Shares of Ocwen Financial Corp. (OCN) rose 11.3% despite reporting lower-than-expected results for third-quarter 2014. Normalized net income came in at approximately $44.2 million or 34 cents per share. Earnings lagged the Zacks Consensus Estimate of 57 cents.
Results were adversely impacted by a substantial increase in operating expenses due to high legal charges, higher net other expenses and a fall in total revenues. Nevertheless, a strong balance sheet, with reasonable liquidity, acted as the tailwind.
After considering charges of $100.0 million for a likely settlement with the New York Department of Financial Services, $9.0 million for fair value changes and $8.1 million of integration, technology-related and severance costs, net loss attributable to Ocwen was $75.4 million or 58 cents per share. This compared unfavorably with a net income of $60.6 million or 39 per share in the prior-year quarter.
Performance Details
Total revenue declined 3.3% year over year to $513.7 million. The fall was due to lower servicing and sub-servicing fees as well as a fall in net gain on loans held for sale. This was, however, partially offset by a rise in other income. Moreover, it missed the Zacks Consensus Estimate of $542.0 million.
Operating expenses were $455.0 million, up 31.4% from the prior-year quarter. The rise was primarily due to a significant increase in professional services fees, and servicing and origination costs, partially offset by a decline in employee compensation and benefits, amortization of mortgage servicing rights and other operating expenses.
Net other expenses were $130.9 million, rising 13.3% from the prior-year quarter.
Income from operations came in at $58.7 million, down 68.3% year over year.
Balance Sheet and Others
As of Sep 30, 2014, Ocwen recorded a cash balance of $299.2 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 21,543 loan modifications, with Home Affordable Modification Program (HAMP) constituting 41% of the completed modifications.
Share Repurchases
During the reported quarter, the company repurchased nearly 5.3 million shares for $158.8 million. Further through Oct 30, roughly 2 million additional shares were bought back for $47 million.
Our Take
Though market volatility and contraction in subprime MSR market remain causes of concern, Ocwen continues to be steadfast on loan modifications and new business acquisitions. Moreover, given its strong liquidity position, we believe that the company is expected to avail the opportunities to acquire servicing portfolios.
Nevertheless, sluggish economic recovery, elevated expenses and new regulations make us apprehensive. Further, on-going regulatory probes, pertaining to Ocwen’s business conduct, have made investors wary of the company’s near-term growth prospects.
Currently, Ocwen carries a Zacks Rank #5 (Strong Sell).
Among other companies in this space, Ellington Financial LLC (EFC) is slated to announce results on Nov 5, while Walker & Dunlop, Inc. (WD) and Nationstar Mortgage Holdings Inc. (NSM) will be reporting on Nov 6.
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