Ocwen Reports in Line, Revenue Up


Ocwen Financial Corporation’s (OCN) second quarter 2012 earnings of 32 cents per share were in line with the Zacks Consensus Estimate. This also compares favorably with the prior-year quarter’s earnings of 25 cents.

The second-quarter results also included $1.8 million of transaction-related expenses for acquisitions completed during the quarter. Ocwen’s net income stood at $44.8 million, up 69.7% from $26.4 million in the year-ago quarter.

Substantial rise in the top line and stable balance sheet position were the positives for the quarter. However, increases in operating and interest expenses along with a dip in interest income were the primary dampeners.  

Behind the Headlines

Ocwen’s total revenue witnessed an impressive growth and surged 99.7% year over year to $211.4 million. The improvement was the result of a substantial rise in servicing and sub-servicing fees and 7.9% increase in process management fees and 37.3% jump in other revenues. Total revenue also significantly outpaced the Zacks Consensus Estimate of $185.0 million.

Operating expenses more than doubled to $85.9 million in the reported quarter. The main reason behind this rise was the radical improvement in compensation and benefits costs and amortization of mortgage servicing rights.

Interest income declined 11.0% year over year to $2.0 million, while interest expenses leaped significantly from the prior-year quarter to $58.3 million.

Income from operations stood at $125.5 million, expanding 97.3% year over year from $63.6 million.

Balance Sheet and Other Developments

As of June 30, 2012, Ocwen recorded cash of $128.1 million compared with $144.2 million as of December 31, 2011. Debt securities totaled $26.1 million as of June 30, 2012, compared with $82.6 as of December 31, 2011.

During the second quarter, Ocwen completed 21,943 loan modifications (including 20.5% in Home Affordable Modification Program).

Also, during the quarter under review, Ocwen completed acquisitions that included mortgage servicing rights (MSRs) on portfolios totaling $42.2 billion of unpaid principal balance (:UPB). In April, the company completed the purchase of MSRs worth $30.3 billion UPB through two separate deals with JPMorgan Chase Bank (Chase), a unit of JPMorgan Chase & Co. (JPM) and Saxon Mortgage Services Inc., a mortgage subsidiary of Morgan Stanley (MS).

In May, Ocwen wrapped up the deal to acquire MSRs from Aurora Bank FSB on a portfolio of small-balance commercial mortgage loans with a UPB of $1.8 billion. Likewise in May, the company completed the purchase of residential MSRs from Bank of America, National Association (BANAF), a unit of Bank of America Corporation (BAC) on a portfolio of mortgage loans owned by Freddie Mac with a UPB of $10.1 billion.

Our Take

Although the near-term outlook remains cautious owing to market volatility and subprime MSR market contraction, Ocwen remains committed to new business acquisitions and loan modifications. These will likely convert into increased profitability over time. Additionally, the company’s recent acquisitions would benefit its financials over the long term.

Furthermore, with the ongoing deterioration of home prices, Ocwen might get even more opportunities to acquire distressed servicing portfolios at low prices. In spite of these positives, the persistently weak capital market, slow economic recovery and continuously rising operating expenses remain our major concerns.

Ocwen currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. Considering the fundamentals, we maintain our long-term ‘Neutral’ recommendation on the stock.

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