Walter Investment Management Corp. Announces Full Year And Fourth Quarter 2015 Highlights And Financial Results

OREANDA-NEWS. Walter Investment Management Corp. (NYSE: WAC) ("Walter Investment" or the "Company") announced operational highlights and financial results for the full year and quarter ended December 31, 2015.

2015 Operational Highlights and Recent Developments

• Net loss of $7.00 per share; Adjusted Earnings of $1.98 per share after tax
• Non-cash goodwill and fair value charges drove $6.36 of the per share net loss
• 4% growth in the serviced portfolio to $266.6 billion of UPB as compared to 2014; ranked nationally as the 8^th largest servicer⁽¹⁾
• Servicing segment delivered full-year AEBITDA margin of 16 bps
• 36% growth in Originations funded volumes to $25.1 billion as compared to 2014; ranked nationally as the 14^th largest originator⁽¹⁾
• Assisted approximately 53,200 homeowners in obtaining modifications and originated approximately 38,300 HARP loans
• Recently executed agreements to add approximately $13.4 billion in UPB to our servicing portfolio with minimal capital outlays

2015 Financial Results

GAAP net loss for the year ended December 31, 2015 was ($263.2) million, or ($7.00) per share, as compared to a GAAP net loss of ($110.3) million, or ($2.93) per share for 2014. Included in the 2015 net loss are pre-tax, non-cash charges of  $207.6 million for goodwill impairment, or $4.00 per share after tax⁽²⁾ and $143.3 million resulting from changes in valuation inputs and other assumptions used in the fair value of assets and liabilities carried at fair value, or $2.36 per share after tax⁽²⁾. Adjusted Earnings for the year was $74.3 million after tax⁽²⁾, or $1.98 per share⁽²⁾, and Adjusted EBITDA ("AEBITDA") for the full year 2015 was $549.7 million.

The goodwill impairment includes a charge of $151.0 million incurred in the fourth quarter related to the Servicing segment and a charge of $56.6 million incurred in the second quarter related to the Reverse Mortgage segment. The goodwill impairment charge related to the Servicing segment was primarily the result of higher discount rates applied to forecasted cash flows driven by the decline in the Company's stock price which has been impacted by continued challenges in the Company's industry, market developments, as well as the impact these factors have had on certain Company specific matters.

The Company reported a GAAP net loss for the fourth quarter of 2015 of ($117.1) million, or ($3.16) per diluted share, as compared to a GAAP net loss of ($44.0) million, or ($1.17) per diluted share, for the fourth quarter of 2014.  The current quarter includes a pre-tax, non-cash charge of $151.0 million, or $2.53 per share after tax⁽¹⁾, for goodwill impairment in the Servicing segment. Adjusted Loss for the fourth quarter of 2015 was ($5.0) million after tax⁽¹⁾, or ($0.14) per share⁽¹⁾, relatively flat as compared to the prior year quarter. Adjusted EBITDA for the quarter was $101.2 million, an increase of approximately 19% when compared to the prior year quarter primarily driven by lower levels of operating expenses. These lower levels of expenses were driven in part, by actions taken throughout 2015 to improve operating efficiency.

"We are embarking on a transformation of our businesses to create a best-in-class experience for homeowners. The ambition of this transformation is to make us the partner of choice for homeowners, regulators and other stakeholders. As we undertake this mission, the Company is pleased to have added significant shareholder representation to the Board," said Denmar J. Dixon, Walter Investment's Vice Chairman, Chief Executive Officer and President.

Earlier this year, Walter launched a company-wide project to transform processes and identify and deploy technology solutions to drive substantial improvement in costs, revenues and compliance.  Mr. Dixon continued, "Our goal is to improve the overall customer experience dramatically, help us drive down our cash costs of operations and at the same time drive long-term growth in per-share intrinsic value."

The Company is intently focused on lowering cash costs, and has initiated a comprehensive review of its cost structure and operations. During this process, we are evaluating investments and other uses of cash against return hurdles and opportunity costs, and are planning to repurchase or pay down debt during the year ahead. Improving Walter's financial strength is a key objective over the near term. Walter's cash flows, focus on expanding our sub-servicing business and disciplined requirements for new cash investments should lead to a stronger balance sheet. Under the Company's 2016 debt reduction plan, Walter is targeting a leverage ratio of 3.4X to 3.6X by the end of the year.

The Company is actively pursuing potential business opportunities with the goal of significantly increasing its mix of sub-servicing business. In 2015, the Company grew its Servicing segment's portfolio by 4% through its originations efforts and opportunistic portfolio purchases without raising capital. The Originations segment capitalized on an attractive rate environment and delivered strong results from both the retention and correspondent channels.

Mr. Dixon noted that the Reverse Mortgage segment encountered significant operational challenges during the year, resulting in a disappointing financial result, "We are taking steps which we believe will drive meaningful improvement in the business in 2016."

Full Year and Fourth Quarter 2015 Financial and Operating Overview

Total revenue for the year ended December 31, 2015 was $1.3 billion, a decline of $212.9 million or 14% as compared to the year ended December 31, 2014, primarily related to a $107.2 million decline in net servicing revenues and fees driven by a $128.5 million decrease in the fair value of mortgage servicing rights. Additionally, the current year had $60.2 million lower interest income on loans primarily due to the sale of the residual interests in seven of the Residual Trusts and $23.8 million lower insurance revenue driven by the loss of commissions earned on GSE lender-placed policies. Total expense of $1.7 billion for the year ended December 31, 2015 increased $86.7 million or 5% as compared to the year ended December 31, 2014, primarily due to a $125.3 million higher goodwill impairment charge in the current year, partially offset by $29.5 million lower interest expense primarily due to the sale of the residual interests in seven of the Residual Trusts and $5.5 million lower other expenses.

Total revenue for the fourth quarter of 2015 was $331.6 million, a slight increase as compared to the prior year quarter, driven by $56.9 million higher net servicing revenue and fees primarily related to favorable fair value gains on mortgage servicing rights, partially offset by $32.5 million lower fair value gains on reverse loans and liabilities and $20.6 million lower interest income on loans primarily due to the sale of the residual interests in the seven Residual Trusts in April 2015. Total expenses for the fourth quarter of 2015 were $548.3 million, 28% higher as compared to the fourth quarter of 2014. Results reflect a goodwill impairment charge of $151.0 million related to the Servicing business and $11.6 million higher curtailment expense in the Reverse Mortgage business, partially offset by $31.6 million lower accruals for loss contingencies and legal expenses due to legal and regulatory matters outside of the normal course of business, $15.3 million lower Servicing advance loss provisions and $13.5 million lower interest expense primarily due to the sale of the residual interests in seven of the Residual Trusts.

Fourth Quarter 2015 Segment Results

Results for the Company's segments are presented below.

Servicing

During the fourth quarter of 2015 the Servicing segment added approximately $10.0 of UPB to the serviced book of business through a combination of MSR acquisitions, sub-servicing arrangements, originated MSR and co-issue relationships, ending the quarter with approximately 2.1 million total accounts serviced with a UPB of approximately $246.6 billion. Ditech ended the year ranked as the 8th largest servicer in the nation by UPB. During the quarter, the Company experienced a net disappearance rate of 13.3% which was aided by the retention performance of the Originations segment.

The Servicing segment generated total revenue of $220.4 million in the fourth quarter of 2015, a 20% increase as compared to fourth quarter 2014 revenue of $183.3 million. The increase was primarily comprised of $42.5 million favorable fair value changes on our mortgage servicing rights and $12.5 million higher servicing fees, partially offset by $20.6 million lower interest income on loans resulting primarily from the sale of the residual interests in seven of the Residual Trusts. Servicing revenues for the quarter ended December 31, 2015 included $179.3 million of servicing fees, $23.9 million of incentive and performance-based fees and $28.4 million of ancillary and other fees.The segment recorded a favorable change in fair value resulting from changes in valuation inputs and other assumptions used in the fair value of assets and liabilities carried at fair value of $20.1 million for the quarter.

Expense for the Servicing segment was $369.6 million, an increase of 46% or $116.5 million as compared to the prior year quarter. The change was driven by a $151.0 million goodwill impairment charge partially offset by a $22.2 million decrease in operational expenses including $12.5 million lower accruals for loss contingencies and legal expenses and $15.3 million lower advance loss provisions, as well as $12.2 million lower interest expense primarily as a result of the sale of the residual interests in seven of the Residual Trusts. Expenses also included $11.1 million of depreciation and amortization costs. 

The segment generated AEBITDA of $90.4 million, an increase of 22% as compared to the fourth quarter of 2014, primarily due to lower expenses driven by cost-cutting initiatives implemented throughout 2015. The segment generated Adjusted Earnings of $18.7 million for the fourth quarter of 2015, a decline of 22% as compared to the prior year quarter primarily driven by lower revenues, which include a $23.9 million unfavorable change in the fair value of servicing rights attributable to higher realization of cash flows reflecting the impact of accelerated prepayments, partially offset by lower expenses. 

The Company recently made progress on its goals, executing agreements to add approximately $13.4 billion in UPB to the Servicing segment's portfolio with minimal capital outlays.

Originations

Total pull-through adjusted locked volume for the fourth quarter increased to $5.5 billion, as compared to $5.1 billion for the fourth quarter of 2014, driven by volume growth in the correspondent lending channel. Funded loans in the current quarter totaled $5.6 billion, an increase of 10.8% from the prior year quarter, with approximately 31% of that volume in the consumer lending channel and approximately 69% generated by the correspondent lending channel. Ditech ended the year ranked as the 14th largest originator in the nation by UPB. The combined direct margin for the current quarter was 63 bps, an overall increase of 13 bps from the prior year quarter, consisting of a weighted average of 97 bps direct margin in the consumer lending channel and 33 bps direct margin in the correspondent lending channel.  The Originations business delivered a recapture rate of 25% for the year.

The Originations segment generated revenue of $102.8 million in the fourth quarter of 2015, a 15% increase as compared to the prior year quarter primarily due to a $9.4 million increase in other revenues driven by higher origination fees and a $3.9 million increase in net gains on sales of loans.  Expenses for the Originations segment of $90.6 million, which include $8.5 million of interest expense and $2.7 million of depreciation and amortization, were relatively flat as compared to the prior year quarter.

The segment generated Adjusted Earnings of $17.0 million and AEBITDA of $20.5 million for the fourth quarter of 2015, an increase of $9.9 million and $10.9 million, respectively as compared to the prior year quarter, driven by the higher origination fee income in the current quarter.

Reverse Mortgage

The Reverse Mortgage business grew its serviced portfolio 11% year over year to $20.1 billion of UPB at December 31, 2015. During the year, the business securitized $1.5 billion of HECM loans ranking it as the third largest issuer of HMBS in the nation by UPB. Additionally, during the first quarter the business entered into a new $100 million GNMA buy-out facility enhancing its liquidity position.

The Reverse Mortgage segment generated revenue of $18.1 million for the quarter, a 66% decline as compared to the prior year quarter reflecting lower net fair value gains on reverse loans and related HMBS obligations of $32.5 million, driven primarily by unfavorable changes in non-cash fair value adjustments due to a higher interest rates at December 31, 2015 as compared to the prior year period. Current quarter revenues included a gain of $8.0 million due to the net impact of HECM loan and related HMBS obligation fair value adjustments, $8.1 million in net servicing revenue and fees and $2.0 million of other revenues. Total expenses for the fourth quarter of $48.6 million were 13% lower as compared to the prior year period, primarily driven by $18.2 million lower expenses related to legal and regulatory matters partially offset by $11.6 million higher curtailment expenses, primarily related to regulatory developments in 2015 which led to additional charges around curtailable events.

The segment reported an Adjusted Loss of ($10.2) million and AEBITDA of ($9.0) million for the fourth quarter of 2015 as compared to Adjusted Earnings of $0.4 million and AEBITDA of $1.5 million in the fourth quarter of 2014 due primarily to lower levels of earnings from the origination, purchase and securitization of HECM loans, a reduction in net servicing revenue and fees and higher expenses primarily driven by normal course of business curtailment charges.

Securitized and funded originations volumes decreased as compared to the prior year quarter as volumes were negatively impacted by the financial assessment rules, operational disruption in the Company's retail channel and a decision to reduce participation in the correspondent market based on current pricing levels.

Other Non-Reportable Segment

The Other Non-Reportable segment generated revenue of $0.5 million for the fourth quarter of 2015 as compared to revenue of $1.1 million in the prior year quarter. Total expenses in the current quarter were $49.7 million compared to $42.8 million the prior year quarter, and included $35.6 million related to corporate debt.

The Other non-reportable segment generated Adjusted Loss of ($33.6) million and AEBITDA of ($0.7) million for the fourth quarter of 2015 as compared to Adjusted Loss of ($34.9) million and AEBITDA of ($0.4) million in the fourth quarter of 2014.

About Walter Investment Management Corp.

Walter Investment Management Corp. is a diversified mortgage banking firm focused primarily on the servicing and origination of residential loans, including reverse loans. Based in Tampa, Fla., the Company has approximately 5,900 employees and services a diverse loan portfolio. 

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