Ocwen Financial Corporation (OCN) reported first quarter 2011 earnings of 27 cents per share, beating the Zacks Consensus Estimate by 2 cents.
The results for the reported quarter excluded $0.9 million in litigation accruals as well as $11.9 million of incremental amortization of upfront fees and original issue discount on its Senior Secured Term Loan (SSTL) related to a partial prepayment of this loan.
Hence, after considering these, Ocwen’s net income for the reported quarter stood at $22.1 million or 21 cents per share compared with $20.9 million or 20 cents per share in the year-ago quarter.
Ocwen’s better-than-expected results were mainly driven by a rise in total revenue, which was partially offset by operating costs hike, higher interest expense and fall in interest income.
Quarter in Detail
Although Ocwen’s total revenue surged 46.9% year over year to $111.0 million, it lagged the Zacks Consensus Estimate of $113.0 million. The improvement in total revenue was mainly attributable to a 54.2% rise in servicing and sub-servicing fees, which was partially mitigated by a 1.4% fall in process management fees and a 41.3% decline in other revenues.
Operating expenses climbed 17.1% year over year from $35.2 million to $41.2 million in the reported quarter. The rise was mainly due to a substantial rise in expenses related to compensation and benefits, servicing and origination costs as well as amortization of mortgage servicing rights. However, these were partly offset by a drop in occupancy and equipment as well as professional services.
Interest income plunged 40.5% year over year to $2.17 million. Interest expense, however, rose substantially year over year to $37.5 million.
Balance Sheet and Other Updates
As of March 31, 2011, Ocwen had cash of $129.1 million compared with $127.8 million as of December 31, 2010. Debt securities totaled $82.6 million as of March 31, 2011, in line with that of December 31, 2010.
During the reported quarter, Ocwen made voluntary prepayments of $162.5 million on the SSTL, along with the mandatory repayment. This lowered the outstanding principal balance to $26.3 million as of March 31, 2011.
During the quarter, Ocwen completed 24,502 modifications (including 14% in Home Affordable Modification Program), which exceeded the upper end of the company’s guidance of 19,000−22,000 modifications.
Our Viewpoint
Ocwen’s planned principal reduction programs will expectedly enhance its loan modification ability significantly. However, float income is expected to remain under pressure as a result of a continuous decline in prepayment speed. Although near-term outlook remains cautious owing to market volatility and a contraction in subprime MSR market, Ocwen remains committed to new business acquisition and loan modifications. These are expected to gradually convert into increased profitability.
A close competitor of Ocwen, Ellington Financial LLC (EFC), is scheduled to announce its first quarter 2011 earnings results on May 9, 2011.
Ocwen currently retains a Zacks # 4 Rank, which translates into a short-term ‘Sell’ rating. However, considering the fundamentals, we are maintaining our long-term “Neutral” recommendation on the stock.
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