | | 258,934 | | | 2.87 | | 1 | | | 258,934 | | | 2.87 | |
1999 | | 3.77 | | 41,772 | | | 3.77 | | 0 | | | 41,772 | | | 3.77 | |
| | | | | | | | | | | | | | | | |
| | | | 9,278,581 | | | | | | | | 3,486,405 | | | | |
| | | | | | | | | | | | | | | | |
Stock options awarded prior to 2008 generally vest ratably over a five–year period including the award year. The contractual term of all options granted is ten years from the grant date, except where employment terminates by reason of retirement, in which case the option will terminate no later than three years after such retirement or the end of the option term, whichever is earlier. At December 31, 2009 the weighted average remaining contractual term of options outstanding and options exercisable was 7.4 years and 5.4 years, respectively.
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Excluding 1,710,000 and 78,750 market-based options awarded in 2008 and 2009, respectively, that have not met their performance criteria, the net aggregate intrinsic value of stock options outstanding and stock options exercisable at December 31, 2009 was $34,648 and $16,014, respectively.
Compensation expense related to options is measured based on the grant-date fair value of the options using an appropriate valuation model based on the vesting condition of the award. The fair value of the time-based options was determined using the Black-Scholes options pricing model, while a lattice (binomial) model was used to determine the fair value of the market-based options. The following assumptions were used to value the 2009 and 2008 equity incentive award as of the grant dates.
| | | | | | | | |
| | 2009 | | 2008 |
| | | | |
| | Black-Scholes | | Binomial | | Black-Scholes | | Binomial |
| | | | | | | | |
Risk-free interest rate | | 2.51% | | 0.38 – 3.94% | | 3.48% | | 2.15 – 4.28% |
Expected stock price volatility | | 38% | | 38 - 46% | | 38% | | 38 – 46% |
Expected dividend yield | | — | | — | | — | | — |
Expected option life (in years) | | 5 | | — | | 5 | | — |
Contractual life (in years) | | — | | 10 | | — | | 10 |
Fair value | | $3.96 | | $3.99 and $3.40 | | $1.01 | | $0.87 and $0.65 |
The following table sets forth equity-based compensation related to stock options and stock awards and the related excess tax benefit as of December 31:
| | | | | | | | | | |
| | 2009 | | 2008 | | 2007 | |
| | | | | | | |
Employee compensation expense: | | | | | | | | | | |
Stock option awards | | $ | 1,675 | | $ | 1,569 | | $ | 3,048 | |
Stock awards | | | 28 | | | 420 | | | 1,182 | |
Excess tax benefit related to share-based awards | | | 551 | | | 121 | | | 599 | |
As of December 31, 2009, unrecognized compensation costs related to non-vested stock options amounted to $3,297, which will be recognized over a weighted-average remaining requisite service period of approximately 2.3 years.
In addition to stock options, the Compensation Committee has also awarded common stock to employees. These awards are granted at no cost to the employee and vest ratably over a three-year period including the award year. The shares are issued to the employee upon vesting. We did not grant any shares for the 2009, 2008 and 2007 service years; however, during 2007 we awarded 154,553 shares to compensate employees for the loss in fair value from the exchange of stock options that were noncompliant under IRC section 409A. At December 31, 2009, a total of 9,865 shares relating to the IRC section 409A remediation were unvested. These remaining shares vested on January 1, 2010. The fair value of these stock awards is recognized as compensation expense ratably over the vesting period.
| |
NOTE 29 | BUSINESS SEGMENT REPORTING |
Prior to the Separation on August 10, 2009, we managed our business through two distinct lines of business, Ocwen Asset Management and Ocwen Solutions. Ocwen Asset Management includes our core residential servicing business, equity investments in asset management vehicles and our remaining investments in subprime loans and residual securities. Ocwen Solutions, our knowledge-based business process outsourcing (BPO) operation, included our residential fee-based loan processing businesses, all of our technology platforms, our unsecured collections business and our equity interest in BMS Holdings. Due to the Separation, as of August 10, 2009, neither the assets and liabilities, nor the subsequent operations of the Ocwen Solutions line of business comprising the Mortgage Services, Financial Services and Technology Products segments, except for BMS Holdings and GSS, are included in our results.
Our business segments reflect the internal reporting that we have used to evaluate operating performance and to assess the allocation of our resources. Our segments are based upon our organizational structure that focuses primarily on the products and services offered. Segment results for prior periods have been restated to conform to the current segment structure.
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A brief description of our current and former business segments, aligned within our two lines of business, is as follows:
Ocwen Asset Management
| | |
| • | Servicing. This segment provides loan servicing for a fee, including asset management and resolution services, primarily to owners of subprime residential mortgages. Subprime loans represent residential loans we service that were made to borrowers who generally did not qualify under guidelines of Fannie Mae and Freddie Mac (nonconforming loans). This segment is primarily comprised of our core residential servicing business. |
| • | Loans and Residuals. This segment includes our trading and investing activities and our former subprime loan origination operation. Our trading and investing activities include our investments in subprime residual mortgage backed trading securities as well as the results of our whole loan purchase and securitization activities. |
| • | Asset Management Vehicles. This segment is comprised of our 25% equity investment in OSI and approximately a 25% equity investment in ONL and affiliates, unconsolidated entities engaged in the management of residential assets. |
Ocwen Solutions (distributed as part of the Separation, except for BMS Holdings and GSS)
| | |
| • | Mortgage Services. This segment provided due diligence, valuation, real estate sales, default processing services, property inspection and preservation services, homeowner outreach, closing and title services and knowledge process outsourcing services. Services provided spanned the lifecycle of a mortgage loan from origination through the disposition of real estate properties. Prior to August 10, 2009, this segment also includes international servicing for commercial loans which we conducted through GSS. |
| • | Financial Services. This segment comprised our asset recovery management and customer relationship management offerings to the financial services, consumer products, telecommunications and utilities industries. The primary sources of revenues for this segment were contingency collections and customer relationship management for credit card issuers and other consumer credit providers. Effective June 6, 2007, this segment included the operations of NCI, a receivables management company specializing in contingency collections and customer relationship management for credit card issuers and other consumer and credit providers. |
| • | Technology Products. This segment included revenues from the REAL suite of applications that support our Servicing business as well as the servicing and origination businesses of external customers. These products include REALServicing™, REALResolution™, REALTransSM, REALSynergy™ and REALRemit™. REALServicing is the core residential loan servicing application used by OCN. This segment also earned fees from providing technology support services to OCN that cover IT enablement, call center services and third-party applications. Prior to August 10, 2009, the results of our 45% equity investment in BMS Holdings, which provides technology-based case management solutions to trustees, law firms and debtor companies that administer cases in the federal bankruptcy system, is also included in this segment. |
| | |
| Corporate Items and Other. We report items of revenue and expense that are not directly related to a business, business activities that are individually insignificant, interest income on short-term investments of cash and the related costs of financing these investments and certain other corporate expenses in Corporate Items and Other. Our Convertible Notes and Capital Trust Securities are also included in Corporate Items and Other. |
We allocate interest income and expense to each business segment for funds raised or funding of investments made. We also allocate expenses generated by corporate support services to each business segment.
F-44
Financial information for our segments is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Ocwen Asset Management | | Ocwen Solutions | | | | | | | |
| | | | | | | | | | | |
| | Servicing | | Loans and
Residuals | | Asset
Management
Vehicles | | Mortgage
Services | | Financial
Services | | Technology
Products | | Corporate
Items and
Other | | Corporate
Eliminations | | Business
Segments
Consolidated | |
| | | | | | | | | | | | | | | | | | | | |
Results of Operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the year ended December 31, 2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue (1) (2) | | $ | 272,725 | | $ | — | | $ | 1,851 | | $ | 54,052 | | $ | 40,293 | | $ | 28,331 | | $ | 1,066 | | $ | (17,590 | ) | $ | 380,728 | |
Operating expenses (1) (3) (4) (5) | | | 129,252 | | | 2,831 | | | 3,108 | | | 37,040 | | | 45,002 | | | 18,638 | | | 16,308 | | | (16,525 | ) | | 235,654 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | 143,473 | | | (2,831 | ) | | (1,257 | ) | | 17,012 | | | (4,709 | ) | | 9,693 | | | (15,242 | ) | | (1,065 | ) | | 145,074 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | | 266 | | | 7,183 | | | — | | | 2 | | | — | | | — | | | 1,335 | | | — | | | 8,786 | |
Interest expense | | | (59,458 | ) | | (1,447 | ) | | — | | | (28 | ) | | (1,285 | ) | | (289 | ) | | (447 | ) | | — | | | (62,954 | ) |
Other (1) (2) | | | 3,400 | | | (12,026 | ) | | (4,060 | ) | | 829 | | | 25 | | | 186 | | | 12,936 | | | 1,065 | | | 2,355 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other income (expense), net | | | (55,792 | ) | | (6,290 | ) | | (4,060 | ) | | 803 | | | (1,260 | ) | | (103 | ) | | 13,824 | | | 1,065 | | | (51,813 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations before income taxes | | $ | 87,681 | | $ | (9,121 | ) | $ | (5,317 | ) | $ | 17,815 | | $ | (5,969 | ) | $ | 9,590 | | $ | (1,418 | ) | $ | — | | $ | 93,261 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the year ended December 31, 2008 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue (1) | | $ | 340,725 | | $ | — | | $ | 3,664 | | $ | 58,733 | | $ | 73,835 | | $ | 45,283 | | $ | 156 | | $ | (30,268 | ) | $ | 492,128 | |
Operating expenses (1) (3) | | | 164,292 | | | 3,025 | | | 4,113 | | | 46,299 | | | 79,757 | | | 35,895 | | | 18,743 | | | (28,769 | ) | | 323,355 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | 176,433 | | | (3,025 | ) | | (449 | ) | | 12,434 | | | (5,922 | ) | | 9,388 | | | (18,587 | ) | | (1,499 | ) | | 168,773 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | | 1,004 | | | 11,361 | | | — | | | 147 | | | 16 | | | — | | | 2,168 | | | — | | | 14,696 | |
Interest expense | | | (75,835 | ) | | (3,177 | ) | | — | | | (200 | ) | | (1,977 | ) | | (573 | ) | | (4,812 | ) | | — | | | (86,574 | ) |
Other (1) (6) (7) | | | (832 | ) | | (19,841 | ) | | (9,364 | ) | | 881 | | | 8 | | | (5,235 | ) | | (33,029 | ) | | 1,499 | | | (65,913 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other income (expense), net | | | (75,663 | ) | | (11,657 | ) | | (9,364 | ) | | 828 | | | (1,953 | ) | | (5,808 | ) | | (35,673 | ) | | 1,499 | | | (137,791 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations before income taxes | | $ | 100,770 | | $ | (14,682 | ) | $ | (9,813 | ) | $ | 13,262 | | $ | (7,875 | ) | $ | 3,580 | | $ | (54,260 | ) | $ | — | | $ | 30,982 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the year ended December 31, 2007 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue (1) | | $ | 343,648 | | $ | 352 | | $ | 1,444 | | $ | 73,852 | | $ | 41,292 | | $ | 36,235 | | $ | 1,162 | | $ | (17,324 | ) | $ | 480,661 | |
Operating expenses (1) (3) | | | 219,322 | | | 4,191 | | | 829 | | | 59,603 | | | 47,110 | | | 33,714 | | | 5,775 | | | (18,678 | ) | | 351,866 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | 124,326 | | | (3,839 | ) | | 615 | | | 14,249 | | | (5,818 | ) | | 2,521 | | | (4,613 | ) | | 1,354 | | | 128,795 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | | 1,146 | | | 20,485 | | | — | | | 110 | | | 6 | | | — | | | 7,904 | | | — | | | 29,651 | |
Interest expense | | | (57,978 | ) | | (7,499 | ) | | — | | | (504 | ) | | (1,305 | ) | | (537 | ) | | (8,763 | ) | | — | | | (76,586 | ) |
Other (1) | | | (2,145 | ) | | (17,797 | ) | | (774 | ) | | 147 | | | 30 | | | 6,984 | | | (12,397 | ) | | (1,354 | ) | | (27,306 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other income (expense), net | | | (58,977 | ) | | (4,811 | ) | | (774 | ) | | (247 | ) | | (1,269 | ) | | 6,447 | | | (13,256 | ) | | (1,354 | ) | | (74,241 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations before income taxes | | $ | 65,349 | | $ | (8,650 | ) | $ | (159 | ) | $ | 14,002 | | $ | (7,087 | ) | $ | 8,968 | | $ | (17,869 | ) | $ | — | | $ | 54,554 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2009 | | $ | 1,191,212 | | $ | 48,690 | | $ | 15,271 | | $ | — | | $ | — | | $ | — | | $ | 514,177 | | $ | — | | $ | 1,769,350 | |
|
December 31, 2008 | | | 1,416,615 | | | 67,317 | | | 26,755 | | | 3,558 | | | 58,707 | | | 8,906 | | | 664,962 | | | (9,720 | ) | | 2,237,100 | |
|
December 31, 2007 | | | 1,710,947 | | | 102,398 | | | 74,242 | | | 24,149 | | | 67,149 | | | 17,885 | | | 404,122 | | | (8,968 | ) | | 2,391,924 | |
| |
(1) | Intersegment billings for services rendered to other segments are recorded as revenues, as contra-expense or as other income, depending on the type of service that is rendered. Intersegment billings are as follows: |
| | | | | | | | | | | | | | | | |
| | Servicing | | Asset
Management
Vehicles | | Mortgage
Services | | Technology
Products | | Business
Segments
Consolidated | |
| | | | | | | | | | | |
For the year ended December 31, 2009 | | $ | 5,668 | | $ | 471 | | $ | 59 | | $ | 20,425 | | $ | 26,623 | |
For the year ended December 31, 2008 | | | 7,148 | | | 913 | | | 27 | | | 33,720 | | | 41,808 | |
For the year ended December 31, 2007 | | | 2,758 | | | — | | | 194 | | | 19,499 | | | 22,451 | |
| |
(2) | Servicing has a contractual right to receive interest income on float balances. However, Corporate controls investment decisions associated with the float balances. Accordingly, Servicing receives revenues generated by those investments that are associated with float balances but are reported in Corporate Items and Other. Gains and losses associated with corporate investment decisions are recognized in Corporate Items and Other. |
F-45
| |
(3) | Depreciation and amortization expense are as follows: |
| | | | | | | | | | | | | | | | | | | | | | |
| | Servicing | | Loans
and
Residuals | | Mortgage
Services | | Financial
Services | | Technology
Products | | Corporate
Items and
Other | | Business
Segments
Consolidated | |
| | | | | | | | | | | | | | | |
For the year ended December 31, 2009: | | | | | | | | | | | | | | | | | | | | | | |
Depreciation expense | | $ | 54 | | $ | — | | $ | 19 | | $ | 283 | | $ | 3,204 | | $ | 1,182 | | $ | 4,742 | |
Amortization of MSRs | | | 32,228 | | | — | | | — | | | — | | | — | | | — | | | 32,228 | |
Amortization of intangibles | | | — | | | — | | | — | | | 1,624 | | | — | | | — | | | 1,624 | |
| | | | | | | | | | | | | | | | | | | | | | |
For the year ended December 31, 2008: | | | | | | | | | | | | | | | | | | | | | | |
Depreciation expense | | $ | 54 | | $ | 10 | | $ | 70 | | $ | 415 | | $ | 7,443 | | $ | 1,725 | | $ | 9,717 | |
Amortization of MSRs | | | 52,187 | | | — | | | 274 | | | — | | | — | | | — | | | 52,461 | |
Amortization of intangibles | | | — | | | — | | | — | | | 2,554 | | | — | | | — | | | 2,554 | |
| | | | | | | | | | | | | | | | | | | | | | |
For the year ended December 31, 2007: | | | | | | | | | | | | | | | | | | | | | | |
Depreciation expense | | $ | 82 | | $ | 12 | | $ | 366 | | $ | 558 | | $ | 6,289 | | $ | 1,937 | | $ | 9,244 | |
Amortization of MSRs | | | 99,118 | | | — | | | 832 | | | — | | | — | | | — | | | 99,950 | |
Amortization of intangibles | | | — | | | — | | | — | | | 1,555 | | | — | | | — | | | 1,555 | |
| |
(4) | Operating expenses for 2009 include advisory expenses related to the Separation transaction of $3,477 recorded in Corporate Items and Other. |
(5) | Other income (expense) for 2009 and 2008 includes gains (losses) on auction rate securities of $11,863 and $(29,612), respectively, recorded in Corporate Items and Other. |
(6) | Operating expenses for 2008 include $9,532 of due diligence and other costs recorded in Corporate Items and Other related to the “going private” proposal terminated in March 2008 by mutual agreement of the parties. |
(7) | Other income (expense) for 2007 includes a loss of $8,673 recorded in Corporate Items and Other that resulted from the early redemption of CDs that we had acquired at a discount. |
(8) | Other income (expense) for 2007 includes unrealized losses on subordinate and residual trading securities of $29,031 and a gain of $25,587 from the sale of the UK residuals recorded in the Loans and Residuals segment. |
NOTE 30 RELATED PARTY TRANSACTIONS
Although Altisource is a separate company from Ocwen after the Separation, Altisource and Ocwen have the same Chairman of the Board, William C. Erbey. Mr. Erbey is also the Chief Executive Officer of Ocwen. As a result, he has obligations to Ocwen as well as to Altisource. Mr. Erbey currently owns approximately 18% of the common stock of Ocwen and owns approximately 26 % of the common stock of Altisource.
For purposes of governing certain of the ongoing relationships between Ocwen and Altisource after the Separation, and to provide for an orderly transition to the status of two independent companies, we entered into certain agreements with Altisource. A brief description of these agreements follows.
| | |
| l | Separation Agreement. This agreement provides for, among other things, the principal corporate transactions required to effect the Separation and certain other agreements relating to the continuing relationship between Altisource and Ocwen after the Separation. |
| l | Transition Services Agreement. Under this agreement, Altisource and Ocwen provide to each other services in such areas as human resources, vendor management, corporate services, six sigma, quality assurance, quantitative analytics, treasury, accounting, risk management, legal, strategic planning, compliance and other areas where we, and Altisource, may need transition assistance and support following the Separation. |
| l | Tax Matters Agreement. This agreement sets out each party’s rights and obligations with respect to deficiencies and refunds, if any, of federal, state, local or foreign taxes for periods before and after the Separation and related matters such as the filing of tax returns and the conduct of Internal Revenue Service and other audits. |
| l | Employee Matters Agreement. This agreement provides for the transition of employee benefit plans and programs sponsored by us for employees of Altisource. |
| l | Services Agreement. This agreement provides for Altisource’s offering of certain services to us in connection with our business following the Separation for an initial term of eight years, subject to renewal, with pricing terms intended to reflect market rates. Services provided to us under this agreement include residential property valuation, residential property preservation and inspection services, title services and REO sales. |
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| | |
| l | Technology Products Services Agreement. This agreement provides for Altisource’s offering of certain technology products and support services to us in connection with our business, also for an initial term of eight years, subject to renewal, with pricing terms intended to reflect market rates. Technology products provided to us under this agreement include the REAL suite of applications that support our Servicing business. |
| l | Intellectual Property Agreement. This agreement provides for the transfer of intellectual property assets to Altisource. |
| l | Data Center and Disaster Recovery Services Agreement. This agreement provides for Altisource’s offering of certain data center and disaster recovery services in connection with our business. |
Our business is currently dependent on many of the services and products provided under these long-term contracts with Altisource. These contracts are effective for up to eight years with renewal rights. Certain services provided by Altisource under these contracts are charged to the borrower and/or loan investor. Accordingly, such services, while derived from our loan servicing portfolio, are not presented as expenses to Ocwen. We believe the rates charged under these agreements are market rates as they are materially consistent with one or more of the following: the fees charged by Altisource to other customers for comparable services and the rates Ocwen pays to or observes from other service providers.
Altisource provides the following services under the terms of the foregoing commercial agreements:
| | | | | | |
Mortgage Services | | Technology Products |
| l | Valuation services | | | l | Residential loan servicing software |
| l | Residential due diligence | | | l | Vendor management and order fulfillment software |
| l | Residential fulfillment support services | | | l | Default resolution services |
| l | Real estate management and sales | | | l | IT infrastructure support |
| l | Property inspection and preservation services | | | l | Invoice presentment and payment software |
| l | Closing and title services | | | l | Commercial loan servicing software |
| l | Homeowner outreach | | Financial Services |
| l | Trustee foreclosure services | | | l | Mortgage charge-off and deficiency collections |
As of December 31, 2009, the net payable to Altisource was $7,345. For the period from August 10, 2009 through December 31, 2009, no charges were incurred under the transition services agreement with Altisource.
NOTE 31 REGULATORY REQUIREMENTS
Our business is subject to extensive regulation by federal, state and local governmental authorities, including the Federal Trade SEC and the state agencies that license our servicing and collection entities. We also must comply with a number of federal, state and local consumer protection laws, including, among others, the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act, the Real Estate Settlement Procedures Act, the Truth in Lending Act, the Fair Credit Reporting Act and the Homeowners Protection Act. These statutes apply to debt collection, foreclosure and claims handling, investment of and interest payments on escrow balances and escrow payment features, and they mandate certain disclosures and notices to borrowers. These requirements can and do change as statutes and regulations are enacted, promulgated or amended.
We are also subject to licensing and regulation as a mortgage service provider and/or debt collector in a number of states. We are subject to audits and examinations that are conducted by the states. From time to time, we receive requests from state and other agencies for records, documents and information regarding our policies, procedures and practices regarding our loan servicing and debt collection business activities.
Effective June 30, 2005, we voluntarily terminated our status as a federal savings bank, a process we refer to as “debanking.” Prior to returning our original thrift charter to the Office of Thrift Supervision (OTS), we operated as a federal savings bank, and OCN was a registered savings and loan holding company. Our primary regulatory authority was the OTS.
Following debanking, we continued the Bank’s non-depository businesses, including its residential mortgage servicing business, under OLS, a licensed mortgage servicer in all 50 states, the District of Columbia and two U.S. territories. We entered into various agreements to obtain the approval of our regulator, the Office of Thrift Supervision (OTS), for our debanking plan. We directly or indirectly received assignment of all of the assets, liabilities and business remaining after the consummation of the debanking transactions (the Assignment). We entered into an agreement (the Guaranty) in favor of the OTS and any holders of claims with respect to the liabilities we assumed in connection with the Assignment. The Guaranty contains affirmative covenants relating to the maintenance of a $5,000 cash collateral account, reporting requirements, transactions with affiliates, preservation of the existence of our subsidiaries and maintenance of not less than $35,000 of unencumbered financial assets. As of December 31, 2009, we were in compliance with all of the covenants specified in the Guaranty.
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The Guaranty also contains negative covenants that restrict our ability to (i) incur indebtedness if certain financial ratios are not achieved or if we fail to maintain a specified minimum net worth, (ii) enter into merger transactions or a sale of substantially all of our assets, (iii) sell, lease, transfer or otherwise dispose of our assets, or (iv) pay dividends or acquire our capital stock. We agreed not to declare or pay any dividends on or acquire any of our capital stock or other ownership interests or make any distributions or return of capital to our stockholders, partners or members, except for (i) such dividends or distributions that are payable only in OCN’s common stock or (ii) such declarations, dividends, acquisitions, distributions or returns of capital in cash or other property if we maintain a minimum net worth of $333,000 and rating of B2 from Moody’s and B- from S&P on our unsecured, non credit-enhanced debt and any such capital distributions do not exceed our consolidated net income for the year plus our retained earnings for the two preceding years.
The Guaranty will remain in effect until the later of (a) the sixth anniversary of the date on which the Bank’s federal bank charter was cancelled or (b) the date on which we have paid in full (i) any obligations that arise out of certain assumed liabilities with respect to which a claim has been asserted on or prior to the sixth anniversary of the date on which our federal bank charter was cancelled and (ii) all other amounts payable by us under the Guaranty.
There are a number of foreign regulations that are applicable to our operations in India, including acts that govern licensing, employment, safety, taxes, insurance, and the basic law which governs the creation, continuation and the winding up of companies as well as the relationships between the shareholders, the company, the public and the government. The Central Act is applicable to all of India, while various state acts may be applicable to certain locations in India.
NOTE 32 COMMITMENTS AND CONTINGENCIES
Litigation
We are named as a defendant in lawsuits brought in various federal and state courts challenging the Bank’s mortgage servicing practices, including charging improper or unnecessary fees, misapplying borrower payments, etc. In April 2004, our petition was granted to transfer and consolidate a number of lawsuits filed against the Bank, OCN and various third parties into a single proceeding pending in the United States District Court for the Northern District of Illinois (the MDL Proceeding). Additional lawsuits similar to the MDL proceeding have been brought in other courts, some of which may be transferred to and consolidated in the MDL Proceeding. The borrowers in many of these lawsuits seek class action certification. Others have brought individual actions. No class has been certified in the MDL Proceeding or any related lawsuits. In April 2005, the trial court entered a partial summary judgment in favor of defendants holding that plaintiffs’ signed loan contracts authorized the collection of certain fees by Ocwen as servicer for the related mortgages. In May 2006, plaintiffs filed an amended complaint containing various claims under several federal statutes, state deceptive trade practices statutes and common law. No specific amounts of damages are asserted, however, plaintiffs may amend the complaint to seek damages should the matter proceed to trial. In June 2007, the United States Court of Appeals for the Seventh Circuit issued an opinion holding that many of the claims were preempted or failed to satisfy the pleading requirements of the applicable rules of procedure and directing the trial judge to seek clarification from the plaintiffs so as to properly determine which particular claims are to be dismissed. In March 2009, the trial court struck the amended complaint in its entirety on the grounds of vagueness. Plaintiffs filed a third amended complaint on April 20, 2009. Ocwen has moved to dismiss the third amended complaint. The motion is fully briefed and pending decision by the trial court. We believe the allegations in the MDL Proceeding are without merit and will continue to vigorously defend against them.
In November 2004, a final judgment was entered in litigation brought by Cartel Asset Management, Inc. (Cartel) against OCN, the Bank and Ocwen Technology Xchange, Inc. (OTX), a subsidiary that has been dissolved. This matter involved allegations of misappropriation of trade secrets and contract-related claims brought by a former vendor. Initially, a jury verdict awarded damages of $9,320. However, the November 2004 judgment by the trial court awarded $520 against OTX and nominal damages of two dollars against the Bank. Additionally, the Bank was assessed a statutory award to Cartel for attorneys’ fees in an additional amount of $170. The Bank and OTX were further assessed costs in the amount of $9. In September 2007, the United States Court of Appeals for the Tenth Circuit upheld the damage award against OTX and remanded the case for a new trial on damages against the Bank. In December 2007, we paid the full amount of the judgment against OTX, including accrued interest. In March 2008, the trial court entered an order joining OLS, as the Bank’s successor-in-interest, and OCN, as guarantor of the Bank’s obligations, as additional defendants. The trial court has set a date of September 13, 2010 for the new trial against the Bank, OLS and OCN. We do not believe that Cartel is entitled to additional damages, if any, in an amount that would be material to our financial condition, results of operations or cash flows, and we intend to continue to vigorously defend against this matter.
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In September 2006, the Bankruptcy Trustee in Chapter 7 proceedings involving American Business Financial Services, Inc. (ABFS) brought an action against multiple defendants, including OLS, in Bankruptcy Court. The action arises out of Debtor-in-Possession financing to ABFS by defendant Greenwich Capital Financial Products, Inc. and the subsequent purchases by OLS of MSRs and certain residual interests in mortgage-backed securities previously held by ABFS. OLS brought a separate action against the Trustee seeking damages of approximately $2,500 arising out of the ABFS MSRs purchase transaction. OLS’ separate action against the Trustee was dismissed by agreement without prejudice with the right to replead such claims or otherwise file a separate action should the Trustee’s action be dismissed. In February 2007, the court granted OLS’ motion to dismiss some claims but refused to dismiss others. The Trustee filed an amended complaint in March 2007. This complaint sets forth claims against all of the original defendants. The claims against OLS include turnover, fraudulent transfers, accounting, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, breach of contract, fraud, civil conspiracy and conversion. The Trustee seeks compensatory damages in excess of $100,000 and punitive damages jointly and severally against all defendants. In March 2008, the court denied OLS’ motion to dismiss. In April 2008, OLS filed an answer denying all charges and a counterclaim for breach of contract, fraud, negligent misrepresentation and indemnification in connection with the MSR purchase transaction. Fact discovery is complete and both Ocwen and the Trustee have filed motions for partial summary judgment. We believe that the Trustee’s allegations against OLS are without merit and intend to continue to vigorously defend against this matter.
OCN commenced separate arbitrations before the Financial Industry Regulatory Authority against certain Broker/Dealers primarily alleging fraud, breach of duty and statutory violations arising out of the sale of AAA-rated student loan auction rate securities (SLARS) backed by the Federal Family Education Loan Program. In October 2009 and subsequently in early 2010, we settled these arbitration proceedings for cash proceeds. See Note 34.
OCN is subject to various other pending legal proceedings. In our opinion, the resolution of those proceedings will not have a material effect on our financial condition, results of operations or cash flows.
Tax matters
On December 28, 2006, the India tax authorities issued an income tax assessment order (the Order) with respect to IT Enabled services performed for OCN by its wholly-owned Indian subsidiary, OFSPL. The Order relates to the assessment year 2004-05 and determined that the percent mark-up on operating costs with respect to the IT enabled and software development services that OFSPL provided to OCN was insufficient. The proposed adjustment would impose upon OFSPL additional tax of INR 45,290 ($970) and interest of INR 14,922 ($320) for the Assessment Year 2004-05. On December 15, 2008, the India tax authorities issued an additional income tax assessment order (the Second Order) with respect to assessment year 2005-06. The proposed adjustment would impose upon OFSPL additional tax of INR 23,225 ($498) and interest of INR 10,200 ($218) for the Assessment Year 2005-06. In accordance with standard Indian procedures, penalties may also be assessed in the future in connection with the assessment.
OCN and OFSPL intend to vigorously contest the Order, the Second Order and the imposition of tax and interest and do not believe they have violated any statutory provision or rule. OFSPL has filed domestic appeals with the India Commissioner of Income Tax (Appeals) in response to the Order and Second Order. On March 16, 2007, OCN filed a request for Competent Authority Assistance with the Internal Revenue Service under the United States – India Income Tax Treaty. On January 23, 2009, OCN filed a request with the Internal Revenue Service to include Assessment Year 2005-2006 in its Competent Authority case.
Due to the uncertainties inherent in the Appeals and Competent Authority processes, OCN and OFSPL cannot currently estimate any additional exposure beyond the amount detailed in the Order. We also cannot predict when these tax matters will be resolved. The Competent Authority Assistance filing should preserve OCN’s right to credit any potential India taxes against OCN’s U.S. taxes.
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Commitments and Other
We lease certain of our premises and equipment under non-cancelable operating leases with terms expiring through 2018 exclusive of renewal option periods. Our annual aggregate minimum rental commitments under these leases are summarized as follows:
| | | | |
2010 | | $ | 2,559 | |
2011 | | | 2,329 | |
2012 | | | 1,196 | |
2013 | | | 475 | |
2014 | | | 489 | |
Thereafter | | | 2,109 | |
| | | | |
Total minimum lease payments | | $ | 9,157 | |
| | | | |
We converted rental commitments for our facilities outside the United States of America to U.S. dollars using exchange rates in effect at December 31, 2009. Rent expense for 2009, 2008 and 2007 was $6,156, $7,815 and $6,530, respectively.
| |
NOTE 33 | QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) |
| | | | | | | | | | | | | |
| | Quarters Ended | |
| | | |
| | December 31,
2009 | | September 30,
2009 | | June 30,
2009 | | March 31,
2009 | |
| | | | | | | | | |
Revenue | | $ | 72,748 | | $ | 84,211 | | $ | 109,179 | | $ | 114,590 | |
Operating expenses | | | 36,506 | | | 54,232 | | | 72,650 | | | 72,266 | |
| | | | | | | | | | | | | |
Income from operations | | | 36,242 | | | 29,979 | | | 36,529 | | | 42,324 | |
Other expense | | | (16,048 | ) | | (6,521 | ) | | (10,184 | ) | | (19,060 | ) |
| | | | | | | | | | | | | |
Income from continuing operations before income taxes | | | 20,194 | | | 23,458 | | | 26,345 | | | 23,264 | |
Income tax expense | | | 13,307 | | | 65,294 | | | 9,472 | | | 8,037 | |
| | | | | | | | | | | | | |
Income (loss) from continuing operations | | | 6,887 | | | (41,836 | ) | | 16,873 | | | 15,227 | |
Income (loss) from discontinued operations, net of taxes | | | 2,488 | | | (231 | ) | | 1,052 | | | (188 | ) |
| | | | | | | | | | | | | |
Net income (loss) | | | 9,375 | | | (42,067 | ) | | 17,925 | | | 15,039 | |
Net loss (income) attributable to non-controlling interest in subsidiaries | | | 14 | | | 36 | | | (95 | ) | | 70 | |
| | | | | | | | | | | | | |
Net income (loss) attributable to OCN | | $ | 9,389 | | $ | (42,031 | ) | $ | 17,830 | | $ | 15,109 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Basic earnings per share: | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | 0.07 | | $ | (0.51 | ) | $ | 0.25 | | $ | 0.24 | |
Income (loss) from discontinued operations | | | 0.02 | | | — | | | 0.01 | | | — | |
| | | | | | | | | | | | | |
Net income (loss) attributable to OCN | | $ | 0.09 | | $ | (0.51 | ) | $ | 0.26 | | $ | 0.24 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Diluted earnings per share: | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | 0.07 | | $ | (0.51 | ) | $ | 0.24 | | $ | 0.24 | |
Income (loss) from discontinued operations | | | 0.02 | | | — | | | 0.02 | | | — | |
| | | | | | | | | | | | | |
Net income (loss) attributable to OCN | | $ | 0.09 | | $ | (0.51 | ) | $ | 0.26 | | $ | 0.24 | |
| | | | | | | | | | | | | |
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| | | | | | | | | | | | | |
| | Quarters Ended | |
| | | |
| | December 31,
2008 | | September 30,
2008 | | June 30,
2008 | | March 31,
2008 | |
| | | | | | | | | |
Revenue | | $ | 111,391 | | $ | 121,261 | | $ | 131,225 | | $ | 128,251 | |
Operating expenses | | | 76,556 | | | 77,458 | | | 81,266 | | | 88,075 | |
| | | | | | | | | | | | | |
Income from operations | | | 34,835 | | | 43,803 | | | 49,959 | | | 40,176 | |
Other income (expense) | | | (38,792 | ) | | (20,393 | ) | | (46,847 | ) | | (31,759 | ) |
| | | | | | | | | | | | | |
Income (loss) from continuing operations before income taxes | | | (3,957 | ) | | 23,410 | | | 3,112 | | | 8,417 | |
Income tax expense (benefit) | | | 313 | | | 8,330 | | | 424 | | | 2,939 | |
| | | | | | | | | | | | | |
Income (loss) from continuing operations | | | (4,270 | ) | | 15,080 | | | 2,688 | | | 5,478 | |
Loss from discontinued operations, net of taxes | | | (195 | ) | | (186 | ) | | (5,182 | ) | | (204 | ) |
| | | | | | | | | | | | | |
Net income (loss) | | | (4,465 | ) | | 14,894 | | | (2,494 | ) | | 5,274 | |
Net loss (income) attributable to non-controlling interest in subsidiaries | | | 184 | | | 82 | | | (223 | ) | | (2 | ) |
| | | | | | | | | | | | | |
Net income (loss) attributable to OCN | | $ | (4,281 | ) | $ | 14,976 | | $ | (2,717 | ) | $ | 5,272 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Basic earnings per share | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | (0.07 | ) | $ | 0.24 | | $ | 0.04 | | $ | 0.09 | |
Income (loss) from discontinued operations | | | — | | | — | | | (0.08 | ) | | (0.01 | ) |
| | | | | | | | | | | | | |
Net income (loss) attributable to OCN | | $ | (0.07 | ) | $ | 0.24 | | $ | (0.04 | ) | $ | 0.08 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Diluted earnings per share | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | (0.07 | ) | $ | 0.23 | | $ | 0.04 | | $ | 0.09 | |
Income (loss) from discontinued operations | | | — | | | — | | | (0.08 | ) | | (0.01 | ) |
| | | | | | | | | | | | | |
Net income (loss) attributable to OCN | | $ | (0.07 | ) | $ | 0.23 | | $ | (0.04 | ) | $ | 0.08 | |
| | | | | | | | | | | | | |
On January 21, 2010 and March 4, 2010, we negotiated settlements of two of our auction rate securities litigation actions. Under the terms of these settlements, the Broker/Dealers repurchased $103,625 par value of auction rate securities for cash proceeds of $92,775. We recognized no gain or loss on these negotiated settlements. Proceeds from one settlement were used to pay down the investment line.
On January 29, 2010, we repurchased $12,930 face amount of our Capital Trust Securities for a gain of $717.
On February 5, 2010, we sold auction rate securities with a par value of $33,350 for cash proceeds of $29,865. We recognized no gain or loss on this sale. The proceeds from this sale were used to pay down the investment line.
On February 11, 2010, we exercised a portion of our option to sell auction rate securities with a par value of $88,150. We continue to retain a liquidity option in respect of $3,500 par value of auction rate securities. As described in Note 5—Trading Securities—Auction Rate Securities, this sale was recognized as a secured borrowing because of our ability to repurchase the same securities until the maturity of the liquidity option in October 2012. We continue to report these auction rate securities, with a fair value of $86,504 as of December 31, 2009, on the balance sheet. However, these securities are pledged to collateralize a $74,928 borrowing, reflecting the proceeds received upon exercise of the option. We will no longer receive cash interest income on the pledged securities nor will we pay cash interest on this secured borrowing.
On February 12, 2010, we issued $200,000 of notes under the Term Asset Lending Facility (TALF) program. These notes are secured by servicing advances and are scheduled to begin amortizing in 12 months with a final maturity date of September 2023. The interest rate on the notes is fixed at 3.59%.
On February 17, 2010, we used the proceeds from the exercise of the February 11, 2010 liquidity option and an additional $4,039 cash to repay the investment line. As of December 31, 2009, the carrying value of the investment line was $156,968. The investment line was paid off and the remaining auction rate securities, excluding those subject to the secured borrowing incurred under the liquidity option, are no longer pledged as collateral. The fair value of these remaining auction rate securities is $38,083 ($38,800 par value) at December 31, 2009.
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