Ocwen Financial Corporation 2012 Q3 Form 10-Q Summary
Filing identity: The supplied filing identifies the registrant as Ocwen Financial Corporation, not ONITY GROUP INC. It is an unaudited Form 10-Q for the quarter and nine months ended September 30, 2012, filed November 2, 2012.
Business Context and Reporting Period
Ocwen provides residential and commercial mortgage servicing, special servicing and asset management services. Its principal reporting segment is Servicing, supplemented by Corporate Items and Other. The results reflect the September 2011 Litton acquisition, multiple 2012 mortgage servicing rights acquisitions, and transactions with HLSS Holdings involving rights to MSRs and related servicing advances.
- Residential and commercial assets serviced at September 30, 2012: $127.5 billion of UPB.
- Residential assets serviced: $127.1 billion, up 20% from September 30, 2011.
- Non-performing residential assets were 23.6% of residential UPB, down from 28.7% a year earlier and 27.9% at December 31, 2011.
Financial Results and Key Metrics
| Metric | Three months ended September 30, 2012 | Three months ended September 30, 2011 | Nine months ended September 30, 2012 | Nine months ended September 30, 2011 |
|---|---|---|---|---|
| Total revenue | $232.7 million | $122.5 million | $608.6 million | $339.3 million |
| Income from operations | $139.9 million | $56.8 million | $343.8 million | $190.2 million |
| Net income attributable to Ocwen | $51.4 million | $20.2 million | $115.6 million | $68.7 million |
| Diluted EPS | $0.37 | $0.19 | $0.84 | $0.64 |
- Servicing and subservicing fees were $223.0 million in the third quarter and $578.5 million for the nine months.
- Operating margin was approximately 60.1% in the third quarter and 56.5% for the nine months. Net margin was approximately 22.1% and 19.0%, respectively.
- Interest expense was $58.4 million in the third quarter and $163.7 million for the nine months, substantially higher than the comparable 2011 periods.
- Cash provided by operating activities was $1.434 billion for the nine months, compared with $803.6 million in 2011. The primary driver was the collection of servicing advances.
- Investing activities used $944.8 million, including $2.090 billion for MSR and related advance purchases, partly offset by $1.084 billion of proceeds from the sale of match funded advances to HLSS.
- Financing activities used $363.1 million, primarily reflecting repayments of match funded liabilities and other borrowings.
- Cash was $270.5 million at September 30, 2012, versus $144.2 million at December 31, 2011.
- Defined liquidity, consisting of cash plus unused collateralized advance capacity, was $464.2 million, down from $551.1 million at December 31, 2011. Readily available unused advance capacity was $193.7 million.
- Mortgage servicing rights were $420.3 million, up from $293.2 million at December 31, 2011. Total assets were $4.156 billion and stockholders’ equity was $1.523 billion.
- Reported debt included $1.848 billion of match funded liabilities, $559.3 million of lines of credit and other secured borrowings, and $48.2 million owed to securitization investors. Debt securities were zero at September 30, 2012.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 90% and nine-month revenue increased 79%, primarily from the larger servicing portfolio following the Litton acquisition and 2012 MSR purchases.
- Third-quarter net income increased 154%; nine-month net income increased 68%. Operating income increased 146% and 81%, respectively.
- Operating expenses rose 41% in the third quarter and 78% for the nine months as staffing, technology, occupancy, servicing costs and MSR amortization increased with portfolio growth.
- MSR amortization increased to $20.2 million in the third quarter and $53.6 million for the nine months, versus $11.2 million and $30.1 million, respectively.
- Interest expense increased 111% in the third quarter and 88% for the nine months, driven by borrowings related to Litton and 2012 MSR acquisitions, as well as HLSS financing liabilities.
- Total assets declined 12% from year-end 2011, primarily because advances and match funded advances declined by $823.6 million, partly offset by higher MSRs and cash.
- Total liabilities declined 22%, principally because match funded liabilities decreased by $711.3 million and debt securities were eliminated.
- The remaining $56.4 million of convertible notes was converted or redeemed, resulting in 4.635 million common shares issued. The $26.1 million of 10.875% Capital Securities was redeemed in August 2012.
Guidance, Outlook, Risks and Unusual Items
- Management expected delinquency rates to decline absent significant changes in foreclosure processes, but expressly stated that this outcome was not assured.
- Ocwen planned continued expansion through MSR purchases, subservicing, special servicing, co-issue and flow servicing. It expected to pursue additional market opportunities and believed substantial servicing assets could come to market over the following several years.
- Subsequent to quarter-end, Ocwen agreed to acquire Homeward for an anticipated aggregate purchase price of approximately $750 million, including approximately $588 million in cash and $162 million of Series A preferred shares, subject to regulatory and other closing conditions.
- Ocwen and Walter Investment were awarded a $3.0 billion bid for ResCap assets. Ocwen’s expected share was approximately $2.46 billion, including $0.83 billion for MSRs and servicing contracts and $1.63 billion principally for advances. The transaction remained subject to definitive documentation and bankruptcy court approval.
- Ocwen agreed to acquire Genworth Financial Home Equity Access for approximately $22 million in cash, with expected closing in the first quarter of 2013.
- The principal liquidity risks were funding and recovery of servicing advances, renewal or availability of advance facilities, debt covenant compliance, foreclosure delays, higher delinquencies, interest-rate changes and potential reductions in advance-financing capacity.
- The company faced ongoing federal and state regulatory investigations and information requests involving foreclosure, servicing practices, force-placed insurance and consumer protection matters. Adverse actions could result in fines, penalties, higher costs or longer foreclosure timelines.
- Litigation and tax contingencies included the ABFS bankruptcy litigation and Indian tax assessments of approximately $3.0 million, plus potential penalties and interest. Management stated that the ABFS matter was not expected to have a material effect if settled and that it intended to defend the claims if necessary.
- Unusual 2012 items included a $4.779 million lease liability charge, a $3.689 million fee related to cancellation of a planned term-loan upsizing, $5.958 million of deferred hedge losses recognized after the HLSS transaction, and a $653 thousand loss on redemption of the Capital Securities.
Investor Verification Items
- Verify the registrant identity because the request metadata names ONITY GROUP INC., while the filing is for Ocwen Financial Corporation.
- Reconcile the reported liquidity measure of $464.2 million with cash of $270.5 million and readily available unused advance capacity of $193.7 million.
- Assess the sustainability of earnings growth after separating portfolio-acquisition effects, higher MSR amortization, financing costs and unusual items.
- Review the financing and accounting treatment of HLSS transactions, including the $177.7 million financing liability and the continued balance-sheet recognition of related MSRs.
- Evaluate funding requirements and covenant capacity associated with the planned Homeward and ResCap transactions, which were not yet completed at September 30, 2012.
- Monitor regulatory investigations, foreclosure timelines, potential servicing penalties, advance recoverability and the Indian tax assessments.