A substantial rise in revenues drove Ocwen Financial Corp’s (OCN) fourth-quarter 2013 adjusted earnings per share of $1.03, which outpaced the Zacks Consensus Estimate of 87 cents. Further, this compared favorably with 51 cents earned in the year-ago quarter.
Results were higher-than-expected primarily due to a significant rise in top line as well as interest income, partially offset by increase in operating expenses as well as interest expenses. However, a strong balance sheet and good liquidity were the tailwinds.
After considering certain non-recurring charges, Ocwen’s net income came in at $105.3 million or 74 cents per share in the reported quarter, compared with $65.3 million or 47 per share in the prior-year quarter.
For the full year 2013, net income was $294.1 million or $2.02 per share, up from $180.9 million or $1.31 per share in 2012.
Performance Details
For 2013, total revenue was $2.04 billion, up substantially from $845.2 million in 2012. Moreover, it beat the Zacks Consensus Estimate of $2.02 billion.
Total revenue grew significantly to $556.0 million in the said quarter from $236.6 million in the prior-year quarter. Impressive revenue growth was driven by higher servicing and sub-servicing fees, gain on loans held for sale and other income. Nevertheless, total revenue missed the Zacks Consensus Estimate of $565.0 million.
Interest income rose significantly year over year to $5.0 million while interest expenses increased 83.1% from the year-ago quarter to $109.5 million.
Operating expenses were $340.9 million, up substantially from $99.1 million in the prior-year quarter. The rise was mainly due to increase in all expense components on a year-over-year basis.
Income from operations came in at $215.1 million, rising 56.4% year over year.
As of Dec 31, 2013, Ocwen recorded cash of $178.5 million, down from $220.1 million as of Dec 31, 2012. Further, total assets came in at $7.9 billion, increasing from $5.7 billion as of Dec 31, 2012.
In the reported quarter, Ocwen completed 29,979 loan modifications, with Home Affordable Modification Program (HAMP) constituting 44% of the completed modifications.
Share Repurchases
During the fourth quarter, Ocwen bought back 1.13 million shares for $60 million. In Nov 2013, the company had announced a share repurchase authorization of $500 million through Jul 2016.
Major Developments
Of late, Ocwen has been facing significant headwinds. Recently, the company’s deal to acquire mortgage servicing rights (MSRs) from Wells Fargo & Co. (WFC) was restricted by Benjamin Lawsky, the superintendent of New York’s Department of Financial Services (DFS). This was due to concerns over the company's ability to handle the increase in servicing volume.
Additionally, Lawsky has questioned the conflict of interests between Ocwen and certain publicly listed affiliates. Lawsky highlighted the fact that Ocwen’s Chairman, William Erbey, is also the largest shareholder in Altisource Asset Management Corporation, Altisource Residential Corporation (RESI), Altisource Portfolio Solutions S.A. and Home Loan Servicing Solutions, Ltd. (HLSS). The superintendent has also sought information and documents describing the extent and nature of the business relation between Ocwen and these four firms.
Notably, Ocwen stated that all the desired information was already in public domain. Nevertheless, the company is fully ready to cooperate and resolve all the concerns.
Further, in Dec 2013, Ocwen announced $2.1 billion settlement with the Consumer Financial Protection Bureau (CFPB) and other regulators, along with 49 states and the District of Columbia. The settlement pertains to resolution of the alleged charges against the company’s handling of mortgages.
Our Take
We expect the company’s new business acquisitions and loan modifications to boost profitability in the forthcoming quarters. Additionally, the company’s efficient capital deployment activities will continue to boost investors’ confidence in the stock.
However, persistently rising operating expenses, sluggish economic recovery and market volatility with subprime MSR market contraction remain major concerns. Furthermore, we believe that if Ocwen does not address the above-mentioned concerns related to its ability to service mortgages, its creditability will likely suffer.
Currently, Ocwen carries a Zacks Rank #4 (Sell).
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