Shares of Ocwen Financial Corp. (OCN) plunged nearly 13% after it came out with second-quarter 2014 adjusted earnings of 69 cents (approx) per share, missing the Zacks Consensus Estimate of 79 cents. Moreover, the reported figure was lower than 93 cents (approx) earned in the year-ago quarter.
Notably, our quantitative model had also projected Ocwen’s unlikeliness of beating the Zacks Consensus Estimate, as it did not have the right combination of two key components – a positive Earnings ESP and a Zacks Rank #3 (Hold) or better. Ocwen had a Zacks Rank #4 (Sell) and a negative earnings ESP.
Results were adversely impacted by higher net other expenses. However, higher revenues, lower operating expenses, a strong balance sheet with reasonable liquidity acted as the tailwinds.
After considering certain non-recurring charges, Ocwen’s net income came in at $67.0 million or 48 cents per share, up from $76.7 million or 53 per share in the prior-year quarter.
Performance Details
Total revenue climbed 1.5% year over year to $553.1 million. The growth was attributable to a rise in servicing and sub-servicing fees as well as higher net gain on loans held for sale, although partially offset by lower other income. Moreover, it surpassed the Zacks Consensus Estimate of $541.0 million.
Operating expenses were $345.5 million, down 7.8% from the prior-year quarter. The fall was due to a decline in employee compensation and benefits, amortization of mortgage servicing rights and professional services. These were, however, partly offset by an increase in expenses related to servicing and origination, technology and communications, occupancy and equipment and other.
Net other expenses were $130.4 million, rising 58.1% from the prior-year quarter.
Income from operations came in at $207.6 million, up 22.1% year over year.
Balance Sheet and Others
As of Jun 30, 2014, Ocwen recorded a cash balance of $259.5 million, up from $178.5 million as of Dec 31, 2013. Further, total assets came in at $8.4 billion, increasing from $7.9 billion as of Dec 31, 2013.
In the reported quarter, Ocwen completed 27,468 loan modifications, with Home Affordable Modification Program (HAMP) constituting 42% of the completed modifications.
Capital Deployment Activities
During the reported quarter, the company repurchased more than 2.6 million common shares. Since Apr 1, Ocwen has returned over $200 million to its shareholders through a combination share repurchase.
Our Take
We expect Ocwen’s recent acquisitions and loan modifications to boost profitability in the coming quarters. However, sluggish economic recovery and market volatility with subprime MSR market contraction remain the major concerns.
Among other companies in this space, Ellington Financial LLC (EFC), Walker & Dunlop, Inc. (WD) and Nationstar Mortgage Holdings Inc. (NSM) are scheduled to announce results on Aug 6.
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