The following table presents selected results of operations of Corporate Items and Other for the three months ended March 31:
We repurchased debt securities, thereby reducing interest expense and recognizing a gain on redemption. The gain of $765 on trading securities in the first quarter of 2010 include an unrealized gain of $1,022 that were principally based on improvements in the underlying collateral markets and liquidity solutions for auction rate securities, offset by a realized loss of $257 on sales, redemptions and settlements of litigation actions. Unrealized losses on auction rate securities in the first quarter of 2009 were $40.
The following table shows selected assets and liabilities of Corporate Items and Other at:
EQUITY
Total equity amounted to $890,847 at March 31, 2010 as compared to $865,863 at December 31, 2009. This increase of $24,984 is primarily due to net income of $20,860. In addition, as more fully described in Note 1—Securitizations of Residential Mortgage Loans, we recorded a $2,274 increase in the opening balance of retained earnings upon adoption of ASU 2009-17 (ASC 810, Consolidation) on January 1, 2010. The exercise of 207,775 stock options and the compensation related to employee share-based awards also contributed to the increase in equity in 2010.
INCOME TAX EXPENSE
Income tax expense was $10,574 and $8,037 for the first quarter of 2010 and 2009, respectively.
Our effective tax rate for first quarter of 2010 was 33.63% as compared to 34.44% for the first quarter of 2009. Income tax expense on Income from continuing operations before income taxes differs from amounts that would be computed by applying the Federal corporate income tax rate of 35% primarily because of the effect of foreign taxes, foreign income with an indefinite deferral from U.S. taxation, losses from consolidated VIEs and state taxes. At December 31, 2009, we no longer had any low income housing tax credits available to reduce future taxable income.
Our effective tax rate for first quarter of 2010 and 2009 includes a non-cash benefit of approximately 0.33% and 2.31%, respectively, associated with the recognition of certain foreign deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
We define liquidity as unencumbered cash balances plus unused, collateralized advance financing capacity. Our liquidity as of March 31, 2010, as measured by cash and available credit, increased by $66,322, or 23%, from December 31, 2009 to March 31, 2010. At March 31, 2010, our cash position was $300,013 compared to $90,919 at December 31, 2009. Our available credit on collateralized but unused advance financing capacity was $58,423 at March 31, 2010 compared to $0 a year ago. We used available cash to fund advance balances, as part of our debt and interest expense reduction strategy (more fully described below).
Investment policy and funding strategy. Our primary sources of funds for near-term liquidity are:
| | |
| ● | Match funded liabilities |
| | |
| ● | Lines of credit and other secured borrowings |
| | |
| ● | Servicing fees |
| | |
| ● | Payments received on loans held for resale |
| | |
| ● | Payments received on trading securities |
| | |
| ● | Debt securities |
In addition to these near-term sources, additional long-term sources of liquidity include debt securities and equity capital.
Our primary uses of funds are the funding of servicing advances, the payment of interest and operating expenses, the purchase of servicing rights and the repayment of borrowings. We closely monitor our liquidity position and ongoing funding requirements.
Our investment policies emphasize principal preservation by limiting investments to include:
| | |
| ● | Securities issued by the U.S. government, a U.S. agency or a U.S. government-sponsored enterprise |
| | |
| ● | Money market mutual funds |
| | |
| ● | Money market demand deposits |
Currently, we are primarily invested in money market demand deposits. Furthermore, our investment policies are intended to minimize credit and counterparty risk by establishing risk limits based on each counterparty’s equity size and long-term credit ratings. We regularly monitor and project cash flow timing in connection with our efforts to optimize the risk-adjusted yield of our portfolio of investments.
In August 2009, we implemented a strategy to deploy excess cash balances to reduce outstanding debt levels and interest expense. We also began to execute on a strategy to increase the duration of our advance financing. As part of this strategy, we issued multi-year fixed rate notes under the TALF program and created a new advance facility structure which allows for multiple notes with staggering maturity dates to reduce roll-over risk.
Outlook. In 2010, we expect to reduce up-front facility fees and execute at tighter spreads over LIBOR and commercial paper rates. While we expect to benefit from the fixed interest rates on our $210,000 December 2009 and $200,000 February 2010 TALF notes, these rates are currently higher than LIBOR and commercial paper as of March 31, 2010.
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We also expect to benefit from the increase in the duration of our funding sources. Our TALF issuances of $210,000 in December 2009 and $200,000 in February 2010 increased the maturity for 46% of our advance financing needs at fixed interest rates.
Following the repayment of the investment line in full in February 2010 and the transfers of auction rate securities for cash proceeds, we continue our efforts to release cash by liquidating the remaining auction rate securities with a fair value of $125,036and par value of $126,350. We expect to complete this in 2010.
Debt financing summary. During the three months ended March 31, 2010, we reduced our outstanding liabilities by:
| | |
| ● | Fully repaying $156,968 on our auction rate securities investment line; |
| | |
| ● | Repurchasing Capital Trust Securities with a face value of $12,930; |
| | |
| ● | Repaying $12,000 on our original $60,000 fee reimbursement advance; and |
| | |
| ● | Repaying $1,400 on our original $7,000 term note. |
| | |
| Despite a credit environment that remains challenged, during the first quarter of 2010, we: |
| | |
| ● | Renewed a $100,000 advance note; |
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| ● | Renewed and extended a variable funding note with a maximum borrowing capacity of $300,000; and |
| | |
| ● | Issued $200,000 of advance receivable backed notes under the TALF program. |
As a result of our ability to renew and increase advance facility notes before they entered their amortization period and to issue the TALF notes, maximum borrowing capacity for match funded advances increased by $228,000 from $1,360,000 at December 31, 2009 to $1,588,000 at March 31, 2010. When coupled with a reduction in advances and match funded advances of $73,743, we increased our unused advance borrowing capacity from $894,309 at December 31, 2009 to $1,031,515 at March 31, 2010. Our prospects for advance financing improved due to the inclusion of servicer advances in TALF which was announced by the Federal Reserve Bank of New York in on March 19, 2009. TALF allowed lenders to invest a relatively small amount of equity while borrowing the remainder from the Federal Reserve Bank at a modest spread over LIBOR, with a note term of up to three years for servicer advances. On December 10, 2009, we issued $210,000 of TALF notes to replace the $165,000 term advance note that we repaid on August 11, 2009. These TALF notes enter their amortization period in July 2012. On February 12, 2010, we issued an additional $200,000 of TALF notes which begin amortizing in February 2011. Although the TALF window closed in March 2010, we were able to establish relations with many cash and TALF investors during our December 2009 and February 2010 issuances, and thus have generated significant interest for future medium term note issuances.
The amortization date is the date on which the revolving period ends under each advance facility note and repayment of the outstanding balance must begin if the note is not renewed or extended. The maturity date is the date on which all outstanding balances must be repaid. In all but one advance facility, there is a single note outstanding. For each of these facilities, after the amortization date, all collections that represent the repayment of advances pledged to the facility must be applied to reduce the balance of the note outstanding, and any new advances are ineligible to be financed. In order for us to maintain liquidity and the ability to finance new advances, we repay borrowings under facilities that have entered their amortization period and pledge them to another facility. Our new advance facility structure, which has four notes outstanding as of March 2010, permits collateral to be apportioned between notes when one or more notes are in amortization. This feature permits us to continue to finance new advances provided there is sufficient capacity on other revolving notes in the structure that are not in amortization.
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In the table below, we provide the amortization dates and maturity dates for notes under each of our credit facilities at March 31, 2010. The table excludes Secured borrowings – owed to securitization investors of $68,996, the holders of which have no recourse against the assets of Ocwen,
| | | | | | | | | | | | | | |
| | Maturity | | Amortization
Date | | Maximum
Borrowing
Capacity (1) | | Unused
Borrowing
Capacity | | Balance
Outstanding | |
| | | | | | | | | | | |
Servicing | | | | | | | | | | | | | | |
Match funded liabilities: | | | | | | | | | | | | | | |
Advance Receivable Backed Note Series 2009-3 | | Jul. 2023 | | Jul. 2012 | | $ | 210,000 | | $ | — | | $ | 210,000 | |
Advance Receivables Backed Notes Series 2010-1 (2) | | Sep. 2023 | | Feb. 2011 | | | 200,000 | | | — | | | 200,000 | |
Variable Funding Note Series 2009-2 (3) | | Nov. 2023 | | Nov. 2012 | | | 28,000 | | | 1,395 | | | 26,605 | |
Variable Funding Note Series 2009-1 (4) | | Dec. 2022 | | Feb. 2011 | | | 300,000 | | | 300,000 | | | — | |
Variable Funding Note | | Dec. 2013 | | Dec. 2010 | | | 250,000 | | | 140,085 | | | 109,915 | |
Advance Receivable Backed Notes (5) | | Mar. 2020 | | Mar. 2011 | | | 100,000 | | | 90,035 | | | 9,965 | |
Advance Receivable Backed Notes (6) | | May 2011 | | May 2010 | | | 500,000 | | | 500,000 | | | — | |
| | | | | | | | | | | | | | |
Total match funded liabilities | | | | | | | 1,588,000 | | | 1,031,515 | | | 556,485 | |
Fee reimbursement advance (7) | | Mar. 2014 | | Mar 2010 | | | 48,000 | | | — | | | 48,000 | |
Term note | | Mar. 2014 | | Mar. 2014 | | | 5,600 | | | — | | | 5,600 | |
| | | | | | | | | | | | | | |
| | | | | | | 1,641,600 | | | 1,031,515 | | | 610,085 | |
| | | | | | | | | | | | | | |
Corporate Items and Other: | | | | | | | | | | | | | | |
Securities sold with an option to repurchase (8) | | Oct. 2012 | | N/A | | | — | | | — | | | 74,953 | |
Convertible notes | | Aug. 2024 | | N/A | | | — | | | — | | | 56,435 | |
Capital trust securities | | Aug. 2027 | | N/A | | | — | | | — | | | 26,199 | |
| | | | | | | | | | | | | | |
| | | | | | | — | | | — | | | 157,587 | |
| | | | | | | | | | | | | | |
Discount (7) | | | | | | | — | | | — | | | (10,044 | ) |
| | | | | | | | | | | | | | |
| | | | | | $ | 1,641,600 | | $ | 1,031,515 | | $ | 757,628 | |
| | | | | | | | | | | | | | |
| |
(1) | Unused borrowing capacity is available for use only to the extent that there are assets that have been pledged as collateral to a facility but against which no funds have been drawn. With respect to our match funded facilities, all eligible advances had been pledged to a facility at March 31, 2010. However, we had $58,423 of unused borrowing capacity readily available to us on March 31, 2010 because we had pledged collateral to, but had not fully drawn on, our facilities. |
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(2) | On February 12, 2010, we issued $200,000 of notes under the TALF program. These notes carry a 3.59% fixed rate of interest and enter their amortization period in February 2011. |
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(3) | This variable funding note has a maximum borrowing capacity of $100,000; however, the purchaser had no obligation to fund any borrowing under the note until January 2010, at which time the maximum funding obligation was $28,000. The maximum funding obligation under this note increases to $88,000 in November 2010 and to $100,000 in November 2011. |
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(4) | On February 18, 2010, we renewed and extended the amortization date of this note through February 17, 2011. |
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(5) | On March 19, 2010, we extended the amortization date of this note through March 18, 2011. |
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(6) | On April 16, 2010, we negotiated the renewal of this facility that extended the amortization date of the facility to May 5, 2011. |
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(7) | The fee reimbursement advance is payable annually in five installments of $12,000 beginning March 2010. The advance does not carry a stated rate of interest. However, we are compensating the lender for the advance of funds by forgoing payment of fees due from the lender over the five-year term of the advance. Accordingly, we recorded the advance as a zero-coupon bond issued at an initial implied discount of $14,627. |
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(8) | In October 2009, we entered into a liquidity option related to $92,850 face amount of auction rate securities. Under the terms of this agreement, we have the right to sell specific securities for cash. We also have the right to repurchase the same following the initial sale at the same price. On February 11, 2010, we exercised a portion of our option to sell auction rate securities with a par value of $88,150. We recognized the sale as a secured borrowing because of our ability to repurchase the same securities until the maturity of the liquidity option. We no longer receive cash interest income on the pledged securities nor do we pay cash interest on the secured borrowing. We continue to retain a liquidity option in respect of $3,200 par value of auction rate securities. |
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Our ability to finance servicing advances continues to be a significant factor that affects our liquidity. Three of our match funded advance facilities that are rated are subject to increases in the financing discount if deemed necessary by the rating agencies in order to maintain the minimum rating required for the facility. While several rating agencies have adjusted their methodology for rating servicer advances and advance rates for newly issued notes are lower than in the past, we do not expect future advance rate changes to have a material effect on our liquidity. Our ability to continue to pledge collateral under each advance facility depends on the performance of the collateral. Currently, the majority of our collateral qualifies for financing under the advance facility to which it is pledged.
Some of our existing debt covenants limit our ability to incur additional debt in relation to our equity, require that we do not exceed maximum levels of delinquent loans and require that we maintain minimum levels of liquid assets and earnings. Failure to comply with these covenants could result in restrictions on new borrowings or the early termination of our borrowing facilities. We are currently in compliance with these covenants and do not expect them to restrict our activities.
Equity financing summary. In a private placement transaction that closed on April 3, 2009, we sold 5,471,500 shares of common stock at a price of $11.00 per share for $60,165 in proceeds. On the same date, we also purchased 1,000,000 shares of common stock from our Chairman of the Board at a price of $11.00 per share. These transactions generated net cash of $49,165.
On August 18, 2009, we completed the public offering of 32,200,000 shares of common stock which includes 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 discounts and other offering costs.
Auction rate securities. In early 2008, we suffered a significant adverse liquidity event when the auction markets failed for our $300,000 investment in AAA-rated securities backed by securitized Federal Family Education Loan Program student loans. We financed this investment in auction rate securities through the investment line. With the failure of the auction markets for these securities, we were unable to sell our investment because the market mechanism no longer functioned.
At March 31, 2010, the fair value of this investment was $125,036 (representing $126,350 par value securities). We are successfully executing on our liquidation strategy.
| | |
| ● | On January 16, 2010 and March 4, 2010, we settled two of our litigation actions related to auction rate securities resulting in the sale of a combined $103,625 par value for $92,745 cash proceeds. Proceeds from one settlement were used to pay down the investment line. |
| | |
| ● | On February 10, 2010, we sold $33,350 par value of securities for cash proceeds of $29,848. These proceeds were used to pay down the investment line. |
| | |
| ● | On February 11, 2010, we sold $88,150 par value of auction rate securities with the option to repurchase the same securities at the same sales price until October 2012 resulting in a secured borrowing of $74,953. Under this option, we sold the securities, but we retained the ability to benefit from future increases in the value of the securities above the sale price over the term of the option. We used these proceeds to repay the investment line. |
On February 17, 2010, we repaid, in full, the investment line.
Cash flows for the three months ended March 31, 2010. Our operating activities provided $225,995 of cash primarily due to our liquidation of auction rate securities, as discussed above, and a decline in the funding requirements of our Servicing operations. Trading activities provided $123,193 of cash from sales, settlements and redemptions of auction rate securities. We collected $71,643 of net cash on advances and match funded advances while servicing liabilities declined by $17,421.
Our investing activities provided $2,124 cash during the first quarter of 2010. The additions to our servicing portfolio during the first quarter of 2010 were subservicing and special servicing and therefore did not result in the purchase of MSRs.
Our financing activities used $19,025 cash as we repaid the investment line of $156,968, purchased Capital Trust Securities with a face value of $12,930 for $11,589 and paid the first annual installment of $12,000 on our $60,000 fee reimbursement advance. Largely offsetting these cash outflows, we received net proceeds of $90,794 from borrowings under match funded facilities and received proceeds of $74,953 from the sale of auction rate securities with the option to repurchase the same securities. We recognized the sale as a secured borrowing.
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Cash flows for the three months ended March 31, 2009. Our operating activities provided $130,094 reflecting a decline in the funding requirements of our Servicing operations. We collected net cash of $148,509 on advances and match funded advances while servicing liabilities declined by $45,386.
Our investing activities used $6,648 net cash primarily due to the purchase of MSRs for $10,241offset by $3,246 of distributions we received from our asset management entities.
Our financing activities used $165,616 cash as we made $170,797 of net repayments of borrowings under our match funded advance facilities as a result of decline in servicing advances. Net proceeds of $67,000 from two new secured borrowings were largely offset by repayments on the investment line and repurchases of our 3.25% Convertible Notes.
CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ARRANGEMENTS
Contractual Obligations
We believe that we have adequate resources to fund all unfunded commitments to the extent required and meet all contractual obligations as they come due. Such contractual obligations include our Convertible Notes, Capital Trust Securities, lines of credit and other secured borrowings, interest payments and operating leases. See Note 23 to the Interim Consolidated Financial Statements for additional information regarding commitments and contingencies.
Off-Balance Sheet Arrangements
In the normal course of business, we engage in transactions with a variety of financial institutions and other companies that are not reflected on our Consolidated Balance Sheet. We are subject to potential financial loss if the counterparties to our off-balance sheet transactions are unable to complete an agreed upon transaction. We seek to limit counterparty risk through financial analysis, dollar limits and other monitoring procedures. In addition, through our investment in subordinate and residual securities, we provide credit support to the senior classes of securities. We have also entered into non-cancelable operating leases and have committed to invest up to an additional $33,840 in ONL and related entities.
Derivatives. We record all derivative transactions at fair value on our Consolidated Balance Sheets. We currently use these derivatives to manage our interest rate risk. The notional amounts of our derivative contracts do not reflect our exposure to credit loss. See Note 17 to our Interim Consolidated Financial Statements for additional information regarding derivatives.
Involvement with SPEs. We use SPEs for a variety of purposes but principally in the financing of our servicing advances and in the securitization of mortgage loans.
Our securitizations of mortgage loans were structured as sales. The SPEs to which we transferred the mortgage loans were qualifying special purpose entities (QSPEs) and therefore were not subject to consolidation through 2009. We have retained both subordinated and residual interests in these SPEs. Where we are the servicer of the securitized loans, we generally have the right to repurchase the mortgage loans from the SPE when the costs exceed the benefits of servicing the remaining loans. As disclosed in the Recent Accounting Developments below, ASC 860 amended the current accounting standards primarily to eliminate the concept of a QSPE. Effective January 1, 2010, ASC 810 required that we reevaluate these QSPEs as well as all other potentially significant interests in other unconsolidated entities to determine if we should include them in our consolidated financial statements. We have determined that these QSPEs are VIEs and that we are the primary beneficiary of four of these QSPEs and have included them in our consolidated financial statements effective January 1, 2010.
We generally use match funded securitization facilities to finance our servicing advances. The SPEs to which the advances are transferred in the securitization transaction are included in our consolidated financial statements either because the transfer did not qualify for sales accounting treatment or because we are the primary beneficiary where the SPE is also a VIE. The holders of the debt of these SPEs can look only to the assets of the SPEs for satisfaction of the debt and have no recourse against OCN. However, OLS has guaranteed the payment of the obligations of the issuer under a match funded facility that closed in April 2008. The maximum amount payable under the guarantee is limited to 10% of the notes outstanding at the end of the facility’s revolving period.
VIEs. In addition to certain of our financing SPEs, we have invested in several other VIEs primarily in connection with purchases and securitizations of whole loans. If we determine that we are the primary beneficiary of a VIE, we report the VIE in our consolidated financial statements.
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RECENT ACCOUNTING DEVELOPMENTS
Recent Accounting Pronouncements
Listed below are recent accounting pronouncements which did or are expected to have a significant impact upon adoption. For additional information regarding these and other recent accounting pronouncements, see Note 2 to our Interim Consolidated Financial Statements.
ASU 2009-16 (ASC 860, Transfers and Servicing). This statement eliminates the exceptions for qualifying special purpose entities (QSPE) from the consolidation guidance (ASC 810) and clarifies that the objective of the standard is to determine whether a transferor and all of the entities included in the transferor’s financial statements being presented have surrendered control over transferred financial assets. That determination must consider the transferor’s continuing involvements in the transferred financial asset, including all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not entered into at the time of the transfer. This statement modifies the financial-components approach currently used and limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset.
This statement defines the term participating interest to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale. If the transfer does not meet those conditions, a transferor should account for the transfer as a sale only if it transfers an entire financial asset or a group of entire financial assets and surrenders control over the entire transferred asset(s). This statement requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. Enhanced disclosures are required to provide financial statement users with greater transparency about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets.
The provisions for guaranteed mortgage securitizations are removed to require those securitizations to be treated the same as any other transfer of financial assets within the scope of the standard. If such a transfer does not meet the requirements for sale accounting, the securitized mortgage loans should continue to be classified as loans in the transferor’s statement of financial position.
We adopted this standard effective January 1, 2010 as a result of which, we reevaluated certain QSPEs with which we had ongoing relationships as further described under ASU 2009-17, below, and reassessed the adequacy of our disclosures with regard to our servicing assets and servicing liabilities.
ASC 810, Consolidation. This standard requires an enterprise to perform ongoing periodic assessments to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. We adopted this standard effective January 1, 2010. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both of the following characteristics:
| | |
| (a) | The power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance |
| | |
| (b) | The obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. |
In addition to reintroducing the concept of control into the determination of the primary beneficiary of a VIE, this statement makes numerous other amendments to the current standards primarily to reflect the elimination of the concept of a QSPE under ASC 860 (above). This statement also amends the current standards to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The enhanced disclosures are required for any enterprise that holds a variable interest in a VIE. The additional disclosures required by this statement are included in Note 1—Summary of Significant Accounting Policies.
As also disclosed in Note 1—Summary of Significant Accounting Policies, we previously excluded certain loan securitization trusts from our consolidated financial statements because each was a QSPE. Effective January 1, 2010, we reevaluated these QSPEs as well as all other potentially significant interests in other unconsolidated entities to determine if we should include them in our consolidated financial statements.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (DOLLARS IN THOUSANDS) |
Market risk includes liquidity risk, interest rate risk and foreign currency exchange rate risk. Market risk also reflects the risk of declines in the valuation of financial instruments and the collateral underlying loans. Our Investment Committee reviews significant transactions that may impact market risk and is authorized to utilize a wide variety of techniques and strategies to manage market risk including, in particular, interest rate risk.
Liquidity Risk
We are exposed to liquidity risk primarily because of the cash required to support the Servicing business including the requirement to make advances pursuant to servicing contracts. In general, we finance our operations through operating cash flow, match funding agreements and secured borrowings.
Interest Rate Risk
We are exposed to interest rate risk to the extent that our interest-bearing liabilities mature or reprice at different speeds, or different bases, than interest-earning assets or when we use debt to finance assets that are non-interest earning. Our Servicing business is characterized by non-interest earning assets financed by interest-bearing liabilities. Among the more significant non-interest earning assets are servicing advances and MSRs. At March 31, 2010, we had total advances and match funded advances of $894,786. We are indirectly exposed to interest risk by our funding of advances because approximately 68% of our total advances and match funded advances are funded through borrowings, and 25% of such borrowings are variable rate debt. Earnings on float balances (assets) only partially offset this risk.
We significantly increased our ratio of interest-rate sensitive assets to interest rate sensitive liabilities during 2009 and the first quarter of 2010. This increase helps to reduce our exposure to interest rate volatility. We also expect to benefit from the increase in the duration of our funding sources. For example, our recent TALF issuances of $210,000 in December 2009 and $200,000 in February 2010 increased the maturity for 46% of our advance financing needs at fixed interest rates. The reduction in our debt levels and the issuance of the TALF notes were key factors in reducing our total variable rate debt from 53% of borrowings at December 31, 2009 to 30% at March 31, 2010.
In addition, at March 31, 2010, we had interest rate caps with a notional amount of $250,000 and $83,333 to hedge our exposure to rising interest rates on the $250,000 variable-rate match funded note issued in December 2007 and the $100,000 variable-rate match funded note that was renewed in February 2008, respectively.
| | | | |
| | March 31, 2010 | |
| | | |
Total borrowings outstanding (1)(2) | | $ | 767,672 | |
Fixed rate borrowings | | | 540,634 | |
Variable rate borrowings | | | 227,038 | |
Float balances (held in custodial accounts, excluded from our Consolidated Balance Sheet) | | | 331,798 | |
Notional balance of interest rate caps | | | 333,333 | |
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(1) | Borrowing amounts are exclusive of any related discount. |
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(2) | Excluding Secured borrowings – owed to securitization investors of $68,996, the holders of which have no recourse against the assets of Ocwen. |
Excluding Loans, net – restricted for securitization investors of $71,336, our Consolidated Balance Sheet at March 31, 2010 included interest-earning assets totaling $467,142 including $250,520 of interest-earning cash accounts, $125,036 of auction rate securities, $47,541 of debt service accounts, $32,934 of loans held for resale and $7,738 of interest-earning collateral accounts.
Foreign Currency Exchange Rate Risk
We are exposed to foreign currency exchange rate risk in connection with our investment in non-U.S. dollar functional currency operations to the extent that our foreign exchange positions remain unhedged. Our operations in Uruguay and India expose us to foreign currency exchange rate risk, but we consider this risk to be insignificant.
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ITEM 4. | CONTROLS AND PROCEDURES |
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of March 31, 2010. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2010, our disclosure controls and procedures (1) were designed and functioning effectively to ensure that material information relating to Ocwen, including its consolidated subsidiaries, is made known to our Chief Executive Officer and Chief Financial Officer by others within those entities, particularly during the period in which this report was being prepared and (2) were operating effectively in that they provided reasonable assurance that information required to be disclosed by Ocwen in the reports that it files or submits under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management, including the Chief Executive Officer or Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during the fiscal quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
See Note 23—Commitments and Contingencies to the Interim Consolidated Financial Statements for information regarding legal proceedings.
We include a discussion of the principal risks and uncertainties that affect or could affect our business operations under Item 1A on pages 11 through 18 of our Annual Report on Form 10-K for the year ended December 31, 2009.
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(3) | Exhibits. |
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| 2.1 | | Separation Agreement, dated as of August 10, 2009, by and between Ocwen Financial Corporation and Altisource Portfolio Solutions S.A. (1) |
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| 3.1 | | Amended and Restated Articles of Incorporation (2) |
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| 3.2 | | Amended and Restated Bylaws (3) |
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| 4.0 | | Form of Certificate of Common Stock (2) |
| | | |
| 4.1 | | Certificate of Trust of Ocwen Capital Trust I (4) |
| | | |
| 4.2 | | Amended and Restated Declaration of Trust of Ocwen Capital Trust I (4) |
| | | |
| 4.3 | | Form of Capital Security of Ocwen Capital Trust I (included in Exhibit 4.4) (4) |
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| 4.4 | | Form of Indenture relating to 10.875% Junior Subordinated Debentures due 2027 of OCN (4) |
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| 4.5 | | Form of 10.875% Junior Subordinated Debentures due 2027 of OCN (included in Exhibit 4.6) (4) |
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| 4.6 | | Form of Guarantee of OCN relating to the Capital Securities of Ocwen Capital Trust I (4) |
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| 4.7 | | Indenture dated as of July 28, 2004, between OCN and the Bank of New York Trust Company, N.A., as trustee (5) |
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| 10.1 | | Tax Matters Agreement, dated as of August 10, 2009, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l. (1) |
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| 10.2 | | Transition Services Agreement, dated as of August 10, 2009, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l. (1) |
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| 10.3 | | Employee Matters Agreement, dated as of August 10, 2009, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l. (1) |
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| 10.4 | | Technology Products Services Agreement, dated as of August 10, 2009, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l. (1) |
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| 10.5 | | Services Agreement, dated as of August 10, 2009, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l. (1) |
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| 10.6 | | Data Center and Disaster Recovery Agreement, dated as of August 10, 2009, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l. (1) |
| | | |
| 10.7 | | Intellectual Property Agreement, dated as of August 10, 2009, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l. (1) |
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| 31.1 | | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
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| 31.2 | | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
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| 32.1 | | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
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| 32.2 | | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
| |
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(1) | Incorporated by reference from the similarly described exhibit included with the Registrant’s Form 8-K filed with the Commission on August 12, 2009. |
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(2) | Incorporated by reference from the similarly described exhibit filed in connection with the Registrant’s Registration Statement on Form S-1 (File No. 333-5153) as amended, declared effective by the commission on September 25, 1996. |
| |
(3) | Incorporated by reference from the similarly described exhibit included with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007. |
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(4) | Incorporated by reference from the similarly described exhibit filed in connection with our Registration Statement on Form S-1 (File No. 333-28889), as amended, declared effective by the Commission on August 6, 1997. |
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(5) | Incorporated by reference from the similarly described exhibit included with Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004. |
52
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | |
| OCWEN FINANCIAL CORPORATION |
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Date: May 7, 2010 | By: /s/ David J. Gunter | |
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| David J. Gunter, |
| Executive Vice President, Chief Financial Officer and |
| Chief Accounting Officer |
| (On behalf of the Registrant and as its principal financial officer) |
53
