Ocwen Financial Corporation (OCN) reported second quarter 2011 earnings of 25 cents per share, missing the Zacks Consensus Estimate by 2 cents. However, this compares favorably with the prior-year quarter earnings of 23 cents.
The results for the reported quarter excluded $0.5 million expenses related to the Litton acquisition, along with $0.7 million of incremental amortization of upfront fees and original issue discount on its Senior Secured Term Loan (SSTL) related to the final prepayment of this loan.
Hence, after considering these expenses, Ocwen’s net income for the reported quarter stood at $26.4 million or 25 cents per share as against $16.0 million or 15 cents per share in the year-ago quarter.
During the quarter under review, Ocwen had announced that it had reached an agreement with Goldman Sachs Group Inc. (GS) to buy Litton Loan Servicing for $263.7 million. The acquisition is expected to close on September 1. Further, as per the terms of the deal, the company would pay Litton $2.47 billion up front and give $337.4 million to retire a part of the debt that Litton owes to Goldman.
The year-over-year improvement in results was mainly driven by a rise in total revenue and a decline in operating expenses as well as higher interest income. However, these positives were partially offset by higher interest expenses.
Quarter in Detail
Although Ocwen’s total revenue surged 39.3% year over year to $105.8 million, it lagged the Zacks Consensus Estimate of $110.0 million. The improvement in total revenue was mainly attributable to a 45.3% rise in servicing and sub-servicing fees and a 9.9% increase in process management fees, which were partly offset by a 49.5% drop in other revenues.
Operating expenses fell 5.4% year over year to $44.3 million from $44.7 million in the reported quarter. The decline was mainly due to lower servicing and origination costs as well as professional services expenses. However, these were partly mitigated by a rise in expenses related to compensation and benefits as well as occupancy and equipment costs.
Interest income rose 20.5% year over year to $2.29 million, while interest expenses leaped 63.3% year over year to $21.81 million.
Balance Sheet and Other Updates
As of June 30, 2011, Ocwen recorded cash of $104.2 million compared with $127.8 million as of December 31, 2010. Debt securities totaled $82.6 million as of June 30, 2011, in line with the figures as of December 31, 2010.
During the reported quarter, Ocwen made the final prepayments of $26.3 million on the SSTL. This SSTL was obtained last year in connection with its acquisition of the HomEq servicing business.
During the quarter, Ocwen completed 16,825 modifications (including 21% in Home Affordable Modification Program), which was within the company’s guidance of 14,500−17,500 modifications.
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 would benefit its financials over the long term.
Furthermore, with the ongoing home price deterioration, Ocwen might get even more opportunities to acquire distressed servicing portfolios at low prices.
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.
GOLDMAN SACHS (GS): Free Stock Analysis Report
OCWEN FINL CORP (OCN): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment