Ocwen Financial Corporation ( OCN - Analyst Report ) reported third quarter 2011 earnings of 19 cents per share, missing the Zacks Consensus Estimate by 2 cents. However, this compares favorably with the prior-year quarter's loss of 9 cents.

Ocwen’s net income for the reported quarter stood at $20.2 million as against a net loss of $8.8 million in the year-ago quarter.

During the quarter under review, Ocwen announced the completion of its acquisition of Litton Loan Servicing, a unit of Goldman Sachs Group Inc. ( GS - Analyst Report ) , for $263.7 million. The company had announced the acquisition in the second quarter.

Further, on October 19, Ocwen announced a deal to acquire Saxon Mortgage Services Inc., a mortgage subsidiary of Morgan Stanley ( MS - Analyst Report ) . The company would pay the base purchase price of $59.3 million, in addition to an estimated $1.4 billion for servicing advance receivables outstanding. The transaction is anticipated to close in the first quarter of 2012.

The year-over-year improvement in Ocwen’s results was mainly driven by higher total revenue and decline in operating expenses. However, these positives were partially offset by higher interest expenses as well as lower interest income.

Quarter in Detail

Ocwen’s total revenue surged 28.1% year over year to $122.5 million. The improvement in total revenue was mainly attributable to a 30.3% rise in servicing and sub-servicing fees and a 16.5% increase in process management fees, which were partly offset by a 48.5% drop in other revenues.

Operating expenses fell 29.7% year over year to $65.7 million in the reported quarter. The decline was mainly due to lower compensation and benefits costs, as well as professional services expenses. However, these were partly mitigated by a rise in expenses related to amortization of mortgage servicing rights, servicing and origination costs, along with occupancy and equipment costs.

Interest income declined 26.8% year over year to $2.19 million, while interest expenses leaped 14.4% year over year to $27.7 million.

Balance Sheet and Other Updates

As of September 30, 2011, Ocwen recorded cash of $152.03 million compared with $127.8 million as of December 31, 2010. Debt securities totaled $82.6 million as of September 30, 2011, in line with the figures as of December 31, 2010.

During the reported quarter, Ocwen closed a $575 million Senior Secured Term loan (SSTL) to fund the Litton acquisition and made the first quarterly amortization payment of $14.4 million on September 30, 2011.

During the third quarter, Ocwen completed 15,743 modifications (including 16% in Home Affordable Modification Program), which was within the company’s guidance of 13,000−16,000 modifications.

Our Viewpoint

Although the near-term outlook remains cautious owing to market volatility and subprime MSR market contraction, Ocwen remains committed to new business acquisitions and loan modifications. These will likely convert into increased profitability over time. Additionally, the company’s acquisition of Litton and Saxon would benefit its financials over the long term.

Furthermore, with the ongoing home price deterioration, Ocwen might get even more opportunities to acquire distressed servicing portfolios at low prices.

Ocwen currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we are maintaining our long-term “Neutral” recommendation on the stock.