ONITY GROUP INC. quarterly report, Q2 FY2013

Ocwen Financial Corporation 10-Q Summary

Note: The supplied filing identifies the registrant as Ocwen Financial Corporation, not ONITY Group Inc. The report covers the quarter and six months ended June 30, 2013 and was filed August 5, 2013. Financial statements are unaudited.

Business Context and Reporting Period

Ocwen is a mortgage servicing and origination company operating through servicing, subservicing, mortgage origination, reverse mortgage and related businesses. Its servicing portfolio expanded materially through the ResCap acquisition, the Ally MSR transaction and the Homeward acquisition completed in December 2012.

Total residential assets serviced at June 30, 2013 were $436.3 billion, versus $127.9 billion at June 30, 2012.
The portfolio included $344.2 billion of owned servicing and $92.1 billion of subservicing.
Major 2013 transactions included the ResCap acquisition, the Ally MSR transaction, the Liberty reverse-mortgage acquisition and the acquisition of Correspondent One.

Financial Performance and Key Metrics

Metric	Three Months Ended June 30, 2013	Three Months Ended June 30, 2012	Six Months Ended June 30, 2013	Six Months Ended June 30, 2012
Total revenue	$530.0 million	$211.4 million	$934.8 million	$375.9 million
Income from operations	$155.2 million	$125.5 million	$316.4 million	$203.9 million
Income before taxes	$87.5 million	$70.2 million	$138.8 million	$100.3 million
Net income	$76.7 million	$44.8 million	$121.9 million	$64.2 million
Net income attributable to common stockholders	$74.1 million	$44.8 million	$116.7 million	$64.2 million
Diluted EPS	$0.53	$0.32	$0.84	$0.47

Revenue increased 151% in the quarter and 149% for the six-month period, primarily from acquired servicing portfolios and increased servicing volume.
Operating expenses increased 336% in the quarter and 260% year to date, reflecting acquisitions, higher staffing and infrastructure costs, MSR amortization, and a $52.8 million foreclosure-related regulatory charge.
Operating margin was approximately 29.3% in the quarter and 33.8% for the six months, compared with approximately 59.4% and 54.2%, respectively, in the prior comparable periods.
Net margin was approximately 14.5% in the quarter and 13.0% for the six months, compared with approximately 21.2% and 17.1%, respectively, in the prior periods.
Servicing and subservicing fees were $482.6 million for the quarter and $850.1 million year to date, increases of 141% and 139%, respectively.
Gain on loans held for sale was $21.6 million in the quarter and $28.4 million year to date; no comparable amount was reported in 2012.

Balance Sheet, Debt, Liquidity and Cash Flow

Total assets increased to $7.08 billion at June 30, 2013 from $5.69 billion at December 31, 2012.
Cash increased to $439.7 million from $220.1 million.
MSRs carried at amortized cost increased to $1.69 billion from $678.9 million; fair-value MSRs increased to $97.2 million from $85.2 million.
Advances and match-funded advances totaled $3.41 billion, or approximately 48% of total assets.
Total liabilities were $5.20 billion, including $2.39 billion of match-funded liabilities and $2.17 billion of other borrowings. Total stockholders’ equity was $1.73 billion.
Six-month operating cash flow was $877.0 million, compared with $900.6 million in 2012.
Investing activities used $1.50 billion, principally for the $2.10 billion ResCap acquisition and MSR purchases.
Financing activities provided $846.3 million, including new borrowings and proceeds from MSR-related transactions.
Cash increased by $219.6 million during the six months.
Management reported no unused advance financing capacity at June 30, 2013 because facilities were fully drawn against available collateral. Lending warehouse capacity available was $631.8 million.

Material Changes Versus the Prior Comparable Period

The servicing portfolio grew more than threefold, driving substantial revenue growth but also increasing compensation, technology, occupancy, professional services and MSR amortization costs.
Average residential servicing UPB increased 296% in the quarter and 264% for the six months.
Non-performing residential assets declined to 14.4% of serviced UPB at June 30, 2013 from 24.5% a year earlier, partly because newly acquired ResCap and Ally portfolios had lower delinquency rates.
Average prepayment speed increased to 20.8% in the quarter from 15.5%, creating potential pressure on MSR values and amortization.
Interest expense increased 71% in the quarter and 84% year to date, largely because of acquisition financing and financing liabilities related to HLSS transactions.
The effective tax rate for the six months declined to 12.2% from 36.0%, primarily due to the favorable mix of U.S. Virgin Islands operations and other tax factors.
Ocwen terminated its remaining interest-rate swaps on May 31, 2013 and terminated the hedging program for fair-value MSRs effective April 1, 2013.

Guidance, Outlook, Risks and Unusual Items

Management expected additional servicing platforms and portfolios to come to market and identified approximately $400 billion of potential MSR acquisition opportunities. It estimated that more than $1.0 trillion of servicing and subservicing opportunities could come to market over the following two to three years.
Management expected an improving economy and housing market to support servicing performance, while acknowledging that rising rates could increase prepayments in the Agency portfolio.
On June 13, 2013, Ocwen agreed to acquire approximately $78 billion of OneWest MSRs and related advances for an estimated $2.5 billion. The transaction was expected to close in stages during the second half of 2013 and remained subject to consents and closing conditions.
On July 1, 2013, after quarter-end, Ocwen sold rights to MSRs and related advances covering approximately $83.6 billion of UPB to HLSS for approximately $2.7 billion. Approximately $1.8 billion was used to repay match-funded liabilities.
Ocwen recorded a $66.4 million liability for a proposed settlement involving the Multi-State Mortgage Committee, CFPB and state attorneys general concerning foreclosure-related matters; $52.8 million of expense was recorded in the second quarter. The ultimate settlement amount could differ materially.
Other material exposures include representation and warranty and indemnification obligations, foreclosure-related liabilities, regulatory investigations, litigation, advance-recovery timing, borrowing-base restrictions, debt covenants and potential changes in mortgage servicing regulation.
At June 30, 2013, the company reported maximum exposure to loss of approximately $4.51 billion related to certain transferred forward loans, primarily representing unpaid principal balance subject to representations and warranties.
Management stated that it believed debt covenants were satisfied and that existing resources were adequate for contractual obligations, but liquidity remained sensitive to advance levels, collateral availability, foreclosure timelines and facility renewals.

Important Facts for Investors to Verify

Confirm the correct registrant and ticker: the supplied filing is for Ocwen Financial Corporation, NYSE: OCN.
Assess whether revenue and earnings growth are sustainable after separating acquired operations, acquisition-related costs, fair-value gains and unusual items.
Review the effect of the $52.8 million regulatory charge and the $66.4 million proposed-settlement liability, including whether additional amounts were recorded later.
Evaluate liquidity given that advance facilities had no usable excess capacity at quarter-end and servicing advances represented a substantial portion of assets.
Analyze MSR valuation sensitivity to prepayments, delinquencies, discount rates and interest rates, particularly after termination of the fair-value MSR hedging program.
Review the closing, financing and integration risks associated with the OneWest MSR transaction and other acquisitions.
Examine related-party arrangements with Altisource and HLSS, including long-term exclusivity provisions and financing economics.