Nationstar Reports Second Quarter 2014 Financial Results

  • Core EPS of $0.87; core pretax income of $125 million
  • GAAP EPS of $0.74; GAAP pretax of income of $106 million
  • Generated $10 billion of servicing assets in Q2, including originations
  • Servicing acquisition commitments for over $20 billion in Q3
  • Completed Real Estate Digital transaction; integration on track

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

“The continued execution of our strategic plan produced growth across all of our segments and key financial metrics”

“The continued execution of our strategic plan produced growth across all of our segments and key financial metrics,” said Jay Bray, Chief Executive Officer. “Nationstar continues to deliver increasing profits and cash flows quarter over quarter by executing on our strategic initiatives. We are excited about the earnings power of our existing platforms as well as the continued build-out of our comprehensive digital real estate service offerings. Our goal is to be the premier real estate services provider to residential owners, buyers, sellers, agents and investors.”

Nationstar reported quarterly net income of $67 million, or $0.74 per share, for the second quarter, a 174% increase over the $24 million or $0.27 per share in the first quarter 2014. Nationstar generated Core EPS of $0.87 per share compared to $0.61 a share in the previous period, an increase of 43%. Core EPS excludes one-time expenses and MSR fair value adjustments. For the quarter, pretax income was $106 million and core pretax income was $125 million.

Second Quarter Business Highlights

(amounts in millions, unless otherwise noted)

In order to increase transparency and reflect how the operations are currently managed, Nationstar now presents its financials in three operating segments: Servicing, Solutionstar and Originations. Additionally, the Corporate and Other reporting unit includes corporate overhead not directly associated with the operations, the former legacy segment and interest expense associated only with the unsecured senior notes. All prior period amounts reflect the change in the reportable segments.

 

Servicing Segment

             

 

Q2’14 Q1’14 % Change
Total servicing fee income $ 302 276 9 %
Pretax income $ 67 $ 50 34 %
Core pretax income(1) $ 86 $ 79 9 %
Core pretax income margin 28 % 29 % (3 )%
Core operating profitability (bps)(2) 9.0 8.2 10 %
Ending UPB ($B) $ 378.4 $ 384.4 (2 )%
Average UPB ($B) $ 381.4 $ 387.6 (2 )%
60+ day delinquency rate 11.0 % 11.1 % (1 )%
Annualized CPR rate 13.5 % 11.9 % 13 %

(1) Excludes one-time transaction expenses related to the NRZ advance sale and MSR fair value adjustments. See reconciliation tables.

(2) Excludes Solutionstar and allocations to Corporate and Other under current segmentation.

 

Servicing core pretax income increased 9% and core pretax income margin remained flat in the second quarter as additional investments were made in workforce management and automation during the quarter, the benefits of which are expected to accrue in the third quarter. The current expectation is for growth in both margin and core pretax income through the second half of the year principally driven by continued operational improvements as well as an increase in acquisitions. From a basis points perspective, the Servicing operations achieved 9 basis points of operating profitability.

Nationstar’s servicing portfolio, as measured by UPB, ended the second quarter nearly unchanged from first quarter levels, due to $10 billion of new servicing assets generated through acquisitions and the originations platform. Since the end of the second quarter, Nationstar already has commitments for over $20 billion in additional servicing acquisitions. Nationstar’s pipeline of acquisition opportunities totals over $300 billion in aggregate UPB.

Nationstar’s 60-plus day delinquency rate decreased slightly from the first quarter. The servicing portfolio CPR increased in the second quarter, reflective of the lower rate environment.

Solutionstar Segment

Solutionstar provides technology and data enhanced solutions to homebuyers, home sellers, real estate agents and companies engaged in the origination and / or servicing of mortgage loans. Solutionstar intends to transform the home buying experience through the utilization of a next generation real estate exchange and the delivery of high quality residential real estate services. Solutionstar principally operates two divisions:

  • Real Estate Exchange - comprises our HomeSearch.com and Real Estate Digital operational offerings which utilize the power of technology, data analytics and the internet to deliver technologies and services that facilitate the efficient exchange of homes through an internet based real estate marketplace.
  • Real Estate Services - comprises the Solutionstar and Veripro branded residential services which principally include title, close, escrow, collateral valuation and asset management services.
             
Q2’14 Q1’14

 

% Change

Revenue - Real Estate Exchange $ 36 $ 27 33 %
Revenue - Real Estate Services $ 47 $ 38 24 %
Pretax income - total $ 38 $ 26 46 %
Pretax income margin 46 % 40 % 15 %
Real Estate Exchange - number of properties sold 5,663 4,538 25 %
 

Solutionstar’s revenues increased due to a strong increase in order volume in our Real Estate Services division and the continued success of the HomeSearch.com platform in effectively marketing properties. Solutionstar’s pretax margin increased in the second quarter to 46% from 40% in the first quarter, primarily due to mix of revenues. Solutionstar’s results for all periods are reflected to adjust the referral fees typically earned by servicers.

Solutionstar sold nearly 5,700 properties in Q2’14 and 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, in the second quarter Solutionstar started selling properties on behalf of third-party clients through HomeSearch.com.

 

Originations Segment

             
Q2’14 Q1’14 % Change
Revenue $ 165 $ 130 27 %
Pretax income $ 69 $ 24 188 %
Core pretax income(1) $ 69 $ 40 73 %
Core pretax income margin 42 % 31 % 35 %
Funded volume - consumer direct ($B) $ 2.9 $ 3.3 (12 )%
Funded volume - total ($B) $ 4.4 $ 4.7 (6 )%
Application volume ($B) $ 5.0 $ 3.5 43 %
Locked pipeline ($B) $ 2.6 $ 2.9 (10 )%
Recapture percentage 32 % 51 % (37 )%
Purchase origination percentage of funded volume 30 % 28 % 7 %

(1) Excludes one-time expenses related to right sizing the operations in Q1'14. See reconciliation tables.

 

Total originations revenue and pretax income grew sequentially principally due to an increase in gain on sale. Core pretax income margin increased 35% as a function of Nationstar’s continued focus on the consumer direct channel, which presents a significant opportunity and partially insulates volatility in volume compared to the broader market.

Nationstar's funded volume and recapture rate decreased sequentially as a result of thoughtfully originating higher margin loan products, a decline in HARP originations, and efficiently managing capacity while the operations began the migration from multiple origination platforms to a single integrated platform and process. The majority of volume in the quarter came from the consumer direct channel, which includes recapture and Greenlight. Correspondent volume was flat quarter over quarter and Nationstar continues to view the correspondent channel as a cost-effective way to acquire servicing.

Helping Homeowners

Nationstar remains committed to providing mortgage solutions to our more than 2.2 million homeowners. In the second quarter, we helped nearly 23,000 customers avoid foreclosure, including approximately 15,000 loan modifications which lower customer's payments. This also included providing collateral workouts and other repayment plans to approximately 8,000 homeowners.

We also helped 23,000 homeowners secure mortgages. The total includes approximately 6,000 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.

Guidance

Nationstar remains ahead of its 2014 budget and as a result is confirming its 2014 GAAP EPS guidance of $4.00 - $5.00.

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 second quarter 2014 results and other general business matters at 9:00 a.m. ET on Wednesday, August 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 877-474-9502, or 857-244-7555 internationally. Please use the participant passcode 29117120 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 period. 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. Servicing core pretax income excludes one-time expenses related to the advance sale to NRZ and MSR fair value adjustments.

About Nationstar Mortgage Holdings Inc.

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 at www.nationstarholdings.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 growth and profitability; property sales in 2014; estimates of Solutionstar profitability; and estimates of fiscal year 2014 guidance for GAAP EPS. 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, performances 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
June 30, 2014     March 31, 2014

Revenues

Servicing fee income $ 258,099 $ 240,164
Other fee income 118,718   101,547  
Total fee income 376,817 341,711
Gain on mortgage loans held for sale 172,916   127,936  
Total revenues 549,733 469,647
 
Total expenses and impairments 346,711 321,133
 
Other income (expense)
Interest income 42,941 43,943
Interest expense (139,422 ) (156,600 )
Gain (loss) on interest rate swaps and caps (953 ) 2,821  
Total other income (expense) (97,434 ) (109,836 )
 
Income before taxes 105,588 38,678
Income tax expense (38,941 ) (15,001 )
Net income 66,647   23,677  
 
Less: Net gain (loss) attributable to noncontrolling interests 192   (359 )
Net income attributable to Nationstar $ 66,455   $ 24,036  
 
Earnings per share:
Basic earnings per share $ 0.74   $ 0.27  
Diluted earnings per share $ 0.74   $ 0.27  
Weighted average shares:
Basic 89,465 89,342
Dilutive effect of stock awards 729   733  
Diluted 90,194   90,075  
 
Dividends declared per share    
 
 
NATIONSTAR MORTGAGE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

     
Three Months Ended
June 30, 2014     March 31, 2014
Assets
Cash and cash equivalents $ 623,927 $ 404,073
Restricted cash 334,910 471,635
Accounts receivable 2,809,436 4,057,477
Mortgage loans held for sale 2,224,821 1,741,126
Mortgage loans held for investment, subject to nonrecourse debt - Legacy Assets, net 199,125 204,392
Reverse mortgage interests 1,772,386 1,620,879
Mortgage servicing rights 2,691,449 2,590,780
Property and equipment, net 123,720 119,306
Derivative financial instruments 95,328 95,774
Other assets 292,672 327,121
Total assets $ 11,167,774 $ 11,632,563
 
Liabilities and equity
Notes payable $ 4,017,943 $ 4,591,998
Unsecured senior notes 2,443,962 2,444,020
Payables and accrued liabilities 1,071,626 1,189,430
Derivative financial instruments 33,116 6,377
Mortgage servicing liabilities 80,492 82,210
Nonrecourse debt - Legacy Assets 82,731 86,529
Excess spread financing (at fair value) 1,036,038 978,183
Participating interest financing 1,285,853 1,202,252
Mortgage servicing rights financing liabilities 33,452 39,737
Total liabilities $ 10,085,213 $ 10,620,736
 
Total equity 1,082,561 1,011,827
Total liabilities and equity $ 11,167,774 $ 11,632,563
 
 
SERVICING FEE INCOME BEFORE FAIR VALUE ADJUSTMENTS RECONCILIATION

(dollars in thousands)

     
Three Months Ended
June 30, 2014     March 31, 2014
Servicing fee income $ 221,976 $ 235,198
Loss mitigation and performance-based incentive fees 11,570 13,012
Modification fees 45,157 32,808
Late fees and other ancillary charges 15,919 17,794
Reverse mortgage fees 14,477 13,539
Other servicing fee related revenues 5,456   6,180  
Total servicing fee income before MSR fair value adjustments 314,555 318,531
 
Changes in fair value due to inputs / assumptions:
MSR 6,975 (20,645 )
MSR financing liability 31,785 4,407
Excess spread financing (32,078 ) 5,103  
Net change in fair value due to inputs / assumptions: 6,682 (11,135 )
 
Other changes in fair value (amortization):
MSR (52,664 ) (57,704 )
MSR financing liability 6,684 6,381
Excess spread financing 4,942   (1,734 )
Net other changes in fair value: (41,038 ) (53,057 )
 
Total servicing fee income 280,199 254,339
Other fee income 21,798   21,811  
Total servicing revenues $ 301,997   $ 276,150  
 
 
CORE EARNINGS PER SHARE RECONCILIATION

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

     
Three Months Ended
June 30, 2014     March 31, 2014
Net income attributable to Nationstar Inc. $ 66,455 $ 24,036

Net gain (loss) attributable to noncontrolling interests

192   (359 )
Net income 66,647 23,677
 
Income taxes 38,941   15,001  
Income before taxes 105,588 38,678
 
One-time expenses 25,730 39,252
MSR mark (6,682 ) 11,135  
Core pretax income 124,636 89,065
 
Income taxes (using Q2’14, Q1’14 tax rate) (45,966 )

(34,543

)

Core income 78,670 54,522
 
Average share count 90,194 90,075
 
Core EPS $ 0.87   $ 0.61  
 
 

SERVICING: CORE PRETAX INCOME RECONCILIATION

(dollars in thousands)

     
Three Months Ended
June 30, 2014     March 31, 2014
Pretax income $ 67,126 $ 49,543
One-time expenses 25,730 17,900
Ramp expense
 
Changes in fair value due to inputs or assumptions
MSR (6,975 ) 20,645
MSR financing liability (31,785 ) (4,407 )
Excess spread 32,078   (5,103 )
Net change in fair value due to inputs or assumptions (6,682 ) 11,135
   
Servicing core pretax income $ 86,174   $ 78,578  
 
 
ORIGINATIONS: CORE PRETAX INCOME RECONCILIATION

(dollars in thousands)

 
Three Months Ended
June 30, 2014   March 31, 2014
Pretax income $ 68,634 $ 24,182
One-time expenses 15,852
   
Originations core pretax income $ 68,634 $ 40,034
 
 

Q2'14 SEGMENTATION RECONCILIATION

 
Previous Q2'14 Disclosure
      Servicing     Solutionstar (1)     Originations     Operating     Legacy   Total
Operating Expenses $ (237 ) $ $ (97 ) $ (334 ) $ (12 ) $ (347 )
Core Pretax Income 85 54 139 (14 ) 125
 
Current Q2'14 Disclosure
Servicing Solutionstar Originations Operating Corporate / Other

Total

Operating Expenses $ (186 ) $ (46 ) $ (97 ) $ (328 ) $ (18 ) $ (347 )
Core Pretax Income 86 38 69 193 (68 ) 125
 
 

Q1'14 SEGMENTATION RECONCILIATION

 
Previous Q1'14 Disclosure
      Servicing     Solutionstar (1)     Originations     Operating     Legacy     Total
Operating Expenses $ (206 ) $ $ (108 ) $ (314 ) $ (7 ) $ (321 )
Core Pretax Income 69 23 92 (3 ) 89
 
Current Q1'14 Disclosure
Servicing Solutionstar Originations Operating Corporate / Other Total
Operating Expenses $ (165 ) $ (39 ) $ (105 ) $ (310 ) $ (12 ) $ (321 )
Core Pretax Income 79 26 40 145 (55 ) 89
 

(1) Solutionstar was included in servicing under previous segmentation disclosures.

 
 
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 expenses 25,730 25,730 25,730
MSR Mark (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
 
 
SEGMENT INCOME STATEMENT

(dollars in thousands)

     
For the quarter ended March 31, 2014
Servicing     Originations     Solutionstar     Operating    

Corporate
and Other

    Elim.     Total
 
Revenues
Servicing fee income $ 254,339 $ $ 8 254,347 $ 298 $ (14,481 ) $ 240,164
Other fee income 21,811   14,048   64,991   100,850   697     101,547  
Total fee income 276,150 14,048 64,999 355,197 995 (14,481 ) 341,711
Gain on mortgage loans held for sale (1,695 ) 116,200     114,505   (672 ) 14,103   127,936  
Total revenues 274,455 130,248 64,999 469,702 323 (378 ) 469,647
 
Total expenses and impairments 165,333 105,050 39,209 309,592 11,541 321,133
 
Other income (expense)
 
Interest income 18,664 21,521 40,185 3,380 378 43,943
Interest expense (80,799 ) (22,537 ) (54 ) (103,390 ) (53,210 ) (156,600 )
Loss on interest rate swaps and caps 2,556       2,556   265     2,821  
Total other income (expense) (59,579 ) (1,016 ) (54 ) (60,649 ) (49,565 ) 378 (109,836 )
 
Pretax income (loss) 49,543 24,182 25,736 99,461 (60,783 ) 38,678
One time expenses 17,900 15,852 33,752 5,500 39,252
MSR Mark 11,135         11,135           11,135  
Core pretax income $ 78,578 $ 40,034 $ 25,736 $ 144,348 $ (55,283 ) $ $ 89,065
 
Earnings per share $ 0.27
Core earnings per share $ 0.61
 

Contacts

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

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