Yahoo Finance Ocwen Financial Corporation (NYSE:OCN) Q1 2024 Earnings Call Transcript
Ocwen Financial Corporation (NYSE:OCN) Q1 2024 Earnings Call Transcript May 2, 2024
Ocwen Financial Corporation beats earnings expectations. Reported EPS is $1.74, expectations were $1.21. OCN isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Dico Akseraylian: Good morning, and thank you for joining us for Ocwen's First Quarter 2024 Earnings Call. Please note that our earnings release and slide presentation are available on our website. Speaking on the call will be Ocwen's Chair and Chief Executive Officer, Glen Messina and Chief Financial Officer, Sean O'Neil. As a reminder, the presentation and our comments today may contain forward-looking statements made pursuant to the Safe Harbor provisions of the Federal Securities Laws. These statements may be identified by reference to a future period or use of forward-looking terminology and address matters that are uncertain. You should bear this uncertainty in mind and should not place undue reliance on such statements.
Forward-looking statements speak only as of the date they are made and involve assumptions, risks, and uncertainties, including those described in our SEC filings. In the past, actual results have differed materially from those suggested by forward-looking statements, and this may happen again. In addition, the presentation or comments contain references to non-GAAP financial measures, such as adjusted pretax income. We believe these Non-GAAP financial measures provide a useful supplement to discussions and analysis of our financial condition, because they are measures that management uses to assess the performance of our operations and allocate resources. Non-GAAP financial measures should be viewed in addition to and not as an alternative for the company's reported GAAP results.
A reconciliation of these non-GAAP measures to their most directly comparable GAAP measures and management's view on why these measures may be useful to investors may be found in the press release and the Appendix to the investor presentation. Now I will turn the call over to Glen Messina.
Glen Messina : Thanks, Dico. Good morning, everyone, and thanks for joining our call. Today we'll share our results for the first quarter and take you through our progress in executing our strategy and financial objectives to deliver long-term value for our shareholders. Please turn to Slide 3. We're excited about the progress we made in the first quarter and pleased to report improved performance on many of our key financial metrics. We reported adjusted pre-tax income of $14 million, which results in an annualized adjusted return on equity of 13.8%. Both metrics have improved on a sequential quarter and year-over-year basis. We reported GAAP net income of $30 million or diluted earnings per share of $3.74, the highest level in six quarters.
Our results were driven by improved performance in servicing and originations, as well as favorable MSR Fair Value Change Net of Hedge. Book value per share also improved to $56. We continued to grow subservicing with $19 billion of subservicing additions for the quarter. Average servicing UPB for the first quarter was below prior year due to the timing of additions and runoff. Quarter end subservicing UPB was up 4% versus prior year. We exceeded our deleveraging objectives for the first quarter with corporate debt repurchases of $47 million. Total liquidity at quarter end was $219 million below year end 2023's level reflecting our capital allocation to debt retirement. We intend to continue to pay down debt in 2024 as excess liquidity permits.
As we look ahead, third-party estimates for industry volume have been revised lower, reflecting the expectation that interest rates will remain high for longer. We continue to believe our balanced business positions as well in any interest rate environment. Please turn to Slide 4. Guided by our strategy, we've transformed Ocwen into a balanced mortgage originator and servicer with the capabilities to create positive outcomes for clients, homeowners, and investors. We've built up from our foundation in special residential and small balanced commercial loan servicing with the PHH and RMS acquisitions to include performing agency and reverse mortgages. We've added multi-channel origination capabilities to replenish and grow our servicing portfolio and provide earnings balance through interest rate cycles.
We've invested in technology to re-platform the entire business in the cloud, modernize and expand digital interface channels, and implement various automation tools to enable low cost, high performance and improve the customer experience. We focused on growing total servicing portfolios through capital light subservicing with MSR capital partners and industry clients to reduce capital demands and in straight risk exposure. And to enhance returns, we continue to focus on asset management transactions that leverage our core competency in special servicing. Today, we're a top 10 non-bank servicer by UPB with broad capabilities and multiple industry awards for delivering top-tier industry performance for customers and investors. We're a top 10 correspondent lender and a top five reverse lender by volume and endorsements respectively.
And we're continuously improving our portfolio recapture capability. Our technology enabled global operating platform is scalable with a highly competitive cost structure, which we believe will deliver improved profitability, as we increase our total servicing UPB. Our servicing portfolio is 56% subservicing with over 100 subservicing clients and multiple MSR capital partners, which we believe will enable total servicing portfolio growth without additional MSR investment, support our deleveraging objectives and enhance return on equity. And we're executing asset management transactions, including cleanup calls, claims processing, asset recovery to drive incremental income and liquidity. We've meaningfully improved business performance, capabilities, and potential for growth.
And we believe the continued execution of our strategy will deliver long-term value for our shareholders. Now please turn to Slide 5. We're excited about our recently announced plans to rebrand Ocwen to Onity Group, reflecting the evolution of our culture and transformation of our company into one of the strongest operators in the industry. Rebranding to Onity signifies the confidence we have in our business, our capabilities, and our team. Our new brand Onity, was derived from the phrase, on it, and conveys action and our dedication to dependability, performance, and supporting consumers, clients, and investors. It reflects our hardworking culture and our focus on delivering on our commitments to achieve positive outcomes. We expect to formally change our name and begin operating as Onity group next month subject to shareholder approval.
Concurrent with our name change, we will begin trading on the New York Stock Exchange under the new symbol ONIT, O-N-I-T. Our primary operating brands, PHH Mortgage and Liberty Reverse Mortgage, will retain their names at this time. We expect to rebrand PHH and Liberty to Onity Mortgage later this year. We're excited about this new chapter for the company and we look forward to operating under the Onity brand. Let's turn to Slide 6 to discuss our financial objectives. Our first quarter financial results demonstrated another sequential quarter improvement in adjusted pre-tax income, adjusted ROE, reflecting the continued execution of our strategy and financial objectives. Our financial objectives start with sustaining the performance improvements we achieved during 2023 through disciplined MSR investing with optimized hedge coverage, continued cost improvement, and maintaining a prudent risk and compliance management approach.
Next, we're focused on improving return on equity and capital ratios by growing subservicing while maintaining our target MSR investment level, deleveraging as excess liquidity permits, and improving the profitability of our legacy owned MSRs. Lastly, we're focused on capitalizing on market cycle opportunities. In this regard, we believe our Originations platform has the agility to adapt to any industry environment and fulfill its objective to replenish and grow our servicing portfolio. We continue to focus on asset management opportunities and close another asset recovery transaction in the first quarter, which we expect will be accretive to income over the next several quarters. We also continue to dynamically manage our owned MSR portfolio to capitalize on differing views of market values, amongst top market participants.
As always, we remain flexible and committed to considering all options in this dynamic market to maximize value for shareholders. We're pleased with the performance improvements we've driven so far and are committed to executing our financial objectives to further deliver value for our shareholders. Please turn to Slide 7. We have balanced and diversified our business to operate profitably in both high and low industry environments. Our servicing business positions us to deliver strong earnings and cash flow performance in the current high interest rate environment. While originations today is not a material earnings contributor, as you can see in 2021 when interest rates were lower, Originations delivered more substantial earnings. Our diverse capabilities in both Originations and Servicing create multiple opportunities to generate earnings growth and returns.
We have a top 10 or better market position in both the Originations and Servicing, multiple volume acquisition channels, and diverse capabilities which have enabled multiple asset recovery transactions and growth in performing and delinquent small balanced commercial loan servicing. We're excited about the potential opportunities in these high margin areas. Lastly, we've substantially improved our portfolio mix over the past several years, decreasing client concentration rate and reducing liquidity demands with over 85% of our servicing portfolio in subservicing and GSE-owned MSRs where we have materially lower exposure to advances. Please turn to Slide 8. We've continued to make good progress, executing on our capital light growth strategy.
Subservicing additions of $19 billion in the first quarter was equal to subservicing additions for the entire second half of 2023. And subservicing continues to represent most of our total servicing additions. Subservicing UPB with capital partners continues to grow as well. Our efforts to diversify these types of relationships are evident with roughly 46% of our total capital partner subservicing UPB comprised of non-MAV partners. Our capital partner relationships also create the opportunity for subservicing growth by way of MSRs acquired by them in the open market, which comprises roughly 39% of our capital partner subservicing at the end of the quarter. I want to thank Oaktree and our other MSR capital partners for the trust and confidence they have placed in our team to help them achieve their growth and profitability objectives.
Our subservicing growth with mortgage banking clients and MSR capital partners continues to offset the runoff in the Rithm subservicing portfolio. Our average subservicing UPB, excluding Rithm, is up 4% versus 2023 and up 38% over the last two years. We've [forwarded] (ph) over $100 billion in subservicing additions in the last 24 months and applying commitments to Board $29 billion in subservicing UPB in the first half of 2024. We continue to target $69 billion in subservicing additions from all sources for the full year. Our investor-driven approach to MSR purchases results in a capital-efficient growth, helps manage our exposure to MSR valuation changes due to interest rates, and introduces an added level of price discipline for the Originations business.
Please turn to slide 9. Our enterprise sales team delivered solid performance in the first quarter. Originations volume is up 3% and total servicing addition is up 32% versus prior year. It continues to be a highly competitive market so far in 2024. Market leaders and the correspondent and co-issued channels continue to have what we believe is an aggressive view of MSR values. We have remained disciplined in originating MSRs consistent with their yield objectives, which is reflected in the 10 percentage point increase in mix and total additions from higher margin channels and products versus prior year. We're dynamically managing our owned MSR portfolio in a range of $115 billion to $135 billion using strategies of both buying and selling MSRs and using excess spread transactions as we have done for the past three years.
This helps us optimize MSR returns, manage interest rate risk, and supports our objective of repurchasing debt as excess liquidity permits. Consistent with this strategy, we have entered into letters-of-intent to sell up to $6 billion of select MSRs above our book value, taking advantage of differing views of MSR values. NAV has also entered into letters-of-intent to sell up to $6 billion of select MSRs above our book value, taking advantage of differing views of MSR values. NAV has also entered into letters-of-intent to sell up to $10 billion in MSRs, where market pricing [exceeds] (ph) its view of long-term value. While this may temporarily suppress total servicing growth, we believe it's overall accretive for our shareholders and our enterprise sales team can replenish both MSRs over the next six months.
Please turn to Slide 10. We have been relentlessly focused on building one of the best performing servicing platforms in the industry, while maintaining a highly competitive cost structure. Our platform has been recognized by Fannie Mae, Freddie Mac and HUD with top tier industry performance awards for several years. We continue to achieve lower delinquency levels compared to the industry average as reported by Inside Mortgage Finance. And since the fourth quarter of 2020, more of our borrowers have exited forbearance either as current, paid in full, or with an active loss mitigation plan than industry average as reported by the MBA. To complement our operating capability, our focus on continuous cost improvement has positioned us with a highly competitive servicing cost structure.
Based on the results of the MBA's annual operating, servicing operating study for 2022, our fully loaded residential forward servicing costs and basis points of UPB and cost per loan are favorable to our large bank and independent mortgage bank peers which have an average forward residential service in UPB more than twice our size. Our cost competitiveness comes from a relentless focus on continuous process improvement, global operating capability, and strategic investments in technology. Our enterprise-wide technology platform is multi-cloud based and leverages optical character recognition, robotic process automation, and AI and over 100 processes to facilitate transaction processing, customer engagement, information extraction, and document management, and not just in servicing, but in originations, HR, IT, finance, and compliance.
With roughly 35% of our servicing cost structure fixed or semi-variable, and our culture of operational excellence and continuous cost improvement, we believe we can further improve our efficiency as we grow total servicing UPB. Now, I'll turn it over to Sean to discuss our results for the fourth quarter -- first quarter, sorry.
Sean O'Neil : Thank you, Glen. Please turn to slide 11 for the first quarter financial highlights. Overall, this was a strong quarter for financial results, both GAAP and adjusted pre-tax income. And I remain excited about our financial outlook for 2024, regardless of the interest rate environment, due to our balanced business model and capital-led approach. The headline is both our servicing and origination businesses continued their profitable trend and demonstrated yet another quarter of improving positive adjusted pre-tax income as well as positive GAAP net income and growth in book value per share. Starting with the blue column to the right, our material improvement in GAAP net income to $30 million versus the prior quarter's loss of negative $47 million was driven by two main items.
First, an MSR valuation adjustment net of hedge due to higher rates as well as an active MSR market with elevated demand, as well as strong operational performance. Operational performance is reflected directly in our adjusted pre-tax income, which is up to $14 million for the quarter, driven primarily by servicing with a small contribution from originations. This resulted in an adjusted pre-tax ROE of almost 14% and we are maintaining our guidance for 2024 of 12-plus percent. GAAP net income also continued to benefit from utilization of our NOL deferred tax assets reflected in the previously disclosed tax adjusted DTA for the U.S. subsidiary of over $180 million at the end of the year 2023, currently fully offset by evaluation allowance as shown in our 2023 10-K.
Each shareholder metrics would be the $3.23 increase in book value per share to approximately $56 and diluted earnings per share of $3.74, both metrics up from prior and year-over-year quarter. For a more detailed view of our progress on deleveraging, please turn to page 12. During the first quarter, we repurchased in the open-market at a discount and then subsequently retired approximately $47 million of our PMC senior secured notes. This exceeded the initial plan we discussed last quarter. We were able to do this while maintaining appropriate liquidity by leveraging assets, reducing legacy servicing advances, and executing another successful securitization. The securitization was preceded by an opportunistic whole loan purchase, which was driven by a combination of our servicing and origination expertise, another indicator of the strength of our balanced business model.
We still target a debt-to-equity ratio below 3.9 by year end, and we believe this will facilitate future transactions to refinance, extend, or replace our PMC and potentially the OFC senior secured notes. To do so, we will evaluate all options, which could include new debt, junior securities, or other structures. We may pursue any transaction in anticipation of the maturity of our PMC notes, which include market considerations among other factors. Before I leave this page, I would point out that Moody's ratings upgraded our corporate family rating in April to B3 and left our debt rating intact at B2. This is in recognition of improving profitability, focused deleveraging efforts, and capable liquidity management, among other things. Please turn to page 13 for an overview of our servicing segment, which covers both forward and reverse servicing.
Servicing yet again improved its contribution to adjusted pre-tax income for the quarter. You can see this in the upper left graph. This was driven by higher revenues that overcame seasonally lower float income due to tax and insurance disbursements and higher operating expenses, which we typically see in the first quarter. Reverse servicing increased its profitable contribution with higher gains on loans held-for-sale, even as volume contracted. Finally, a reminder that our small but very profitable commercial loan servicing results sit within the forward servicing data on this page, and commercial requires substantially less UPB growth to drive good results. Our average subservicing volumes declined slightly in the quarter, as Glen mentioned.
However, we added substantial new volume late in the quarter, so our quarter-end UPB metric improved but not the average UPB. In addition to routine runoff, the average balance decline was impacted by subservicing clients selling into a strong MSR market. Our capital partner relationships remain highly effective and we anticipate an additional $9 billion of UPB to Board in the second quarter. Underlying the strong results is the ongoing effort on continued cost improvements, driven by technology, as Glen previously mentioned, and traditional process improvements across both forward and reverse servicing, as well as lower advances on our legacy book, which have decreased 14% year-over-year. Please turn to page 14 for an overview of our Originations segment, both forward and reverse originations.
Despite rising rates, further depressing seasonally low origination volume, we are pleased to say all of our channels returned to profitability in the quarter. Higher margins on lower volumes drove the profitability with reverse origination seeing the largest improvement. Lower profits and correspondence were offset by gains in reverse and bringing consumer direct back to break even. We continue to see improvements in our cost per loan metric. Consumer direct is seeing solid improvements and recapture, which help both revenue and cost per loan. Thus, we continue to operate an origination business that is agile, profitable, and should be effective even if rates are higher for longer, as current market expectations indicate. I would like to point out to investors a few key data points in our appendix.
We provide data on fully diluted shares and equity on page 27. We have valuation metrics for the MSR on Page 28. These are designed to be transparent and can be used versus peer data and surveys, where we show many valuation parameters across the major investor types. More detailed balance sheet data on page 19 shows you the assets that require matching asset and liability gross-ups under GAAP treatment, usually driven by three different buckets. Our MAV and MSR partner capital assets are one, reverse HECM assets are two, and the Ginnie Mae MSRs that are eligible for an early buyout or the third. ESS assets sit within the all other bucket on the far right of that page. Back to you, Glen.
Glen Messina : Thanks, Sean. Now please turn to slide 15 for a few wrap-up comments before we go to Q&A. I'm excited about how we started 2024 and believe we are well positioned to navigate the market environment ahead and deliver long-term value for our shareholders. Our balanced and diversified business creates opportunities, mitigates risk, and supports our ability to perform across multiple business cycles. We are executing a focused, prudent, capital-like growth strategy, leveraging our superior operating capabilities to grow subservicing across multiple investor and product types. We've expanded our client base, grow our Originations volume mix from higher margin channels and products and continue to improve recapture performance.
We believe our originations platform is positioned to operate effectively in any industry environment. We have a strong pipeline of subservicing boarding commitments and we've expanded our MSR capital partner relationships to accelerate subservicing growth. Our servicing platform delivers top-tier operational performance levels and results in measurable improvements for clients, borrowers, and investors. Through our investment in technology, global operating capability, and process improvement, we've built a scalable servicing platform with the best practice cost structure and capacity for growth that delivers improved borrower and client satisfaction. Lastly, we're prudently managing capital liquidity for economic and interest rate volatility and de-leveraging our balance sheet as excess liquidity permits to further improve financial performance and mitigate capital structure related risks.
Overall, we are excited about the potential for our business and do not believe our recent share price is reflective of our financial position, growth opportunities, or the strength of our business. With that, Natalie, let's open up the call for questions.
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