Form 8-K WALTER INVESTMENT MANAGE For: Feb 29
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 29, 2016
Walter Investment Management Corp.
(Exact name of registrant as specified in its charter)
| Maryland | 001-13417 | 13-3950486 | ||
| (State or other jurisdiction of incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
| 3000 Bayport Drive, Suite 1100 Tampa, FL |
33607 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (813) 421-7600
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 2.02. Results of Operations and Financial Condition.
On February 29, 2016, Walter Investment Management Corp. (the “Company”) issued a press release announcing its financial results for the full year and quarter ended December 31, 2015, as well as updates on operational highlights for the Company. On the same date, the Company posted earnings presentation materials, which include a financial supplement, on its investor relations website at http://investor.walterinvestment.com. These materials are being made available in connection with the Company’s earnings conference call and audio webcast on February 29, 2016 at 10:00 a.m. ET. The press release and the earnings presentation are furnished as Exhibits 99.1 and 99.2 to this Current Report on Form 8-K and are hereby incorporated herein by reference.
Item 7.01. Regulation FD Disclosure.
The information set forth above under Item 2.02 is hereby incorporated herein by reference.
In accordance with General Instruction B.2 of Form 8-K, the information being furnished pursuant to this Current Report on Form 8-K, including Exhibits 99.1 and 99.2, shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any registration statement or other document filed by the Company under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
| Exhibit No. |
Description | |
| 99.1 | Press Release, dated February 29, 2016 | |
| 99.2 | Earnings Presentation, including Financial Supplement, dated February 29, 2016 | |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| WALTER INVESTMENT MANAGEMENT CORP. | ||||||
| Date: February 29, 2016 | By: | /s/ Gary L. Tillett | ||||
| Gary L. Tillett, Executive Vice President and Chief Financial Officer | ||||||
EXHIBIT INDEX
| Exhibit No. |
Description | |
| 99.1 | Press Release, dated February 29, 2016 | |
| 99.2 | Earnings Presentation, including Financial Supplement, dated February 29, 2016 | |
Exhibit 99.1
Press Release
Investor and Media Contact: Whitney Finch
Vice President of Investor Relations
813.421.7694
FOR IMMEDIATE RELEASE
February 29, 2016
WALTER INVESTMENT MANAGEMENT CORP. ANNOUNCES FULL YEAR AND
FOURTH QUARTER 2015 HIGHLIGHTS AND FINANCIAL RESULTS
(Tampa, Fla.) – Walter Investment Management Corp. (NYSE: WAC) (“Walter Investment” or the “Company”) today 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 8th 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 14th 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
(1) Source: Inside Mortgage Finance
(2) This calculation assumes an effective tax rate of 38% and 39% for 2015 and 2014, respectively. Note, the goodwill impairment charge in the Servicing segment is tax deductible for GAAP while the goodwill impairment charge recorded by the Reverse segment is not.
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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
(1) This calculation assumes an effective tax rate of 38% and 39% for 2015 and 2014, respectively. Note, the goodwill impairment charge in the Servicing segment is tax deductible for GAAP while the goodwill impairment charge recorded by the Reverse segment is not.
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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’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.
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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. For more information about Walter Investment Management Corp., please visit the Company’s website at www.walterinvestment.com. The information on our website is not a part of this release.
Conference Call Webcast
Members of the Company’s leadership team will discuss Walter Investment’s full year and fourth quarter results and other general business matters during a conference call and live webcast to be held on Monday, February 29, 2016, at 10 a.m. Eastern Time. To listen to the event live or in an archive, and to access presentation slides (which include supplemental information) which will be available for at least 30 days, visit the Company’s website at www.walterinvestment.com.
This press release and the accompanying reconciliations include non-GAAP financial measures. For a description of these non-GAAP financial measures, including the reasons management uses each measure, and reconciliations of these non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with GAAP, please see the reconciliations as well as “Non-GAAP Financial Measures” at the end of this press release.
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Disclaimer and Cautionary Note Regarding Forward-Looking Statements
This press 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. Statements that are not historical fact are forward-looking statements. Certain of these forward-looking statements can be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “assumes,” “may,” “should,” “will,” “targets,” or other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, and our actual results, performance or achievements could differ materially from future results, performance or achievements expressed in these forward-looking statements. These forward-looking statements are based on our current beliefs, intentions and expectations. These statements are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties described below and in more detail under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015 and in our other filings with the SEC.
In particular (but not by way of limitation), the following important factors, risks and uncertainties could affect our future results, performance and achievements and could cause actual results, performance and achievements to differ materially from those expressed in the forward-looking statements:
| • | our ability to operate our business in compliance with existing and future rules and regulations affecting our business, including those relating to the origination and servicing of residential loans, the management of third-party assets and the insurance industry (including lender-placed insurance), and changes to, and/or more stringent enforcement of, such rules and regulations; |
| • | increased scrutiny and potential enforcement actions by federal and state authorities; |
| • | the substantial resources (including senior management time and attention) we devote to, and the significant compliance costs we incur in connection with, regulatory compliance and regulatory examinations and inquiries, and any consumer redress, fines, penalties or similar payments we make in connection with resolving such matters; |
| • | uncertainties relating to interest curtailment obligations and any related financial and litigation exposure (including exposure relating to false claims); |
| • | potential costs and uncertainties, including the effect on future revenues, associated with and arising from litigation, regulatory investigations and other legal proceedings; |
| • | our dependence on U.S. government-sponsored entities (especially Fannie Mae) and agencies and their residential loan programs and our ability to maintain relationships with, and remain qualified to participate in programs sponsored by, such entities, our ability to satisfy various existing or future GSE, agency and other capital, net worth, liquidity and other financial requirements applicable to our business, and our ability to remain qualified as a GSE approved seller, servicer or component servicer, including the ability to continue to comply with the GSEs’ respective residential loan and selling and servicing guides; |
| • | uncertainties relating to the status and future role of GSEs, and the effects of any changes to the origination and/or servicing requirements of the GSEs or various regulatory authorities or the servicing compensation structure for mortgage servicers pursuant to programs of GSEs or various regulatory authorities; |
| • | our ability to maintain our loan servicing, loan origination, insurance agency or collection agency licenses, or any other licenses necessary to operate our businesses, or changes to, or our ability to comply with, our licensing requirements; |
| • | our ability to comply with the servicing standards required by the National Mortgage Settlement; |
| • | our ability to comply with the terms of the stipulated order resolving allegations arising from an FTC and CFPB investigation of Ditech Financial; |
| • | operational risks inherent in the mortgage servicing and mortgage originations businesses, including reputational risk; |
| • | risks related to our substantial levels of indebtedness, including our ability to comply with covenants contained in our debt agreements, generate sufficient cash to service such indebtedness and refinance such indebtedness on favorable terms, as well as our ability to incur substantially more debt; |
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| • | our ability to renew advance financing facilities or warehouse facilities and maintain borrowing capacity under such facilities; |
| • | our ability to maintain or grow our servicing business and our residential loan originations business; |
| • | our ability to achieve our strategic initiatives, particularly our ability to: execute and complete balance sheet management activities; complete the sale of our insurance business; make arrangements with potential capital partners; complete sales of assets to, and enter into other arrangements with, WCO; increase the mix of our fee-for-service business; reduce our debt; and develop new business, including acquisitions of MSRs or entering into new subservicing arrangements; |
| • | changes in prepayment rates and delinquency rates on the loans we service or sub-service; |
| • | the ability of our clients and credit owners to transfer or otherwise terminate our servicing or sub-servicing rights; |
| • | a downgrade of, or other adverse change relating to, our servicer ratings or credit ratings; |
| • | our ability to collect reimbursements for servicing advances and earn and timely receive incentive payments and ancillary fees on our servicing portfolio; |
| • | our ability to collect indemnification payments and enforce repurchase obligations relating to mortgage loans we purchase from our correspondent clients and our ability to collect in a timely manner indemnification payments relating to servicing rights we purchase from prior servicers; |
| • | local, regional, national and global economic trends and developments in general, and local, regional and national real estate and residential mortgage market trends in particular, including the volume and pricing of home sales and uncertainty regarding the levels of mortgage originations and prepayments; |
| • | uncertainty as to the volume of originations activity we will benefit from prior to, and following, the expiration of HARP, which is scheduled to occur on December 31, 2016, including uncertainty as to the number of “in-the-money” accounts we may be able to refinance; |
| • | risks associated with the origination, securitization and servicing of reverse mortgages, including changes to reverse mortgage programs operated by FHA, HUD or Ginnie Mae, our ability to accurately estimate interest curtailment liabilities, continued demand for HECM loans and other reverse mortgages, our ability to fund HECM repurchase obligations, our ability to fund principal additions on our HECM loans, and our ability to securitize our HECM loans and tails; |
| • | our ability to realize all anticipated benefits of past, pending or potential future acquisitions or joint venture investments; |
| • | the effects of competition on our existing and potential future business, including the impact of competitors with greater financial resources and broader scopes of operation; |
| • | changes in interest rates and the effectiveness of any hedge we may employ against such changes; |
| • | risks and potential costs associated with technology and cybersecurity, including: the risks of technology failures and of cyber-attacks against us or our vendors; our ability to adequately respond to actual or alleged cyber-attacks; and our ability to implement adequate internal security measures and protect confidential borrower information; |
| • | risks and potential costs associated with the implementation of new technology such as MSP, the use of new vendors or the transfer of our servers or other infrastructure to new data center facilities; |
| • | our ability to comply with evolving and complex accounting rules, many of which involve significant judgment and assumptions; |
| • | uncertainties regarding impairment charges relating to our goodwill or other intangible assets; |
| • | our ability to maintain effective internal controls over financial reporting and disclosure controls and procedures; |
| • | our ability to manage conflicts of interest relating to our investment in WCO and maintain our relationship with WCO; and |
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| • | risks related to our relationship with Walter Energy and uncertainties arising from or relating to its bankruptcy filings, including potential liability for any taxes, interest and/or penalties owed by the Walter Energy consolidated group for the full or partial tax years during which certain of the Company’s former subsidiaries were a part of such consolidated group and certain other tax risks allocated to us in connection with our spin-off from Walter Energy. |
All of the above factors, risks and uncertainties are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond our control. New factors, risks and uncertainties emerge from time to time, and it is not possible for our management to predict all such factors, risks and uncertainties.
Although we believe that the assumptions underlying the forward-looking statements (including those relating to our outlook) contained herein are reasonable, any of the assumptions could be inaccurate, and therefore any of these statements included herein may prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made, except as otherwise required under the federal securities laws. If we were in any particular instance to update or correct a forward-looking statement, investors and others should not conclude that we would make additional updates or corrections thereafter except as otherwise required under the federal securities laws.
Amounts or metrics that relate to future earnings projections are forward-looking and subject to significant business, economic, regulatory and competitive uncertainties, many of which are beyond the control of us and our management, and are based upon assumptions with respect to future decisions, which are subject to change. Actual results will vary and those variations may be material. Nothing in this release should be regarded as a representation by any person that any target will be achieved and we undertake no duty to update any target. Please refer to the disclosures in this press release, in our Annual Report on Form 10-K for the year ended December 31, 2015 and our other filings with the SEC for important information regarding forward-looking statements and the use and limitations of non-GAAP financial measures. Because we do not predict special items that might occur in the future, and our outlook is developed at a level of detail different than that used to prepare GAAP financial measures, we are not providing a reconciliation to GAAP of any forward-looking financial measures presented herein.
In addition, this press release may contain statements of opinion or belief concerning market conditions and similar matters. In certain instances, those opinions and beliefs could be based upon general observations by members of our management, anecdotal evidence and/or our experience in the conduct of our business, without specific investigation or statistical analyses. Therefore, while such statements reflect our view of the industries and markets in which we are involved, they should not be viewed as reflecting verifiable views and such views may not be shared by all who are involved in those industries or markets.
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Walter Investment Management Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(in thousands, except per share data)
| For the Years Ended December 31, | ||||||
|
2015 |
2014 |
2013 | ||||
| REVENUES |
||||||
| Net servicing revenue and fees |
$ 494,267 | $ 601,510 | $ 783,389 | |||
| Net gains on sales of loans |
453,840 | 462,172 | 598,974 | |||
| Interest income on loans |
74,365 | 134,555 | 144,651 | |||
| Net fair value gains on reverse loans and related HMBS obligations |
98,265 | 109,972 | 120,382 | |||
| Insurance revenue |
47,201 | 71,010 | 84,478 | |||
| Other revenues |
106,321 | 107,934 | 70,625 | |||
|
|
|
| ||||
| Total revenues |
1,274,259 | 1,487,153 | 1,802,499 | |||
| EXPENSES |
||||||
| Salaries and benefits |
576,817 | 578,627 | 549,799 | |||
| General and administrative |
574,091 | 577,506 | 480,377 | |||
| Interest expense |
273,606 | 303,103 | 272,655 | |||
| Depreciation and amortization |
69,128 | 72,721 | 71,027 | |||
| Goodwill impairment |
207,557 | 82,269 | — | |||
| Other expenses, net |
10,557 | 10,803 | 9,395 | |||
|
|
|
| ||||
| Total expenses |
1,711,756 | 1,625,029 | 1,383,253 | |||
| OTHER GAINS (LOSSES) |
||||||
| Gains (losses) on extinguishments |
4,660 | — | (12,489) | |||
| Other net fair value gains |
7,398 | 19,280 | 6,061 | |||
| Other |
21,013 | (744) | — | |||
|
|
|
| ||||
| Total other gains (losses) |
33,071 | 18,536 | (6,428) | |||
| Income (loss) before income taxes |
(404,426) | (119,340) | 412,818 | |||
| Income tax expense (benefit) |
(141,236) | (9,012) | 159,351 | |||
|
|
|
| ||||
| Net income (loss) |
$ (263,190) | $ (110,328) | $ 253,467 | |||
|
|
|
| ||||
| OTHER COMPREHENSIVE INCOME (LOSS) BEFORE TAXES |
||||||
| Change in postretirement benefits liability |
193 | 138 | 58 | |||
| Amortization of realized losses on closed hedges |
— | (145) | (127) | |||
| Unrealized gain on available-for-sale security in other assets |
503 | 77 | 75 | |||
|
|
|
| ||||
| Other comprehensive income before taxes |
696 | 70 | 6 | |||
| Income tax expense for other comprehensive income items |
278 | 173 | 1 | |||
|
|
|
| ||||
| Other comprehensive income (loss) |
418 | (103) | 5 | |||
|
|
|
| ||||
| Total comprehensive income (loss) |
$ (262,772) | $ (110,431) | $ 253,472 | |||
|
|
|
| ||||
| Net income (loss) |
$ (263,190) | $ (110,328) | $ 253,467 | |||
| Basic earnings (loss) per common and common equivalent share |
$ (7.00) | $ (2.93) | $ 6.75 | |||
| Diluted earnings (loss) per common and common equivalent share |
(7.00) | (2.93) | 6.63 | |||
| Weighted-average common and common equivalent shares outstanding — basic |
37,578 | 37,631 | 37,003 | |||
| Weighted-average common and common equivalent shares outstanding — diluted |
37,578 | 37,631 | 37,701 | |||
8
Walter Investment Management Corp. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share data)
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| ASSETS | ||||||||
| Cash and cash equivalents |
$ | 202,828 | $ | 320,175 | ||||
| Restricted cash and cash equivalents |
708,099 | 733,015 | ||||||
| Residential loans at amortized cost, net (includes $4,457 and $10,033 in allowance for loan losses at December 31, 2015 and 2014, respectively) |
541,406 | 1,314,539 | ||||||
| Residential loans at fair value |
12,673,439 | 11,832,630 | ||||||
| Receivables, net (includes $16,542 and $25,201 at fair value at December 31, 2015 and 2014, respectively) |
214,398 | 215,629 | ||||||
| Servicer and protective advances, net (includes $120,338 and $112,427 in allowance for uncollectible advances at December 31, 2015 and 2014, respectively) |
1,595,911 | 1,761,082 | ||||||
| Servicing rights, net (includes $1,682,016 and $1,599,541 at fair value at December 31, 2015 and 2014, respectively) |
1,788,576 | 1,730,216 | ||||||
| Goodwill |
367,911 | 575,468 | ||||||
| Intangible assets, net |
84,038 | 103,503 | ||||||
| Premises and equipment, net |
106,481 | 124,926 | ||||||
| Deferred tax asset, net |
108,050 | — | ||||||
| Other assets (includes $58,512 and $68,151 at fair value at December 31, 2015 and 2014, respectively) |
200,364 | 238,400 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 18,591,501 | $ | 18,949,583 | ||||
|
|
|
|
|
|||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Payables and accrued liabilities (includes $6,475 and $30,024 at fair value at December 31, 2015 and 2014, respectively) |
$ | 639,980 | $ | 663,829 | ||||
| Servicer payables |
603,692 | 584,567 | ||||||
| Servicing advance liabilities |
1,229,280 | 1,365,885 | ||||||
| Warehouse borrowings |
1,340,388 | 1,176,956 | ||||||
| Servicing rights related liabilities at fair value |
117,000 | 66,311 | ||||||
| Corporate debt |
2,157,424 | 2,237,037 | ||||||
| Mortgage-backed debt (includes $582,340 and $653,167 at fair value at December 31, 2015 and 2014, respectively) |
1,051,679 | 1,739,827 | ||||||
| HMBS related obligations at fair value |
10,647,382 | 9,951,895 | ||||||
| Deferred tax liability, net |
— | 86,617 | ||||||
|
|
|
|
|
|||||
| Total liabilities |
17,786,825 | 17,872,924 | ||||||
|
|
|
|
|
|||||
| Commitments and contingencies (Note 29) |
||||||||
| Stockholders’ equity: |
||||||||
| Preferred stock, $0.01 par value per share: |
||||||||
| Authorized - 10,000,000 shares |
||||||||
| Issued and outstanding - 0 shares at December 31, 2015 and 2014 |
— | — | ||||||
| Common stock, $0.01 par value per share: |
||||||||
| Authorized - 90,000,000 shares |
||||||||
| Issued and outstanding - 35,573,405 and 37,711,623 shares at December 31, 2015 and 2014, respectively |
355 | 377 | ||||||
| Additional paid-in capital |
591,454 | 600,643 | ||||||
| Retained earnings |
212,054 | 475,244 | ||||||
| Accumulated other comprehensive income |
813 | 395 | ||||||
|
|
|
|
|
|||||
| Total stockholders’ equity |
804,676 | 1,076,659 | ||||||
|
|
|
|
|
|||||
| Total liabilities and stockholders’ equity |
$ | 18,591,501 | $ | 18,949,583 | ||||
|
|
|
|
|
|||||
9
Non-GAAP Financial Measures
We manage our Company in three reportable segments: Servicing, Originations and Reverse Mortgage. We measure the performance of our business segments through the following measures: income (loss) before income taxes, Adjusted Earnings (Loss), and Adjusted EBITDA. Management considers Adjusted Earnings (Loss) and Adjusted EBITDA, both non-GAAP financial measures, to be important in the evaluation of our business segments and of the Company as a whole, as well as for allocating capital resources to our segments. Adjusted Earnings (Loss) and Adjusted EBITDA are supplemental metrics utilized by management to assess the underlying key drivers and operational performance of the continuing operations of the business. In addition, analysts, investors, and creditors may use these measures when analyzing our operating performance. Adjusted Earnings (Loss) and Adjusted EBITDA are not presentations made in accordance with GAAP and our use of these measures and terms may vary from other companies in our industry.
Adjusted Earnings (Loss) is defined as income (loss) before income taxes plus changes in fair value due to changes in valuation inputs and other assumptions; certain depreciation and amortization costs related to the increased basis in assets (including servicing rights and sub-servicing contracts) acquired within business combination transactions (or step-up depreciation and amortization); goodwill impairment, if any; the provision for curtailment expense, net of expected third-party recoveries; share-based compensation expense; non-cash interest expense; restructuring costs; estimated settlements and costs for certain legal and regulatory matters; fair value to cash adjustments for reverse loans; and select other cash and non-cash adjustments primarily including certain non-recurring costs; severance; gain or loss on extinguishment of debt; the net impact of the Non-Residual Trusts; and transaction and integration costs. Adjusted Earnings (Loss) excludes unrealized changes in fair value of MSRs that are based on projections of expected future cash flows and prepayments. Adjusted Earnings (Loss) includes both cash and non-cash gains from mortgage loan origination activities. Non-cash gains are net of non-cash charges or reserves provided. Adjusted Earnings (Loss) includes cash generated from reverse mortgage origination activities. Adjusted Earnings (Loss) may from time to time also include other adjustments, as applicable based upon facts and circumstances, consistent with the intent of providing investors with a supplemental means of evaluating our operating performance.
Adjusted EBITDA eliminates the effects of financing, income taxes and depreciation and amortization. Adjusted EBITDA is defined as income (loss) before income taxes; amortization of servicing rights and other fair value adjustments; interest expense on corporate debt; depreciation and amortization; goodwill impairment, if any; the provision for curtailment expense, net of expected third-party recoveries; share-based compensation expense; restructuring costs; estimated settlements and costs for certain legal and regulatory matters; fair value to cash adjustments for reverse loans; and select other cash and non-cash adjustments primarily certain non-recurring costs; the net provision for the repurchase of loans sold; non-cash interest income; severance; gain or loss on extinguishment of debt; interest income on unrestricted cash and cash equivalents; the net impact of the Non-Residual Trusts; the provision for loan losses; Residual Trust cash flows; transaction and integration costs; and servicing fee economics. Adjusted EBITDA includes both cash and non-cash gains from mortgage loan origination activities. Adjusted EBITDA excludes the impact of fair value option accounting on certain assets and liabilities and includes cash generated from reverse mortgage origination activities. Adjusted EBITDA may also include other adjustments, as applicable based upon facts and circumstances, consistent with the intent of providing investors a supplemental means of evaluating our operating performance.
Adjusted Earnings (Loss) and Adjusted EBITDA should not be considered as alternatives to (i) net income (loss) or any other performance measures determined in accordance with GAAP or (ii) operating cash flows determined in accordance with GAAP. Adjusted Earnings (Loss) and Adjusted EBITDA have important limitations as analytical tools, and should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP. Some of the limitations of these metrics are:
| • | Adjusted Earnings (Loss) and Adjusted EBITDA do not reflect cash expenditures for long-term assets and other items that have been and will be incurred, future requirements for capital expenditures or contractual commitments; |
| • | Adjusted Earnings (Loss) and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; |
| • | Adjusted Earnings (Loss) and Adjusted EBITDA do not reflect certain tax payments that represent reductions in cash available to us; |
10
| • | Adjusted Earnings (Loss) and Adjusted EBITDA do not reflect any cash requirements for the assets being depreciated and amortized that may have to be replaced in the future; |
| • | Adjusted Earnings (Loss) and Adjusted EBITDA do not reflect non-cash compensation which is and will remain a key element of our overall long-term incentive compensation package; |
| • | Adjusted Earnings (Loss) and Adjusted EBITDA do not reflect the change in fair value due to changes in valuation inputs and other assumptions; |
| • | Adjusted EBITDA does not reflect the change in fair value resulting from the realization of expected cash flows; and |
| • | Adjusted EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our servicing rights related liabilities and corporate debt, although they do reflect interest expense associated with our servicing advance liabilities, master repurchase agreements, mortgage-backed debt, and HMBS related obligations. |
Because of these limitations, Adjusted Earnings (Loss) and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted Earnings (Loss) and Adjusted EBITDA only as supplements. Users of our financial statements are cautioned not to place undue reliance on Adjusted Earnings (Loss) and Adjusted EBITDA.
11
Walter Investment Management Corp.
Segment Results of Operations and Non-GAAP Financial Measures
For the Three Months Ended December 31, 2015
(in thousands)
|
Servicing
|
Originations
|
Reverse
|
Other
|
Eliminations
|
Total
| |||||||
| REVENUES: |
||||||||||||
| Servicing revenue and fees |
$ 176,139 | $ — | $ 8,080 | $ — | $ (2,983) | $ 181,236 | ||||||
| Gain on loan sales, net |
2,281 | 89,933 | — | — | 782 | 92,996 | ||||||
| Interest income on loans |
11,816 | 12 | — | — | — | 11,828 | ||||||
| Insurance revenue |
12,878 | — | — | — | — | 12,878 | ||||||
| Net fair value gains on reverse loans and related HMBS obligations |
— | — | 8,032 | — | — | 8,032 | ||||||
| Other income |
17,244 | 12,872 | 2,003 | 459 | (7,972) | 24,606 | ||||||
| Total revenues |
220,358 | 102,817 | 18,115 | 459 | (10,173) | 331,576 | ||||||
| EXPENSES: |
||||||||||||
| Interest expense |
18,420 | 8,512 | 828 | 35,582 | — | 63,342 | ||||||
| Depreciation and amortization |
11,115 | 2,728 | 1,910 | 4 | — | 15,757 | ||||||
| Goodwill impairment |
151,018 | — | — | — | — | 151,018 | ||||||
| Other expenses, net |
188,997 | 79,322 | 45,840 | 14,149 | (10,173) | 318,135 | ||||||
| Total expenses |
369,550 | 90,562 | 48,578 | 49,735 | (10,173) | 548,252 | ||||||
| OTHER GAINS (LOSSES) |
||||||||||||
| Net fair value gains (losses) |
620 | — | — | 3,205 | — | 3,825 | ||||||
| Gain (loss) on extinguishment of debt |
— | — | — | 4,660 | — | 4,660 | ||||||
| Total other gains (losses) |
620 | — | — | 7,865 | — | 8,485 | ||||||
| Income (loss) before income taxes |
(148,572) | 12,255 | (30,463) | (41,411) | — | (208,191) | ||||||
| ADJUSTED EARNINGS (LOSS) |
||||||||||||
| Goodwill impairment |
151,018 | — | — | — | — | 151,018 | ||||||
| Changes in fair value due to changes in valuation inputs and other assumptions | (20,114) | — | — | — | — | (20,114) | ||||||
| Step-up depreciation and amortization |
6,785 | 568 | 1,193 | — | — | 8,546 | ||||||
| Step-up amortization of sub-servicing rights |
4,401 | — | — | — | — | 4,401 | ||||||
| Non-cash interest expense |
(210) | — | — | 2,832 | — | 2,622 | ||||||
| Share-based compensation expense |
4,226 | 1,820 | 646 | (100) | — | 6,592 | ||||||
| Fair value to cash adjustment for reverse loans |
— | — | 9,938 | — | — | 9,938 | ||||||
| Curtailment expense |
— | — | 7,407 | — | — | 7,407 | ||||||
| Legal and regulatory matters |
18,227 | — | 555 | — | — | 18,782 | ||||||
| Restructuring costs |
723 | 1,623 | 667 | — | — | 3,013 | ||||||
| Other |
2,193 | 713 | (107) | 5,077 | — | 7,876 | ||||||
| Total adjustments |
167,249 | 4,724 | 20,299 | 7,809 | — | 200,081 | ||||||
| Adjusted Earnings (Loss) |
18,677 | 16,979 | (10,164) | (33,602) | — | (8,110) | ||||||
| ADJUSTED EBITDA |
||||||||||||
| Amortization of servicing rights and other fair value adjustments |
66,520 | — | 477 | — | — | 66,997 | ||||||
| Interest expense on debt |
1,792 | — | — | 32,751 | — | 34,543 | ||||||
| Depreciation and amortization |
4,330 | 2,160 | 717 | 4 | — | 7,211 | ||||||
| Other |
(916) | 1,334 | (36) | 197 | — | 579 | ||||||
| Total adjustments |
71,726 | 3,494 | 1,158 | 32,952 | — | 109,330 | ||||||
| Adjusted EBITDA |
$ 90,403 | $ 20,473 | $ (9,006) | $ (650) | $ — | $ 101,220 | ||||||
12
Walter Investment Management Corp.
Segment Results of Operations and Non-GAAP Financial Measures
For the Three Months Ended December 31, 2014
(in thousands)
|
Servicing
|
Originations
|
Reverse
|
Other
|
Eliminations
|
Total
| |||||||
| REVENUES: |
||||||||||||
| Servicing revenue and fees |
$ 117,180 | $ — | $ 9,827 | $ — | $ (2,676) | $ 124,331 | ||||||
| Gain on loan sales, net |
— | 86,012 | — | — | — | 86,012 | ||||||
| Interest income on loans |
32,430 | 34 | — | — | — | 32,464 | ||||||
| Insurance revenue |
13,250 | — | — | — | — | 13,250 | ||||||
| Net fair value gains on reverse loans and related HMBS obligations |
— | — | 40,532 | — | — | 40,532 | ||||||
| Other income |
20,398 | 3,501 | 2,794 | 1,103 | (6,893) | 20,903 | ||||||
| Total revenues |
183,258 | 89,547 | 53,153 | 1,103 | (9,569) | 317,492 | ||||||
| EXPENSES: |
||||||||||||
| Interest expense |
30,579 | 8,013 | 1,287 | 36,963 | — | 76,842 | ||||||
| Depreciation and amortization |
11,306 | 4,189 | 2,270 | 3 | — | 17,768 | ||||||
| Other expenses, net |
211,197 | 75,340 | 52,485 | 5,792 | (9,569) | 335,245 | ||||||
| Total expenses |
253,082 | 87,542 | 56,042 | 42,758 | (9,569) | 429,855 | ||||||
| OTHER GAINS (LOSSES) |
||||||||||||
| Net fair value gains (losses) |
966 | — | — | 2,491 | — | 3,457 | ||||||
| Other |
(154) | — | — | — | — | (154) | ||||||
| Total other gains (losses) |
812 | — | — | 2,491 | — | 3,303 | ||||||
| Income (loss) before income taxes |
(69,012) | 2,005 | (2,889) | (39,164) | — | (109,060) | ||||||
| ADJUSTED EARNINGS (LOSS) |
||||||||||||
| Changes in fair value due to changes in valuation inputs and other assumptions | 44,041 | — | — | — | — | 44,041 | ||||||
| Step-up depreciation and amortization |
6,101 | 2,275 | 1,681 | — | — | 10,057 | ||||||
| Step-up amortization of sub-servicing contracts |
9,337 | — | — | — | — | 9,337 | ||||||
| Non-cash interest expense |
(1,017) | — | — | 2,554 | — | 1,537 | ||||||
| Share-based compensation expense |
2,159 | 791 | 462 | (450) | — | 2,962 | ||||||
| Fair value to cash adjustments for reverse loans |
— | — | (18,271) | — | — | (18,271) | ||||||
| Curtailment expense |
— | — | 21 | — | — | 21 | ||||||
| Legal and regulatory matters |
30,727 | 907 | 18,755 | — | — | 50,389 | ||||||
| Restructuring costs |
1,657 | — | — | — | — | 1,657 | ||||||
| Other |
(1) | 1,076 | 612 | 2,166 | — | 3,853 | ||||||
| Total adjustments |
93,004 | 5,049 | 3,260 | 4,270 | — | 105,583 | ||||||
| Adjusted Earnings (Loss) |
23,992 | 7,054 | 371 | (34,894) | — | (3,477) | ||||||
| ADJUSTED EBITDA |
||||||||||||
| Amortization of servicing rights and other fair value adjustments |
42,996 | — | 589 | — | — | 43,585 | ||||||
| Interest expense on debt |
2,278 | — | 3 | 34,409 | — | 36,690 | ||||||
| Depreciation and amortization |
5,205 | 1,914 | 589 | 3 | — | 7,711 | ||||||
| Other |
(201) | 614 | (38) | 85 | — | 460 | ||||||
| Total adjustments |
50,278 | 2,528 | 1,143 | 34,497 | — | 88,446 | ||||||
| Adjusted EBITDA |
$ 74,270 | $ 9,582 | $ 1,514 | $ (397) | $ — | $ 84,969 | ||||||
13
Walter Investment Management Corp.
Segment Results of Operations and Non-GAAP Financial Measures
For the Year Ended December 31, 2015
(in thousands)
|
Servicing
|
Originations
|
Reverse
|
Other
|
Eliminations
|
Total
| |||||||||||||||||
| REVENUES: |
||||||||||||||||||||||
| Servicing revenue and fees |
$ | 462,544 | $ | — | $ | 42,648 | $ | — | $ | (10,925 | ) | $ 494,267 | ||||||||||
| Gain on loan sales, net |
3,699 | 448,533 | (98 | ) | — | 1,706 | 453,840 | |||||||||||||||
| Interest income on loans |
74,303 | 62 | — | — | — | 74,365 | ||||||||||||||||
| Insurance revenue |
47,201 | — | — | — | — | 47,201 | ||||||||||||||||
| Net fair value gains on reverse loans and related HMBS obligations | — | — | 98,265 | — | — | 98,265 | ||||||||||||||||
| Other income |
81,756 | 45,250 | 6,794 | 5,345 | (32,824 | ) | 106,321 | |||||||||||||||
| Total revenues |
669,503 | 493,845 | 147,609 | 5,345 | (42,043 | ) | 1,274,259 | |||||||||||||||
| EXPENSES: |
||||||||||||||||||||||
| Interest expense |
85,482 | 36,470 | 3,902 | 147,752 | — | 273,606 | ||||||||||||||||
| Depreciation and amortization |
45,437 | 15,811 | 7,865 | 15 | — | 69,128 | ||||||||||||||||
| Goodwill impairment |
151,018 | — | 56,539 | — | — | 207,557 | ||||||||||||||||
| Other expenses, net |
663,545 | 318,028 | 191,640 | 30,295 | (42,043 | ) | 1,161,465 | |||||||||||||||
| Total expenses |
945,482 | 370,309 | 259,946 | 178,062 | (42,043 | ) | 1,711,756 | |||||||||||||||
| OTHER GAINS (LOSSES) |
||||||||||||||||||||||
| Net fair value gains (losses) |
75 | — | — | 7,323 | — | 7,398 | ||||||||||||||||
| Gain (loss) on extinguishment of debt |
— | — | — | 4,660 | — | 4,660 | ||||||||||||||||
| Other |
6,134 | — | — | 14,879 | — | 21,013 | ||||||||||||||||
| Total other gains (losses) |
6,209 | — | — | 26,862 | — | 33,071 | ||||||||||||||||
| Income (loss) before income taxes |
(269,770 | ) | 123,536 | (112,337 | ) | (145,855 | ) | — | (404,426) | |||||||||||||
| ADJUSTED EARNINGS (LOSS) |
||||||||||||||||||||||
| Goodwill impairment |
151,018 | — | 56,539 | — | — | 207,557 | ||||||||||||||||
| Changes in fair value due to changes in valuation inputs and other assumptions | 137,198 | — | — | — | — | 137,198 | ||||||||||||||||
| Step-up depreciation and amortization |
27,697 | 7,424 | 5,178 | — | — | 40,299 | ||||||||||||||||
| Step-up amortization of sub-servicing rights |
18,965 | — | — | — | — | 18,965 | ||||||||||||||||
| Non-cash interest expense |
1,283 | — | — | 10,815 | — | 12,098 | ||||||||||||||||
| Share-based compensation expense |
12,700 | 5,557 | 2,395 | 285 | — | 20,937 | ||||||||||||||||
| Fair value to cash adjustment for reverse loans | — | — | 2,291 | — | — | 2,291 | ||||||||||||||||
| Curtailment expense |
— | — | 30,419 | — | — | 30,419 | ||||||||||||||||
| Legal and regulatory matters |
20,445 | — | 5,575 | — | — | 26,020 | ||||||||||||||||
| Restructuring costs |
6,462 | 2,608 | 1,640 | 851 | — | 11,561 | ||||||||||||||||
| Other |
3,776 | 1,272 | 349 | 11,547 | — | 16,944 | ||||||||||||||||
| Total adjustments |
379,544 | 16,861 | 104,386 | 23,498 | — | 524,289 | ||||||||||||||||
| Adjusted Earnings (Loss) |
109,774 | 140,397 | (7,951 | ) | (122,357 | ) | — | 119,863 | ||||||||||||||
| ADJUSTED EBITDA |
||||||||||||||||||||||
| Amortization of servicing rights and other fair value adjustments | 250,539 | — | 2,053 | — | — | 252,592 | ||||||||||||||||
| Interest expense on debt |
8,779 | — | 2 | 136,938 | — | 145,719 | ||||||||||||||||
| Depreciation and amortization |
17,740 | 8,387 | 2,687 | 15 | — | 28,829 | ||||||||||||||||
| Other |
(6,556 | ) | 8,827 | 139 | 306 | — | 2,716 | |||||||||||||||
| Total adjustments |
270,502 | 17,214 | 4,881 | 137,259 | — | 429,856 | ||||||||||||||||
| Adjusted EBITDA |
$ | 380,276 | $ | 157,611 | $ | (3,070 | ) | $ | 14,902 | $ | — | $ 549,719 | ||||||||||
14
Walter Investment Management Corp.
Segment Results of Operations and Non-GAAP Financial Measures
For the Year Ended December 31, 2014
(in thousands)
|
Servicing
|
Originations
|
Reverse
|
Other
|
Eliminations
|
Total
| |||||||||||||||||
| REVENUES: |
||||||||||||||||||||||
| Servicing revenue and fees |
$ | 575,961 | $ | — | $ | 35,446 | $ | — | $ | (9,897 | ) | $601,510 | ||||||||||
| Gain on loan sales, net |
— | 462,172 | — | — | — | 462,172 | ||||||||||||||||
| Interest income on loans |
134,472 | 83 | — | — | — | 134,555 | ||||||||||||||||
| Insurance revenue |
71,010 | — | — | — | — | 71,010 | ||||||||||||||||
| Net fair value gains on reverse loans and related HMBS obligations | — | — | 109,972 | — | — | 109,972 | ||||||||||||||||
| Other income |
75,991 | 19,567 | 11,743 | 41,179 | (40,546 | ) | 107,934 | |||||||||||||||
| Total revenues |
857,434 | 481,822 | 157,161 | 41,179 | (50,443 | ) | 1,487,153 | |||||||||||||||
| EXPENSES: |
||||||||||||||||||||||
| Interest expense |
121,856 | 29,841 | 3,773 | 147,633 | — | 303,103 | ||||||||||||||||
| Depreciation and amortization |
46,333 | 17,090 | 9,284 | 14 | — | 72,721 | ||||||||||||||||
| Goodwill impairment |
— | — | 82,269 | — | — | 82,269 | ||||||||||||||||
| Other expenses, net |
716,992 | 317,787 | 163,003 | 19,597 | (50,443 | ) | 1,166,936 | |||||||||||||||
| Total expenses |
885,181 | 364,718 | 258,329 | 167,244 | (50,443 | ) | 1,625,029 | |||||||||||||||
| OTHER GAINS (LOSSES) |
||||||||||||||||||||||
| Net fair value gains (losses) |
(796 | ) | — | — | 20,076 | — | 19,280 | |||||||||||||||
| Other |
(744 | ) | — | — | — | — | (744) | |||||||||||||||
| Total other gains (losses) |
(1,540 | ) | — | — | 20,076 | — | 18,536 | |||||||||||||||
| Income (loss) before income taxes |
(29,287 | ) | 117,104 | (101,168 | ) | (105,989 | ) | — | (119,340) | |||||||||||||
| ADJUSTED EARNINGS (LOSS) |
||||||||||||||||||||||
| Goodwill impairment |
— | — | 82,269 | — | — | 82,269 | ||||||||||||||||
| Changes in fair value due to changes in valuation inputs and other assumptions | 114,759 | — | — | — | — | 114,759 | ||||||||||||||||
| Step-up depreciation and amortization |
26,587 | 9,903 | 7,081 | 1 | — | 43,572 | ||||||||||||||||
| Step-up amortization of sub-servicing rights |
33,317 | — | — | — | — | 33,317 | ||||||||||||||||
| Non-cash interest expense |
2,326 | — | — | 9,755 | — | 12,081 | ||||||||||||||||
| Share-based compensation expense |
8,942 | 3,445 | 2,185 | (39 | ) | — | 14,533 | |||||||||||||||
| Fair value to cash adjustment for reverse loans |
— | — | (24,602 | ) | — | — | (24,602) | |||||||||||||||
| Curtailment expense |
— | — | 1,460 | — | — | 1,460 | ||||||||||||||||
| Legal and regulatory matters |
75,564 | 907 | 24,297 | — | — | 100,768 | ||||||||||||||||
| Restructuring costs |
1,657 | 2,887 | — | — | — | 4,544 | ||||||||||||||||
| Other |
963 | 4,049 | 4,485 | (7,091 | ) | — | 2,406 | |||||||||||||||
| Total adjustments |
264,115 | 21,191 | 97,175 | 2,626 | — | 385,107 | ||||||||||||||||
| Adjusted Earnings (Loss) |
234,828 | 138,295 | (3,993 | ) | (103,363 | ) | — | 265,767 | ||||||||||||||
| ADJUSTED EBITDA |
||||||||||||||||||||||
| Amortization of servicing rights and other fair value adjustments | 156,131 | — | 2,683 | — | — | 158,814 | ||||||||||||||||
| Interest expense on debt |
5,003 | — | 26 | 137,878 | — | 142,907 | ||||||||||||||||
| Depreciation and amortization |
19,746 | 7,187 | 2,203 | 13 | — | 29,149 | ||||||||||||||||
| Other |
8,741 | (1,165 | ) | (73 | ) | 44 | — | 7,547 | ||||||||||||||
| Total adjustments |
189,621 | 6,022 | 4,839 | 137,935 | — | 338,417 | ||||||||||||||||
| Adjusted EBITDA |
$ | 424,449 | $ | 144,317 | $ | 846 | $ | 34,572 | $ | — | $ 604,184 | |||||||||||
15
Reconciliation of GAAP Loss Before Income Taxes to
Non-GAAP AEBITDA
(in millions)
| For the Three Months Ended | For the Year Ended | |||||||||||||||
| December 31, 2015
|
December 31, 2014
|
December 31, 2015
|
December 31, 2014
|
|||||||||||||
| Loss before income taxes |
$ | (208.2) | $ | (109.1) | $ | (404.4) | $ | (119.3) | ||||||||
| Add/(Subtract): |
||||||||||||||||
| Goodwill impairment |
151.0 | — | 207.6 | 82.3 | ||||||||||||
| Amortization of servicing rights and other fair value adjustments |
51.3 | 97.0 | 408.8 | 306.9 | ||||||||||||
| Interest expense |
37.2 | 38.2 | 157.8 | 155.0 | ||||||||||||
| Depreciation and amortization |
15.8 | 17.8 | 69.1 | 72.7 | ||||||||||||
| Curtailment expense |
7.4 | — | 30.4 | 1.4 | ||||||||||||
| Share-based compensation expense |
6.6 | 3.0 | 20.9 | 14.5 | ||||||||||||
| Fair value to cash adjustment for reverse loans |
9.9 | (18.3) | 2.3 | (24.6) | ||||||||||||
| Legal and regulatory matters |
18.8 | 50.4 | 26.0 | 100.8 | ||||||||||||
| Restructuring costs |
3.0 | 1.7 | 11.6 | 4.5 | ||||||||||||
| Other |
8.4 | 4.3 | 19.6 | 10.0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Sub-total
|
309.4 | 194.1 | 954.1 | 723.5 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Adjusted EBITDA |
$ | 101.2 | $ | 85.0 | $ | 549.7 | $ | 604.2 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Reconciliation of GAAP Loss Before Income Taxes to Non-GAAP Adjusted Earnings (Loss) (in millions, except per share amounts) |
| |||||||||||||||
| For the Three Months Ended | For the Year Ended | |||||||||||||||
| December 31, 2015 |
December 31, 2014 |
December 31, 2015 |
December 31, 2014 |
|||||||||||||
| Loss before income taxes |
$ | (208.2) | $ | (109.1) | $ | (404.4) | $ | (119.3) | ||||||||
| Add/(Subtract): |
||||||||||||||||
| Goodwill impairment |
151.0 | — | 207.6 | 82.3 | ||||||||||||
| Changes in fair value due to changes in valuation inputs and other assumptions |
(20.1) | 44.1 | 137.2 | 114.8 | ||||||||||||
| Curtailment expense |
7.4 | — | 30.4 | 1.4 | ||||||||||||
| Step-up depreciation and amortization |
8.6 | 10.1 | 40.3 | 43.6 | ||||||||||||
| Step-up amortization of sub-servicing rights |
4.4 | 9.3 | 19.0 | 33.3 | ||||||||||||
| Share-based compensation expense |
6.6 | 3.0 | 20.9 | 14.5 | ||||||||||||
| Non-cash interest expense |
2.6 | 1.5 | 12.1 | 12.1 | ||||||||||||
| Fair value to cash adjustment for reverse loans |
9.9 | (18.3) | 2.3 | (24.6) | ||||||||||||
| Legal and regulatory matters |
18.8 | 50.4 | 26.0 | 100.8 | ||||||||||||
| Restructuring costs |
3.0 | 1.7 | 11.6 | 4.5 | ||||||||||||
| Other |
7.9 | 3.8 | 16.9 | 2.3 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Adjusted Earnings (Loss) |
$ | (8.1) | $ | (3.5) | $ | 119.9 | $ | 265.7 | ||||||||
| Adjusted Earnings (Loss) after tax (38% in 2015 and 39% in 2014) |
(5.0) | (2.1) | 74.3 | 162.1 | ||||||||||||
| Adjusted Earnings (Loss) after taxes per common and common equivalent share. |
$ | (0.14) | $ | (0.06) | $ | 1.98 | $ | 4.31 | ||||||||
16
2015 Earnings Presentation February 29, 2016 Exhibit 99.2
Forward-Looking Statements Certain statements in this presentation constitute “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. Statements that are not historical fact are forward-looking statements. Certain of these forward-looking statements can be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “assumes,” “may,” “should,” “will,” “targets,” or other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, and our actual results, performance or achievements could differ materially from future results, performance or achievements expressed in these forward-looking statements. These forward-looking statements are based on our current beliefs, intentions and expectations. These statements are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties described in the appendix and in more detail under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015 and in our other filings with the SEC. As of As of As of As of As of As of 12/31/2015 12/31/2015 9/30/2015 9/30/2015 12/31/2014 12/31/2014 Balance Sheet Total Assets $ 18,591.5 $ 18,776.3 $ 18,949.6 Total Liabilities 17,786.8 17,831.2 17,872.9 Equity 804.7 945.1 1,076.7 FY 2015 FY 2015 FY 2014 FY 2014 Q4 2015 Q4 2015 Q3 2015 Q3 2015 Q4 2014 Q4 2014 Income Statement Total revenues $ 1,274.3 $ 1,487.2 $ 331.6 $ 219.4 $ 317.5 Total expenses (1,711.8 ) (1,625.0 ) (548.3 ) (364.1 ) (429.9 ) Other gains 33.1 18.5 8.5 13.2 3.3 Income tax (expense) benefit 141.2 9.0 91.1 54.6 65.1 Net loss $ (263.2 ) $ (110.3 ) $ (117.1 ) $ (76.9 ) $ (44.0 ) Net loss per share $ (7.00 ) $ (2.93 ) $ (3.16 ) $ (2.04 ) $ (1.17 ) GAAP Financials ($ in millions, except per share amounts)
2015 - 2016 Sector Review Valuations under pressure across the sector Regulatory uncertainty/change Cost pressure - compliance/risk driving earnings power concerns Rate volatility Businesses begin to reposition to address changes in operating environment 2015: Sector and Operational Environment was Challenging 2016: Environment Expected to Remain Challenging; Transition Underway to More Stability Believe the pace of regulatory change is moderating Operational plans continue to adapt to evolving environment Market pricing beginning to reflect shift in costs Environment provides significant barriers to entry Scale, compliance, efficiency key to success Expect continued consolidation within sector Non-bank entities poised to increase market share as banks continue to focus on "core clients"
Strategy Overview Organization & Efficiency Capital Allocation & Balance Sheet Intense focus on capital allocation/cash flow Execute on debt reduction plan, targeting improvement in our leverage ratio to 3.4X to 3.6X by the end of the year Flow and/or opportunistic MSR sales, principally with servicing retained Sale of Insurance business Excess cash flows Increase mix of sub-servicing business, limiting capital deployed to sustain portfolio Stakeholder focused organization Substantial shareholder representation on the Board Drive high performing culture throughout organization Process accelerated with Ditech merger Project underway to drive efficiencies across the platform Identifying significant opportunities Business process re-engineering and technology driven Expense Revenue Customer experience WAC is accelerating the transition of the business and implementing plan to address the operating environment and drive value for stakeholders
Generated Adjusted Earnings of $1.98 per share, after tax Consolidated forward servicing and originations businesses under the Ditech brand Prepaid ~$86 MN in par value of debt Generated AEBITDA of $549.7 MN, 69% from the Servicing segment Originations business generated $157.6 MN of AEBITDA, ~29% of total AEBITDA Implemented efficiency initiatives which resulted in significant cost savings 2015 in Review and Recent Developments 2015 Accomplishments Recent Developments Acquiring certain assets of RCS, increasing sub-servicing by ~$10.0 BN Agreed to acquire MSRs relating to $3.6 BN UPB of GSE mortgage loans Agreements for sale of our Insurance business are in advanced negotiations WCO pursuing opportunities to generate additional capital/acquire assets and increase leverage on existing book
Performance Against Previously Disclosed 2015 Select Targets UPB Portfolio Growth AEBITDA Margin (bps) Servicing Reverse Mortgage Originations Average Servicing UPB Funded UPB (excluding tails) Consumer Lending Funded UPB ($BNs) Direct Margin (bps) Correspondent Lending Funded UPB ($BNs) Direct Margin (bps) Metric Target (1) 2015 Result (1) As presented in the Q4 2014 earnings presentation. (2) As presented in the Q3 2015 earnings presentation. (3) As presented in the Q2 2015 earnings presentation. (4) Calculated using an average of the previous 5 quarters. 10%+ 14 - 18 bps 4% 16 bps $5 - $10 BN 80 - 120 bps $15 - $18 BN 10 - 20 bps $7.3 BN 192 bps $17.8 BN 40 bps ~$20 BN(4) $1.0 - $1.5 BN $19.2 BN(4) $1.0 BN Final Target ~4%(2) - - 140 - 190 bps(3) - 25 - 35 bps(3) - -
2015 Review Serviced UPB grew 4% to $246.6 BN as compared to 2014 Ranked nationally as the 8th largest servicer(1) Added $46.4 BN of UPB to serviced portfolio Servicing delivered 16 bps of AEBITDA margin and 4 bps of Adjusted Earnings margin Disappearance rate net of recapture of 14.2% for the year Full year results consist of ($269.8 MN) of pre-tax loss, $109.8 MN of Adjusted Earnings and $380.3 MN AEBITDA Funded volumes grew 36% to $25.1 BN as compared to 2014 Ranked nationally as the 14th largest originator(1) Direct margin of 192 bps in the Consumer Lending channel and 40 bps in the Correspondent Lending channel Recapture rate of 25% for the year Generated $123.5 MN of pre-tax income, $140.4 MN of Adjusted Earnings and $157.6 MN of AEBITDA Serviced UPB grew 11% to $20.1 BN as compared to 2014 Reverse Mortgage ranked nationally as the 3rd largest issuer of HMBS(2) Finished the year with a pre-tax loss of ($112.3 MN), an Adjusted Loss of ($8.0 MN) and AEBITDA of ($3.1 MN) Servicing Originations Reverse Increased legal, regulatory and compliance costs Advance costs, including both provisions and carrying costs, were lower as compared to the prior year, but higher than 2015 expectations Higher than planned expense, including MSR amortization, on legacy servicing book 2015 Key Operating Challenges (1) Source: Inside Mortgage Finance (2) Source: New View Advisors HMBS Issuer Rankings published January 5, 2016.
Q4 2015 Results by Segment Pre-tax loss of ($148.6 MN) $90.4 MN of AEBITDA; $18.7 MN of Adjusted Earnings Disappearance rate of 13.3% net of recapture 15 bps of AEBITDA margin and 3 bps of Adjusted Earnings margin Completed the issuance of $500 MN of agency servicer advance term notes Portfolio additions of $10.0 BN of UPB through a combination of MSR acquisitions, sub-servicing arrangements, originated MSR and flow arrangements/co-issue relationships Reverse Mortgage Originations Servicing Pre-tax income of $12.3 MN $20.5 MN of AEBITDA; $17.0 MN of Adjusted Earnings Funded volumes of $5.6 BN Generated a combined direct margin of 63 bps Recapture rate of 23% for Q4 2015; originated approximately 8,400 HARP loans As of December 31, 2015 there were approximately 480,000 "in-the-money"(1) accounts Pre-tax loss of ($30.5 MN) ($9.0 MN) of AEBITDA; ($10.2 MN) of Adjusted Loss Losses principally driven by elevated levels of curtailment related to regulatory developments Issued $220.8 MN of securitizations Unfunded IDL tails at December 31, 2015: $376 MN eligible for draw immediately; $476 MN scheduled to become eligible for draw over next 12 months(3) (1)"In-the-money" refers to those accounts which would receive a reduction in monthly mortgage payment amount of at least $70 should they take advantage of a mortgage refinance opportunity, based on assumed mortgage terms and excluding refinancing costs and fees. In-the-money borrowers may not benefit economically from a loan modification and, for that or other reasons, may be unwilling to modify their loans. Interest rates are a significant factor in determining which accounts are “in-the-money”, so changes in interest rates (and other factors) may cause the number of such accounts to vary from time to time. (2) Source: New View Advisors HMBS Issuer Rankings published January 5, 2016. (3) Assumes the loans remain performing.
(1) These are select targets we have used to develop our 2016 business plan. These targets may change based on market conditions, our future earnings, our ability to achieve certain strategic initiatives, and other factors, and do not represent all of the factors affecting our results of operations. These are not projections, are forward-looking statements, and actual results may differ materially from these targets. 2016 Capital Structure Targets(1) Targeting improvement in corporate debt / AEBITDA ratio to 3.4X - 3.6X at year-end Proceeds from Planned MSR Sales Excess Cash Generated Proceeds from Planned Sale of Insurance Business Debt Reduction
Transition towards an increased mix of sub-servicing business AEBITDA margin targeted in the range of 11 - 15 bps in 2016 Adjusted Earnings margin targeted in the range of 3 - 5 bps in 2016 Above ranges are net of corporate allocations of approximately 1.5 bps Reduced requirements for capital to grow serviced UPB Average UPB targeted to remain consistent with 2015 ending levels principally through growth in sub-servicing Adjusted Earnings targeted to be positive Consumer Lending Targeting volumes of $6 - $9 BN UPB at 200 - 250 bps direct margin Correspondent Lending Targeting volumes of $14 - $18 BN UPB at 25 - 35 bps direct margin Indirect costs targeted to be approximately $50 - $60 MN for the year including corporate allocations Servicing Originations Reverse Mortgage (1) These are select targets we have used to develop our 2016 business plan. These targets do not represent all of the factors affecting our results of operations, including expenses, fair value adjustments, legal and regulatory matters, etc. These are not projections, are forward-looking statements, and actual results may differ materially from these targets. 2016 Select Targets(1)
Key Takeaways Market uncertainties driving depressed valuation Stock trading at significant discount to book value Accelerating plan designed to improve valuation Substantial shareholder representation on the Board Valuation Operating Initiatives Market Opportunities Low rate environment favorable to Originations business Consolidation in servicing sector expected to continue Market pricing beginning to reflect shift in costs Strong relationships with counterparties drive opportunity Non-bank market share gains; banks are focused on "core customers" Identifying significant opportunities to drive efficiencies Drive efficiencies through process re-engineering and technology Significant attention on enhancing the Ditech brand and customer experience Maximize retention opportunity Balance Sheet Initiatives Intense focus on capital allocation and cash flow Targeted reduction of leverage Planned sale of Insurance business UPB additions targeted through sub-servicing agreements requiring limited capital outlay
Appendix: Supplemental Information & Reconciliations
Use of Non-GAAP Measures and Definitions Generally Accepted Accounting Principles ("GAAP") is the term used to refer to the standard framework of guidelines for financial accounting. GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing transactions and in the preparation of financial statements. In addition to reporting financial results in accordance with GAAP, the Company has provided the following non-GAAP financial measures in this presentation: Adjusted Earnings, Adjusted EBITDA and Funds Generated in Period. See the definitions below for a description of how these items are presented and see the Non-GAAP Reconciliations for a reconciliation of these measures to the most directly comparable GAAP financial measures. Management considers Adjusted Earnings (Loss), Adjusted EBITDA and Funds Generated in Period, each of which is a non-GAAP financial measure, to be important in the evaluation of our business segments and of the Company as a whole, as well as for allocating capital resources to our segments. Adjusted Earnings (Loss), Adjusted EBITDA and Funds Generated in Period are supplemental metrics utilized by management to assess the underlying key drivers and operational performance of the continuing operations of the business. In addition, analysts, investors, and creditors may use these measures when analyzing our operating performance. Adjusted Earnings (Loss), Adjusted EBITDA and Funds Generated in Period are not presentations made in accordance with GAAP and our use of these measures and terms may vary from other companies in our industry. These non-GAAP financial measures should not be considered as alternatives to (1) net income (loss) or any other performance measures determined in accordance with GAAP or (2) operating cash flows determined in accordance with GAAP. These measures have important limitations as analytical tools, and should not be considered in isolation or as substitutes for analysis of the Company’s results as reported under GAAP. Because of these limitations, these measures should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted Earnings (Loss) and Adjusted EBITDA only as supplements. Users of our financial statements are cautioned not to place undue reliance on Adjusted Earnings (Loss) and Adjusted EBITDA. Adjusted Earnings (Loss) is defined as income (loss) before income taxes plus changes in fair value due to changes in valuation inputs and other assumptions; certain depreciation and amortization costs related to the increased basis in assets (including servicing rights and sub-servicing contracts) acquired within business combination transactions (or step-up depreciation and amortization); goodwill impairment, if any; the provision for curtailment expense, net of expected third-party recoveries; share-based compensation expense; non-cash interest expense; restructuring costs; estimated settlements and costs for certain legal and regulatory matters; fair value to cash adjustments for reverse loans; and select other cash and non-cash adjustments primarily including certain non-recurring costs; severance; gain or loss on extinguishment of debt; the net impact of the Non-Residual Trusts; and transaction and integration costs. Adjusted Earnings (Loss) excludes unrealized changes in fair value of MSRs that are based on projections of expected future cash flows and prepayments. Adjusted Earnings (Loss) includes both cash and non-cash gains from mortgage loan origination activities. Non-cash gains are net of non-cash charges or reserves provided. Adjusted Earnings (Loss) includes cash generated from reverse mortgage origination activities. Adjusted Earnings (Loss) may from time to time also include other adjustments, as applicable based upon facts and circumstances, consistent with the intent of providing investors with a supplemental means of evaluating our operating performance. Adjusted EBITDA eliminates the effects of financing, income taxes and depreciation and amortization. Adjusted EBITDA is defined as income (loss) before income taxes; amortization of servicing rights and other fair value adjustments; interest expense on corporate debt; depreciation and amortization; goodwill impairment, if any; the provision for curtailment expense, net of expected third-party recoveries; share-based compensation expense; restructuring costs; estimated settlements and costs for certain legal and regulatory matters; fair value to cash adjustments for reverse loans; and select other cash and non-cash adjustments primarily certain non-recurring costs; the net provision for the repurchase of loans sold; non-cash interest income; severance; gain or loss on extinguishment of debt; interest income on unrestricted cash and cash equivalents; the net impact of the Non-Residual Trusts; the provision for loan losses; Residual Trust cash flows; transaction and integration costs; and servicing fee economics. Adjusted EBITDA includes both cash and non-cash gains from mortgage loan origination activities. Adjusted EBITDA excludes the impact of fair value option accounting on certain assets and liabilities and includes cash generated from reverse mortgage origination activities. Adjusted EBITDA may also include other adjustments, as applicable based upon facts and circumstances, consistent with the intent of providing investors a supplemental means of evaluating our operating performance. Funds Generated in Period is calculated as Adjusted EBITDA, as described above, less capital expenditures, cash paid for corporate debt interest expense and income taxes. Management believes Funds Generated in Period is useful as a supplemental indicator of the cash capable of being generated by the business during the relevant period and for that purpose considers the values of the OMSRs created during the period as equivalent to cash on the assumption that such OMSRs could have been sold during the period for cash equivalent to their fair value reflected in our books. There can be no assurance that the OMSRs could have been sold during the period for cash equivalent to their fair value reflected in our books. Funds Generated in Period does not represent cash flow or cash available for investment. Amounts or metrics that relate to future earnings projections are forward-looking and subject to significant business, economic, regulatory and competitive uncertainties, many of which are beyond the control of Walter Investment and its management, and are based upon assumptions with respect to future decisions, which are subject to change. Actual results will vary and those variations may be material. Nothing in this presentation should be regarded as a representation by any person that any target will be achieved and the Company undertakes no duty to update any target. Please refer to the introductory slides of this presentation, as well as additional disclosures in this Appendix and in our Annual Report on Form 10-K for the year ended December 31, 2015 and our other filings with the SEC, for important information regarding forward looking statements and the use and limitations of non-GAAP financial measures. Because we do not predict special items that might occur in the future, and our outlook is developed at a level of detail different than that used to prepare GAAP financial measures, we are not providing a reconciliation to GAAP of any forward-looking financial measures presented herein.
Forward-Looking Statements Certain statements in this presentation constitute “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. Statements that are not historical fact are forward-looking statements. Certain of these forward-looking statements can be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “assumes,” “may,” “should,” “will,” “targets,” or other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, and our actual results, performance or achievements could differ materially from future results, performance or achievements expressed in these forward-looking statements. These forward-looking statements are based on our current beliefs, intentions and expectations. These statements are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties described below and in more detail under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015 and in our other filings with the SEC. In particular (but not by way of limitation), the following important factors, risks and uncertainties could affect our future results, performance and achievements and could cause actual results, performance and achievements to differ materially from those expressed in the forward-looking statements: our ability to operate our business in compliance with existing and future rules and regulations affecting our business, including those relating to the origination and servicing of residential loans, the management of third-party assets and the insurance industry (including lender-placed insurance), and changes to, and/or more stringent enforcement of, such rules and regulations; increased scrutiny and potential enforcement actions by federal and state authorities; the substantial resources (including senior management time and attention) we devote to, and the significant compliance costs we incur in connection with, regulatory compliance and regulatory examinations and inquiries, and any consumer redress, fines, penalties or similar payments we make in connection with resolving such matters; uncertainties relating to interest curtailment obligations and any related financial and litigation exposure (including exposure relating to false claims); potential costs and uncertainties, including the effect on future revenues, associated with and arising from litigation, regulatory investigations and other legal proceedings; our dependence on U.S. government-sponsored entities (especially Fannie Mae) and agencies and their residential loan programs and our ability to maintain relationships with, and remain qualified to participate in programs sponsored by, such entities, our ability to satisfy various existing or future GSE, agency and other capital, net worth, liquidity and other financial requirements applicable to our business, and our ability to remain qualified as a GSE approved seller, servicer or component servicer, including the ability to continue to comply with the GSEs’ respective residential loan and selling and servicing guides; uncertainties relating to the status and future role of GSEs, and the effects of any changes to the origination and/or servicing requirements of the GSEs or various regulatory authorities or the servicing compensation structure for mortgage servicers pursuant to programs of GSEs or various regulatory authorities; our ability to maintain our loan servicing, loan origination, insurance agency or collection agency licenses, or any other licenses necessary to operate our businesses, or changes to, or our ability to comply with, our licensing requirements; our ability to comply with the servicing standards required by the National Mortgage Settlement; our ability to comply with the terms of the stipulated order resolving allegations arising from an FTC and CFPB investigation of Ditech Financial; operational risks inherent in the mortgage servicing and mortgage origination businesses, including reputational risk; risks related to our substantial levels of indebtedness, including our ability to comply with covenants contained in our debt agreements, generate sufficient cash to service such indebtedness and refinance such indebtedness on favorable terms, as well as our ability to incur substantially more debt; our ability to renew advance facilities or warehouse facilities and maintain borrowing capacity under such facilities; our ability to maintain or grow our servicing business and our residential loan originations business; our ability to achieve our strategic initiatives, particularly our ability to: execute and complete balance sheet management activities; complete the sale of our insurance business; make arrangements with potential capital partners; complete sales of assets to, and enter into other arrangements with, WCO; increase the mix of our fee-for-service business; reduce our debt; and develop new business, including acquisitions of MSRs or entering into new subservicing arrangements; changes in prepayment rates and delinquency rates on the loans we service or sub-service;
Forward-Looking Statements the ability of our clients and credit owners to transfer or otherwise terminate our servicing or sub-servicing rights; a downgrade of, or other adverse change relating to, our servicer ratings or credit ratings; our ability to collect reimbursements for servicing advances and earn and timely receive incentive payments and ancillary fees on our servicing portfolio; our ability to collect indemnification payments and enforce repurchase obligations relating to mortgage loans we purchase from our correspondent clients and our ability to collect in a timely manner indemnification payments relating to servicing rights we purchase from prior servicers; local, regional, national and global economic trends and developments in general, and local, regional and national real estate and residential mortgage market trends in particular, including the volume and pricing of home sales and uncertainty regarding the levels of mortgage originations and prepayments; uncertainty as to the volume of originations activity we will benefit from prior to, and following, the expiration of HARP, which is scheduled to occur on December 31, 2016, including uncertainty as to the number of "in-the-money" accounts we may be able to refinance; risks associated with the origination, securitization and servicing of reverse mortgages, including changes to reverse mortgage programs operated by FHA, HUD or Ginnie Mae, our ability to accurately estimate interest curtailment liabilities, continued demand for HECM loans and other reverse mortgages, our ability to fund HECM repurchase obligations, our ability to fund principal additions on our HECM loans, and our ability to securitize our HECM loans and tails; our ability to realize all anticipated benefits of past, pending or potential future acquisitions or joint venture investments; the effects of competition on our existing and potential future business, including the impact of competitors with greater financial resources and broader scopes of operation; changes in interest rates and the effectiveness of any hedge we may employ against such changes; risks and potential costs associated with technology and cybersecurity, including: the risks of technology failures and of cyber-attacks against us or our vendors; our ability to adequately respond to actual or alleged cyber-attacks; and our ability to implement adequate internal security measures and protect confidential borrower information; risks and potential costs associated with the implementation of new technology such as MSP, the use of new vendors or the transfer of our servers or other infrastructure to new data center facilities; our ability to comply with evolving and complex accounting rules, many of which involve significant judgment and assumptions; uncertainties regarding impairment charges relating to our goodwill or other intangible assets; our ability to maintain effective internal controls over financial reporting and disclosure controls and procedures; our ability to manage conflicts of interest relating to our investment in WCO and maintain our relationship with WCO; and risks related to our relationship with Walter Energy and uncertainties arising from or relating to its bankruptcy filings, including potential liability for any taxes, interest and/or penalties owed by the Walter Energy consolidated group for the full or partial tax years during which certain of the Company's former subsidiaries were part of such consolidated group and certain other tax risks allocated to us in connection with our spin-off from Walter Energy. All of the above factors, risks and uncertainties are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond our control. New factors, risks and uncertainties emerge from time to time, and it is not possible for our management to predict all such factors, risks and uncertainties. Although we believe that the assumptions underlying the forward-looking statements (including those relating to our outlook) contained herein are reasonable, any of the assumptions could be inaccurate, and therefore any of these statements included herein may prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made, except as otherwise required under the federal securities laws. If we were in any particular instance to update or correct a forward-looking statement, investors and others should not conclude that we would make additional updates or corrections thereafter except as otherwise required under the federal securities laws. In addition, this presentation may contain statements of opinion or belief concerning market conditions and similar matters. In certain instances, those opinions and beliefs could be based upon general observations by members of our management, anecdotal evidence and/or our experience in the conduct of our business, without specific investigation or statistical analyses. Therefore, while such statements reflect our view of the industries and markets in which we are involved, they should not be viewed as reflecting verifiable views and such views may not be shared by all who are involved in those industries or markets.
Servicing Segment (1) Adjusted average UPB serviced and AEBITDA for 2014 include adjustments related to servicing fee economics to reflect MSR acquisitions closed during certain quarters as though they were closed at the beginning of the quarter as economics (cash flows) were actually recorded for the full quarter. (2) The quarterly and annual portfolio disappearance rates are the weighted averages of the disappearance rates for each month in such quarter or annual period. The monthly disappearance rate is the annualized exponential rate of dividing the aggregate dollar amount of contractual payments, voluntary prepayments and defaults attributable to mortgage loans in the mortgage loan servicing portfolio during such month by the sum of the unpaid principal balance of the loans in the mortgage loan servicing portfolio at the beginning of such month plus the unpaid principal balance of any mortgage loans added to such portfolio during such month. $ in millions Servicing Key Metrics FY 2015 FY 2015 FY 2014 FY 2014 Q4 2015 Q4 2015 Q3 2015 Q3 2015 Q4 2014 Q4 2014 Servicing fees $ 704.0 $ 672.2 $ 179.2 $ 178.7 $ 166.8 Incentive and performance fees 94.8 135.9 23.9 19.4 31.5 Ancillary and other fees 98.2 84.6 28.4 22.7 21.5 Servicing revenue and fees $ 897.0 $ 892.7 $ 231.5 $ 220.8 $ 219.8 Amortization of servicing rights (24.8 ) (40.4 ) (5.7 ) (6.2 ) (11.0 ) Other changes in fair value of servicing rights (244.7 ) (149.0 ) (65.2 ) (66.7 ) (41.4 ) Changes in valuation inputs of servicing rights (157.3 ) (124.5 ) 16.2 (158.3 ) (50.1 ) Changes in fair value of servicing rights related liabilities (7.7 ) (2.8 ) (0.7 ) 0.5 (0.1 ) Net servicing revenue and fees $ 462.5 $ 576.0 $ 176.1 $ (9.9 ) $ 117.2 AEBITDA/average UPB 16 bps 18 bps 15 bps 15 bps 12 bps Adjusted Earnings/average UPB 4 bps 10 bps 3 bps 2 bps 4 bps Serviced UPB (in billions) $ 246.6 $ 238.1 $ 246.6 $ 245.6 $ 238.1 Serviced units (in millions) 2.1 2.2 2.1 2.1 2.2 Adjusted average UPB serviced (in billions)(1) $ 244.7 $ 236.6 $ 249.1 $ 245.5 $ 238.8 Disappearance Rate(2) 14.2 % 13.5 % 13.3 % 14.4 % 12.8 %
Originations Segment $ in billions (2) Calculated on pull-through adjusted locked volume. (3) Calculated on funded volume. $ in thousands (1) Recapture rate represents the percent of voluntary UPB payoffs during the period refinanced in to new loans by Ditech. This metric excludes payoffs on non-marketable portfolios (e.g. sub-serviced), payoffs under $20K UPB, or payoffs prior to 60 days after boarding. Originations Data by Channel Consumer Lending Origination Economics Correspondent Lending Origination Economics Pull-Through Adjusted Locked Volume FY 2015 FY 2015 FY 2014 FY 2014 Q4 2015 Q4 2015 Q3 2015 Q3 2015 Q4 2014 Q4 2014 Consumer Lending $ 7.5 $ 8.3 $ 1.9 $ 1.8 $ 1.7 Correspondent Lending 17.6 11.0 3.6 4.5 3.4 $ 25.1 $ 19.3 $ 5.5 $ 6.3 $ 5.1 Funded Volume FY 2015 FY 2015 FY 2014 FY 2014 Q4 2015 Q4 2015 Q3 2015 Q3 2015 Q4 2014 Q4 2014 Consumer Lending $ 7.3 $ 8.2 $ 1.7 $ 1.8 $ 1.6 Correspondent Lending 17.8 10.3 3.9 5.1 3.4 $ 25.1 $ 18.5 $ 5.6 $ 6.9 $ 5.0 FY 2015 FY 2015 FY 2014 FY 2014 Q4 2015 Q4 2015 Q3 2015 Q3 2015 Q4 2014 Q4 2014 Recapture Rate(1) 25 % 37 % 23 % 22 % 28 % bps FY 2015 FY 2014 Q4 2015 Q3 2015 Q4 2014 Gain on Sale(2) 450 495 363 462 416 Fee Income(3) 33 10 46 46 — Direct Expenses(3) (291 ) (260 ) (312 ) (288 ) (302 ) Direct Margin 192 245 97 220 114 bps FY 2015 FY 2014 Q4 2015 Q3 2015 Q4 2014 Gain on Sale(2) 63 46 57 75 41 Fee Income(3) 11 11 12 11 10 Direct Expenses(3) (34 ) (45 ) (36 ) (34 ) (41 ) Direct Margin 40 12 33 52 10 (bps) Gross Margin & Fee Income Direct Cost(4) Direct Margin Funded Volume (in BNs) Funded Volume (in BNs) Consumer Lending 409 (312 ) 97 $ 1.7 Retention 410 (259 ) 151 $ 1.4 Retail 354 (619 ) (265 ) $ 0.2 Consumer Direct 430 (534 ) (104 ) $ 0.1 Correspondent Lending 69 (36 ) 33 $ 3.9 ($MNs) Q4 2015 Q4 2015 FY 2015 FY 2015 Consumer Lending $ 23.4 $ 146.9 Retention 25.7 168.5 Retail (4.0 ) (10.9 ) Consumer Direct 1.7 (10.7 ) Correspondent Lending 11.4 70.2 Q4 2015 Margin Detail (bps) Direct Margin Detail ($) (4) Includes intersegment retention expense, interest expense, direct compensation, direct benefits and direct general and administrative expenses.
Reverse Mortgage Segment $ in millions (1) Representative of servicing fee for on-balance sheet residential loans serviced. (2) Cash generated by origination, purchase and securitization of HECM loans. (3) Funded volumes exclude funded tail volumes. Reverse Mortgage Key Metrics FY 2015 FY 2015 FY 2014 FY 2014 Q4 2015 Q4 2015 Q3 2015 Q3 2015 Q4 2014 Q4 2014 Interest income $ 435.6 $ 398.9 $ 109.6 $ 110.3 $ 103.6 Interest expense (403.8 ) (372.3 ) (102.6 ) (102.1 ) (96.1 ) Net interest margin(1) $ 31.8 $ 26.6 $ 7.0 $ 8.2 $ 7.5 Blended cash generated(2) 68.8 58.8 11.0 17.0 14.7 Fair value of loans and HMBS obligations (2.3 ) 24.6 (9.9 ) 27.4 18.3 Fair value $ 98.3 $ 110.0 $ 8.1 $ 52.6 $ 40.5 Net servicing revenues and fees 42.6 35.4 8.1 11.2 9.8 Other 6.7 11.8 2.0 1.6 2.8 Total revenue $ 147.6 $ 157.2 $ 18.2 $ 65.4 $ 53.1 Funded volume(3) $ 984 MN $ 1,139 MN $ 93 MN $ 217 MN $ 356 MN Securitized volume $ 1,466 MN $ 1,480 MN $ 221 MN $ 390 MN $ 416 MN Serviced UPB (in billions) $ 20.1 $ 18.0 $ 20.1 $ 19.8 $ 18.0 Serviced units 121,233 110,498 121,233 120,888 110,498 $ in millions
Securitized Reverse Mortgages and VIEs(1) $ in millions Reverse Mortgage - Securitized Portfolio Assets $ 10,578.5 Liabilities $ 10,647.4 $ (68.9 ) Residual Trusts Assets $ 523.3 Liabilities $ 471.4 $ 51.9 Non-Residual Trusts Assets $ 554.5 Liabilities $ 582.3 $ (27.8 ) Servicer and Protective Advance Financing Facilities Assets $ 1,173.4 Liabilities $ 994.1 $ 179.3 Ø Net fair value liability of $68.9 MN in Reverse Mortgage should be positive to tangible net worth over time Ø $51.9 MN of residual interest in legacy Walter Investment portfolio Ø Net fair value liability of $27.8 MN associated with mandatory clean-up call obligation in Non-Residual Trusts Ø $179.3 MN of equity in servicer advance trusts (1) Above presentation excludes impact of overall Walter tax positions. Net equity of $134.5 MN is embedded in securitized reverse mortgages and VIEs.
Reconciliation of GAAP Income (Loss) Before Income Taxes to Non-GAAP Adjusted EBITDA $ in millions For the Three Months Ended For the Three Months Ended For the Year Ended For the Year Ended For the Three Months Ended For the Three Months Ended For the Year Ended For the Year Ended December 31, 2015 December 31, 2015 December 31, 2015 December 31, 2015 December 31, 2014 December 31, 2014 December 31, 2014 December 31, 2014 Loss before income taxes $ (208.2 ) $ (404.4 ) $ (109.1 ) $ (119.3 ) Add/(Subtract): Goodwill impairment 151.0 207.6 — 82.3 Amortization of servicing rights and other fair value adjustments 51.3 408.8 97.0 306.9 Interest expense 37.2 157.8 38.2 155.0 Depreciation and amortization 15.8 69.1 17.8 72.7 Share-based compensation expense 6.6 20.9 3.0 14.5 Fair value to cash adjustment for reverse loans 9.9 2.3 (18.3 ) (24.6 ) Curtailment expense 7.4 30.4 — 1.4 Legal and regulatory matters 18.8 26.0 50.4 100.8 Restructuring costs 3.0 11.6 1.7 4.5 Other 8.4 19.6 4.3 10.0 Sub-total 309.4 954.1 194.1 723.5 Adjusted EBITDA $ 101.2 $ 549.7 $ 85.0 $ 604.2
Reconciliation of GAAP Income (Loss) Before Income Taxes to Non-GAAP Adjusted Earnings ($ in millions, except per share amounts) For the Three Months Ended For the Three Months Ended For the Year Ended For the Year Ended For the Three Months Ended For the Three Months Ended For the Year Ended For the Year Ended December 31, 2015 December 31, 2015 December 31, 2015 December 31, 2015 December 31, 2014 December 31, 2014 December 31, 2014 December 31, 2014 Loss before income taxes $ (208.2 ) $ (404.4 ) $ (109.1 ) $ (119.3 ) Add/(Subtract): Goodwill impairment 151.0 207.6 — 82.3 Changes in fair value due to changes in valuation inputs and other assumptions (20.1 ) 137.2 44.1 114.8 Step-up depreciation and amortization 8.6 40.3 10.1 43.6 Step-up amortization of sub-servicing rights 4.4 19.0 9.3 33.3 Non-cash interest expense 2.6 12.1 1.5 12.1 Share-based compensation expense 6.6 20.9 3.0 14.5 Fair value to cash adjustment for reverse loans 9.9 2.3 (18.3 ) (24.6 ) Curtailment expense 7.4 30.4 — 1.4 Legal and regulatory matters 18.8 26.0 50.4 100.8 Restructuring costs 3.0 11.6 1.7 4.5 Other 7.9 16.9 3.8 2.3 Adjusted Earnings (Loss) $ (8.1 ) $ 119.9 $ (3.5 ) $ 265.7 Adjusted Earnings (Loss) after tax (38%) $ (5.0 ) $ 74.3 $ (2.1 ) $ 162.1 Adjusted Earnings (Loss) after taxes per common and common equivalent share. $ (0.14 ) $ 1.98 $ (0.06 ) $ 4.31
Reconciliation of GAAP Income (Loss) Before Income Taxes to Non-GAAP Adjusted EBITDA by Segment ($ in millions) For the three months ended December 31, 2015 For the three months ended December 31, 2015 Servicing Servicing Originations Originations Reverse Mortgage Reverse Mortgage Other Other Total Consolidated Total Consolidated Income (loss) before income taxes $ (148.6 ) $ 12.3 $ (30.5 ) $ (41.4 ) $ (208.2 ) ADJUSTED EARNINGS (LOSS) Step-up depreciation and amortization 6.8 0.6 1.2 — 8.5 Step-up amortization of sub-servicing rights 4.4 — — — 4.4 Non-cash interest expense (0.2 ) — — 2.8 2.6 Share-based compensation expense 4.2 1.8 0.6 (0.1 ) 6.6 Fair value to cash adjustment for reverse loans — — 9.9 — 9.9 Changes in fair value due to changes in valuation inputs and other assumptions (20.1 ) — — — (20.1 ) Legal and regulatory matters 18.2 — 0.6 — 18.8 Goodwill impairment 151.0 — — — 151.0 Curtailment expense — — 7.4 — 7.4 Restructuring costs 0.7 1.6 0.7 — 3.0 Other 2.2 0.7 (0.1 ) 5.1 7.9 Total adjustments 167.2 4.7 20.3 7.8 200.1 Adjusted Earnings (Loss) 18.7 17.0 (10.2 ) (33.6 ) (8.1 ) ADJUSTED EBITDA Depreciation and amortization 4.3 2.2 0.7 — 7.2 Amortization of servicing rights and other fair value adjustments 66.5 — 0.5 — 67.0 Interest expense on debt 1.8 — — 32.8 34.5 Other (0.9 ) 1.3 — 0.2 0.6 Total adjustments 71.7 3.5 1.2 33.0 109.3 Adjusted EBITDA $ 90.4 $ 20.5 $ (9.0 ) $ (0.7 ) $ 101.2 Please note that numbers may not foot due to rounding
Reconciliation of GAAP Income (Loss) Before Income Taxes to Non-GAAP Adjusted EBITDA by Segment ($ in millions) For the year ended December 31, 2015 For the year ended December 31, 2015 Servicing Servicing Originations Originations Reverse Mortgage Reverse Mortgage Other Other Total Consolidated Total Consolidated Income (loss) before income taxes $ (269.8 ) $ 123.5 $ (112.3 ) $ (145.9 ) $ (404.4 ) ADJUSTED EARNINGS (LOSS) Step-up depreciation and amortization 27.7 7.4 5.2 — 40.3 Step-up amortization of sub-servicing rights 19.0 — — — 19.0 Non-cash interest expense 1.3 — — 10.8 12.1 Share-based compensation expense 12.7 5.6 2.4 0.3 20.9 Fair value to cash adjustment for reverse loans — — 2.3 — 2.3 Changes in fair value due to changes in valuation inputs and other assumptions 137.2 — — — 137.2 Legal and regulatory matters 20.4 — 5.6 — 26.0 Goodwill impairment 151.0 — 56.5 — 207.6 Curtailment expense — — 30.4 — 30.4 Restructuring costs 6.5 2.6 1.6 0.9 11.6 Other 3.8 1.3 0.3 11.5 16.9 Total adjustments 379.5 16.9 104.4 23.5 524.3 Adjusted Earnings (Loss) 109.8 140.4 (8.0 ) (122.4 ) 119.9 ADJUSTED EBITDA Depreciation and amortization 17.7 8.4 2.7 — 28.8 Amortization of servicing rights and other fair value adjustments 250.5 — 2.1 — 252.6 Interest expense on debt 8.8 — — 136.9 145.7 Other (6.6 ) 8.8 0.1 0.3 2.7 Total adjustments 270.5 17.2 4.9 137.3 429.9 Adjusted EBITDA $ 380.3 $ 157.6 $ (3.1 ) $ 14.9 $ 549.7 Please note that numbers may not foot due to rounding
Reconciliation of GAAP Income (Loss) Before Income Taxes to Non-GAAP Adjusted EBITDA by Segment ($ in millions) For the three months ended December 31, 2014 For the three months ended December 31, 2014 Servicing Servicing Originations Originations Reverse Mortgage Reverse Mortgage Other Other Total Consolidated Total Consolidated Income (loss) before income taxes $ (69.0 ) $ 2.0 $ (2.9 ) $ (39.2 ) $ (109.1 ) ADJUSTED EARNINGS (LOSS) Step-up depreciation and amortization 6.1 2.3 1.7 — 10.1 Step-up amortization of sub-servicing contracts 9.3 — — — 9.3 Non-cash interest expense (1.0 ) — — 2.6 1.5 Share-based compensation expense 2.2 0.8 0.5 (0.5 ) 3.0 Fair value to cash adjustments for reverse loans — — (18.3 ) — (18.3 ) Changes in fair value due to changes in valuation inputs and other assumptions 44.0 — — — 44.0 Legal and regulatory matters 30.7 0.9 18.8 — 50.4 Restructuring costs 1.7 — — — 1.7 Other — 1.1 0.6 2.2 3.9 Total adjustments 93.0 5.0 3.3 4.3 105.6 Adjusted Earnings (Loss) 24.0 7.1 0.4 (34.9 ) (3.5 ) ADJUSTED EBITDA Depreciation and amortization 5.2 1.9 0.6 — 7.7 Amortization of servicing rights and other fair value adjustments 43.0 — 0.6 — 43.6 Interest expense on debt 2.3 — — 34.4 36.7 Other (0.2 ) 0.6 — 0.1 0.5 Total adjustments 50.3 2.5 1.1 34.5 88.4 Adjusted EBITDA $ 74.3 $ 9.6 $ 1.5 $ (0.4 ) $ 85.0 Please note that numbers may not foot due to rounding
Reconciliation of GAAP Income (Loss) Before Income Taxes to Non-GAAP Adjusted EBITDA by Segment ($ in millions) For the year ended December 31, 2014 For the year ended December 31, 2014 Servicing Servicing Originations Originations Reverse Mortgage Reverse Mortgage Other Other Total Consolidated Total Consolidated Income (loss) before income taxes $ (29.3 ) $ 117.1 $ (101.2 ) $ (106.0 ) $ (119.3 ) ADJUSTED EARNINGS (LOSS) Step-up depreciation and amortization 26.6 9.9 7.1 — 43.6 Step-up amortization of sub-servicing contracts 33.3 — — — 33.3 Non-cash interest expense 2.3 — — 9.8 12.1 Share-based compensation expense 8.9 3.4 2.2 — 14.5 Fair value to cash adjustments for reverse loans — — (24.6 ) — (24.6 ) Changes in fair value due to changes in valuation inputs and other assumptions 114.8 — — — 114.8 Legal and regulatory matters 75.6 0.9 24.3 — 100.8 Goodwill impairment — — 82.3 — 82.3 Curtailment expense — — 1.5 — 1.5 Restructuring costs 1.7 2.9 — — 4.5 Other 1.0 4.0 4.5 (7.1 ) 2.4 Total adjustments 264.1 21.2 97.2 2.6 385.1 Adjusted Earnings (Loss) 234.8 138.3 (4.0 ) (103.4 ) 265.8 ADJUSTED EBITDA Depreciation and amortization 19.7 7.2 2.2 — 29.1 Amortization of servicing rights and other fair value adjustments 156.1 — 2.7 — 158.8 Interest expense on debt 5.0 — — 137.9 142.9 Other 8.7 (1.2 ) (0.1 ) — 7.5 Total adjustments 189.6 6.0 4.8 137.9 338.4 Adjusted EBITDA $ 424.4 $ 144.3 $ 0.8 $ 34.6 $ 604.2 Please note that numbers may not foot due to rounding
Reconciliation of Funds Generated in Period to Net Increase in Cash and Cash Equivalents ($ in millions) (1) Represents originated MSRs that have been capitalized upon transfer of loans. (2) Represents originations activity including purchases and originations of residential loans held for sale, proceeds from sale and payments on residential loans held for sale, net change in master repurchase agreements associated with residential loans held for sale and total net gains on sales of loans less gain on capitalized servicing rights. (3) Represents payments for acquisitions of businesses net of cash acquired, acquisitions of servicing rights and transaction & integration costs incurred as a result. For the three months ended For the three months ended For the year ended For the year ended For the three months ended For the three months ended For the year ended For the year ended December 31, 2015 December 31, 2015 December 31, 2015 December 31, 2015 December 31, 2014 December 31, 2014 December 31, 2014 December 31, 2014 Adjusted EBITDA $ 101.2 $ 549.7 $ 85.0 $ 604.2 Less: Cash Interest Expense on Corporate Debt (46.4 ) (128.9 ) (47.3 ) (132.5 ) Cash Taxes/Refund 1.1 1.6 1.3 5.3 Capital Expenditures (11.0 ) (27.8 ) (4.2 ) (21.6 ) Funds Generated in Period $ 44.9 $ 394.6 $ 34.8 $ 455.4 Investing and Financing activity and other uses of Funds Generated in Period: Investment in retained OMSRs(1) (63.3 ) (306.7 ) (58.7 ) (214.3 ) Net investment in originations activity(2) (20.3 ) (10.1 ) (8.1 ) (14.4 ) Net activity for servicing advances (48.0 ) 46.7 218.8 168.2 Net investment in reverse mortgage activity 46.8 (58.1 ) (7.2 ) (5.8 ) Proceeds from servicing rights related liabilities, net of payments 50.2 43.4 (4.6 ) 68.6 Acquisitions, including related transaction costs(3) (31.4 ) (273.4 ) (101.2 ) (549.2 ) Net payments of corporate debt (30.2 ) (92.8 ) (4.0 ) (17.2 ) Other working capital (14.5 ) 139.1 (75.5 ) (63.0 ) Change in Cash and Cash Equivalents $ (65.8 ) $ (117.3 ) $ (5.7 ) $ (171.7 ) Cash flows used in operating activities (162.6 ) (48.1 ) (210.8 ) (204.3 ) Cash flows provided by (used in) investing activities 46.6 (454.9 ) (310.7 ) (1,244.1 ) Cash flows provided by financing activities 50.2 385.7 515.8 1,276.7 Total change in cash and cash equivalents (65.8 ) (117.3 ) (5.7 ) (171.7 )
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