UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

or

o     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________
 
Commission File Number: 001-35777
 
New Residential Investment Corp.
(Exact name of registrant as specified in its charter)
 
Delaware
 
45-3449660
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
1345 Avenue of the Americas, New York, NY
 
10105
(Address of principal executive offices)
 
(Zip Code)
 
(212) 798-3150
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes o  No x
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  o   Accelerated filer  o   Non-accelerated filer  x     (Do not check if a smaller reporting company)   Smaller reporting company  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.

Common stock, $0.01 par value per share: 253,025,645 shares outstanding as of August 8, 2013.
 
 


 
 
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
 
This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of our investments, the stability of our earnings, and our financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “could,” “project,” “predict,” “continue” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Our ability to predict results or the actual outcome of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:
 
 
reductions in cash flows received from our investments;
 
 
our ability to take advantage of investment opportunities at attractive risk-adjusted prices;
 
 
our ability to take advantage of investment opportunities in excess mortgage servicing rights (“Excess MSRs”);
 
 
our ability to deploy capital accretively;
 
 
our counterparty concentration and default risks in Nationstar Mortgage LLC (“Nationstar”), Springleaf Finance, Inc. (“Springleaf”) and other third-parties;
 
 
a lack of liquidity surrounding our investments which could impede our ability to vary our portfolio in an appropriate manner;
 
 
the impact that risks associated with subprime mortgage loans and consumer loans, as well as deficiencies in servicing and foreclosure practices, may have on the value of our residential mortgage-backed securities (“RMBS”) and consumer loan portfolios;
 
 
the risks that default and recovery rates on our real estate securities, residential mortgage loans and consumer loans deteriorate compared to our underwriting estimates;
 
 
changes in prepayment rates on the loans underlying certain of our assets, including, but not limited to, our Excess MSRs;
 
 
the risk that projected recapture rates on the portfolios underlying our Excess MSRs are not achieved;
 
 
the relationship between yields on assets which are paid off and yields on assets in which such monies can be reinvested;
 
 
the relative spreads between the yield on the assets we invest in and the cost of financing;
 
 
changes in economic conditions generally and the real estate and bond markets specifically;
 
 
adverse changes in the financing markets we access affecting our ability to finance our investments;
 
 
the quality and size of the investment pipeline and the rate at which we can invest our cash;
 
 
 

 
 
 
changing risk assessments by lenders that potentially lead to increased margin calls, not extending our repurchase agreements or other financings in accordance with their current terms or entering into new financings with us;
 
 
changes in interest rates and/or credit spreads, as well as the success of any hedging strategy we may undertake in relation to such changes;
 
 
impairments in the value of the collateral underlying our investments and the relation of any such impairments to our judgments as to whether changes in the market value of our securities or loans are temporary or not and whether circumstances bearing on the value of such assets warrant changes in carrying values;
 
 
the availability and cost of capital for future investments;
 
 
competition within the finance and real estate industries;
 
 
the legislative/regulatory environment, including, but not limited to, the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, U.S. government programs intended to stabilize the economy, the federal conservatorship of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and legislation that permits modification of the terms of loans;
 
 
our ability to maintain our qualification as a real estate investment trust (“REIT”) for U.S. federal income tax purposes and the potentially onerous consequences that any failure to maintain such qualification would have on our business;
 
 
our ability to maintain our exemption from registration under the Investment Company Act of 1940 (the “1940 Act”) and the fact that maintaining such exemption imposes limits on our operations; and
 
 
other risks detailed from time to time below, particularly under the heading “Risk Factors,” and in our other reports filed with or furnished to the Securities and Exchange Commission (the “SEC”).

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. The factors noted above could cause our actual results to differ significantly from those contained in any forward-looking statement.

Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management’s views only as of the date of this report. We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.
 
 
 

 

SPECIAL NOTE REGARDING EXHIBITS

In reviewing the agreements included as exhibits to this Quarterly Report on Form 10-Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
 
 
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;

 
have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

 
may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
 
 
were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Quarterly Report on Form 10-Q and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.

The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this report not misleading.
 
 
 

 

NEW RESIDENTIAL INVESTMENT CORP.
FORM 10-Q

INDEX
 
   
PAGE
     
 
1
     
 
1
     
 
1
     
 
2
     
 
3
     
 
4
     
 
5
     
 
7
     
 
35
     
 
64
     
 
67
     
 
68
     
 
68
     
 
68
     
 
98
     
 
98
     
 
98
     
 
98
     
 
98
     
 
103
 
 
 

 
 
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)

CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

 
   
June 30, 2013
(Unaudited)
   
December 31, 2012
 
Assets
           
Real estate securities, available-for-sale
  $ 1,759,239     $ 289,756  
Investments in excess mortgage servicing rights, at fair value
    271,420       245,036  
Investments in excess mortgage servicing rights, equity method investees, at fair value
    183,153        
Investments in consumer loans, equity method investees
    280,816        
Residential mortgage loans, held-for-investment
    33,636        
Cash and cash equivalents
    209,699        
Other assets
    4,479       84  
    $ 2,742,442     $ 534,876  
                 
Liabilities and Equity
               
                 
Liabilities
               
Repurchase agreements
  $ 1,474,338     $ 150,922  
Due to affiliate
    3,631       5,136  
Dividends payable
    17,712        
Accrued expenses and other liabilities
    1,036       462  
 
    1,496,717       156,520  
                 
Commitments and contingencies
               
                 
Stockholders’ Equity
               
Common Stock, $0.01 par value, 2,000,000,000 shares authorized, 253,025,645 issued and outstanding at June 30, 2013
    2,530        
Additional paid-in capital
    1,157,042       362,830  
Retained earnings
    66,939        
Accumulated other comprehensive income
    19,214       15,526  
      1,245,725       378,356  
 
  $ 2,742,442     $ 534,876  

See notes to consolidated financial statements.
 
 
1

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per share data)

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
    Interest income
  $ 22,999     $ 4,479     $ 39,190     $ 6,516  
    Interest expense
    2,651       —-       3,550        
Net Interest Income
    20,348       4,479       35,640       6,516  
                                 
Impairment
                               
Other-than-temporary impairment (“OTTI”) on securities
    3,756             3,756        
Net interest income after impairment
    16,592       4,479       31,884       6,516  
                                 
Other Income
                               
Change in fair value of investments in excess mortgage servicing rights
    41,833       3,523       43,691       4,739  
Change in fair value of investments in excess mortgage servicing rights, equity method investees
    20,127             21,096        
Earnings from investments in consumer loans, equity method investees
    36,164             36,164        
Gain on settlement of securities
    58             58        
      98,182       3,523       101,009       4,739  
                                 
Operating Expenses
                               
   General and administrative expenses
    602       1,266       3,321       1,677  
   Management fee allocated by Newcastle
    1,809       262       4,134       416  
   Management fee to affiliate
    2,263             2,263        
   Incentive compensation to affiliate
    878             878        
      5,552       1,528       10,596       2,093  
                                 
Net Income
  $ 109,222     $ 6,474     $ 122,297     $ 9,162  
                                 
                                 
Income Per Share of Common Stock
                               
  Basic
  $ 0.43     $ 0.03     $ 0.48     $ 0.04  
  Diluted
  $ 0.43     $ 0.03     $ 0.48     $ 0.04  
                                 
                                 
Weighted Average Number of Shares of Common
 Stock Outstanding
 
  Basic
    253,025,645       253,025,645       253,025,645       253,025,645  
  Diluted
    256,659,488       253,025,645       254,852,605       253,025,645  
                                 
                                 
Dividends Declared per Share of Common Stock
  $ 0.07     $     $ 0.07     $  

 
See notes to consolidated financial statements.
 
 
2

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands)

 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
Net income
  $ 109,222     $ 6,474     $ 122,297     $ 9,162  
Other comprehensive income:
                               
Net unrealized gain (loss) on securities
    (16,193 )           (10 )      
Reclassification of net realized (gain) loss on securities into earnings
    3,698             3,698        
Other comprehensive income (loss)
    (12,495 )           3,688        
Comprehensive income
  $ 96,727     $ 6,474     $ 125,985     $ 9,162  
 
See notes to consolidated financial statements.
 
 
3

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2013
(dollars in thousands)

 
   
Common Stock
                         
   
 
Shares
   
Amount
   
Additional Paid-in Capital
   
Retained Earnings
   
Accumulated Other Comprehensive Income
   
Total Stockholders' Equity
 
Equity - December 31, 2012
        $     $ 362,830     $     $ 15,526     $ 378,356  
Dividends declared
                      (17,712 )           (17,712 )
Capital contributions
               
893,466
                 
893,466
 
Contributions in-kind
               
1,093,684
                 
1,093,684
 
Capital distributions
                (1,228,054 )                 (1,228,054 )
Issuance of common stock
    253,025,645       2,530       (2,530 )                  
Net income
                37,646       84,651             122,297  
Other comprehensive income
                            3,688       3,688  
Equity - June 30, 2013
   
253,025,645
    $ 2,530     $
1,157,042
    $
66,939
    $
19,214
    $
1,245,725
 
 
See notes to consolidated financial statements.
 
 
4

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)

 
   
Six Months Ended June 30,
 
   
 
2013
   
 
2012
 
Cash Flows From Operating Activities
           
   Net income
  $ 122,297     $ 9,162  
   Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Change in fair value of investments in excess mortgage servicing rights
    (43,691 )     (4,739 )
Change in fair value of investments in excess mortgage servicing rights, equity method investees
    (21,096 )      
Distributions of earnings from excess mortgage servicing rights, equity method investees
    4,822        
Earnings from consumer loan equity method investees
    (36,164 )      
Distributions of earnings from consumer loan equity method investees
    769        
Accretion of discount and other amortization
    (6,596 )      
(Gain) / loss on settlement of investments (net)
    (58 )      
Other-than-temporary impairment ("OTTI")
    3,756        
   Changes in:
               
Other assets
    (3,907 )      
Due to affiliate
    (2,715 )     353  
Accrued expenses and other liabilities      574       883  
Reduction of liability deemed as capital contribution by Newcastle
    11,515        
   Other operating cash flows:
               
Cash proceeds from investments, in excess of interest income
    41,435       2,220  
Net cash proceeds deemed as capital distributions to Newcastle
    (52,888 )     (7,879 )
   Net cash provided by (used in) operating activities
    18,053        
                 
Cash Flows From Investing Activities
               
Principal repayments from Non-Agency RMBS
    23,592        
Principal repayments from Agency RMBS
    102,553        
Return of investments in excess mortgage servicing rights
    6,600        
Return of investments in excess mortgage servicing rights, equity method invstees
    4,018        
Purchase of real estate securities
    (265,100 )      
Proceeds from sale of investments
    4,421        
Acquisition of investments in excess mortgage servicing rights
    (2,391 )      
Acquisition of investments in excess mortgage servicing rights, equity method investees
    (53,766 )      
Principal paydowns on residential mortgage loans, held-for-investment
    1,789        
   Net cash provided by (used in) investing activities
    (178,284 )      
 
Continued on next page
 
 
5

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)

 
Cash Flows From Financing Activities
           
Borrowings under repurchase agreements
    415,982        
Repayments of repurchase agreements
    (290,747 )      
Margin deposits under repurchase agreements
    (87,579 )      
Return of margin deposits under repurchase agreements
    87,216        
Contributions in kind
    245,058        
   Net cash provided by (used in) financing activities
    369,930        
                 
Net Increase (Decrease) in Cash and Cash Equivalents
    209,699        
                 
Cash and Cash Equivalents, Beginning of Period
           
                 
Cash and Cash Equivalents, End of Period
  $ 209,699     $  
                 
Supplemental Disclosure of Cash Flow Information
               
Cash paid during the period for interest expense
  $ 3,029     $  
                 
Supplemental Schedule of Non-Cash Investing and Financing Activities Prior to Date of Cash Contribution by Newcastle
 
Cash proceeds from investments, in excess of interest income
  $ 41,435     $ 2,220  
Acquisition of investments in excess mortgage servicing rights
          190,510  
Acquisition of real estate securities
    242,750        
Acquisition of investments in equity method investees at fair value
    125,099        
Acquisition of residential mortgage loans, held-for-investment
    35,138        
Acquisition of investments in consumer loan equity method investees
    245,421          
Borrowings under repurchase agreements
    1,179,068        
Repayments of repurchase agreements
    3,902        
Deposit paid on investment in excess mortgage servicing rights
          16,801  
Purchase price payable on investments in excess mortgage servicing rights
          31,382  
Capital contributions by Newcastle
    648,408       207,311  
Contributions in-kind by Newcastle
    1,093,684        
Capital distributions to Newcastle
    1,228,054       7,879  
                 
Supplemental Schedule of Non-Cash Investing and Financing Activities Subsequent to Date of Cash Contribution by Newcastle
 
                 
Dividends declared but not paid
  $ 17,712     $  
 
See notes to consolidated financial statements.
 
 
6

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2013
(dollars in tables in thousands, except share data)

 
1.      GENERAL

New Residential Investment Corp. (formerly known as NIC MSR LLC) (together with its subsidiaries, “New Residential”) is a Delaware corporation that was formed as a limited liability company in September 2011 for the purpose of making real estate related investments and commenced operations on December 8, 2011. On December 20, 2012, New Residential was converted to a corporation. Newcastle Investment Corp. (“Newcastle”) was the sole stockholder of New Residential until the spin-off (Note 10), which was completed on May 15, 2013. Newcastle is listed on the New York Stock Exchange under the symbol “NCT.” As sole stockholder, Newcastle generally did not have any liability for the obligations of New Residential, except as described in Note 8.

Following the spin-off, New Residential is an independent publicly traded real estate investment trust (“REIT”) primarily focused on investing in residential mortgage related assets. New Residential is listed on the New York Stock Exchange under the symbol “NRZ”.

As of June 30, 2013, New Residential had acquired, or committed to acquire, directly and through equity method investees, excess mortgage servicing rights (“Excess MSRs”) on eleven pools of residential mortgage loans from Nationstar Mortgage LLC (“Nationstar”), a leading residential mortgage servicer. Furthermore, New Residential had acquired real estate securities, residential mortgage loans, and consumer loans.

New Residential intends to elect and qualify to be taxed as a REIT for U.S. federal income tax purposes for the tax year ending December 31, 2013. As such, New Residential will generally not be subject to U.S. federal corporate income tax on that portion of its net income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by prescribed dates and complies with various other requirements.

New Residential has entered into a management agreement (the “Management Agreement”) with FIG LLC (the “Manager”), an affiliate of Fortress Investment Group LLC (“Fortress”), under which the Manager advises New Residential on various aspects of its business and manages its day-to-day operations, subject to the supervision of New Residential’s board of directors. For its services, the Manager is entitled to management fees and incentive compensation, both defined in, and in accordance with the terms of, the Management Agreement. For a further discussion of the Management Agreement, see Note 12. The Manager also manages Newcastle and investment funds that own a majority of Nationstar.

As of June 30, 2013, New Residential operated in the following business segments: (i) investments in Excess MSRs, (ii) investments in real estate securities and loans, (iii) investments in consumer loans and (iv) corporate.

The consolidated financial statements for periods prior to May 15, 2013 have been prepared on a spin-off basis from the consolidated financial statements and accounting records of Newcastle and reflect New Residential’s historical results of operations, financial position and cash flows, in accordance with U.S. GAAP. As presented in the Consolidated Statements of Cash Flows, New Residential did not have any cash balance during periods prior to April 5, 2013, which is the first date Newcastle contributed cash to New Residential. All of its cash activity occurred in Newcastle’s accounts during these periods. The consolidated financial statements for periods prior to May 15, 2013 do not necessarily reflect what New Residential’s consolidated results of operations, financial position and cash flows would have been had New Residential operated as an independent company prior to the spin-off.

Certain expenses of Newcastle, comprised primarily of a portion of its management fee, have been allocated to New Residential to the extent they were directly associated with New Residential for periods prior to the spin-off on May 15, 2013. The portion of the management fee allocated to New Residential prior to the spin-off represents the product of the management fee rate payable by Newcastle (1.5%) and New Residential’s gross equity, which management believes is a reasonable method for quantifying the expense of the services provided by the employees of the Manager to New Residential. The incremental cost of certain legal, accounting and other expenses related to New Residential’s operations prior to May 15, 2013 are reflected in the accompanying consolidated financial statements. New Residential and Newcastle do not share any expenses following the spin-off.
 
 
7

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2013
(dollars in tables in thousands, except share data)

 
The accompanying consolidated financial statements and related notes of New Residential have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under U.S. generally accepted accounting principles have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of New Residential’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with New Residential’s consolidated financial statements for the year ended December 31, 2012 and notes thereto included in New Residential’s Registration Statement on Form 10 filed with the Securities and Exchange Commission. Capitalized terms used herein, and not otherwise defined, are defined in New Residential’s consolidated financial statements for the year ended December 31, 2012.

Recent Accounting Pronouncements

In February 2013, the FASB issued new guidance regarding the reporting of reclassifications out of accumulated other comprehensive income. The new guidance does not change current requirements for reporting net income or other comprehensive income in the financial statements. However, it requires companies to present the effects on the line items of net income of significant amounts reclassified out of accumulated OCI if the item reclassified is required to be reclassified to net income in its entirety during the same reporting period. Presentation should occur either on the face of the income statement where net income is presented or in the notes to the financial statements. New Residential has adopted this accounting standard and presents this information in Note 13.

The FASB has recently issued or discussed a number of proposed standards on such topics as consolidation, financial statement presentation, revenue recognition, financial instruments, hedging, and contingencies. Some of the proposed changes are significant and could have a material impact on New Residential’s reporting. New Residential has not yet fully evaluated the potential impact of these proposals, but will make such an evaluation as the standards are finalized.

2.      SEGMENT REPORTING

New Residential conducts its business through the following segments: (i) investments in Excess MSRs, (ii) investments in real estate securities and loans, (iii) investments in consumer loans, and (iv) corporate. The corporate segment consists primarily of general and administrative expenses, the allocation of management fees by Newcastle until the spin-off on May 15, 2013, and the management fees and incentive compensation owed to the Manager by New Residential following the spin-off.
 
 
8

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2013
(dollars in tables in thousands, except share data)

 
Summary financial data on New Residential’s segments is given below, together with a reconciliation to the same data for New Residential as a whole:
 
   
Excess MSRs
   
Real Estate Securities and Loans
   
Consumer Loans
   
Corporate
   
Total
 
Three Months Ended June 30, 2013
                             
Interest income
  $ 10,745     $ 12,216     $     $ 38     $ 22,999  
Interest expense
          2,651                   2,651  
Net interest income
    10,745       9,565             38       20,348  
Impairment
          3,756                   3,756  
Other income
    61,960       58       36,164             98,182  
Operating expenses
    34       152             5,366       5,552  
Net income (loss)
  $ 72,671     $ 5,715     $ 36,164     $ (5,328 )   $ 109,222  

   
Excess MSRs
   
Real Estate Securities and Loans
   
Consumer Loans
   
Corporate
   
Total
 
Six Months Ended June 30, 2013
                             
Interest income
  $ 20,780     $ 18,372     $     $ 38     $ 39,190  
Interest expense
          3,550                   3,550  
Net interest income
    20,780       14,822             38       35,640  
Impairment
          3,756                   3,756  
Other income
    64,787       58       36,164             101,009  
Operating expenses
    96       152       1,951       8,397       10,596  
Net income (loss)
  $ 85,471     $ 10,972     $ 34,213     $ (8,359 )   $ 122,297  
 
   
Excess MSRs
   
Real Estate Securities and Loans
   
Consumer Loans
   
Corporate
   
Total
 
June 30, 2013
                             
Investments
  $ 454,573     $ 1,792,875     $ 280,816     $     $ 2,528,264  
Cash and cash equivalents
                      209,699       209,699  
Other assets
          4,379             100       4,479  
Total assets
    454,573       1,797,254       280,816       209,799       2,742,442  
Debt
          (1,474,338 )                 (1,474,338 )
Other liabilities
    (67 )     (1,734 )           (20,578 )     (22,379 )
Total liabilities
    (67 )     (1,476,072 )           (20,578 )     (1,496,717 )
GAAP book value
  $ 454,506     $ 321,182     $ 280,816     $ 189,221     $ 1,245,725  
                                         
Investments in equity method investees
  $ 183,153     $     $ 280,816     $     $ 463,969  
 
 
9

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2013
(dollars in tables in thousands, except share data)

   
Excess MSRs
   
Real Estate Securities and Loans
   
Consumer Loans
   
Corporate
   
Total
 
Three Months Ended June 30, 2012
                             
Interest income
  $ 4,479     $     $     $     $ 4,479  
Interest expense
                             
Net interest income
    4,479                         4,479  
Other income
    3,523                         3,523  
Operating expenses
    761                   767       1,528  
Net income (loss)
  $ 7,241     $     $     $ (767 )   $ 6,474  

   
Excess MSRs
   
Real Estate Securities and Loans
   
Consumer Loans
   
Corporate
   
Total
 
Six Months Ended June 30, 2012
                             
Interest income
  $ 6,516     $     $     $     $ 6,516  
Interest expense
                             
Net interest income
    6,516                         6,516  
Other income
    4,739                         4,739  
Operating expenses
    1,147                   946       2,093  
Net income (loss)
  $ 10,108     $     $     $ (946 )   $ 9,162  
 
 
10

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2013
(dollars in tables in thousands, except share data)

 
3.      INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS AT FAIR VALUE

Pool 1. On December 13, 2011, Newcastle announced the completion of the first co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights acquired by Nationstar. New Residential invested approximately $44 million to acquire a 65% interest in the Excess MSRs on a portfolio of government-sponsored enterprise (“GSE”) residential mortgage loans with an outstanding principal balance of approximately $9.9 billion (“Pool 1”). Nationstar has co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and is the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, the servicing obligations and liabilities as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations.

Pool 2. On June 5, 2012, Newcastle announced the completion of a co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights Nationstar acquired from Bank of America. New Residential invested approximately $42 million to acquire a 65% interest in the Excess MSRs on a portfolio of residential mortgage loans with an outstanding principal balance of approximately $10.4 billion (“Pool 2”), comprised of loans in GSE pools. Nationstar has co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and is the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations.

Pools 3, 4 and 5. On June 29, 2012, Newcastle announced the completion of a co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights Nationstar acquired from Aurora Bank FSB, a subsidiary of Lehman Brothers Bancorp Inc. New Residential invested approximately $176.5 million to acquire a 65% interest in the Excess MSRs on a portfolio of residential mortgage loans with an outstanding principal balance of approximately $63.7 billion, comprised of approximately 75% non-conforming loans in private label securitizations and approximately 25% conforming loans in GSE pools. The portfolio is comprised of three pools: two GSE loan pools with outstanding principal balances of approximately $9.8 billion (“Pool 3”) and $6.3 billion (“Pool 4”), respectively, and a pool of non-conforming loans in private label securitizations with an outstanding principal balance of approximately $47.6 billion (“Pool 5”). Nationstar has co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and is the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations.

Pool 11. On May 20, 2013, New Residential entered into an excess spread agreement with Nationstar to purchase for $2.4 million a two-thirds interest in the Excess MSRs on a portion of the loans in the pool which are eligible to be refinanced by a specific third party for a period of time, with Nationstar retaining the remaining one-third interest in the Excess MSRs and all servicing rights. After this period expires, Nationstar will have the ability to refinance all of the loans in the pool. See Note 6 for information on our other agreements with Nationstar with respect to Pool 11.
 
 
11

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2013
(dollars in tables in thousands, except share data)

 
New Residential elected to record its investments in Excess MSRs at fair value pursuant to the fair value option for financial instruments in order to provide users of the financial statements with better information regarding the effects of prepayment risk and other market factors on the Excess MSRs.
 
The following is a summary of New Residential’s direct investments in Excess MSRs:
 
   
June 30, 2013
   
Six
Months
Ended June
30, 2013
 
   
Unpaid Principal
Balance (“UPB”) of Underlying Mortgages
   
Amortized
Cost Basis
 (A)
   
Carrying Value (B)
   
Weighted Average Yield
   
Weighted Average Life
(Years) (C)
   
Changes in Fair Value Recorded in Other
 Income (D)
 
MSR Pool 1
  $ 7,593,438     $ 28,120     $ 39,147       12.5 %     4.9     $ 5,290  
MSR Pool 1 - Recapture Agreement
          2,980       5,383       12.5 %     11.0       1,897  
MSR Pool 2
    8,570,405       31,629       37,339       12.5 %     5.1       4,666  
MSR Pool 2 - Recapture Agreement
          2,934       6,557       12.5 %     12.1       3,441  
MSR Pool 3
    8,380,524       25,351       33,183       12.5 %     4.8       4,976  
MSR Pool 3 - Recapture Agreement
          4,088       5,755       12.5 %     11.5       1,742  
MSR Pool 4
    5,381,133       10,205       13,176       12.5 %     4.6       1,952  
MSR Pool 4 - Recapture Agreement
          2,657       3,533       12.5 %     11.1       891  
MSR Pool 5
    39,989,031       99,530       121,102       12.5 %     5.5       19,594  
MSR Pool 5 - Recapture Agreement
          8,454       3,854       12.5 %     12.8       (758 )
MSR Pool 11 - Recapture Agreement
          2,391       2,391       12.5 %            
    $ 69,914,531     $ 218,339     $ 271,420       12.5 %     5.8     $ 43,691  
 
(A)
The amortized cost basis of the Recapture Agreements is determined based on the relative fair values of the Recapture Agreements and related Excess MSRs at the time they were acquired.
   
(B)
Carrying Value represents the fair value of the pools or Recapture Agreements, as applicable.
   
(C)
Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this investment.
   
(D)
The portion of the change in fair value of the Recapture Agreements relating to loans recaptured to date is reflected in the respective pool.
 
 
12

 

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2013
(dollars in tables in thousands, except share data)

 
The table below summarizes the geographic distribution of the underlying residential mortgage loans of the direct investments in Excess MSRs at June 30, 2013:

State Concentration
 
Percentage of Total Outstanding (A)
 
California
    31.5 %
Florida
    10.1 %
New York
   
4.5
%
Washington
    4.3 %
Arizona
    3.8 %
Texas
    3.6 %
Maryland
    3.5 %
Colorado
    3.5 %
New Jersey
    3.2 %
Virginia
    3.1 %
Other U.S.
    28.9 %
      100.0 %
 
 
(A)
Based on the information provided by the loan servicer as of June 30, 2013.

Geographic concentrations of investments expose New Residential to the risk of economic downturns within the relevant states. Any such downturn in a state where New Residential holds significant investments could affect the underlying borrower’s ability to make mortgage payments and therefore could have a meaningful, negative impact on the Excess MSRs.

4.      INVESTMENTS IN REAL ESTATE SECURITIES

During 2013, New Residential acquired $547.5 million face amount of Non-Agency RMBS for approximately $362.4 million and $156.3 million face amount of Agency ARM RMBS for approximately $165.2 million net of sales.  In addition, Newcastle contributed $1.0 billion face amount of Agency ARM RMBS to New Residential during this period.
 
The following is a summary of New Residential’s real estate securities at June 30, 2013, all of which are classified as available-for-sale and are, therefore, reported at fair value with changes in fair value recorded in other comprehensive income.
 
 
13

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2013
(dollars in tables in thousands, except share data)

 
               
Gross Unrealized
             
Weighted Average
 
Asset Type
 
Outstanding
Face Amount
   
Amortized
Cost Basis
   
Gains
   
Losses
   
Carrying
Value (A)
   
Number of
Securities
 
Rating (B)
 
Coupon
   
Yield
   
Life (Years)
(C)
   
Principal
Subordination
(D)
 
                                                               
Agency ARM RMBS (E) (F)
  $ 1,059,950     $ 1,134,190     $ 1,430     $ (5,834 )   $ 1,129,786       66  
 AAA
    3.30 %     1.47 %     3.2       N/A  
Non-Agency RMBS
    927,903       605,835       33,286       (9,668 )     629,453       98  
 CC
    0.77 %     4.87 %     3.8       6.7 %
Total/Weighted Average (G)
  $ 1,987,853     $ 1,740,025     $ 34,716     $ (15,502 )   $ 1,759,239       164  
 BBB
    2.12 %     2.65 %     3.4          
 
(A)
Fair value, which is equal to carrying value for all securities. See Note 9 regarding the estimation of fair value.
   
(B)
Represents the weighted average of the ratings of all securities in each asset type, expressed as an S&P equivalent rating. For each security rated by multiple rating agencies, the lowest rating is used. Ratings provided were determined by third party rating agencies, represent the most recent credit ratings available as of the reporting date and may not be current.
   
(C)
The weighted average life is based on the timing of expected principal reduction on the assets.
   
(D)
Percentage of the outstanding face amount of securities and residual interests that is subordinate to New Residential’s investments.
   
(E)
Includes securities issued or guaranteed by U.S. Government agencies such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”).
   
(F)
Amortized cost basis and carrying value include principal receivable of $13.8 million.
   
(G) The total outstanding face amount was $ 18.4 million for fixed rate securities and $ 1.97 billion for floating rate securities.
 
Unrealized losses that are considered other than temporary are recognized currently in earnings.  During the six months ended June 30, 2013, New Residential recorded other-than-temporary impairment charges (“OTTI”) of $3.8 million with respect to real estate securities held prior to the spin-off on May 15, 2013.  Based on Newcastle management’s analysis of these securities, Newcastle determined it did not have the intent to hold the securities past May 15, 2013.  Any remaining unrealized losses on New Residential’s securities were primarily the result of changes in market factors, rather than issue-specific credit impairment.  New Residential performed analyses in relation to such securities, using management’s best estimate of their cash flows, which support its belief that the carrying values of such securities were fully recoverable over their expected holding period.  New Residential has no intent to sell, and is not more likely than not to be required to sell, these securities.
 
 
14

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2013
(dollars in tables in thousands, except share data)

 
The following table summarizes New Residential’s securities in an unrealized loss position as of June 30, 2013.
 
         
Amortized Cost Basis
   
Gross Unrealized
             
Weighted Average
       
Securities in an Unrealized Loss Position
 
Outstanding
Face Amount
   
Before
Impairment
   
Other-Than-
Temporary
 Impairment (A)
   
After
Impairment
   
Gains
   
Losses
   
Carrying Value
   
Number of
Securities
 
Rating
 
Coupon
   
Yield
   
Life
(Years)
 
                                                                     
Less than Twelve Months
  $ 1,183,118     $ 1,104,946     $ (3,429 )   $ 1,101,517     $     $ (15,485 )   $ 1,086,032       79  
BBB
    2.51 %     1.83 %     3.5  
                                                                                           
Twelve or More Months
    6,798       7,447       (40 )     7,407             (17 )     7,390       1  
 AAA
    2.76 %     0.93 %     4.2  
                                                                                           
Total/WA
  $ 1,189,916     $ 1,112,393     $ (3,469 )   $ 1,108,924     $     $ (15,502 )   $ 1,093,422       80  
BBB
    2.51 %     1.82 %     3.5  
 
 
(A)
Other than temporary impairment was recorded in connection with unrealized losses at the time of spin-off as Newcastle did not have the intent and ability to hold the securities past May 15, 2013.  The losses were not recorded as the result of New Residential’s intent to sell the securities and are not the result of credit impairment.
 
The table below summarizes the geographic distribution of the collateral securing New Residential’s Non-Agency RMBS at June 30, 2013:
 
Geographic Location
 
Outstanding Face
Amount
   
Percentage of Total
Outstanding
 
Western U.S.
  $ 346,056       37.3 %
Northeastern U.S.
    219,197       23.6 %
Southeastern U.S.
    190,998       20.6 %
Midwestern U.S.
    98,933       10.7 %
Southwestern U.S.
    72,719       7.8 %
    $ 927,903       100.0 %
 
New Residential evaluates the credit quality of its real estate securities, as of the acquisition date, for evidence of credit quality deterioration. As a result, New Residential identified a population of real estate securities for which it was determined that it was probable that New Residential would be unable to collect all contractually required payments. For securities acquired during the six months ended June 30, 2013, the face amount of these real estate securities was $472.7 million, with total expected cash flows of $375.2 million and a fair value of $298.9 million.
 
 
15

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2013
(dollars in tables in thousands, except share data)

 
The following is the outstanding face amount and carrying value for securities, for which, as of the acquisition date, it was probable that New Residential would be unable to collect all contractually required payments, at December 31, 2012 and June 30, 2013:
 
   
Outstanding Face Amount
   
Carrying Value
 
December 31, 2012
  $ 342,013     $ 212,129  
June 30, 2013
  $ 771,682     $ 495,872  
 
The following is a summary of the changes in accretable yield for these securities:
 
   
For the Six Months
Ended June 30, 2013
 
Balance at December 31, 2012
  $ 90,077  
         
Additions
    76,263  
         
Accretion
    (9,706 )
         
Reclassifications from nonaccretable difference
    23,679  
         
Disposals
    153  
         
Balance at June 30, 2013
  $ 180,466  
 
5.      INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS

On February 27, 2013, New Residential, through a subsidiary, entered into an agreement to co-invest in reverse mortgage loans with a UPB of approximately $83 million as of December 31, 2012. New Residential has invested approximately $35 million to acquire a 70% interest in the reverse mortgage loans. Nationstar has co-invested pari passu with New Residential in 30% of the reverse mortgage loans and is the servicer of the loans performing all servicing and advancing functions and retaining the ancillary income, servicing obligations and liabilities as the servicer.

Loans for which New Residential has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are classified as held-for-investment. Loans are presented in the consolidated balance sheet at cost net of any unamortized discount (or gross of any unamortized premium). New Residential determines at acquisition whether loans will be aggregated into pools based on common risk characteristics (credit quality, loan type, and date of origination or acquisition); loans aggregated into pools are accounted for as if each pool were a single loan. Income on these loans is recognized similarly to that on securities using a level yield methodology.

To the extent that residential mortgage loans are classified as held-for-investment, New Residential must periodically evaluate each of these loans or loan pools for possible impairment. Impairment is indicated when it is deemed probable that New Residential will be unable to collect all amounts due according to the contractual terms of the loan, or for loans acquired at a discount for credit losses, when it is deemed probable that New Residential will be unable to collect as anticipated. Upon determination of impairment, New Residential would establish a specific valuation allowance with a corresponding charge to earnings. New Residential continually evaluates its loans receivable for impairment. New Residential’s residential mortgage loans are aggregated into pools for evaluation based on like characteristics, such as loan type and acquisition date. Pools of loans are evaluated based on criteria such as an analysis of borrower performance, credit ratings of borrowers, loan to value ratios, the estimated value of the underlying collateral, the key terms of the loans and historical and anticipated trends in defaults and loss severities for the type and seasoning of loans being evaluated. This information is used to estimate provisions for estimated unidentified incurred losses on pools of loans. Significant judgment is required in determining impairment and in estimating the resulting loss allowance. Furthermore, New Residential must assess its intent and ability to hold its loan investments on a periodic basis. If New Residential does not have the intent to hold a loan for the foreseeable future or until its expected payoff, the loan must be classified as “held for sale” and recorded at the lower of cost or estimated value.
 
 
16

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2013
(dollars in tables in thousands, except share data)

.
 
The following is a summary of residential mortgage loans at June 30, 2013, all of which are classified as held for investment:
 
Loan Type
 
Outstanding Face Amount
   
Carrying Value
   
Loan Count
   
Wtd. Avg. Yield
   
Wtd. Avg. Coupon (A)
   
Wtd. Avg. Life (Years) (B)
   
Floating Rate Loans as a % of Face Amount
   
Delinquent Face Amount
 
Reverse Mortgage Loans
  $ 56,730     $ 33,636       328       10.6 %     5.1 %     4.1       20.7 %     N/A  

(A)
Represents the stated interest rate on the loans.  Accrued interest on reverse mortgage loans is generally added to the principal balance and paid when the loan is resolved.
   
(B)
The weighted average life is based on the expected timing of the receipt of cash flows.
 
Activities related to the carrying value of residential mortgage loans are as follows:
 
   
For the six months ended June 30, 2013
 
Balance at December 31, 2012
  $  
Purchases/additional fundings
    35,138  
Proceeds from repayments
    (2,686 )
Accretion of loan discount and other amortization
    1,184  
Balance at June 30, 2013
  $ 33,636  
 
6.      INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS EQUITY METHOD INVESTEES

During the six months ended June 30, 2013, New Residential entered into investments in joint ventures (“Excess MSR joint ventures”) jointly controlled by New Residential and Fortress-managed funds investing in Excess MSRs. New Residential elected to record these investments at fair value pursuant to the fair value option for financial instruments to provide users of the financial statements with better information regarding the effects of prepayment risk and other market factors.
 
 
17

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2013
(dollars in tables in thousands, except share data)

 
The following tables summarize the investments in equity method investees held by New Residential at June 30, 2013:
 
   
June 30, 2013
 
Excess MSR Assets
  $ 351,863  
Other Assets (A)
    22,394  
Debt
     
Other Liabilities
    (7,951 )
Equity
  $ 366,306  
New Residential’s Investment
  $ 183,153  
         
New Residential’s Ownership
    50.0 %

 
(A)
Includes $20.8 million of deposits related to investments which have not closed at June 30, 2013.

   
Six Months Ended
 June 30, 2013
 
Interest Income
  $ 13,756  
Other Income
    31,374  
Expenses
    (2,938 )
Net Income
  $ 42,192  
 
The following is a summary of New Residential’s Excess MSR investments made through equity method investees:
 
   
June 30, 2013
 
   
Unpaid
Principal
Balance
   
Investee
 Interest in
 Excess MSR
   
New Residential Interest
in Investees
   
Amortized
Cost Basis (A)
   
Carrying Value (B)
   
Weighted Average Yield
   
Weighted Average Life (Years) (C)
 
MSR Pool 6
  $ 11,149,355       66.7 %     50.0 %   $ 40,027     $ 44,139       12.5 %     4.8  
MSR Pool 6 - Recapture Agreement
          66.7 %     50.0 %     10,683       13,284       12.5 %     10.7  
MSR Pool 7
    34,480,698       66.7 %     50.0 %     104,057       112,946       12.5 %     5.1  
MSR Pool 7 - Recapture Agreement
          66.7 %     50.0 %     22,962       25,965       12.5 %     12.0  
MSR Pool 8
    15,417,544       66.7 %     50.0 %     56,180       57,960       12.5 %     5.0  
MSR Pool 8 - Recapture Agreement
          66.7 %     50.0 %     12,928       14,103       12.5 %     11.7  
MSR Pool 11
    22,817,213       66.7 %     50.0 %     51,033       55,797       12.5 %     5.3  
MSR Pool 11 - Recapture Agreement
          66.7 %     50.0 %     23,459       27,669       12.5 %     9.9  
    $ 83,864,810                     $ 321,329     $ 351,863       12.5 %     6.4  
 
(A)
Represents the amortized cost basis of the equity method investees in which New Residential holds a 50% interest. The amortized cost basis of the Recapture Agreements is determined based on the relative fair values of the Recapture Agreements and related Excess MSRs at the time they were acquired.
(B)
Represents the carrying value of the Excess MSRs held in equity method investees, in which New Residential holds a 50% interest. Carrying value represents the fair value of the pools or Recapture Agreements, as applicable.
(C)
The weighted average life represents the weighted average expected timing of the receipt of cash flows of each investment.
 
 
18

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2013
(dollars in tables in thousands, except share data)

 
Pool 6. On January 4, 2013, New Residential, through a joint venture, co-invested in Excess MSRs on a portfolio of Government National Mortgage Association (“Ginnie Mae”) residential mortgage loans with a UPB of approximately $13 billion (“Pool 6”) as of November 30, 2012. Nationstar acquired the related servicing rights from Bank of America in November 2012. New Residential contributed approximately $28.9 million for a 50% interest in a joint venture which acquired an approximately 67% interest in the Excess MSRs on this portfolio. The remaining interests in the joint venture are owned by a Fortress-managed fund and the remaining interest of approximately 33% in the Excess MSRs is owned by Nationstar. As the servicer, Nationstar performs all servicing and advancing functions, and it retains the ancillary income, servicing obligations and liabilities associated with this portfolio. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by the joint venture and Nationstar, subject to certain limitations.

Pools 7, 8, 9, 10.  On January 6, 2013 New Residential, through joint ventures, agreed to co-invest in Excess MSRs on a portfolio of four pools of residential mortgage loans with a UPB of approximately $215 billion as of November 30, 2012. Approximately 53% of the loans in this portfolio are in private label securitizations (“Pool 10”), and the remainder are owned, insured or guaranteed by Fannie Mae (“Pool 7”), Freddie Mac (“Pool 8”) or Ginnie Mae (“Pool 9”). Nationstar has agreed to acquire the related servicing rights from Bank of America. New Residential committed to invest approximately $340 million (based on the November 30, 2012 UPB) for a 50% interest in joint ventures which will acquire an approximately 67% interest in the Excess MSRs on this portfolio. As of June 30, 2013, New Residential had contributed approximately $80.7 million to the joint ventures. The remaining interests in the joint ventures are owned by Fortress-managed funds and the remaining interest of approximately 33% in the Excess MSRs are owned by Nationstar. As the servicer, Nationstar performs all servicing and advancing functions, and it retains the ancillary income, servicing obligations and liabilities associated with this portfolio. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by the joint ventures and Nationstar, subject to certain limitations. On January 31, 2013, New Residential completed the first closing of this co-investment. The first closing related to Excess MSRs on loans with an aggregate UPB of approximately $58 billion as of December 31, 2012, that are owned, insured, or guaranteed by Fannie Mae or Freddie Mac.

Pool 11. On May 20, 2013, New Residential acquired, through a joint venture, an interest in Excess MSRs from Nationstar on a portfolio of mortgage loans with a UPB of approximately $22.8 billion (“Pool 11”) as of March 31, 2013. New Residential has invested approximately $37.8 million to acquire a one-third interest in the Excess MSRs. Nationstar is the servicer of the loans and has retained a one-third interest in the Excess MSRs; a Fortress managed fund has acquired the remaining one-third interest. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are included in the portfolio, subject to certain limitations. New Residential, Nationstar and the Fortress fund share equally in these Excess MSRs.
 
See Recent Activities (Note 15) for information on Pools 9 and 10.
 
 
19

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2013
(dollars in tables in thousands, except share data)

 
The table below summarizes the geographic distribution of the underlying residential mortgage loans of the Excess MSR investments made through equity method investees at June 30, 2013:
 
State Concentration
 
Percentage of Total Outstanding (A)
 
California
    13.6 %
Florida
    8.3 %
Georgia
    5.8 %
Texas
    5.6 %
New York
    5.5 %
Illinois
    4.5 %
Massachusetts
    3.5 %
New Jersey
    3.3 %
Washington
    3.0 %
Virginia
    3.0 %
Other U.S.
    43.9 %
      100.0 %
 
(A)  Based on the information provided by the loan servicer as of June 30, 2013.

 
7.      INVESTMENTS IN CONSUMER LOAN EQUITY METHOD INVESTEES
 
On April 1, 2013, New Residential completed, through newly formed limited liability companies (together, the “Consumer Loan Companies”) a co-investment in a portfolio of consumer loans with a UPB of approximately $4.2 billion as of December 31, 2012. The portfolio includes over 400,000 personal unsecured loans and personal homeowner loans originated through subsidiaries of HSBC Finance Corporation. The Consumer Loan Companies acquired the portfolio from HSBC Finance Corporation and its affiliates. New Residential invested approximately $250 million for 30% membership interests in each of the Consumer Loan Companies. Of the remaining 70% of the membership interests, Springleaf Finance, Inc. (“Springleaf”), which is majority-owned by Fortress funds managed by our Manager, acquired 47%, and an affiliate of Blackstone Tactical Opportunities Advisors L.L.C. acquired 23%. Springleaf acts as the managing member of the Consumer Loan Companies. The Consumer Loan Companies financed $2.2 billion of the approximately $3.0 billion purchase price with asset-backed notes. The Consumer Loan Companies were formed on March 19, 2013, for the purpose of making this investment, and commenced operations upon the completion of the investment. After a servicing transition period, Springleaf will be the servicer of the loans and will provide all servicing and advancing functions for the portfolio.
 
New Residential accounts for its investment in the Consumer Loan Companies pursuant to the equity method of accounting because it can exercise significant influence over the Consumer Loan Companies, but the requirements for consolidation are not met.  New Residential’s share of earnings and losses in these equity method investees is included in “Earnings from investments in consumer loans, equity method investees” on the Consolidated Statements of Income. Equity method investments are included in “Investments in consumer loans, equity method investees” on the Consolidated Balance Sheets.
 
New Residential periodically reviews equity method investments for impairment in value whenever events or changes in circumstances indicate that the carrying amount of such investments may not be recoverable. New Residential will record an impairment charge to the extent that the estimated fair value of an investment is less than its carrying value and New Residential determines the impairment is other-than-temporary.
 
 
20

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2013
(dollars in tables in thousands, except share data)

 
The following tables summarize the investment the Consumer Loan Companies held by New Residential at June 30, 2013:

   
June 30, 2013
 
Consumer Loan Assets
  $ 2,835,996  
Other Assets
    119,163  
Debt (A)
    (2,018,486 )
Other Liabilities
    (620 )
Equity
  $ 936,053  
New Residential’s investment
  $ 280,816  
New Residential’s ownership
    30.0 %
 
(A)
Represents asset-back notes with an interest rate of 3.75% and a maturity of April 2021.  Substantially all of the net cash flow generated by the Consumer Loan Companies is required to be used to pay down the these notes.  When the balance of the outstanding notes is reduced to 50% of the outstanding UPB of the performing consumer loans, the equity holders of the Consumer Loan Companies will be entitled to receive, in the aggregate, 30% of the net cash flow of the Consumer Loan Companies on a periodic basis.
 
   
Six Months Ended
 June 30, 2013
 
Interest income
  $ 168,130  
Interest expense
    (24,590 )
Provision for finance receivable losses
    (554 )
Other expenses
    (22,441 )
Net income
  $ 120,545  
New Residential’s equity in net income
  $ 36,164  
 
The following is a summary of New Residential’s consumer loan investments made through equity method investees:
 
   
June 30, 2013
 
   
Unpaid
Principal
Balance
   
Interest in
 Consumer Loan Companies
   
Carrying Value (A)
   
Weighted Average Coupon (B)
   
Weighted Average Asset Yield
   
Weighted Average Expected Life (Years) (C)
 
Consumer Loans
  $ 3,675,979       30.0 %   $ 2,835,996       18.6 %     14.0 %     4.5  
 
(A)
Represents the carrying value of the consumer loans held by the Consumer Loan Companies.
   
(B)
Substantially all of the cash flow received on the loans is required to be used to make payments on the notes described above.
   
(C)
Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this investment.
 
 
21

 
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES (formerly known as NIC MSR LLC)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2013
(dollars in tables in thousands, except share data)

 
New Residential’s investments in consumer loans, equity method investees changed during the six months ended June 30, 2013 as follows:

   
For the six months ended June 30, 2013
 
Balance at December 31, 2012
  $  
Contributions to equity method investees
    245,421  
Distributions of earnings from equity method investees
    (769 )
Earnings from investments in consumer loan equity method investees
    36,164  
         
Balance at June 30, 2013
  $ 280,816  
 
8.      DEBT OBLIGATIONS
 
The following table presents certain information regarding New Residential’s debt obligations at June 30, 2013:
 
                                  
Collateral
 
Repurchase Agreements (A)
 
Month Issued
 
Outstanding Face
   
Carrying Value
 
Final Stated Maturity (D)
 
Weighted Average Funding Cost
   
WAL
   
Outstanding Face
   
Amortized Cost Basis
   
Carrying Value
   
WAL (Years)
 
                                                       
Agency ARM RMBS (B)
 
Various
  $ 1,061,250     $ 1,061,250  
Jul-13
    0.39 %     0.1     $ 1,059,950     $ 1,134,190     $ 1,129,786       3.2  
Non Agency RMBS (C)
 
Various
    413,088       413,088  
Jul-13
    2.03 %     0.1       907,247       590,131       613,078       3.8  
                                                                       
        $ 1,474,338     $ 1,474,338         0.85 %     0.1     $ 1,967,197     $ 1,724,321     $ 1,742,864       3.5  
 
(A)
These repurchase agreements had approximately $0.5 million of associated accrued interest payable at June 30, 2013.
   
(B)
The counterparties of these repurchase agreements are Goldman Sachs $357.8 million, Barclays $266.1 million, Nomura $210.2 million, Citi $138.4 million, Morgan Stanley $65.8 million and Bank of America $23.0 million.
   
(C)
The counterparties of these repurchase agreements are Credit Suisse $267.4 million, Barclays $97.9 million, and Royal Bank of Canada $47.7 million.
   
(D)
All of these repurchase agreements were renewed or refinanced subsequent to June 30, 2013.