Nationstar Reports Third Quarter 2014 Financial Results

  • GAAP EPS of $1.22; increase of 65% QoQ
  • Core EPS of $0.80; core pretax income of $115 million
  • Signed commitments to acquire $43 billion in servicing acquisitions since Q2’14; closed $16 billion in Q3
  • Replaced portfolio runoff in Q3 from originations and servicing acquisitions
  • Strategic hiring of technology innovator Kal Raman as CEO of Solutionstar

LEWISVILLE, Texas--()--Nationstar Mortgage Holdings Inc. (NYSE: NSM) (“Nationstar”), a leading residential mortgage services company, today reported financial results for its third quarter ended September 30, 2014.

“In the third quarter, Nationstar remained focused on its 2014 strategic initiatives to drive long term shareholder value”

“In the third quarter, Nationstar remained focused on its 2014 strategic initiatives to drive long term shareholder value,” said Jay Bray, Chief Executive Officer. “During the quarter, we generated strong margins across all of our businesses, executed on our servicing segment profitability initiatives and added additional third party clients within Solutionstar. We signed multiple servicing portfolio acquisitions and replaced virtually 100 percent of portfolio runoff in the quarter. As we announced earlier this week, we are pleased with the addition of Kal Raman as CEO of Solutionstar. This strategic hiring represents the continued evolution and growth at Solutionstar as we develop and deploy technology that will make the real estate experience easier and more transparent for consumers and real estate professionals.”

Nationstar reported quarterly net income of $111 million, or $1.22 per share, for the third quarter, a 65% increase over the $67 million or $0.74 per share in the second quarter 2014. Nationstar generated core EPS of $0.80 per share compared to $0.87 a share in the previous period. Core EPS utilizes a normalized tax rate and excludes one-time items and MSR fair value adjustments. Through the first three quarters of 2014 year-to-date, core earnings are up 27% compared to full year 2013 core earnings. Nationstar continues to see an increase in recurring fee-based earnings as a composition of overall earnings mix with 70% of pretax income in the third quarter generated from servicing and Solutionstar, as compared to 60% in the second quarter.

               

Third Quarter Business Highlights

(amounts in millions, unless otherwise noted)

Servicing Segment

     
Q3’14 Q2’14 % Change
Total fee income $ 282 $ 302

(7

)%

Pretax income $ 90 $ 67 34 %
Core Pretax income(1) $ 93 $ 86 8 %
Core pretax income margin 33 % 28 % 18 %
Core operating profitability (bps) 9.9 9.0 10 %
Ending UPB ($B) $ 377.8 $ 378.4 %
Average UPB ($B) $ 378.1 $ 381.4

(1

)%

60+ day delinquency rate 10.6 % 11.1 %

(5

)%

Annualized CPR rate 14.0 % 13.5 % 4 %

(1) Excludes one-time items including expenses related to the completion of servicing advance sales to New Residential and one-time
severance expenses related to the consolidation of operations. See reconciliation tables.

 

Servicing core pretax income increased 8% sequentially and core pretax income margin increased 18% due to continued execution on our servicing profitability targets including workforce management, reducing delinquencies and controlling vendor spend. From a basis points perspective, the Servicing operations achieved 9.9 basis points of operating profitability in the third quarter and expects to exit the year at or above 11 basis points principally driven by continued benefits from operational improvements.

Nationstar’s servicing portfolio, as measured by UPB, ended the third quarter virtually unchanged from second quarter levels as Nationstar replaced nearly 100% of runoff. Since the end of the second quarter, Nationstar has entered into commitments to acquire $43 billion of new servicing acquisitions, and closed on $16 billion in the third quarter, with the expectation of closing the remaining $27 billion by first quarter 2015.

Nationstar’s 60-plus day delinquency rate decreased to 10.6% in the quarter as a result of completing more than 18,000 workouts. The servicing portfolio CPR increased to 14.0%, reflective of the lower rate environment.

               

Solutionstar Segment

     
Q3'14 Q2’14 % Change
Revenue - Real Estate Exchange $ 25 $ 36 (30 )%
Revenue - Real Estate Services $ 60 $ 47 28 %
Pretax income $ 35 $ 38 (8 )%
Pretax income margin 41 % 46 % (11 )%
Property sales 5,225 5,661 (8 )%
REO ending inventory 9,639 8,789 10 %
 
 

Solutionstar’s revenues increased slightly during the quarter as a result of increased revenues from the real estate services business. Solutionstar’s pretax margin in the third quarter decreased slightly to 41% from 46% in the second quarter, primarily due to a higher mix of business coming from the real estate services business.

During the quarter, Solutionstar sold over 5,200 properties and still expects more than 20,000 sales over the course of 2014. The number of properties under management continues to increase as a result of the successful closing of the private-label portfolio acquisitions from Bank of America in late 2013. In addition, during the quarter, Solutionstar entered into 10 new agreements to sell properties on behalf of third-party clients. It is expected that these assets will be boarded onto the HomeSearch.com platform during the fourth quarter with sales and earnings materializing thereafter.

Nationstar recently announced the strategic hiring of technology innovator Kal Raman as Chief Executive Officer of Solutionstar. Mr. Raman brings more than two decades of experience in technology and retail businesses and has an extensive record of leadership at innovative, consumer-focused technology companies, including Groupon, eBay and Amazon. This hiring represents the next step in Solutionstar's strategy to capitalize on market opportunities and position itself as an innovative leader in real estate transactions and technology.

In early November, Solutionstar deployed its next generation technology for HomeSearch.com which delivers an enhanced experience to consumers by providing increased functionality including access to distressed and non-distressed property listings and advanced search tools.

               

Originations Segment

     
Q3’14 Q2’14 % Change
Revenue $ 139 $ 165 (16 )%
Pretax income $ 51 $ 69 (26 )%
Core pretax income(1) $ 54 $ 69 (22 )%
Core pretax income margin 39 % 42 % (7 )%
Funded volume - consumer direct ($B) $ 2.7 $ 2.9 (7 )%
Funded volume - total ($B) $ 4.1 $ 4.4 (7 )%
Locked pipeline ($B) $ 2.4 $ 2.5 (4 )%
Recapture percentage 29 % 32 % (9 )%
Purchase origination percentage of funded volume 31 % 30 % 3 %
 

(1) Excludes one-time items including expenses related to the transition to a single origination platform. See reconciliation tables.

 

Originations revenue decreased sequentially principally due to reduced volumes and a reduction in secondary market spreads. Originations expenses decreased during the quarter as a result of increased productivity and platform efficiencies. The originations segment generated a 39% margin during the quarter, representing the second consecutive quarter of high margins.

During the quarter, Nationstar successfully completed the migration to a single integrated platform that will generate efficiencies in subsequent quarters. Nationstar funded $4.1 billion of volume during the quarter with approximately 65% of the volume from the consumer direct channel. Correspondent volume was flat quarter over quarter and Nationstar continues to view the correspondent channel as an opportunistic cost-effective way to acquire servicing.

Key Performance Metrics

On a go-forward basis, in lieu of updating guidance, Nationstar has identified key operational metrics, which are key drivers of long-term growth, profitability and shareholder value. The company has established a long term earnings growth target in excess of 20% per annum. Additional detail on the key financial and operational target metrics for 2015 can be found in Nationstar's Q3'14 investor presentation.

Commitment to Homeowners

Nationstar is committed to driving down customer complaints by being consistent, resourceful, proactive and transparent in our interactions with homeowners. We believe this will translate into lower complaint volumes, lower operating expenses and put Nationstar in a preferred position for future servicing transfer approvals. In Q1'15 Nationstar will launch a customer feedback portal that will allow customers to have direct interaction with our customer support staff, track complaint statistics over time and provide transparency for all constituents. The creation of the consumer feedback portal is a prudent investment that will improve the customer experience and support long-term strategic goals and growth.

Nationstar continues to provide mortgage solutions to our more than 2.2 million homeowners. In the third quarter, we helped over 18,000 customers avoid foreclosure, including approximately 11,000 loan modifications which lower customer's payments. This also included providing collateral workouts and other repayment plans to more than 7,000 homeowners.

In addition, we helped 21,000 homeowners secure mortgages. The total includes over 8,900 homeowners whose mortgages were refinanced through the Home Affordable Refinance Program (“HARP”), which allows us to refinance a borrower with a very high loan-to-value ratio or a homeowner with negative equity in their house.

Conference Call Webcast and Investor Presentation

Chief Executive Officer, Jay Bray, and Chief Financial Officer, Robert Stiles, will host a conference call for investors and analysts to discuss Nationstar’s third quarter 2014 results and other general business matters at 9:00 a.m. ET on Thursday, November 6, 2014. To listen to the event live or in an archive which will be available for 14 days, visit Nationstar's website at http://investors.nationstarholdings.com. The conference call will also be accessible by dialing 800-299-8538, or 617-786-2902 internationally. Please use the participant passcode 92319922 to access the live conference call. An investor presentation will also be available at http://investors.nationstarholdings.com.

Non-GAAP Financial Measures

This disclaimer applies to every usage of “Core Earnings per Share” or “Core EPS”, "Core Pretax Income", and “Servicing Core Pretax Income” in this release. Core EPS is a metric that is used by management to normalize earnings for one-time expenses and changes in fair value of the MSR. Core pretax income is a metric that is used by management to exclude certain non-recurring items, and changes in the fair value of the MSR, in an attempt to provide better earnings per share comparison to prior periods. Servicing core pretax income is a metric that is used by management to exclude certain non-recurring items in an attempt to provide a better earnings per share comparison to prior periods.

About Nationstar

Based in Lewisville, Texas, Nationstar earns fees through the delivery of quality servicing, origination and transaction based services related principally to single-family residences throughout the United States. Additional corporate information is available on the investors tab at www.nationstarmtg.com.

Forward Looking Statements

Any statements in this release that are not historical or current facts are forward looking statements. These forward looking statements include, but are not limited to, statements regarding: estimates of our servicing segment’s profitability and amount of acquisitions, Solutionstar property sales in 2014 and expectation and boarding of assets on HomeSearch, the generation of efficiencies in the origination segment, key operational metrics and targets, and estimates regarding customer complaints. Forward looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-statements. Certain of these risks and uncertainties are described in the “Risk Factors” section of our most recent annual report and other required documents as filed with the SEC which are available at the SEC’s website at http://www.sec.gov. Nationstar undertakes no obligation to publicly update or revise any forward looking statements or any other financial information contained herein, and the statements made in this press release are current as of the date of this release only.

Financial Tables

   

NATIONSTAR MORTGAGE HOLDINGS INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(dollars and shares in thousands, except per share data)

 
Three Months Ended
September 30, 2014       June 30, 2014
Revenues:
Servicing fee income $ 235,408 $ 258,099
Other fee income 126,101   118,718  
Total fee income 361,509 376,817
Gain on mortgage loans held for sale 142,815   172,916  
Total revenues 504,324 549,733
 
Total expenses and impairments 327,224 346,711
 
Other income (expense):
Interest income 43,314 42,941
Interest expense (116,673 ) (139,422 )
Gain on disposal of property 4,898
Gain on interest rate swaps and caps 940   (953 )
Total other income (expense) (67,521 ) (97,434 )
 
Income before taxes 109,579 105,588
Income tax expense / (benefit)(1) (1,700 ) 38,941  
Net income 111,279   66,647  
 
Less: Net gain (loss) attributable to noncontrolling interests 54   192  
Net income attributable to Nationstar $ 111,225   $ 66,455  
 
Earnings per share:
Basic earnings per share $ 1.23   $ 0.74  
Diluted earnings per share $ 1.22   $ 0.74  
Weighted average shares:
Basic 90,120 89,465
Dilutive effect of stock awards 1,001   729  
Diluted 91,121   90,194  
 
Dividends declared per share    
 

(1) In the third quarter, Nationstar released a deferred tax valuation allowance in the amount of $44 million which resulted in a tax credit during the period. The valuation allowance was released as a result of Nationstar's recent growth and profitable results and the expectation of continued growth and profitability in the future.

 
         

NATIONSTAR MORTGAGE HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

 
September 30, 2014 June 30, 2014

Assets

Cash and cash equivalents $ 269,735 $ 623,927
Restricted cash 294,044 334,910
Accounts receivable 3,060,382 2,809,436

Mortgage loans held for sale, $1,695,502 and $2,224,205 at fair value, respectively

1,697,041 2,224,821
Mortgage loans held for investment, net of allowance for loan losses of $3,549 and $4,193 respectively 195,432 199,125
Reverse mortgage interests 1,956,952 1,772,386
Mortgage servicing rights, $2,898,209 and $2,678,134 at fair value, respectively 2,910,640 2,691,449
Property and equipment, net of accumulated depreciation of $100,515 and $93,985 respectively 121,635 123,720
Derivative financial instruments 88,333 95,328
Other assets 282,850   292,672
Total assets $ 10,877,044   $ 11,167,774
 

Liabilities and stockholders' equity

Notes payable $ 3,532,743 $ 4,017,943
Unsecured senior notes 2,159,651 2,443,962
Payables and accrued liabilities 1,344,895 1,071,626
Derivative financial instruments 9,621 33,116
Mortgage servicing liabilities 78,954 80,492
Nonrecourse debt - Legacy Assets 78,481 82,731
Excess spread financing 1,062,544 1,036,038
Participating interest financing 1,367,382 1,285,853
Mortgage servicing rights financing liabilities 44,449   33,452
Total liabilities $ 9,678,720 $ 10,085,213
 
Total equity 1,198,324   1,082,561
Total liabilities and stockholders' equity $ 10,877,044   $ 11,167,774
 
   

SERVICING FEE INCOME BEFORE FAIR VALUE ADJUSTMENTS RECONCILIATION

(dollars in thousands)

 
Three Months Ended
September 30, 2014       June 30, 2014
Servicing fee income $ 223,989 $ 221,976
Loss mitigation and performance-based incentive fees 15,088 11,570
Modification fees 30,611 45,157
Late fees and other ancillary charges 15,645 15,919
Reverse mortgage fees 13,093 14,477
Other servicing fee related revenues 8,626   5,456  
Total servicing fee income before MSR fair value adjustments 307,052 314,555
 
Changes in fair value due to inputs / assumptions:
MSR 63,449 6,975
MSR financing liability (17,749 ) 31,785
Excess spread financing (44,464 ) (32,078 )
Net change in fair value due to inputs / assumptions: 1,236 6,682
 
Other changes in fair value (amortization):
MSR (68,757 ) (52,664 )
MSR financing liability 6,752 6,684
Excess spread financing 7,151   4,942  
Net other changes in fair value: (54,854 ) (41,038 )
 
Servicing fee income 253,434 280,199
Other fee income 28,113   21,798  
Total fee income $ 281,547   $ 301,997  
 
   

CORE EARNINGS PER SHARE RECONCILIATION

(dollars and shares in thousands, except per share data)

 
Three Months Ended
September 30, 2014       June 30, 2014
Net income attributable to Nationstar Inc. $ 111,225 $ 66,455
Net gain (loss) attributable to noncontrolling interests 54   192  
Net income 111,279 66,647
 
Income taxes / (benefit)(1) (1,700 ) 38,941  
Income before taxes 109,579 105,588
 
One-time items(2) 6,836 25,730
MSR mark (1,236 ) (6,682 )
Core pretax income 115,179 124,636
 
Income taxes (42,478 ) (45,966 )
Core income 72,701 78,670
 
Average share count 91,121   90,194  
 
Core EPS $ 0.80   $ 0.87  
 

(1) In the third quarter, Nationstar released a deferred tax valuation allowance in the amount of $44 million which resulted in a tax credit during the period. The valuation allowance was released as a result of Nationstar's recent growth and profitable results and the expectation of continued growth and profitability in the future.

 

(2) One-time items include gain on sale of facility in Scottsbluff, expenses related to the retirement of 10 7/8 unsecured notes, expenses related to the originations platform consolidation, expenses related to the completion of the sale of advances to NRZ and severance expenses related to consolidation of servicing operations.

 
   

SERVICING: CORE PRETAX INCOME RECONCILIATION

(dollars in thousands)

 
Three Months Ended
September 30, 2014       June 30, 2014
Pretax income $ 89,938 $ 67,126
One-time items(1) 4,403 25,730
 
Changes in fair value due to inputs or assumptions
MSR (63,449 ) (6,975 )
MSR financing liability 17,749 (31,785 )
Excess spread 44,464   32,078  
Net change in fair value due to inputs or assumptions (1,236 ) (6,682 )
       
Servicing core pretax income $ 93,105   $ 86,174  
 

(1) One-time items include expenses related to the completion of the sale of advances to NRZ and severance expenses related to consolidation of servicing operations.

 
   

ORIGINATIONS: CORE PRETAX INCOME RECONCILIATION

(dollars in thousands)

 
Three Months Ended
September 30, 2014       June 30, 2014
Pretax income $ 51,243 $ 68,634
One-time items(1) 2,833
     
Originations core pretax income $ 54,076   $ 68,634
 

(1) One-time items expenses related to the originations platform consolidation.

 
   

SEGMENT INCOME STATEMENT

(dollars in thousands)

 
For the quarter ended September 30, 2014
Servicing     Originations     Solutionstar     Operating    

Corporate and
Other

    Elim.     Total
 
 
Revenues
Servicing fee income $ 253,434 $ 105 $ 4 $ 253,543 $ (1,002 ) $ (17,133 ) $ 235,408
Other fee income 28,113   10,334   85,519   123,966   2,135     126,101  
Total fee income 281,547 10,439 85,523 377,509 1,133 (17,133 ) 361,509
Gain on mortgage loans held for sale (1,147 ) 128,355     127,208   (1,172 ) 16,779   142,815  
Total revenues 280,400 138,794 85,523 504,717 (39 ) (354 ) 504,324
 
Total expenses and impairments 160,975 89,369 50,006 300,350 26,874 327,224
Other income (expense)
Interest income 18,369 18,903 37,272 5,688 354 43,314
Interest expense (48,651 ) (17,085 ) (352 ) (66,088 ) (50,585 ) (116,673 )
Gain on sale of property 4,898 4,898
Loss on interest rate swaps and caps 795       795   145     940  
Total other income (expense) (29,487 ) 1,818 (352 ) (28,021 ) (39,854 ) 354 (67,521 )
 
Pretax income (loss) 89,938 51,243 35,165 176,346 (66,767 ) 109,579
One-time items(1) 4,403 2,833 7,236 (400 ) 6,836
MSR Mark (1,236 )     (1,236 )     (1,236 )
Core pretax income $ 93,105 $ 54,076 $ 35,165 $ 182,346 $ (67,167 ) $ $ 115,179
 
Earnings per share $ 1.22
Core earnings per share $ 0.80
 

(1) One-time items include gain on sale of facility in Scottsbluff, expenses related to the retirement of 10 7/8 unsecured notes, expenses related to the originations platform consolidation, expenses related to the completion of the sale of advances to NRZ and severance expenses related to consolidation of servicing operations.

 
   

SEGMENT INCOME STATEMENT

(dollars in thousands)

 
For the quarter ended June 30, 2014
Servicing     Originations     Solutionstar     Operating    

Corporate
and Other

    Elim.     Total
 
Revenues
Servicing fee income $ 280,199 $ 212 $ 5 280,416 $ 275 $ (22,592 ) 258,099
Other fee income 21,798   13,689   83,359   118,846   (128 )   118,718  
Total fee income 301,997 13,901 83,364 399,262 147 (22,592 ) 376,817
Gain on mortgage loans held for sale (130 ) 151,201     151,071   (379 ) 22,224   172,916  
Total revenues 301,867 165,102 83,364 550,333 (232 ) (368 ) 549,733
 
Total expenses and impairments 185,690 97,084 45,510 328,284 18,427 346,711
Other income (expense)
Interest income 22,158 17,327 39,485 3,088 368 42,941
Interest expense (70,014 ) (16,711 ) (90 ) (86,815 ) (52,607 ) (139,422 )
Loss on interest rate swaps and caps (1,195 )     (1,195 ) 242     (953 )
Total other income (expense) (49,051 ) 616 (90 ) (48,525 ) (49,277 ) 368 (97,434 )
 
Pretax income (loss) 67,126 68,634 37,764 173,524 (67,936 ) 105,588
One time items 25,730 25,730 25,730
MSR mark to market (6,682 )     (6,682 )     (6,682 )
Core pretax income $ 86,174 $ 68,634 $ 37,764 192,572 $ (67,936 ) $ 124,636
 
Earnings per share $ 0.74
Core earnings per share $ 0.87

Contacts

Nationstar Mortgage Holdings Inc.
Marshall Murphy, 469-549-3005

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