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Ocwen Financial Corp (OCN - Analyst Report) reported fourth-quarter 2012 earnings of 47 cents per share, missing the Zacks Consensus Estimate of 51 cents. However, this compares favorably with the prior-year quarter earnings of 8 cents.

For 2012, Ocwen’s earnings came in at $1.31 per share, missing the Zacks Consensus Estimate of $1.44 per share. However, it came in better than the year-ago earnings of 71 cents.

Augmented top line and stable balance sheet position were the positives for the quarter. However, increased operating and interest expenses, along with lower interest income, were the primary dampeners.

Ocwen’s net income stood at $65.3 million, striding way ahead of $9.7 million in the prior-year quarter. In 2012, net income was recorded at $180.9 million, substantially increasing from $78.3 million last year.

Behind the Headlines

Ocwen’s total revenue witnessed an impressive growth. It surged 50.9% year over year to $236.4 million. The improvement was the result of rise in servicing and sub-servicing fees, process management fees and other income. Total revenue also outpaced the Zacks Consensus Estimate of $228.0 million by 3.7%.

For 2012, total revenue stood at $845.0 million, up 70.4% from 2011. Total revenue also surpassed the Zacks Consensus Estimate of $800.0 million by 5.6%.

Operating expenses stood at $99.1 million, up 9.5% from the prior-year quarter. The hike was driven by higher amortization of mortgage servicing rights, servicing and origination costs, technology and communications expenditure, occupancy and equipment costs as well as other expenses, partly offset by lower compensation and benefits costs.

Interest income declined 15.1% year over year to $1.9 million, while interest expenses leaped 30.7% from the prior-year quarter to $59.8 million.

Income from operations stood at $137.3 million, expanding substantially from $66.1 million in the year-ago quarter.

Balance Sheet and Other Developments

As of Dec 31, 2012, Ocwen recorded cash of $220.1 million, up 52.6% as of Dec 31, 2011.

During the third quarter, Ocwen completed 23,926 loan modifications, inclusive of Homeward residential share (Home Affordable Modification Program accounted for 33.0% of modifications).

However, total assets came in at $5.6 billion, surging 20.0% from the year-ago period. Total stockholder equity came in at $1.6 billion, climbing 20.0% from the prior-year quarter.

Acquisitions

In Feb 2013, Ocwen acquired Residential Capital LLC’s (ResCap) mortgage-servicing rights (MSRs) in collaboration with Walter Investment Management Corp. (WAC - Snapshot Report). Ocwen shelled out $2.1 billion for the deal, subject to post-closing adjustments.

During the reported quarter, Ocwen completed the previously announced acquisition of Homeward Residential Holdings Inc. – an integrated mortgage firm with prime lending and mortgage servicing operations – from WL Ross & Co. LLC. The acquisition was announced in Oct 2012.

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 in 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 carries a Zacks Rank #3 (Hold). Stocks from the same sector worth recommending include Home Loan Servicing Solutions, Ltd. (HLSS - Snapshot Report) and Nationstar Mortgage Holdings Inc. (NSM - Snapshot Report). Both these companies carry a Zacks Rank #1 (Strong Buy).

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