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Ocwen Reports Record Earnings

Zacks Equity Research

Though Ocwen Financial Corp (OCN) lagged the first-quarter 2013 Zacks Consensus Estimate by approximately 15%, it reported record earnings. The company’s adjusted earnings came in at 64 cents per share, up from the prior-year quarter number of 25 cents.

On a year-over-year basis, the results benefited from impressive top-line growth and a rise in interest income, partially offset by increased operating and interest expenses. Moreover, a strong balance sheet and good liquidity were the tailwinds.

After considering certain non-recurring items, Ocwen’s net income was $45.1 million or 31 cents per share, way above $19.3 million or 14 cents per share in the prior-year quarter.

Behind the Headlines

Ocwen’s total revenue witnessed significant growth on a year-over-year basis to $406.7 million, from $164.5 million in the prior-year quarter. This rise in total revenue was driven by increased servicing and sub-servicing fees, gain on loans held for sale and other income. Total revenue also surpassed the Zacks Consensus Estimate of $366.0 million.

Operating expenses were $243.5 million, up substantially from $86.1 million in the year-ago quarter. The increase was due to higher compensation and benefits costs, amortization of mortgage servicing rights, servicing and origination costs, technology and communications expenditures, occupancy and equipment costs as well as other expenses.

Interest income rose significantly year over year to $5.2 million, while interest expenses leaped 99.1% from the prior-year quarter to $93.4 million.

Income from operations came in at $163.1 million, rising significantly from $78.4 million in the year-ago quarter.

As of Mar 31, 2013, Ocwen recorded cash of $663.4 million, up from $220.1 million as of Dec 31, 2012. Further, total assets came in at $7.2 billion, surging 27.7% from $5.6 billion as of Dec 31, 2012.

Other Developments

In the first quarter, Ocwen completed 24,184 loan modifications, with Home Affordable Modification Program (HAMP) constituting 34% of the completed modifications. The company expects the quarterly modification volume to rise as modification programs are applied to the newly acquired servicing portfolios.

In Apr 2013, Ocwen closed the deal to acquire Genworth Financial Home Equity Access, Inc. from Genworth Financial, Inc. (GNW) for approximately $22 million in cash. In the same month, Ocwen also completed the acquisition of $84.6 billion worth of Fannie Mae mortgage servicing rights (MSRs) from Ally Bank.

In Mar 2013, Ocwen sold $703 million worth of servicing advances as well as the rights to receive servicing fees on about $15.9 billion of unpaid principal balances (:UPB) to Home Loan Servicing Solutions, Ltd. (HLSS).

In Feb 2013, Ocwen acquired Residential Capital LLC’s MSRs in collaboration with Walter Investment Management Corp. (WAC). The company shelled out $2.1 billion for the deal, subject to post-closing adjustments.

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. Going forward, these will likely garner increased profitability. Additionally, the company’s recent acquisitions will benefit its financials in the long term.

Notably, with the ongoing fall in home prices, Ocwen might get even more opportunities to acquire distressed servicing portfolios at low prices. Despite these positives, the weak capital market, sluggish economic recovery and persistently rising operating expenses remain our major concerns.

Ocwen currently carries a Zacks Rank #2 (Buy).

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