Ocwen Financial Corporation Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2011. The source filing identifies the registrant as Ocwen Financial Corporation (NYSE: OCN), not Onity Group Inc.; this company-name discrepancy should be verified.
Business context
Ocwen provides residential and commercial mortgage loan servicing, subservicing, special servicing and asset-management services. The company’s primary reported segment is Servicing, which generated nearly all consolidated revenue. Ocwen completed the Litton Loan Servicing acquisition on September 1, 2011, adding approximately 245,000 primarily non-prime loans with approximately $38.6 billion of unpaid principal balance.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenue | $122.5 million | $95.6 million | $339.3 million | $247.1 million |
| Income from operations | $56.8 million | $2.2 million | $190.2 million | $73.9 million |
| Income from continuing operations | $20.2 million | $(13.2) million | $68.7 million | $23.7 million |
| Net income attributable to Ocwen | $20.2 million | $(8.8) million | $68.7 million | $28.1 million |
| Diluted EPS | $0.19 | $(0.09) | $0.64 | $0.27 |
| Operating margin | 46.4% | 2.3% | 56.1% | 29.9% |
| Net margin attributable to Ocwen | 16.5% | (9.2)% | 20.2% | 11.4% |
Revenue mix: Servicing and subservicing fees were $112.6 million in Q3 and $311.0 million for the first nine months, up 30% and 42%, respectively. The servicing portfolio totaled $106.4 billion of UPB at September 30, 2011, up 43% from December 31, 2010. The 90-plus-day non-performing rate was 28.7% of UPB, or 23.6% excluding Litton.
Cash flow: Operating activities provided $803.6 million during the first nine months, compared with $434.6 million in the prior-year period. Investing activities used $2.65 billion, principally for the $2.65 billion cash payment for Litton. Financing activities provided $1.88 billion, largely from new advance-funding and term-loan facilities. Cash ended at $152.0 million versus $127.8 million at December 31, 2010.
Balance sheet and leverage: Total assets increased to $4.90 billion from $2.92 billion at year-end 2010, primarily from Litton-related advances, mortgage servicing rights and goodwill. Match-funded advances were $3.76 billion and related liabilities were $3.08 billion. Lines of credit and other secured borrowings were $555.1 million, including the new $575.0 million senior secured term loan, net of discount. Total liabilities were $3.92 billion and total equity was $977.9 million.
Liquidity: Management-defined liquidity, consisting of unencumbered cash plus unused collateralized advance capacity, was $229.1 million, down 11% from December 31, 2010. Of $627.9 million of total unused borrowing capacity, only $77.0 million was readily available based on collateral constraints.
Material changes versus the prior comparable periods
- Revenue increased 28% in the third quarter and 37% for the first nine months, primarily from larger servicing portfolios following the HomEq, Saxon and Litton transactions.
- Operating expenses decreased 30% in Q3 and 14% for the first nine months, principally because 2010 included substantial HomEq acquisition and litigation costs. These savings were partly offset by higher mortgage servicing-right amortization and staffing costs.
- Interest expense increased to $27.7 million in Q3 and $87.0 million for the first nine months, versus $24.2 million and $50.0 million, respectively, reflecting acquisition-related borrowings and debt-cost amortization.
- Q3 2011 included a $2.4 million gain on debt extinguishment; the nine-month period included $3.7 million of such gains and significant write-offs of debt discounts and issuance costs associated with debt repayments.
- Litton contributed $14.6 million of revenue and a $10.1 million net loss from September 1 through September 30, including $18.4 million of transaction-related expenses and $2.3 million of acquired MSR amortization.
- Other 2010 items that did not recur in 2011 included auction-rate-security losses, a commercial real-estate investment write-off and substantial litigation charges.
Guidance, outlook, risks and unusual items
- Management expected advances to continue declining absent significant changes in foreclosure processes, but stated that this outcome was not assured.
- Ocwen intended to continue pursuing servicing-platform acquisitions, MSR purchases, subservicing opportunities and new servicing segments. It also expected the Saxon transaction to close in the first quarter of 2012 and entered into a JPMorgan MSR transaction expected to close around January 1, 2012.
- The Saxon transaction contemplated approximately $59.3 million of base consideration plus an estimated $292.2 million for unfunded servicing advances. The JPMorgan transaction contemplated approximately $950 million of consideration, with $625 million expected to be financed through an existing advance facility.
- Ocwen planned to fund these transactions through cash, operating cash flow, available credit, additional term-loan borrowing, servicing-advance facilities and a registered common-stock offering.
- Foreclosure delays, moratoria or regulatory actions could increase advances and operating costs, delay collections, reduce financing availability and pressure liquidity. Match-funded facilities may restrict financing for aged advances or prolonged foreclosure timelines.
- The company was subject to regulatory inquiries from the Federal Housing Finance Agency and Federal Trade Commission regarding servicing activities; the filing states that neither inquiry alleged wrongdoing against Ocwen.
- The Litton purchase-price allocation was preliminary. The Goldman Shared Loss Cap was approximately $123.6 million, and Ocwen could bear additional losses from third-party claims or liabilities exceeding contractual protections.
- Ocwen disclosed a major unresolved bankruptcy-trustee lawsuit involving American Business Financial Services. The trustee sought compensatory damages exceeding $100 million plus punitive damages, but the company could not estimate a possible loss or range of loss.
- Ocwen discontinued hedge accounting prospectively for one interest-rate swap effective July 1, 2011 and began amortizing $6.2 million of deferred losses through the debt’s maturity.
- Management stated that the company was in compliance with debt covenants as of September 30, 2011.
Most important facts to verify
- Confirm whether this filing belongs to Ocwen Financial Corporation or the requested Onity Group Inc., because the source document names Ocwen throughout.
- Reconcile the impact of the Litton acquisition, including preliminary purchase-price allocations, acquired advances, MSRs, goodwill and transaction-related losses.
- Assess whether $229.1 million of management-defined liquidity and only $77.0 million of readily available collateralized capacity are adequate for upcoming acquisitions, advances and debt maturities.
- Review advance-funding facility terms, collateral eligibility, amortization dates, interest-rate floors, covenants and the 10% guarantee related to one match-funded facility.
- Monitor foreclosure timelines, delinquency trends and the resulting effect on advances, collections, financing capacity and interest expense.
- Evaluate litigation, regulatory inquiries, Litton loss-sharing provisions and the unresolved ABFS bankruptcy litigation for potential exposures not fully reflected in reserves.
- Verify the financing and closing conditions for the Saxon and JPMorgan MSR transactions, including the planned equity offering and additional borrowing.