Business Context and Reporting Period
This Form 10-Q covers Ocwen Financial Corporation (OCN) for the quarterly and six-month periods ended June 30, 2010. Ocwen is a leading provider of residential and commercial mortgage loan servicing, special servicing, and asset management services. The reporting period reflects the company's post-separation structure following the spin-off of Altisource Portfolio Solutions S.A. in August 2009. A significant accounting change occurred on January 1, 2010, with the adoption of ASU 2009-17 (ASC 810), requiring the consolidation of four residential mortgage loan securitization trusts previously excluded from the balance sheet.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2010 |
|---|---|---|
| Total Revenue | $75,953 | $151,539 |
| Net Income Attributable to OCN | $16,038 | $36,898 |
| Diluted EPS | $0.15 | $0.35 |
| Operating Cash Flow | N/A | $360,795 |
| Cash and Cash Equivalents | $143,386 | $143,386 |
| Total Assets | $2,077,529 | $2,077,529 |
| Total Liabilities | $1,177,599 | $1,177,599 |
| Match Funded Liabilities | $835,172 | $835,172 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 30% for the quarter and 32% year-to-date compared to 2009. This decline is primarily attributed to the 2009 spin-off of the Ocwen Solutions business (Mortgage Services, Financial Services, and Technology Products), which contributed significantly to 2009 results.
- Income from Operations: Operating income decreased 14% for the quarter and 9% year-to-date. Despite the loss of the Ocwen Solutions segments, the core Servicing segment saw a 38% increase in pre-tax income for the quarter due to portfolio growth and higher modification fees.
- Balance Sheet Expansion: Total assets increased 17% from December 31, 2009, driven by a $367 million increase in advances and match-funded advances following the acquisition of a $6.9 billion servicing portfolio in Q2 2010. Liabilities increased 30%, largely due to increased match-funded liabilities ($369 million increase) and the consolidation of securitization trust borrowings.
- Trading Securities: Auction rate securities declined by approximately $169 million due to sales, litigation settlements, and redemptions. The company realized losses on the sale of these securities in 2010, contrasting with unrealized gains in the same period of 2009.
Guidance, Outlook, and Risks
- Strategic Priorities: Management focuses on establishing predictable revenue growth through acquisitions, improving process efficiencies, and reducing asset intensity. The key driver of profitability is identified as the reduction of non-performing loans.
- Pending Acquisition: On May 28, 2010, Ocwen agreed to acquire the "HomEq Servicing" business from Barclays for approximately $1.3 billion. The transaction is expected to close on September 1, 2010, and would result in a combined servicing portfolio exceeding $80 billion in unpaid principal balance (UPB). To fund this, Ocwen secured a $350 million senior secured term loan facility in July 2010.
- Liquidity: As of June 30, 2010, liquidity (cash plus unused collateralized advance financing capacity) was $229.9 million, a 21% decrease from year-end 2009. The company maintains unused borrowing capacity of $752.8 million to protect against delinquency increases and fund future acquisitions.
- Legal Contingencies:
- MDL Proceeding: Ocwen reached an agreement in principle to settle a multi-district litigation proceeding regarding mortgage servicing practices. The proposed settlement amount is $5.163 million plus non-cash consideration.
- Cartel Asset Management: A new trial is scheduled for September 2010 regarding trade secret misappropriation claims. Cartel seeks approximately $26 million in damages.
- Tax Matters: Ongoing disputes with Indian tax authorities regarding mark-up on operating costs for the Indian subsidiary (OFSPL). A settlement was reached for 2004-2006 assessment years, but a draft order for 2006-2007 remains contested.
- Forward-Looking Risks: Risks include the availability of liquidity, delinquency rates, advances, general economic conditions, and uncertainty related to government programs and regulations (including the Dodd-Frank Act).
Investor Verification Checklist
- HomEq Acquisition Closing: Verify the successful closing of the $1.3 billion HomEq Servicing acquisition and the associated $350 million term loan facility.
- MDL Settlement Approval: Confirm court approval of the $5.163 million settlement for the multi-district litigation proceeding.
- Delinquency Trends: Monitor the percentage of non-performing loans in the servicing portfolio, as this directly impacts advances, interest expense, and profitability.
- Advance Financing Renewals: Track the renewal of match-funded advance facilities and any changes in advance rates or discounts required by rating agencies.
- Indian Tax Resolution: Follow the outcome of the dispute resolution panel regarding the 2006-2007 Indian tax assessment order.