Ocwen Misses Estimate, Profit Falls - Analyst Blog

Ocwen Financial Corporation (OCN) reported second quarter 2010 earnings per share of 15 cents, substantially lower than the Zacks Consensus Estimate of 23 cents. This also compares unfavorably with the earnings of 26 cents recorded in the year-ago quarter.

 

Results in the quarter suffered due to a significant reduction in total revenue and interest income. However, a decrease in operating expenses was encouraging.

 

 

Ocwen’s net income decreased 10.1% to $16.0 million from $17.8 million in the year-ago quarter. The decline was primarily due to the separation of the Portfolio Solutions S.A. business from Ocwen in August 2009 and certain one-time charges along with professional fees and operating expenses related to the yet to be completed HomEq servicing acquisition from Barclays Bank. This was partially offset by an $8.2 million reversal related to income tax expense.

 

Total revenue plunged 30.4% year over year to $76.0 million and significantly missed the Zacks Consensus Estimate of $82.0 million. The year-over-year drop in total revenue was mainly due to a 79.3% fall in process management fees and a 52.8% decline in other revenues. However, servicing and sub-servicing fees increased 0.8% from the year-ago quarter.

 

Operating expenses fell 38.5% year over year to $44.7 million. The decline was due to a 52% drop in compensation and benefits expenses and an 84% decline in servicing and origination expenses. The decrease was partially offset by an 11% increase in professional services expenses.

 

Interest income fell 17.4% year over year to $1.9 million. Interest expense was down 22.5% year over year to $13.4 million.

 

As of June 30, 2010, Ocwen recorded cash of $143.4 million compared with $90.9 million as of December 31, 2009. Debt securities were $82.6 million as of June 30, 2010 compared with $95.6 million recorded at the end of December 31, 2009.

 

 

On May 3, Ocwen completed the acquisition of $6.9 billion Saxon servicing portfolio. With this, the company has successfully acquired $23.5 billion of servicing and sub-servicing contracts over the past five quarters.

 

In June 2010, Ocwen signed an agreement with Barclays Bank to acquire the servicing rights and platform of HomEq. This acquisition is expected to close on September 1. The company is expected to become the third largest subprime service provider with over $80 billion in unpaid principal balances, subsequent to the closure of the acquisition. 

 

Following the end of the second quarter, Ocwen also closed a syndicated five-year senior secured term loan facility of $350 million. This term loan will be used mainly to acquire HomEq.

 

During the quarter, Ocwen completed 14,384 modifications that were within the company’s guidance of 12,500−15,500 modifications.

 

 

During the quarter, Ocwen's unsecured debt rating was upgraded from "B-" to "B" by Standard and Poor’s while Moody's Investors Service, a subsidiary of Moody’s Corp. (MCO), removed its negative outlook on the company. These rating actions reflect the company's seasoned management team, focused operational and default management capabilities as well as its proficient use of technology.

 

 

Although near-term outlook remains cautious based on market volatility and a weak housing loan payment and demand, Ocwen remains committed to acquire new business, increase loan modifications and continue Troubled Asset-Backed Securities Loan Facility (TALF) financing. These will likely lead to increased profitability in the future.

 

Ocwen currently retains a Zacks #3 Rank, which translates into a short-term Hold rating, indicating no directional pressure on the shares over the near term. Also, considering the fundamentals, we are maintaining our Neutral recommendation on the stock in the long term.