SEC Filing Summary: Ocwen Financial Corporation Form 10-Q
Data note: The request metadata identifies “ONITY GROUP INC.,” but the filing text is for Ocwen Financial Corporation (NYSE: OCN). This is an unaudited quarterly report for the three and nine months ended September 30, 2013, filed November 4, 2013.
Business Context and Reporting Period
Ocwen provides residential mortgage servicing, subservicing, special servicing, mortgage origination and forward and reverse mortgage lending. The 2013 results were materially affected by the Homeward and ResCap acquisitions, the Ally MSR transaction, the staged OneWest MSR transaction and sales of servicing rights and advances to HLSS.
- Residential servicing and subservicing portfolio: $434.8 billion of unpaid principal balance at September 30, 2013, versus $127.1 billion at September 30, 2012.
- Total assets serviced, including commercial assets, were $435.3 billion at September 30, 2013.
- Agency loans represented 57% of residential serviced UPB, compared with 16% a year earlier, while non-performing residential assets declined to 14.6% of UPB from 23.6%.
Financial Performance and Key Metrics
| Metric | Q3 2013 | Q3 2012 | Change |
|---|---|---|---|
| Total revenue | $531.2 million | $232.7 million | +128% |
| Servicing and subservicing fees | $483.3 million | $223.0 million | +117% |
| Gain on loans held for sale | $28.3 million | — | New in 2013 |
| Operating expenses | $346.3 million | $92.8 million | +273% |
| Income from operations | $185.0 million | $139.9 million | +32% |
| Operating margin | 34.8% | 60.1% | Down |
| Net income | $67.0 million | $51.4 million | +30% |
| Net income attributable to common stockholders | $61.2 million | $51.4 million | +19% |
| Diluted EPS | $0.44 | $0.37 | +19% |
| Net margin | 12.6% | 22.1% | Down |
For the nine months ended September 30, 2013, revenue was $1.482 billion versus $608.6 million, income from operations was $521.9 million versus $343.8 million, net income was $188.9 million versus $115.6 million, and diluted EPS was $1.27 versus $0.84. Nine-month operating margin was approximately 35.2%, compared with 56.5% in the prior-year period; net margin was approximately 12.7%, compared with 19.0%.
- Operating expenses increased sharply due to acquired employees, servicing platform integration, technology and infrastructure costs, MSR amortization and regulatory and professional-service costs.
- Interest expense increased to $110.1 million in Q3 and $303.3 million for the nine-month period, primarily because of HLSS financing liabilities and acquisition-related debt.
- MSR amortization was $79.2 million in Q3 and $197.4 million for the nine-month period, compared with $20.2 million and $53.6 million, respectively, in the prior-year periods.
Cash Flow, Balance Sheet, Debt and Liquidity
- Cash increased to $357.5 million at September 30, 2013 from $220.1 million at December 31, 2012.
- Operating cash flow was $1.020 billion for the first nine months, down from $1.434 billion in the comparable 2012 period.
- Investing activities provided $50.0 million, including $3.492 billion of proceeds from sales of match-funded advances and $215.7 million from sales of diversified fee businesses, offset by $2.261 billion paid for the ResCap acquisition and other MSR purchases.
- Financing activities used $933.1 million, including $2.170 billion of net repayments of match-funded liabilities and $157.9 million used to repurchase common shares issued upon preferred-stock conversion.
- Total liabilities were $3.510 billion at September 30, 2013, versus $3.918 billion at year-end 2012. Other borrowings rose to $2.593 billion from $1.097 billion, while match-funded liabilities declined to $363.0 million from $2.533 billion.
- The new senior secured term loan had approximately $1.288 billion of carrying value at September 30, 2013 and a stated maturity in February 2018.
- Management defined liquidity as cash plus unused collateralized advance capacity. Only $0.1 million of the $37.0 million of nominal available advance capacity could be used based on eligible collateral, indicating limited incremental servicing-advance capacity at quarter-end.
- Stockholders’ equity was $1.741 billion, up 8% from December 31, 2012. Mezzanine preferred equity declined to $59.9 million after conversion of $100 million of preferred stock.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by a 234% increase in average residential serviced UPB in Q3 and a 256% increase for the nine-month period.
- ResCap contributed $212.2 million of Q3 revenue and $8.2 million of Q3 net income; for the post-acquisition nine-month period, it contributed $508.6 million of revenue and $81.4 million of net income.
- MSRs carried at amortized cost increased to $1.737 billion from $678.9 million, largely from the ResCap, Ally and OneWest transactions.
- Advances and match-funded advances fell 54% to $1.480 billion, primarily because of collections and sales of advances to HLSS, despite advances acquired in the transactions.
- Servicing revenue growth was moderated by a shift toward lower-fee Agency servicing and subservicing. Annualized servicing revenue declined to 0.45% of average UPB from 0.69% in Q3 2012.
- Q3 servicing income before taxes declined to $78.0 million from $84.3 million despite substantially higher revenue, reflecting acquisition-related expenses, MSR amortization and higher interest costs.
- The company recognized a $52.8 million second-quarter charge related to a proposed settlement concerning foreclosure and servicing matters and carried a $66.4 million liability for the proposed regulatory settlement at September 30.
Outlook, Commentary, Risks and Unusual Items
Management expected additional MSR acquisition opportunities and identified approximately $400 billion of potential MSR opportunities over the following 12 to 18 months. It also expected additional HLSS transactions and a new advance financing facility to support near-term growth. Management believed rising rates, lower refinancing activity, improving housing conditions and lower delinquencies could benefit the servicing portfolio, although higher rates could reduce mortgage origination volumes.
- The OneWest transaction was closing in stages and remained subject to investor and third-party consents. The estimated total purchase price was approximately $2.4 billion, including approximately $2.0 billion of servicing advances.
- Subsequent to quarter-end, the company purchased additional OneWest MSRs and advances and funded the November 1 transaction partly with a newly executed $1.6 billion match-funded advance facility.
- Management terminated its remaining interest-rate swaps in May 2013 and ended its economic hedging program for fair-value MSRs effective April 1, 2013. The company continued to hedge mortgage loans held for sale and interest-rate lock commitments.
- Recorded indemnification obligations were $206.1 million, including representation and warranty obligations and foreclosure timeline-related fees. Management stated that additional losses beyond recorded amounts were reasonably possible but could not estimate a range.
- The company had representation and warranty exposure covering $89.4 billion of UPB and outstanding repurchase demands covering $113.0 million of UPB.
- Risks include constrained advance-financing capacity, debt covenant compliance, interest-rate and prepayment sensitivity, MSR valuation uncertainty, servicing execution and integration risk, regulatory investigations, foreclosure-related claims, loan repurchase obligations and related-party dependence on Altisource and HLSS.
- The company’s executive chairman also chaired Altisource, HLSS, Altisource Residential and AAMC. Ocwen had significant long-term service and financing arrangements with these related parties.
Most Important Facts for Investors to Verify
- Confirm the issuer identity because the supplied metadata names Onity Group Inc., while the filing is for Ocwen Financial Corporation.
- Reconcile the effect of the ResCap, Ally and OneWest transactions on MSR valuation, amortization, servicing revenue, advances and goodwill.
- Assess whether the very limited usable advance capacity at September 30, 2013 is consistent with management’s growth and acquisition plans.
- Review HLSS financing terms, related interest expense, deferred gains and the economic implications of selling MSR rights while retaining servicing obligations.
- Evaluate the proposed regulatory settlement, the $66.4 million recorded liability and potential additional foreclosure-related costs.
- Test the adequacy of the $206.1 million indemnification liability against the $89.4 billion of covered UPB and outstanding repurchase demands.
- Monitor MSR sensitivity to prepayment speeds, delinquencies, discount rates, interest rates and changes in the Agency/non-Agency portfolio mix.