ONITY GROUP INC. annual report, FY2013

2013 Form 10-K Summary

Filing identity: The provided filing is for Ocwen Financial Corporation, not “ONITY GROUP INC.” It covers the fiscal year ended December 31, 2013, with quarterly information for the fourth quarter ended December 31, 2013.

Business Context and Reporting Period

Ocwen is a mortgage servicing and lending company headquartered in Atlanta, Georgia. Its primary businesses are residential mortgage servicing, subservicing, special servicing, forward mortgage lending and reverse mortgage lending. Operations extend across the United States, the U.S. Virgin Islands, India, the Philippines and Uruguay.

At December 31, 2013, Ocwen serviced or subserviced 2,861,918 residential loans with aggregate unpaid principal balance of $464.7 billion, compared with 1,219,956 loans and $203.7 billion at December 31, 2012. The filing is an audited annual report; the fourth quarter is presented as unaudited quarterly information.

Financial Performance and Key Metrics

Metric	2013	2012	Change
Total revenue	$2.038 billion	$845.2 million	+141%
Servicing and subservicing fees	$1.824 billion	$804.4 million	+127%
Operating expenses	$1.301 billion	$363.9 million	+258%
Income from operations	$737.0 million	$481.3 million	+53%
Income before taxes	$335.2 million	$257.5 million	+30%
Net income	$294.1 million	$180.9 million	+63%
Net income attributable to common stockholders	$282.1 million	$180.8 million	+56%
Diluted EPS	$2.02	$1.31	+54%

Approximate operating margin was 36.2%, compared with 57.0% in 2012; net margin was approximately 14.4%, compared with 21.4%.
Interest expense increased to $412.8 million from $223.5 million, primarily due to higher financing liabilities associated with HLSS transactions and additional secured borrowings.
The effective tax rate declined to approximately 12.3% from 29.7%, principally because of favorable U.S. Virgin Islands Economic Development Commission benefits. These benefits reduced foreign taxes by approximately $103.1 million in 2013.
Servicing segment pretax income was $374.4 million, compared with $274.4 million. Lending generated $35.6 million of pretax income, compared with a $0.3 million pretax loss in 2012. Corporate Items and Other generated a $74.8 million pretax loss.

Cash Flow, Debt and Liquidity

Cash provided by operating activities was $867.2 million, compared with $1.816 billion in 2012. The decline primarily reflected lower net collections of servicing advances and the classification of certain advance-sale proceeds as investing activities.
Investing activities used $2.415 billion, including approximately $5.9 billion paid for acquisitions and MSR-related transactions, partially offset by $3.8 billion of proceeds from sales of advances and match-funded advances to HLSS.
Financing activities provided $1.506 billion. Cash at year-end was $178.5 million, down from $220.1 million.
Total assets increased 38% to $7.874 billion. Mortgage servicing rights increased 171% to $2.069 billion, while advances and match-funded advances increased 7% to $3.445 billion.
Total liabilities increased 53% to $6.017 billion. Year-end borrowings included $2.365 billion of match-funded liabilities, $1.284 billion of financing liabilities and $1.778 billion of other secured borrowings.
Only $85.2 million of maximum servicing-advance facility capacity remained available at year-end, and the filing states that none was usable based on pledged eligible collateral. Lending warehouse capacity available at year-end was $536.2 million.
Management stated that it was in compliance with debt covenants and believed it had adequate financing for the next twelve months. The company had no interest-rate swaps outstanding at year-end, but maintained interest-rate caps with $1.868 billion of notional coverage.

Material Changes Versus the Prior Comparable Period

Growth was driven by the February 2013 ResCap acquisition, Ally MSR transaction, OneWest MSR transaction and Greenpoint MSR transaction. Ocwen boarded approximately 2.5 million forward loans with $376.1 billion of UPB during 2013.
Conventional and government-insured loans increased to 56.8% of servicing UPB from 24.4%, improving portfolio quality but lowering average servicing fees relative to non-Agency loans.
The non-performing residential asset rate declined to 14.5% from 23.5%, although the filing notes that legacy portfolios remained materially more delinquent than the acquired portfolios.
Average prepayment speed increased to 16.9% from 14.7%, creating additional amortization and MSR valuation risk.
Operating expenses included approximately $175 million of transition, transaction and ramp-up costs related to acquisitions and integrations, as well as a $53.5 million expense related to a regulatory settlement.
Ocwen sold diversified fee-based businesses acquired through Homeward and ResCap to Altisource for cash proceeds of approximately $210.8 million in 2013.
The company repurchased 1,125,707 common shares for $60.0 million during the fourth quarter under a newly authorized $500 million repurchase program. It also paid $157.9 million to repurchase common shares issued upon conversion of preferred stock.

Fourth-Quarter 2013 Snapshot

Revenue was $556.0 million, compared with $236.6 million in the fourth quarter of 2012.
Operating income was $215.1 million, compared with $137.5 million.
Net income attributable to common stockholders was $104.3 million, or $0.77 basic EPS and $0.74 diluted EPS, compared with $65.2 million, or $0.48 basic EPS and $0.47 diluted EPS.
The fourth quarter benefited from continued servicing portfolio growth but remained exposed to high integration costs, interest expense and regulatory compliance costs.

Guidance, Outlook, Risks and Unusual Items

Management expected additional servicing and subservicing opportunities as banks continued to sell or outsource non-core mortgage assets; it estimated that approximately $1.0 trillion of opportunities could come to market over the following three years.
Management expected a rising-rate environment, improving housing conditions and lower delinquencies to support servicing results, while anticipating lower forward mortgage origination volumes and slow reverse mortgage growth in 2014.
The ResCap servicing platform integration was expected to be completed in the second quarter of 2014. Management expected operating expenses to decline significantly after major integrations were completed.
In February 2014, the New York Department of Financial Services placed an indefinite hold on Ocwen’s proposed acquisition from Wells Fargo of approximately 184,000 loans with $39.0 billion of UPB.
A February 2014 consent judgment approved a regulatory agreement requiring three years of independent monitoring, a $127.3 million consumer relief payment, and at least $2.0 billion of principal-forgiveness modifications over three years. Ocwen reserved $66.9 million for its expected share of the payment.
At December 31, 2013, Ocwen had representation and warranty obligations covering $89.1 billion of UPB and outstanding repurchase demands covering $158.8 million of UPB and 753 loans. Management could not estimate a range of reasonably possible losses above the recorded liability.
Key risks include regulatory enforcement, litigation, foreclosure delays, servicing advance funding, covenant compliance, MSR valuation, prepayment speeds, interest rates, acquisition integration, reliance on Altisource technology and related-party arrangements, counterparty exposure and changes in housing markets.
Deloitte & Touche LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of December 31, 2013.

Most Important Facts for Investors to Verify

Confirm the issuer identity: the supplied filing is Ocwen Financial Corporation’s 2013 Form 10-K, despite the request identifying ONITY Group Inc.
Review the sustainability of earnings after excluding acquisition-related integration costs, the $53.5 million regulatory charge and favorable U.S. Virgin Islands tax benefits.
Assess liquidity, particularly the limited usable servicing-advance capacity, $4.1 billion of reported match-funded and other secured borrowings, and dependence on HLSS and other financing transactions.
Evaluate MSR valuation sensitivity to prepayment speeds, delinquencies, servicing costs and discount rates.
Monitor regulatory matters, independent oversight, the $127.3 million settlement payment, required principal forgiveness and the status of the Wells Fargo acquisition.
Reconcile reported servicing portfolio growth with lower average fee yields, higher prepayment rates and the cost of integrating acquired platforms.
Review representation and warranty reserves, indemnification obligations, pending repurchase demands and potential losses beyond recorded liabilities.
Examine related-party transactions and long-term dependence on Altisource for technology, services and outsourcing support.