Ocwen Financial Corporation
's (
OCN
) first quarter 2012 earnings of 14 cents per share substantially
lagged the Zacks Consensus Estimate of 31 cents. This also compares
unfavorably with the prior-year quarter earnings of 21 cents.
Significantly higher operating expenses along with a surge in
interest expenses were the negatives during the quarter. However,
the result benefited from higher revenue and interest income.
Performance Details
Ocwen's net income for the reported quarter stood at $19.3
million compared with $22.1 million in the year-ago quarter.
Ocwen's total revenue in the first quarter surged 48.2% year
over year to $164.5 million. The improvement was mainly
attributable to a 51.3% rise in servicing and sub-servicing fees
and 12.8% increase in process management fees, which were partly
offset by a 7.5% drop in other revenues. Total revenue also
surpassed the Zacks Consensus Estimate of $159.0 million.
Operating expenses more than doubled to $86.1 million in the
reported quarter. The main reason behind this rise was the drastic
increase in compensation and benefits costs. Apart from this,
expenses related to amortization of mortgage servicing rights,
servicing and origination costs as well as expenses related to
professional services were also high during the quarter.
Interest income grew 6.6% year over year to $2.23 million, while
interest expenses leaped 25.0% year over year to $46.9 million.
Balance Sheet and Other Developments
As of March 31, 2012, Ocwen recorded cash of $683.9 million
compared with $144.2 million as of December 31, 2011. Debt
securities totaled $26.1 million as of March 31, 2012, compared
with $82.6 as of December 31, 2011.
During the first quarter, Ocwen completed 23,491 modifications
(including 14.8% in Home Affordable Modification Program). Further,
modification offers rose 32.3% to 28,539 during the reported
quarter.
Ocwen utilized $615 million of capital to purchase the mortgage
servicing rights on $30.3 billion of unpaid principal balance (UPB)
by closing deals with JPMorgan Chase Bank, a unit of
JPMorgan Chase & Co.
(
JPM
) and Saxon Mortgage Services Inc., a mortgage subsidiary of
Morgan Stanley
(
MS
).
On March 20, 2012, Ocwen entered into an agreement with Aurora
Bank FSB to purchase the servicing rights on a portfolio of
commercial mortgage loans. As of March 31, 2012, the portfolio
consisted of 3,389 loans with a total principal balance of $1.9
billion. The deal is expected to close by the end of this
month.
Additionally, in March 2012, Ocwen completed the sale of the
right to receive the servicing fees relating to about $15 billion
of UPB to Home Loan Servicing Solutions (HLSS), along with an
additional $2.9 billion sale on May 1.
Our Viewpoint
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 acquisition of Litton and Saxon 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,
persistently weak capital market and slow economic recovery drive
us on the sidelines.
Ocwen currently retains a Zacks # 3 Rank, which translates into
a short-term 'Hold' rating. Also, considering the fundamentals, we
maintain our long-term "Neutral" recommendation on the stock.
JPMORGAN CHASE (JPM): Free Stock Analysis
Report
MORGAN STANLEY (MS): Free Stock Analysis Report
OCWEN FINL CORP (OCN): Free Stock Analysis
Report
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