ONITY GROUP INC. quarterly report, Q1 FY2019

SEC Form 10-Q Summary

Filing identity: The supplied filing identifies the registrant as Ocwen Financial Corporation (NYSE: OCN), not ONITY GROUP INC. The report covers the three months ended March 31, 2019, with comparisons to March 31, 2018.

Business Context and Reporting Period

Ocwen originates and services residential mortgage loans, including forward and reverse mortgages. Its primary segments are Servicing, Lending, and Corporate Items and Other. The company completed its acquisition of PHH Corporation in October 2018; first-quarter 2019 results therefore include post-acquisition PHH operations. At March 31, 2019, Ocwen serviced or subserviced approximately 1.53 million loans with aggregate unpaid principal balance of $251.1 billion, including substantial activity for New Residential Investment Corp. (NRZ).

Key Financial Metrics

Metric	Q1 2019	Q1 2018
Total revenue	$303.9 million	$260.3 million
Servicing and subservicing fees	$255.9 million	$222.1 million
Gain on loans held for sale	$17.6 million	$19.8 million
Total expenses	$280.1 million	$206.5 million
MSR valuation adjustments	$109.0 million expense	$17.1 million expense
Interest expense	$70.4 million	$50.8 million
Net income attributable to Ocwen stockholders	$(44.5) million	$2.5 million
Basic and diluted earnings per share	$(0.33)	$0.02
Net cash provided by operating activities	$100.7 million	$99.4 million

Revenue increased 17%, but the company reported a substantial net loss. The reported loss was driven principally by $109.0 million of MSR valuation adjustments, higher compensation and integration costs, and increased interest expense. The approximate reported net margin was negative 14.6%, versus approximately 1.0% in the prior-year quarter.

Balance Sheet, Debt and Liquidity

Total assets were $9.54 billion at March 31, 2019, up from $9.39 billion at December 31, 2018.
Cash was $263.2 million, down from $329.1 million; cash and restricted cash totaled $326.6 million at quarter-end.
Stockholders’ equity declined to $511.6 million from $554.7 million, primarily because of the quarterly net loss.
Total liabilities were $9.03 billion. Major obligations included $5.61 billion of HMBS-related borrowings, $649.4 million of match-funded liabilities, $1.04 billion of other financing liabilities, $437.0 million of other secured borrowings, and $448.1 million of senior notes.
On March 18, 2019, Ocwen increased its Senior Secured Term Loan by $120.0 million. The company reported approximately $720.4 million of debt outstanding under facilities maturing within the next 12 months, including $97.5 million of PHH senior notes due in 2019.
Operating cash flow was $100.7 million, while investing activities used $151.3 million and financing activities used $19.8 million. Net cash and restricted cash decreased by $70.4 million during the quarter.
Management stated that it believed liquidity and access to capital were sufficient for the next twelve months, while acknowledging reliance on renewals, replacements, or extensions of financing facilities.

Material Changes Versus the Prior Comparable Period

Revenue grew by $43.6 million, primarily from PHH-related servicing revenue and higher other revenue.
Servicing and subservicing revenue rose 15%, but the legacy Ocwen portfolio declined; excluding acquired PHH activity, servicing revenue declined approximately 15% in line with portfolio runoff.
MSR valuation expense increased by $91.9 million, primarily from portfolio runoff and interest-rate effects, especially on Agency MSRs acquired from PHH.
Compensation and benefits expense increased 21%, including $19.2 million of severance and retention costs related to integration-driven headcount reductions.
Professional services expense fell 91%, principally because of a $30.7 million recovery from a service provider and lower litigation and acquisition-related costs.
Interest expense increased 39%, primarily because of higher expense associated with NRZ financing liabilities and debt assumed in the PHH acquisition.
Lending segment pretax income increased to $19.9 million from $8.8 million, largely due to favorable fair-value changes on HECM reverse mortgage assets and related HMBS financing liabilities.
The servicing portfolio increased 45% year over year to $251.1 billion because of the PHH acquisition, despite runoff and servicing transfers.

Guidance, Outlook, Risks and Unusual Items

Management targeted a return to profitability and identified five priorities: PHH integration, cost re-engineering, servicing portfolio growth, balance-sheet management, and resolution of regulatory and legal matters.
Ocwen expects to complete the remaining migration from REALServicing to Black Knight MSP in the second quarter of 2019. Approximately 470,000 loans had been transferred by April 30, 2019.
The cost-reengineering program targets $340.0 million of annualized expense reductions, with estimated implementation costs of $55.0 million to $65.0 million. The company incurred $22.1 million during the first quarter and expected most remaining costs and savings in the second half of 2019.
Management intended to reduce combined staffing by more than 2,100 positions by year-end 2019 and consolidate U.S. operations into four principal locations.
Ocwen acquired MSRs representing $4.9 billion of UPB during the quarter and had been awarded approximately $25.5 billion of additional MSRs expected to close in the second quarter, subject to customary conditions. Its stated minimum portfolio objective was $260.0 billion of UPB.
NRZ accounted for approximately 50% of residential servicing UPB and 73% of servicing and subservicing fee revenue. The concentration creates counterparty, funding, servicing-transfer, and termination risk.
Regulatory and litigation exposure remains material. Accrued legal and regulatory matters were $52.9 million, while management could not estimate reasonably possible losses above accrued amounts.
The company remained subject to CFPB, state, HUD, DOJ, GSE, Ginnie Mae, and other regulatory inquiries, settlements, consent orders, and compliance obligations. Failure to comply could result in fines, restrictions, loss of licenses, or termination of servicing approvals.
MSRs and other assets are heavily dependent on Level 3 fair-value estimates. A hypothetical 10% increase in prepayment speeds would reduce MSR fair value by approximately $127.2 million; a 20% increase would reduce it by approximately $245.7 million.
Representation and warranty repurchase demands totaled $46.3 million of UPB at March 31, 2019, and the related liability was $46.6 million. Management stated that additional losses beyond recorded amounts were reasonably possible but could not be estimated.
The company adopted new lease accounting on January 1, 2019, recognizing approximately $66.2 million of right-of-use assets and lease liabilities and a $16 thousand cumulative adjustment to retained earnings.

Most Important Facts for Investors to Verify

Confirm the registrant identity, because the supplied metadata names ONITY GROUP INC. while the filing is for Ocwen Financial Corporation.
Assess whether the PHH integration, Black Knight MSP conversion, staffing reductions, and facility closures deliver the projected $340.0 million of annualized savings.
Monitor liquidity against approximately $720.4 million of debt maturities within 12 months, including the $97.5 million PHH note due in 2019.
Evaluate dependence on NRZ, including the concentration of revenue and the status of MSR transfers, advance funding, and termination rights.
Review subsequent developments in CFPB, state regulatory, DOJ, HUD, litigation, and servicing-compliance matters, including potential losses exceeding the $52.9 million accrual.
Test the sensitivity of earnings and equity to MSR fair-value assumptions, interest rates, prepayments, delinquencies, and portfolio runoff.
Verify the renewal or replacement of advance-financing and warehouse facilities and compliance with debt covenants and minimum tangible-net-worth requirements.