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Business Acquisitions | 12 Months Ended
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Dec. 31, 2018
Business Combinations [Abstract] |
Business Acquisitions | Note 2 — Business Acquisition On October 4, 2018, we completed our acquisition of PHH, a non-bank servicer with established servicing and origination recapture capabilities. As a result of the acquisition, PHH became a wholly owned subsidiary of Ocwen. The acquisition has been accounted for under the acquisition method of accounting pursuant to ASC 805, Business Combinations. Assets acquired and liabilities assumed are recorded at their fair value as of the date of acquisition based on management’s estimates using currently available information. The results of PHH operations are included in Ocwen’s consolidated statements of operations from the date of acquisition. For U.S. income tax purposes, the acquisition of PHH is treated as a stock purchase. The aggregate consideration paid to the former holders of PHH common stock was $358.4 million in cash and was funded by a combination of PHH cash on hand of $325.0 million and Ocwen cash on hand of $33.4 million. At the closing, there were 32,581,485 shares of PHH common stock, par value $0.01, outstanding, all of which were converted into the right to receive $11.00 in cash per share. In connection with the acquisition, all outstanding options to purchase PHH common stock and all PHH equity awards with performance-based vesting conditions were cancelled without any consideration or cash payment. All other PHH equity awards were cancelled in exchange for a cash payment equal to $11.00 per share underlying the award. We have recognized a bargain purchase gain, net of tax, of $64.0 million in connection with the acquisition. The bargain purchase gain results from the fair value of PHH’s net assets exceeding the purchase price we paid. The purchase price we negotiated contemplated that PHH would incur losses after the acquisition date. To the extent those losses are realized, they will be included in our consolidated statements of operations. Costs incurred in connection with the transaction are expensed as incurred and are reported in Professional services in the consolidated statements of operations. Such costs were $13.7 million during 2018. Purchase Price Allocation The purchase price allocation provided in the table below reflects the fair value of assets acquired and liabilities assumed in the acquisition of PHH, with the excess of total identifiable net assets over total consideration paid recorded as a bargain purchase gain. Independent valuation specialists conducted analyses to assist management in determining the fair value of certain acquired assets and assumed liabilities. Management is responsible for these third-party valuations and appraisals. The methodologies that we use and key assumptions that we made to estimate the fair value of the acquired assets and assumed debt are described in Note 4 — Fair Value.
Purchase Price Allocation | October 4, 2018
Cash | $ | 423,088 |
Restricted cash | 38,813 |
Mortgage servicing rights | 518,127 |
Advances, net | 96,163 |
Loans held for sale | 42,324 |
Receivables, net | 46,838 |
Premises and equipment, net | 15,203 |
Real estate owned | 3,289 |
Other assets | 6,293 |
Assets related to discontinued operations | 2,017 |
Financing liabilities (MSRs pledged, at fair value) | (481,020 | )
Other secured borrowings, net | (27,594 | )
Senior notes, net (Senior unsecured notes) | (120,624 | )
Accrued legal fees and settlements | (9,960 | )
Other accrued expenses | (36,889 | )
Loan repurchase and indemnification liability | (27,736 | )
Unfunded pension liability | (9,815 | )
Other liabilities | (34,131 | )
Liabilities related to discontinued operations | (21,954 | )
Total identifiable net assets | 422,432 |
Total consideration paid to seller | (358,396 | )
Bargain purchase gain | $ | 64,036 |
In a business combination, the initial allocation of the purchase price is considered preliminary and therefore subject to change until the end of the measurement period (not to exceed one year from the acquisition date). Because the measurement period is still open, certain fair value estimates may change once all information necessary to make a final fair value assessment has been received. Post-Acquisition Results of Operations The following table presents the results of operations of PHH that are included in our consolidated statements of operations from the acquisition date of October 4, 2018 through December 31, 2018:
Revenues |  | $ | 72,487 |
Expenses |  | 84,877 |
Other income (expense) |  | (19,132 | )
Income tax benefit |  | (6,711 | )
Net loss from continuing operations |  | $ | (24,811 | )
Pro Forma Results of Operations (Unaudited) The following table presents supplemental pro forma information for Ocwen as if the PHH Acquisition occurred on January 1, 2017. Pro forma adjustments include:
• | Fair value adjustments of $24.4 million and $(16.9) million in 2018 and 2017, respectively, to conform the accounting for MSRs to the valuation policies of Ocwen related to acquired MSRs;
• | Adjust interest expense for a total net impact of $30.6 million and $(73.8) million in 2018 and 2017, respectively. The pro forma adjustments primarily pertain to fair value adjustments of $31.4 million and $(79.3) million in 2018 and 2017, respectively, related to the assumed MSR secured liability using valuation assumptions consistent with Ocwen's methodology;
• | Report the bargain purchase gain of $64.0 million as if the acquisition had occurred in 2017 rather than 2018;
• | Report Ocwen and PHH acquisition-related charges of $18.5 million for professional services as if they had been incurred in 2017 rather than 2018;
• | Adjust depreciation expense to amortize internally developed software acquired from PHH on a straight-line basis for the years presented based on a useful life of three years;
• | Adjust revenue for a total net impact of $120.6 million and $134.6 million in 2018 and 2017, respectively, which primarily include adjusting servicing and subservicing fees for $127.7 million and $97.0 million in 2018 and 2017, respectively, to gross up activity related to PHH MSRs sold accounted for as secured borrowings consistent with Ocwen’s presentation. The offset to these adjustments are interest income and interest expense, with no net effect on earnings.
• | Income tax benefit of $0.3 million and $0.2 million in 2018 and 2017, respectively, to record lower 2018 current federal tax under the new base erosion and anti-abuse tax (BEAT) provision of the Tax Act assuming Ocwen and PHH would file a consolidated federal tax return beginning January 1, 2017 and the benefit of the additional acquisition-related charges as if they had been incurred in 2017.
| 2018 |  | 2017
| (Unaudited) |  | (Unaudited)
Revenues | $ | 1,305,972 |  |  | $ | 1,785,408 |
Loss from continuing operations, net of tax attributable to Ocwen common stockholders | $ | (201,382 | ) |  | $ | (356,824 | )
The pro forma consolidated results presented above are not indicative of what Ocwen’s consolidated results would have been had we completed the acquisition on the date indicated due to a number of factors, including but not limited to expected reductions in servicing, origination and overhead costs through the realization of targeted cost synergies and improved economies of scale, the impact of incremental costs to integrate the two companies and differences in servicing practices and cost structures between Ocwen and PHH. In addition, the pro forma consolidated results do not purport to project combined future operating results of Ocwen and PHH nor do they reflect the expected realization of any cost savings associated with the acquisition of PHH. Discontinued Operations In November 2016, PHH announced its plan to exit the private label solutions (PLS) business, and in February 2017, PHH announced its intention to operate as a smaller business that is focused solely on subservicing and portfolio retention services, and exit the Real Estate channel. As a result, PHH would exit the PLS business through the run-off of operations, and exit the Real Estate channel through the sale of certain assets of PHH Home Loans, LLC (PHH Home Loans) and its subsidiaries and subsequent run-off of the operations. Those exit activities were substantially complete prior to our acquisition of PHH, and as such, the results of PLS and Real Estate have been presented as discontinued operations in the consolidated statement of operations and consolidated statement of comprehensive income (loss), and are excluded from continuing operations and segment results for the post-acquisition period. Results of Operations The results of discontinued operations for the post-acquisition period (October 4, 2018, through December 31, 2018) are summarized below:
Net revenues | $ | 413 |
Total expenses (1) | (996 | )
Income before income taxes | 1,409 |
Income tax expense (benefit) | — |
Income from discontinued operations | $ | 1,409 |
(1) Total expenses are shown net of a severance expense reversal that occurred as a result of voluntary post-acquisition employee departures and amortization of facility exit costs. There was no gain or loss directly attributed to the completion of the disposal of these businesses. Assets and Liabilities The carrying amounts of major classes of assets and liabilities related to discontinued operations consisted of the following at December 31, 2018:
Assets |
Mortgage loans held for sale | $ | 650 |
Accounts receivable, net | 144 |
Total assets related to discontinued operations | $ | 794 |
Liabilities |
Other liabilities (1) | 18,265 |
Total liabilities related to discontinued operations | $ | 18,265 |
(1) The primary component of Other liabilities is an exit cost liability which includes $14.9 million of facility exit costs related to vacating certain facilities. Cash Flows The cash flows related to discontinued operations have not been segregated and are included in the consolidated statement of cash flows for the post-acquisition period. There were no significant adjustments necessary to reconcile Net loss to net cash provided by operating activities that relate to discontinued operations.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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