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 (BANA), 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.
BANK OF AMER CP (BAC): Free Stock Analysis
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JPMORGAN CHASE (JPM): Free Stock Analysis
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MORGAN STANLEY (MS): Free Stock Analysis Report
OCWEN FINL CORP (OCN): Free Stock Analysis
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