Business Context and Reporting Period
The filing is for Ocwen Financial Corporation, not “Onity Group Inc.”, for the quarter and six months ended June 30, 2014. Ocwen is a mortgage servicing and lending financial services holding company operating through servicing, subservicing, forward mortgage origination and reverse mortgage businesses. The financial statements are unaudited and comparative 2013 amounts are presented as restated.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2014 | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2014 | Six Months Ended June 30, 2013 |
|---|---|---|---|---|
| Total revenue | $553.1 million | $544.8 million | $1.104 billion | $951.1 million |
| Income from operations | $207.6 million | $170.0 million | $409.7 million | $332.6 million |
| Net income | $67.0 million | $65.7 million | $127.5 million | $114.6 million |
| Net income attributable to common stockholders | $66.0 million | $63.1 million | $125.5 million | $109.4 million |
| Basic diluted EPS | $0.49 / $0.48 | $0.46 / $0.45 | $0.93 / $0.91 | $0.81 / $0.78 |
| Operating margin | 37.5% | 31.2% | 37.1% | 35.0% |
| Net margin | 12.1% | 12.1% | 11.5% | 12.0% |
- Servicing and subservicing fees increased 2% year over year in the quarter and 16% for the six-month period, to $491.7 million and $982.1 million, respectively.
- Gain on loans held for sale increased 6% in the quarter and 85% year to date, to $38.8 million and $82.8 million, respectively.
- Interest expense increased 20% in the quarter and 36% year to date, to $136.2 million and $276.1 million, respectively, reflecting higher financing liabilities and debt balances.
- Cash was $259.5 million at June 30, 2014, compared with $178.5 million at December 31, 2013. Operating cash flow was $210.0 million; investing activities used $542.2 million; and financing activities provided $413.1 million.
- Total assets were $8.365 billion, up 6% from year-end 2013. Total liabilities were $6.447 billion, and total equity was $1.857 billion.
- Mortgage servicing rights totaled $2.002 billion at carrying value, while estimated fair value was $2.496 billion. Advances and match-funded advances totaled $3.463 billion.
- Debt and debt-like liabilities included $2.073 billion of match-funded liabilities, $1.864 billion of financing liabilities, $1.686 billion of other secured borrowings and $350.0 million of senior unsecured notes.
Material Changes Versus the Prior Comparable Period
- Six-month revenue increased 16% and income from operations increased 23%, but interest expense increased 36%, limiting the improvement in pretax income to 15% and net income to 11%.
- Operating expenses increased 12% year to date, primarily because of acquired operations, higher MSR amortization, bad-debt provisions and integration costs. Second-quarter operating expenses declined 8%, partly because 2013 included a $52.8 million charge related to the Ocwen National Mortgage Settlement.
- A change in the MSR amortization estimate, effective January 1, 2014, reduced amortization expense by $21.9 million for the quarter and $47.9 million for the six months. Management reported that this increased common-stockholder net income by $19.2 million and $42.0 million, respectively, and increased six-month basic and diluted EPS by $0.31 and $0.30.
- The servicing portfolio totaled $435.1 billion of residential assets serviced at June 30, 2014, broadly unchanged from June 30, 2013. Non-performing residential assets declined to 12.9% of the portfolio from 14.4%.
- Forward mortgage originations declined, but the shift from correspondent to higher-margin direct lending improved forward lending results. Reverse mortgage production declined substantially following government program and product changes.
- Ocwen issued $350.0 million of 6.625% senior unsecured notes due 2019 and used part of the proceeds to reduce match-funded liabilities and for general corporate purposes.
- Ocwen repurchased 2.663 million common shares for $94.6 million during the six months. After quarter-end, it repurchased an additional 1.953 million shares for $65.5 million and repurchased 1.950 million shares issued upon conversion of the preferred stock for $72.3 million.
Guidance, Outlook, Risks and Unusual Items
- Management expected to complete the remaining ResCap platform integration onto the REALServicing platform in the second half of 2014 and anticipated lower operating costs after completion.
- Management stated that it expected to continue capital-light transactions, including servicing-rights sales and financing transactions, to mitigate prepayment, market and liquidity risk.
- Management reported compliance with borrowing, licensing and seller/servicer covenants at June 30, 2014. However, $452.5 million of maximum servicing-advance capacity remained, and none was usable based on pledged eligible collateral.
- The filing discloses a restatement caused by an error in applying the interest method to financing liabilities related to rights to MSRs sold to HLSS. The restatement reduced previously reported second-quarter 2013 net income by $11.1 million and six-month 2013 net income by $7.3 million.
- Management concluded that a material weakness existed in internal control over financial reporting related to the accounting for the HLSS financing liability. Corrective controls were being implemented, but the weakness was not yet considered remediated.
- Ocwen faced pending federal and state regulatory investigations, including matters involving the New York Department of Financial Services and SEC subpoenas concerning related-party dealings, executive stock options and subsequent financial restatements.
- The company had representation and warranty obligations covering $86.2 billion of unpaid principal balance and outstanding repurchase demands covering $124.9 million of unpaid principal balance. The recorded liability for indemnification and related obligations was $151.7 million; management could not estimate reasonably possible losses above recorded amounts.
- The Ocwen National Mortgage Settlement required a $127.3 million consumer-relief payment, which was satisfied in May 2014, and at least $2.0 billion of principal-forgiveness modifications over three years.
- Key ongoing risks include regulatory and litigation exposure, servicing performance and foreclosure timelines, advance funding and debt-covenant compliance, MSR valuation sensitivity to prepayments and interest rates, counterparty and repurchase obligations, technology and cybersecurity risks, and reliance on related parties and service providers such as Altisource.
Most Important Facts for Investors to Verify
- Confirm that the filing and financial statements relate to Ocwen Financial Corporation, despite the request metadata identifying Onity Group Inc.
- Review the restatement adjustments and determine whether the material weakness in internal controls has subsequently been remediated.
- Assess the sustainability of earnings after excluding the favorable MSR amortization estimate change and unusual 2013 settlement comparison.
- Evaluate liquidity against servicing-advance requirements, the lack of currently usable advance capacity, debt maturities and variable-rate exposure.
- Monitor regulatory investigations, SEC inquiries, litigation, settlement compliance and potential additional fines or operating restrictions.
- Reconcile MSR carrying values to fair values and test sensitivity to prepayment speeds, delinquency rates, discount rates and interest-rate changes.
- Track repurchase, indemnification and representation-and-warranty claims relative to the $151.7 million recorded liability and the $124.9 million of outstanding demands.
- Verify the effect of post-quarter-end preferred-stock conversion and share repurchases on common shares outstanding, leverage and capital allocation.