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Ocwen Financial Corp (OCN - Analyst Report) reported third quarter 2012 earnings of 37 cents per share, missing the Zacks Consensus Estimate of 40 cents. However, this compares favorably with the prior-year quarter earnings of 19 cents.

Substantial rise in the top line and stable balance sheet position were the positives for the quarter. However, increases in operating and interest expenses along with a decrease in interest income were the primary dampeners.

Ocwen’s net income stood at $51.4 million, striding way ahead of $20.2 million in the prior-year quarter.

Behind the Headlines

Ocwen’s total revenue witnessed an impressive growth. It surged 90.0% year over year to $232.7 million. The improvement was the result of a substantial rise in servicing and sub-servicing fees and 19.1% rise in other income, partly offset by a decline of 3.0% in process management fees. Total revenue also significantly outpaced the Zacks Consensus Estimate of $228.0 million by 2.1%.

Operating expenses stood at $92.8 million, up 41.3% from the prior-year quarter. The main reason behind this hike was the drastic rise in compensation and benefits costs, amortization of mortgage servicing rights, servicing and origination costs, technology and communications expenditure, occupancy and equipment costs and other expenses.

Interest income declined 4.7% year over year to $2.1 million, while interest expenses leaped significantly from the prior-year quarter to $58.4 million.

Income from operations stood at $143.4 million, expanding substantially from $58.7 million in the year-ago quarter.

Balance Sheet and Other Developments

As of September 30, 2012, Ocwen recorded cash of $270.5 million compared with $144.2 million as of December 31, 2011.

During the third quarter, Ocwen completed 18,135 loan modifications (including 29.0% in Home Affordable Modification Program).

However, total assets came in at $4.2 billion, falling 12.1% from the year-ago period. Total stockholders’ equity came in at $1.5 billion, climbing 13.4% from the prior-year quarter.

Acquisitions

Concurrent with the earnings release, Ocwen announced an agreement whereby it will acquire Genworth Financial Home Equity Access, Inc. – a wing of Genworth Financial Corporation (GNW - Analyst Report). The deal estimated to be worth around $22 million and the transaction is expected to close in the first quarter of 2013.

Early in October this year, Ocwen announced the signing of a definitive agreement to acquire Homeward Residential Holdings Inc. – an integrated mortgage firm with prime lending and mortgage servicing operations – from WL Ross & Co. LLC. For this, the company will be paying about $588 million in cash and $162 million in Ocwen convertible preferred stock. The company will expand its operations by foraying into mortgage origination business.

Later in the same month, Ocwen won a bid to acquire Residential Capital's (ResCap) mortgage-servicing rights (MSRs) in collaboration with Walter Investment Management Corp. (WAC - Snapshot Report) for a sum of $3 billion, higher than the initial valuation of $2.5 billion. The offer needs to be approved by the bankruptcy court in a hearing scheduled for November 19.

Our Take

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 recent acquisitions would benefit its financials over the long term.

Furthermore, with the ongoing deterioration of home prices, Ocwen might get even more opportunities to acquire distressed servicing portfolios at low prices. Despite these positives, the persistently weak capital market, slow economic recovery and continuously rising operating expenses remain our major concerns.

Ocwen currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. However, considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.

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