Ocwen Financial Corporation Announces Second Quarter 2006 Net Income
WEST PALM BEACH, Fla., July 27, 2006 -- Ocwen Financial Corporation (NYSE:OCN) today reported net income of $159.1 million or $2.53 per share for the second quarter of 2006. This compares to $2.9 million or $0.05 per share for the second quarter of 2005. For the six months ended June 30, 2006 net income was $175.6 million or $2.79 per share as compared to $5.3 million or $0.08 per share for the same period in 2005. Second quarter results include a tax benefit of $141.7 million, primarily reflecting the reversal of $145.2 million of the valuation allowance that had been established in prior years.
Chairman and CEO William C. Erbey stated, "Our second quarter net income reflects a tax benefit arising from the reversal of $145.2 million of the deferred tax asset valuation allowance that we had established in prior years. We concluded that our recent earnings results and future outlook met the accounting criteria for recording this adjustment.
"Our second quarter pre-tax results were driven primarily by the continued strong performance of our Residential Servicing segment. As compared to the second quarter and first half of last year, Residential Servicing reported higher revenue and lower expenses. All of our other segments reported pre-tax earnings in the second quarter of 2006 apart from our Residential Origination Services segment which reported a loss of $(2.1) million in the second quarter, although year to date results reflect pre-tax income of $2.9 million. Our 2006 results in this segment are driven in large part by a limited number of loan purchase and securitization transactions which typically span several quarters before they are fully executed and thus create earnings variances across those periods. These transactions resulted in losses of $(3.2) million in the second quarter of 2006 and a gain of $1.2 million for the first six months. No such transactions occurred during the first half of 2005.
"Our total assets declined by $274.1 million as compared to December 31, 2005, primarily due to a reduction in loans held for resale of $510.2 million, reflecting securitization transactions executed during the first half of this year. This reduction was partially offset by increases of $44.6 million in cash and equivalents, $27.1 million in our subordinate and residual trading portfolio reflecting securities retained from securitization transactions and $151.0 million in our deferred tax assets, primarily due to the reduction of the valuation allowance in the second quarter of 2006. Our leverage has improved in the first half of the year as reflected by an equity to assets ratio of 32.7% as of June 30, 2006 as compared to 18.7% as of December 31, 2005."
Residential Servicing
Three Months Six Months
For the periods ended
June 30, 2006 2005 2006 2005
Revenue $82,969 $68,459 $162,911 $136,906
Operating expenses 58,658 60,644 114,288 122,040
Other income (expense) (6,163) (5,215) (12,607) (9,319)
Pre-tax income (loss) $18,148 $ 2,600 $ 36,016 $ 5,547
-- As of June 30, 2006, we were the servicer of approximately 404
thousand loans with an unpaid principal balance (UPB) of $47.1
billion as compared to approximately 369 thousand loans and $42.8
billion of UPB at December 31, 2005.
-- Revenue in the 2006 periods reflects increased servicing fees and
float income from a larger servicing portfolio and higher interest
rates.
-- The decline in operating expenses reflects a reduction in interest
paid to investors related to loan pay-offs as well as a reduction in
operating expenses reflecting process improvements and automation.
Operating expenses also include a provision of $2.9 million to
increase litigation reserves related to ongoing cases.
Commercial Servicing
Three Months Six Months
For the periods ended
June 30, 2006 2005 2006 2005
Revenue $ 3,084 $ 4,558 $ 6,199 $ 8,999
Operating expenses 2,784 4,025 5,634 8,398
Other income (expense) (18) (198) (18) (245)
Pre-tax income (loss) 282 $ 335 $ 547 $ 356
-- Revenue and expense declines primarily reflect the sale of GSS Japan
and reduced revenue and expenses in GSS Taiwan reflecting reduced
activity in that location.
Ocwen Recovery Group
Three Months Six Months
For the periods ended
June 30, 2006 2005 2006 2005
Revenue $ 1,856 $ 3,274 $ 4,057 $ 7,086
Operating expenses 1,928 3,057 4,561 6,454
Other income (expense) 192 27 274 117
Pre-tax income (loss) $ 120 $ 244 $ (230) $ 749
-- The decline in revenue in the 2006 periods primarily reflects a shift
in revenue from proprietary assets to lower yielding third-party
contracts.
-- Operating expenses declined in 2006 as a result of process
improvements, technology enhancements and a greater concentration of
India resources.
Residential Origination
Services
Three Months Six Months
For the periods ended
June 30, 2006 2005 2006 2005
Revenue $14,431 $12,870 $ 29,006 $ 25,137
Operating expenses 17,551 13,259 38,310 24,340
Other income (expense) 1,037 2,113 12,244 3,761
Pre-tax income (loss) $(2,083) $ 1,724 $ 2,940 $ 4,558
-- Second quarter and six month 2006 results include transaction losses
of approximately $(3.2) million and transaction gains of $1.2
million, respectively, related to our securitization and loan sale
activities. No such transactions were conducted in the first half of
2005.
-- Excluding these transactions, segment results reflect the net impact
of losses in loan origination activities and declines in the revenue
earned from our maturing UK residual securities portfolio, partially
offset by improvements in our loan processing operations.
Business Process
Outsourcing
Three Months Six Months
For the periods ended
June 30, 2006 2005 2006 2005
Revenue $ 2,656 $ 2,858 $ 5,379 $ 5,443
Operating expenses 1,963 2,575 4,688 5,030
Other income (expense) (7) (19) (17) (51)
Pre-tax income (loss) $ 686 $ 264 $ 674 $ 362
-- Revenue declines in 2006 reflect the loss of a client due to a merger
during the first quarter of the year.
-- Expenses have declined as a result of cost reduction efforts initiated
during the second quarter.
Corporate Items and Other
Three Months Six Months
For the periods ended
June 30, 2006 2005 2006 2005
Revenue $ 140 $ (4) $ 34 $ (68)
Operating expenses 1,530 2,489 4,247 4,476
Other income (expense) 1,631 2,499 3,118 1,082
Pre-tax income (loss) $ 241 $ 6 $ (1,095) $ (3,462)
-- Results for 2006 include a gain of approximately $0.9 million in the
first quarter representing interest income arising from a cash
distribution on a commercial residual security now approaching the
end of its economic life, and a gain of approximately $1.2 million
from the sale of a real estate asset in the second quarter.
-- In the first six months of 2005 we retained greater interest expense
in Corporate, reflecting the high cash balances we were holding in
preparation for debanking, and also incurred expenses in Corporate
related to that initiative.
Ocwen Financial Corporation is a leading provider of servicing and origination processing solutions to the loan industry with headquarters in West Palm Beach, Florida, offices in, Orlando, Florida, Downers Grove, Illinois and Atlanta, Georgia and global operations in Canada, Germany, India and Taiwan. We make our clients' loans worth more by leveraging our superior processes, innovative technology and high-quality, cost-effective global human resources. Additional information is available at www.ocwen.com.
This news release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to the securitization market and our plans to securitize loans and expectations as to the impact of rising interest rates and cost-effective resources in India. Forward-looking statements are not guarantees of future performance, and involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially.
Important factors that could cause actual results to differ materially from those suggested by the forward-looking statements include, but are not limited to, the following: general economic and market conditions, prevailing interest or currency exchange rates, governmental regulations and policies, international political and economic uncertainty, availability of adequate and timely sources of liquidity, federal income tax rates, real estate market conditions and trends and the outcome of ongoing litigation as well as other risks detailed in OCN's reports and filings with the Securities and Exchange Commission, including its periodic report on Form 10-K for the year ended December 31, 2005 and Form 10-Q for the quarter ended March 31, 2006. The forward-looking statements speak only as of the date they are made and should not be relied upon. OCN undertakes no obligation to update or revise the forward-looking statements.
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
Three Months Six Months
For the periods ended
June 30, 2006 2005 2006 2005
Revenue
Servicing and sub-
servicing fees $ 82,772 $ 71,651 $ 162,857 $ 144,031
Process management
fees 18,837 17,454 38,149 34,406
Other revenues 3,527 2,910 6,580 5,066
Total revenue 105,136 92,015 207,586 183,503
Operating expenses
Compensation and
benefits 22,006 24,355 47,707 48,727
Amortization of
servicing rights 27,663 24,930 53,952 50,045
Servicing and
origination 12,707 15,148 25,904 29,181
Technology and
communications 6,034 7,862 12,673 15,261
Professional services 7,620 5,715 15,399 10,733
Occupancy and equipment 4,823 4,571 9,799 8,813
Other operating
expenses 3,561 3,468 6,294 7,978
Total operating
expenses 84,414 86,049 171,728 170,738
Other income (expense)
Interest income 6,298 6,764 24,411 13,096
Interest expense (10,062) (9,072) (27,316) (17,512)
Gain (loss) on
trading securities 1,701 (1,269) 1,327 (2,667)
Gain (loss) on loans
held for resale, net (3,437) --- (1,221) ---
Other, net 2,172 2,784 5,793 2,428
Other income
(expense), net (3,328) (793) 2,994 (4,655)
Income before income
taxes 17,394 5,173 38,852 8,110
Income tax expense
(benefit) (141,692) 2,265 (136,767) 2,815
Net income $ 159,086 $ 2,908 $ 175,619 $ 5,295
Earnings per share
Basic $ 2.53 $ 0.05 $ 2.79 $ 0.08
Diluted $ 2.23 $ 0.05 $ 2.47 $ 0.08
Weighted average common
shares outstanding
Basic 62,821,428 62,809,286 63,033,454 62,776,469
Diluted (1) 71,767,873 63,709,246 71,876,666 63,864,247
(1) For purposes of computing diluted earnings per share, the 2006
periods reflect the assumed conversion of our 3.25% Convertible
Notes into 7,962,205 shares of common stock. Conversion of the
Convertible Notes has not been assumed for the 2005 periods
because the effect would be anti-dilutive.
OCWEN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
June 30, December 31,
2006 2005
Assets
Cash $ 204,134 $ 269,611
Trading securities, at fair value
Investment grade 111,780 1,685
Subordinates and residuals 57,421 30,277
Loans held for resale 114,485 624,671
Advances 263,963 219,716
Match funded advances 351,593 377,105
Mortgage servicing rights 151,501 148,663
Receivables 60,738 68,266
Deferred tax assets, net 171,300 20,270
Premises and equipment, net 37,446 40,108
Other assets 55,655 53,761
Total assets $ 1,580,016 $ 1,854,133
Liabilities and Stockholders' Equity
Liabilities
Match funded liabilities $ 313,963 $ 339,292
Servicer liabilities 316,277 298,892
Lines of credit and other
secured borrowings 187,835 626,448
Debt securities 150,329 154,329
Other liabilities 93,283 85,912
Total liabilities 1,061,687 1,504,873
Minority interest in subsidiary 1,892 1,853
Stockholders' Equity
Common stock, $.01 par value;
200,000,000 shares authorized;
62,429,907 and 63,133,471
shares issued and outstanding at
June 30, 2006 and December
31, 2005, respectively 624 631
Additional paid-in capital 176,320 184,262
Retained earnings 338,817 163,198
Accumulated other
comprehensive income
(loss), net of taxes 676 (684)
Total stockholders' equity 516,437 347,407
Total liabilities and
stockholders' equity $ 1,580,016 $ 1,854,133
CONTACT: Ocwen Financial Corporation
Robert J. Leist, Jr., Senior Vice President
and Chief Accounting Officer
(561) 682-7958
robert.leist@ocwen.com
