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 September 30, 2015
 
or
 
¨  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 x    No ¨
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 ¨
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 x  Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨    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: 230,458,866 shares outstanding as of November 1, 2015.




CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. Such forward-looking statements relate to, among other things, the operating performance of our investments, the stability of our earnings, our financing needs and the size and attractiveness of market opportunities. 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, cash flows or 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;
the quality and size of the investment pipeline and our ability to take advantage of investment opportunities at attractive risk-adjusted prices;
servicer advances may not be recoverable or may take longer to recover than we expect, which could cause us to fail to achieve our targeted return on our investment in servicer advances;
our ability to deploy capital accretively and the timing of such deployment;
our counterparty concentration and default risks in Nationstar, Ocwen, 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 Excess MSRs, servicer advances, RMBS and consumer loan portfolios;
the risks that default and recovery rates on our Excess MSRs, servicer advances, 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 on attractive terms, or at all;
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 not 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 terms 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 Act, U.S. government programs intended to stabilize the economy, the federal conservatorship of Fannie Mae and 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 exclusion from registration under the 1940 Act and the fact that maintaining such exclusion imposes limits on our operations;
the risks related to HLSS liabilities that we have assumed;
the impact of current or future legal proceedings and regulatory investigations and inquiries;
the impact of any material transactions with FIG LLC (the “Manager”) or one of its affiliates, including the impact of any actual, potential or perceived conflicts of interest; and
events, conditions or actions that might occur at HLSS or Ocwen.

We also direct readers to other risks and uncertainties referenced in this report, including those set forth under “Risk Factors.” We caution that you should not place undue reliance on any of our forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us. Except as required by law, we are under no obligation (and expressly disclaim any obligation) to update or alter any forward-looking statement, whether written or oral, that we may make from time to time, whether as a result of new information, future events or otherwise.
 




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 New Residential Investment Corp. (the “Company,” “New Residential” or “we,” “our” and “us”) 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 provide 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    General
 
 
 
 
 
 
 
 
 
 




 
 
 
 
 
 
 
 
 
 
    Inflation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
 
September 30, 2015
 
December 31, 2014
 
(Unaudited)
 
Assets
 
 
 
Investments in:
 
 
 
Excess mortgage servicing rights, at fair value
$
1,459,690

 
$
417,733

Excess mortgage servicing rights, equity method investees, at fair value
213,318

 
330,876

Servicer advances, at fair value
7,499,775

 
3,270,839

Real estate securities, available-for-sale
2,428,729

 
2,463,163

Residential mortgage loans, held-for-investment
40,813

 
47,838

Residential mortgage loans, held-for-sale
713,917

 
1,126,439

Real estate owned
29,454

 
61,933

Consumer loans, equity method investees

 

Cash and cash equivalents
348,312

 
212,985

Restricted cash
165,039

 
29,418

Derivative assets
1,318

 
32,597

Trade receivable
2,031,425

 

Deferred tax asset
162,788

 

Other assets
261,640

 
95,423

 
$
15,356,218

 
$
8,089,244

 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
 
Liabilities
 
 
 
Repurchase agreements
$
3,773,880

 
$
3,149,090

Notes payable
7,245,200

 
2,908,763

Trades payable
1,059,232

 
2,678

Due to affiliates
12,398

 
57,424

Dividends payable
106,011

 
53,745

Deferred tax liability

 
15,114

Accrued expenses and other liabilities
133,426

 
52,505

 
12,330,147

 
6,239,319

 
 
 
 
Commitments and Contingencies


 


 
 
 
 
Equity
 
 
 
Common Stock, $0.01 par value, 2,000,000,000 shares authorized, 230,458,866 and 141,434,905 issued and outstanding at September 30, 2015 and December 31, 2014, respectively
2,304

 
1,414

Additional paid-in capital
2,640,680

 
1,328,587

Retained earnings
151,838

 
237,769

Accumulated other comprehensive income, net of tax
11,711

 
28,319

Total New Residential stockholders’ equity
2,806,533

 
1,596,089

Noncontrolling interests in equity of consolidated subsidiaries
219,538

 
253,836

Total Equity
3,026,071

 
1,849,925

 
$
15,356,218

 
$
8,089,244


See notes to condensed consolidated financial statements.

1



NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share data)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Interest income
$
182,341

 
$
97,587

 
$
444,891

 
$
261,733

Interest expense
77,558

 
33,307

 
193,408

 
108,816

Net Interest Income
104,783

 
64,280

 
251,483

 
152,917

 
 
 
 
 
 
 
 
Impairment
 
 
 
 
 
 
 
Other-than-temporary impairment (“OTTI”) on securities
1,574

 

 
3,294

 
943

Valuation provision (reversal) on loans and real estate owned
(3,341
)
 
1,134

 
2,408

 
1,591

 
(1,767
)
 
1,134

 
5,702

 
2,534

 
 
 
 
 
 
 
 
Net interest income after impairment
106,550

 
63,146

 
245,781

 
150,383

 
 
 
 
 
 
 
 
Other Income
 
 
 
 
 
 
 
Change in fair value of investments in excess mortgage servicing rights
1,131

 
28,566

 
(274
)
 
40,670

Change in fair value of investments in excess mortgage servicing rights, equity method investees
8,427

 
31,833

 
16,443

 
50,950

Change in fair value of investments in servicer advances
(18,738
)
 
22,948

 
(1,845
)
 
105,825

Earnings from investments in consumer loans, equity method investees

 
22,490

 

 
60,185

Gain (loss) on settlement of investments, net
(16,409
)
 
938

 
(441
)
 
57,834

Other income (loss), net
7,764

 
15,289

 
18,237

 
19,539

 
(17,825
)
 
122,064

 
32,120

 
335,003

 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
General and administrative expenses
19,563

 
7,499

 
49,362

 
14,886

Management fee to affiliate
9,860

 
5,124

 
23,357

 
14,525

Incentive compensation to affiliate
1,811

 
10,910

 
7,895

 
33,111

Loan servicing expense
1,668

 
1,778

 
9,510

 
2,210

 
32,902

 
25,311

 
90,124

 
64,732

 
 
 
 
 
 
 
 
Income Before Income Taxes
55,823

 
159,899

 
187,777

 
420,654

Income tax expense (benefit)
(5,932
)
 
7,801

 
4,947

 
29,483

Net Income
$
61,755

 
$
152,098

 
$
182,830

 
$
391,171

Noncontrolling Interests in Income of Consolidated Subsidiaries
$
7,230

 
$
25,726

 
$
17,174

 
$
92,524

Net Income Attributable to Common Stockholders
$
54,525

 
$
126,372

 
$
165,656

 
$
298,647

 
 
 
 
 
 
 
 
Net Income Per Share of Common Stock
 
 
 
 
 
 
 
Basic
$
0.24

 
$
0.89

 
$
0.87

 
$
2.22

Diluted
$
0.24

 
$
0.88

 
$
0.85

 
$
2.16

 
 
 
 
 
 
 
 
Weighted Average Number of Shares of Common Stock Outstanding
 
 
 
 
 
 
 
Basic
230,455,568

 
141,211,580

 
191,259,587

 
134,814,020

Diluted
231,215,235

 
144,166,601

 
194,081,345

 
137,972,639

 
 
 
 
 
 
 
 
Dividends Declared per Share of Common Stock
$
0.46

 
$
0.35

 
$
1.29

 
$
1.20

 
See notes to condensed consolidated financial statements.


2



NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Net income
$
61,755

 
$
152,098

 
$
182,830

 
$
391,171

Other comprehensive income (loss)
 
 
 
 
 
 
 
Net unrealized gain (loss) on securities
17,360

 
1,308

 
11,328

 
67,915

Reclassification of net realized (gain) loss on securities into earnings
(22,880
)
 
(3,668
)
 
(27,936
)
 
(64,501
)
 
(5,520
)
 
(2,360
)
 
(16,608
)
 
3,414

Total comprehensive income
$
56,235

 
$
149,738

 
$
166,222

 
$
394,585

Comprehensive income attributable to noncontrolling interests
$
7,230

 
$
25,726

 
$
17,174

 
$
92,524

Comprehensive income attributable to common stockholders
$
49,005

 
$
124,012

 
$
149,048

 
$
302,061

 
See notes to condensed consolidated financial statements.


3



NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED) 
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015
(dollars in thousands, except share data)
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Total New Residential Stockholders’ Equity
 
Noncontrolling
Interests in Equity of Consolidated Subsidiaries
 
Total Equity
Equity - December 31, 2014
141,434,905

 
$
1,414

 
$
1,328,587

 
$
237,769

 
$
28,319

 
$
1,596,089

 
$
253,836

 
$
1,849,925

Dividends declared

 

 

 
(249,277
)
 

 
(249,277
)
 

 
(249,277
)
Capital contributions

 

 

 

 

 

 
5,161

 
5,161

Capital distributions

 

 

 

 

 

 
(56,633
)
 
(56,633
)
Issuance of common stock
85,435,389

 
854

 
1,311,829

 

 

 
1,312,683

 

 
1,312,683

Option exercises
3,570,984

 
36

 
(36
)
 

 

 

 

 

Director share grants
17,588

 

 
300

 

 

 
300

 

 
300

Modified retrospective adjustment for the adoption of ASU No. 2014-11

 

 

 
(2,310
)
 

 
(2,310
)
 

 
(2,310
)
Comprehensive income (loss) (net of tax)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 

 
165,656

 

 
165,656

 
17,174

 
182,830

Net unrealized gain (loss) on securities

 

 

 

 
11,328

 
11,328

 

 
11,328

Reclassification of net realized (gain) loss on securities into earnings

 

 

 

 
(27,936
)
 
(27,936
)
 

 
(27,936
)
Total comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
149,048

 
17,174

 
166,222

Equity - September 30, 2015
230,458,866

 
$
2,304

 
$
2,640,680

 
$
151,838

 
$
11,711

 
$
2,806,533

 
$
219,538


$
3,026,071

 
See notes to condensed consolidated financial statements.


4


NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
 
Nine Months Ended September 30,
 
2015
 
2014
Cash Flows From Operating Activities
 
 
 
Net income
$
182,830

 
$
391,171

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
274

 
(40,670
)
Change in fair value of investments in excess mortgage servicing rights, equity method investees
(16,443
)
 
(50,950
)
Change in fair value of investments in servicer advances
1,845

 
(105,825
)
Earnings from consumer loan equity method investees

 
(60,185
)
Unrealized gain (loss) on derivative investments
22,498

 
(2,355
)
Accretion and other amortization
(360,467
)
 
(213,945
)
(Gain) / loss on settlement of investments (net)
441

 
(57,834
)
(Gain) / loss on transfer of loans to REO
(1,075
)
 
(11,861
)
(Gain) / loss on excess mortgage servicing rights recapture agreement
(2,246
)
 
(323
)
Other-than-temporary impairment ("OTTI")
3,294

 
943

Valuation provision on loans and real estate owned
2,408

 
1,591

Unrealized loss on other ABS
1,074

 

Non-cash directors' compensation
300

 
328

Deferred tax provision
5,885

 
22,485

 
 
 
 
Changes in:
 
 
 
Restricted cash
(63,041
)
 
3,376

Other assets
177,592

 
(8,961
)
Due to affiliates
(45,026
)
 
15,972

Accrued expenses and other liabilities
19,055

 
4,665

Other operating cash flows:
 
 
 
Interest received from excess mortgage servicing rights
84,518

 
38,548

Interest received from servicer advance investments
124,934

 
91,829

Interest received from Non-Agency RMBS
31,715

 
5,536

Interest payments from residential mortgage loans, held-for-investment

 
5,536

Distributions of earnings from excess mortgage servicing rights, equity method investees
31,876

 
34,680

Distributions of earnings from consumer loan equity method investees

 
10,599

Purchases of residential mortgage loans, held-for-sale
(611,160
)
 
(737,230
)
Proceeds from sales of purchased residential mortgage loans, held-for-sale
722,961

 
249,690

Principal repayments from purchased residential mortgage loans, held-for-sale
48,069

 

Net cash provided by (used in) operating activities
362,111

 
(413,190
)

Continued on next page.

5


NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
 
Nine Months Ended September 30,
 
2015
 
2014
Cash Flows From Investing Activities
 
 
 
Acquisition of investments in excess mortgage servicing rights
(131,488
)
 
(75,206
)
Acquisition of HLSS, net of cash acquired
(959,616
)
 

Purchase of servicer advance investments
(10,647,912
)
 
(5,569,238
)
Purchase of Agency RMBS
(3,040,422
)
 
(1,229,580
)
Purchase of Non-Agency RMBS
(763,095
)
 
(1,148,631
)
Purchase of residential mortgage loans
(664
)
 
(620,038
)
Purchase of derivative assets
(4,370
)
 
(70,027
)
Purchase of real estate owned
(2,784
)
 
(6,314
)
Payments for settlement of derivatives
(61,212
)
 
(22,643
)
Return of investments in excess mortgage servicing rights
112,648

 
30,615

Return of investments in excess mortgage servicing rights, equity method investees
3,867

 
26,498

Principal repayments from servicer advance investments
11,646,489

 
5,188,295

Principal repayments from Agency RMBS
110,863

 
213,993

Principal repayments from Non-Agency RMBS
54,979

 
65,483

Principal repayments from residential mortgage loans, held-for-investment and held-for-sale
15,944

 
33,235

Proceeds from sale of residential mortgage loans
649,712

 

Proceeds from sale of Agency RMBS
2,435,168

 
796,392

Proceeds from sale of Non-Agency RMBS
389,719

 
1,273,191

Proceeds from settlement of derivatives
22,841

 
14,107

Proceeds from sale of real estate owned
52,139

 
4,140

Net cash provided by (used in) investing activities
(117,194
)
 
(1,095,728
)

Continued on next page.

6


NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
 
 
Nine Months Ended 
 September 30,
 
2015
 
2014
Cash Flows From Financing Activities
 
 
 
Repayments of repurchase agreements
(5,644,864
)
 
(2,839,051
)
Margin deposits under repurchase agreements and derivatives
(441,696
)
 
(221,598
)
Repayments of notes payable
(5,445,381
)
 
(5,019,000
)
Payment of deferred financing fees
(38,486
)
 
(8,389
)
Common stock dividends paid
(197,011
)
 
(178,162
)
Borrowings under repurchase agreements
6,184,472

 
3,957,212

Return of margin deposits under repurchase agreements and derivatives
439,875

 
243,658

Borrowings under notes payable
4,211,548

 
5,377,633

Issuance of common stock
882,166

 
173,201

Costs related to issuance of common stock
(3,580
)
 
(2,693
)
Noncontrolling interest in equity of consolidated subsidiaries - contributions

 
142,082

Noncontrolling interest in equity of consolidated subsidiaries - distributions
(56,633
)
 
(200,368
)
Net cash provided by (used in) financing activities
(109,590
)
 
1,424,525

 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
135,327

 
(84,393
)
 
 
 
 
Cash and Cash Equivalents, Beginning of Period
212,985

 
271,994

 
 
 
 
Cash and Cash Equivalents, End of Period
$
348,312

 
$
187,601

 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid during the period for interest
$
175,615

 
$
105,937

Cash paid during the period for income taxes
535

 
9,119

 
 
 
 
Supplemental Schedule of Non-Cash Investing and Financing Activities
 
 
 
Dividends declared but not paid
$
106,011

 
$
49,484

Reclassification resulting from the application of ASU No. 2014-11
85,955

 

Purchase of investments, primarily Agency RMBS, settled after quarter end
1,059,232

 

Non-cash contingent consideration
50,000

 

Sale of Agency RMBS settled after quarter end
2,031,425

 

Transfer from residential mortgage loans, held-for-sale to real estate owned
28,836

 

Non-cash distribution from Consumer Loan Companies
585

 
609

Portion of HLSS Acquisition (Note 1) paid in common stock
434,092

 

Real estate securities retained from loan securitizations
14,990

 

 
See notes to condensed consolidated financial statements.

7



NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2015
(dollars in tables in thousands, except share data) 
 

1. ORGANIZATION AND BASIS OF PRESENTATION
 
New Residential Investment Corp. (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 13), which was completed on May 15, 2013. Newcastle is listed on the New York Stock Exchange (“NYSE”) under the symbol “NCT.”
 
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 NYSE under the symbol “NRZ.”
 
New Residential has elected and intends to qualify to be taxed as a REIT for U.S. federal income tax purposes. 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. See Note 17 regarding New Residential’s taxable REIT subsidiaries.
 
New Residential has entered into a management agreement (the “Management Agreement”) with FIG LLC (the “Manager”), an affiliate of Fortress Investment Group LLC (“Fortress”), pursuant to which the Manager provides a management team and other professionals who are responsible for implementing New Residential’s business strategy, 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. The Manager also manages Newcastle and investment funds that own a majority of Nationstar Mortgage LLC (“Nationstar”), a leading residential mortgage servicer, and Springleaf Holdings, Inc. (“Springleaf”), managing member of the Consumer Loan Companies (Note 9).
 
As of September 30, 2015, New Residential conducted its business through the following segments: (i) investments in Excess MSRs, (ii) investments in servicer advances, (iii) investments in real estate securities, (iv) investments in real estate loans, (v) investments in consumer loans and (vi) corporate.
 
Approximately 2.4 million shares of New Residential’s common stock were held by Fortress, through its affiliates, and its principals as of September 30, 2015. In addition, Fortress, through its affiliates, held options to purchase approximately 10.9 million shares of New Residential’s common stock as of September 30, 2015.
 
Interim Financial Statements

The accompanying condensed 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 note 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 condensed consolidated financial statements should be read in conjunction with New Residential’s consolidated financial statements for the year ended December 31, 2014 and notes thereto included in New Residential’s Annual Report on Form 10-K 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, 2014.
 
Certain prior period amounts have been reclassified to conform to the current period’s presentation. In addition, New Residential completed a one-for-two reverse stock split in October 2014 (Note 13). The impact of this reverse stock split has been retroactively applied to all periods presented.


8

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2015
(dollars in tables in thousands, except share data) 
 

Correction of the Financial Statements

New Residential determined during the second quarter of 2015 that purchases and sales of residential mortgage loans classified as held-for-sale upon acquisition that had been reported on the condensed consolidated statements of cash flows as cash flows from investing activities should have been reported as operating activities.

New Residential has corrected the previously presented condensed consolidated statement of cash flows for these loans. The effect of the adjustment on the presentation for the nine months ended September 30, 2014 was to move $249.7 million of gross cash inflows and $737.2 million of gross cash outflows from investing activities to operating activities. New Residential has evaluated the effect of the incorrect presentation, both qualitatively and quantitatively, and concluded that it did not materially misstate the previously issued financial statements.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenues from Contracts with Customers (Topic 606). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In effect, companies will be required to exercise further judgment and make more estimates prospectively. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU No. 2014-09 is effective for New Residential in the first quarter of 2018. Early adoption is not permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance in ASU No. 2014-09. New Residential is currently evaluating the new guidance to determine the impact it may have on its condensed consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The standard changes the accounting for repurchase-to-maturity transactions and linked repurchase financing transactions to secured borrowing accounting. ASU No. 2014-11 also expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers accounted for as secured borrowings. ASU No. 2014-11 was effective for New Residential in the first quarter of 2015. Disclosures are not required for comparative periods presented before the effective date. New Residential has determined that, as of January 1, 2015, its linked transactions (Note 10) are accounted for as secured borrowings.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The standard provides guidance on management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern by requiring management to assess an entity’s ability to continue as a going concern by incorporating and expanding on certain principles that are currently in U.S. auditing standards. ASU No. 2014-15 is effective for New Residential for the annual period ending on December 31, 2016. Early adoption is permitted. New Residential is currently evaluating the new guidance to determine the impact that it may have on its condensed consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The standard amends the consolidation considerations when evaluating certain limited partnerships, variable interest entities and investment funds. ASU No. 2015-02 is effective for New Residential in the first quarter of 2016.  Early adoption is permitted. New Residential does not expect the adoption of this new guidance to have an impact on its condensed consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest. The standard amends the balance sheet presentation requirements for debt issuance costs such that they are no longer recognized as deferred charges but are rather presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. ASU No. 2015-03 is effective for New Residential in the first quarter of 2016. Early adoption is permitted. New Residential has adopted ASU No. 2015-03 in June 2015 and has determined that the adoption of ASU No. 2015-03 resulted in an immaterial reclassification of its Deferred Financing Costs, Net (Note 2) to an offset of its Notes Payable (Note 11).

The FASB has recently issued or discussed a number of proposed standards on such topics as financial statement presentation, financial instruments and hedging. 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. 

9

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2015
(dollars in tables in thousands, except share data) 
 


Acquisition of HLSS Assets and Liabilities

On February 22, 2015, New Residential entered into an Agreement and Plan of Merger (the “Initial Merger Agreement”) with Home Loan Servicing Solutions, Ltd., a Cayman Islands exempted company (“HLSS”) and Hexagon Merger Sub, Ltd., a Cayman Islands exempted company and a wholly owned subsidiary of New Residential (“Merger Sub”). HLSS was listed on the NASDAQ Stock Market LLC under the symbol “HLSS” until April 29, 2015, when its shares were delisted. On April 6, 2015, with the approval of their respective Boards of Directors, New Residential and HLSS, together with certain of their respective subsidiaries, entered into a Termination Agreement (the “Termination Agreement”) (providing for the termination of the Initial Merger Agreement) and simultaneously entered into a Share and Asset Purchase Agreement (the “Acquisition Agreement”).

The parties to the Acquisition Agreement included New Residential, HLSS, HLSS Advances Acquisition Corp., a Delaware corporation and wholly owned subsidiary of New Residential (“HLSS Advances”), and HLSS MSR-EBO Acquisition LLC, a Delaware limited liability company and wholly owned subsidiary of New Residential (together with HLSS Advances, the “Buyers”). Pursuant to the Acquisition Agreement, the Buyers acquired from HLSS substantially all of the assets of HLSS (including all of the issued share capital of HLSS’s first-tier subsidiaries) and assumed (and agreed to indemnify HLSS for) the liabilities of HLSS (together, the “HLSS Acquisition”), other than post-closing liabilities in an amount up to the Retained Amount (as defined below), for aggregate consideration (net of certain transaction expenses being reimbursed by HLSS), consisting of approximately $1.0 billion in cash and 28,286,980 shares of common stock, par value $0.01 per share (“New Residential Acquisition Common Stock”), of New Residential delivered to HLSS in a private placement. The closing of the HLSS Acquisition (the “Acquisition Closing”) occurred simultaneously with the execution of the Acquisition Agreement.

The Acquisition Agreement includes certain customary post-closing covenants of New Residential, the Buyers and HLSS. In addition, the Board of Directors of HLSS also approved a wind down plan (the “Distribution and Liquidation Plan”), pursuant to which HLSS sold the shares of New Residential Acquisition Common Stock received in the HLSS Acquisition on April 8, 2015 and distributed to HLSS shareholders the cash consideration from the HLSS Acquisition and the cash proceeds from the sale of shares of New Residential Acquisition Common Stock; provided that under the terms of the Distribution and Liquidation Plan, HLSS retained $50.0 million of cash (the “Retained Amount”) for wind down costs, of which $45.1 million remained as of September 30, 2015.

At the Acquisition Closing, HLSS Advances entered into a Services Agreement, dated as of April 6, 2015, with HLSS (the “Services Agreement”). Pursuant to the Services Agreement, HLSS Advances agreed to manage the assets and affairs of HLSS in accordance with terms and conditions set forth therein and, in all cases, in accordance with the Distribution and Liquidation Plan. The Services Agreement provided that HLSS Advances was responsible for the operations of HLSS and performed (or caused to be performed) such services and activities relating to the assets and operations of HLSS as may have been appropriate, including, among other things, administering the Distribution and Liquidation Plan and handling all claims, disputes or controversies in which HLSS was a party or may otherwise have been involved, through the consummation of the New Merger (as defined below). HLSS Advances was not compensated by HLSS for its services under the Services Agreement but was reimbursed by HLSS for expenses incurred on behalf of HLSS.

At the Acquisition Closing, New Residential and Merger Sub entered into an Agreement and Plan of Merger, dated April 6, 2015, with HLSS (the “New Merger Agreement”), pursuant to which, upon the terms and subject to the conditions set forth therein (including the approval of HLSS’s shareholders), HLSS (which at the time of the New Merger (as defined below) had substantially wound-down its operations) merged with and into Merger Sub, with Merger Sub continuing as the surviving company and a wholly owned subsidiary of New Residential (the “New Merger”). Following the New Merger, references to HLSS refer to Merger Sub.

Pursuant to the New Merger Agreement, and upon the terms and conditions set forth therein, at the effective time of the New Merger (the “Effective Time”), each ordinary share of HLSS, par value $0.01 per share, issued and outstanding immediately prior to the Effective Time (other than those shares of HLSS owned by New Residential or any direct or indirect wholly-owned subsidiary of New Residential and shares of HLSS as to which dissenters’ rights have been properly exercised), was automatically converted into the right to receive $0.704059 per share in cash, without interest. The Effective Time occurred on October 23, 2015, at which time New Residential paid approximately $50.0 million to HLSS shareholders and the New Merger was completed.

The New Merger did not require the approval of New Residential’s shareholders. However, consummation of the New Merger was subject to, among other things: (i) approval of the New Merger by the requisite vote of HLSS’s shareholders; (ii) not more than 10% of HLSS’s issued and outstanding shares properly exercising appraisal rights as of the time immediately before the

10

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2015
(dollars in tables in thousands, except share data) 
 

closing of the New Merger (the “New Merger Closing”); and (iii) certain other customary closing conditions. Moreover, each party’s obligation to consummate the New Merger was subject to certain other conditions, including without limitation, (i) the accuracy of the other party’s representations and warranties and (ii) the other party’s compliance with its covenants and agreements contained in the New Merger Agreement (in each case subject to customary materiality qualifiers). In addition, the obligations of New Residential and Merger Sub to consummate the New Merger were subject to the absence of any Company Material Adverse Effect (as defined in the New Merger Agreement).

The purchase price for the HLSS Acquisition included the fair value of the common stock issued of $434.1 million, cash consideration paid of $622.0 million, HLSS seller financing of $385.2 million, and contingent cash consideration of $50.0 million. The total consideration is summarized as follows:
Total Consideration
 
Amount
Share Issuance Consideration
 
28,286,980

New Residential's 4/6/2015 share price
 
$
15.3460

Dollar Value of Share Issuance(A)
 
$
434,092

Cash Consideration
 
621,982

HLSS Seller Financing(B)
 
385,174

New Merger Payment (71,016,771 @ $0.704059)(C)
 
50,000

Total Consideration
 
$
1,491,248


(A)
Share Issuance Consideration
The share issuance consideration consists of 28.3 million newly issued shares of New Residential common stock with a par value $0.01 per share. The fair value of the common stock at the date of the acquisition was $15.3460 per share, which was New Residential’s volume weighted average share price on April 6, 2015.
(B)
HLSS Seller Financing
New Residential agreed to deliver $1.0 billion of cash purchase price, including a promise to pay an amount of $385.2 million immediately after closing from the proceeds of financing that was committed in anticipation of the HLSS Acquisition and is collateralized by certain of the HLSS assets acquired.
(C)
New Merger Payment
The New Merger Agreement, and the $50.0 million consideration related thereto, is included as a part of the business combination in conjunction with the Share and Asset Purchase Agreement. The range of outcomes for this contingent consideration was from $0.0 million to $50.0 million, dependent on whether the New Merger was approved by HLSS shareholders and other factors. As of the Effective Time, the net contingent consideration paid was fixed at $5.1 million.


11

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2015
(dollars in tables in thousands, except share data) 
 

New Residential has performed a preliminary allocation of the purchase price to HLSS’s assets and liabilities, as set forth below. The final allocation of purchase price may differ from the amounts included herein. The preliminary allocation of the total consideration, following reclassifications to conform to New Residential’s presentation, is as follows:
Total Consideration ($ in millions)
$
1,491.2

Assets
 
Cash and cash equivalents
$
51.5

Servicer advances, at fair value
5,098.2

Excess mortgage servicing rights, at fair value
919.5

Residential mortgage loans, held-for-sale(A)
418.8

Deferred tax asset(B)
186.8

Investment in HLSS Ltd.
44.9

Other assets(C)
405.0

Total Assets Acquired
$
7,124.7

 
 
Liabilities
 
Notes payable
5,583.0

Deferred tax liabilities
(0.8
)
Accrued expenses and other liabilities(D)(E)
51.3

Total Liabilities Assumed
$
5,633.5

 
 
Net Assets
$
1,491.2


(A)
Represents $424.3 million UPB of GNMA early buy-out (“EBO”) residential mortgage loans not subject to ASC No. 310-30 as the contractual cash flows are guaranteed by the Federal Housing Administration (“FHA”).
(B)
Due to the difference between carryover historical tax basis and acquisition date fair value of one of HLSS’s first tier subsidiaries.
(C)
Includes restricted cash and receivables not subject to ASC No. 310-30 which New Residential has deemed fully collectible.
(D)
Includes liabilities arising from contingencies regarding ongoing HLSS matters (Note 14).
(E)
Contingencies for HLSS class action law suits have not been recognized at the acquisition date as the criteria in ASC No. 450 have not been met (Note 14).

The acquisition of HLSS resulted in no goodwill as the total consideration transferred was equal to the fair value of the net assets acquired.

Separately Recognized Transactions

Certain transactions were recognized separately from New Residential’s acquisition of assets and assumption of liabilities in the business combination. These separately recognized transactions include 1) contingent payments to the acquiree’s employees and 2) debt issuance costs.

Contingent Payment to the Acquiree’s Employees

New Residential identified both retention bonus and severance arrangements for the HLSS employees. Retention bonus payments are triggered by a change in control and continued employment for a specified period post-acquisition. As future service is required, retention bonus payments totaling approximately $3.0 million have been recognized in General and administrative expenses in New Residential’s statement of income for the nine months ended September 30, 2015.

Severance is triggered by a change in control and termination without cause by New Residential within a specified period post-acquisition. As the second trigger represents an action by New Residential as the acquirer, a total amount of approximately $2.8 million has been recognized in General and administrative expenses in New Residential’s statement of income for the nine months ended September 30, 2015.

12

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2015
(dollars in tables in thousands, except share data) 
 


Debt Issuance Costs

New Residential entered into new financing arrangements in connection with the HLSS Acquisition. Such arrangements resulted in New Residential incurring various commitment fees. Commitment fees are treated as a cost of financing and accounted for as debt issuance costs that are not considered a direct cost of the acquisition. Therefore, debt issuance costs totaling approximately $27.0 million have been recorded on the post-acquisition balance sheet of New Residential.

Unaudited Supplemental Pro Forma Financial Information - The following table presents unaudited pro forma combined Interest income and Income Before Income Taxes for the three and nine months ended September 30, 2014 and 2015 prepared as if the HLSS Acquisition had been consummated on January 1, 2014.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(unaudited)
 
(unaudited)
 
(unaudited)
 
(unaudited)
Pro Forma
 
 
 
 
 
 
 
Interest income
$
182,341

 
$
194,555

 
$
531,479

 
$
558,564

Income Before Income Taxes
58,655

 
206,320

 
229,771

 
558,819


The 2015 unaudited supplemental pro forma financial information has been adjusted to exclude, and the 2014 unaudited supplemental pro forma financial information has been adjusted to include, approximately $26.1 million of acquisition-related costs incurred by New Residential and HLSS in 2015. The unaudited supplemental pro forma financial information has not been adjusted for transactions other than the HLSS Acquisition, or for the conforming of accounting policies. The unaudited supplemental pro forma financial information does not include any anticipated synergies or other anticipated benefits of the HLSS Acquisition and, accordingly, the unaudited supplemental pro forma financial information is not necessarily indicative of either future results of operations or results that might have been achieved had the HLSS Acquisition occurred on January 1, 2014.

New Residential’s condensed consolidated statements of income include interest income and income before income taxes of HLSS since the April 6, 2015 acquisition of $184.3 million and $69.4 million, respectively.

Relationship with Ocwen

HLSS and HLSS Holdings, LLC (a subsidiary of HLSS acquired by New Residential in the HLSS Acquisition) entered into a mortgage servicing rights purchase agreement (the “Purchase Agreement”) with Ocwen Financial Corporation (together with its subsidiaries, including Ocwen Loan Servicing LLC, “Ocwen”), which remains in effect following the HLSS Acquisition. Pursuant to the Purchase Agreement, HLSS and HLSS Holdings purchased, among other things, the rights to certain servicing fees under MSRs in respect of private label securitization transactions, associated servicer advances and other related assets from Ocwen from time to time. The specific terms of any acquisition of such assets are documented pursuant to separate sale supplements to the Purchase Agreement executed by the parties from time to time (each a “Sale Supplement” and together, the “Sale Supplements”). As of March 31, 2015, the UPB of the mortgage loans in respect of the related MSRs equaled $156.4 billion. Ocwen consented to HLSS’s assignment of its rights and interests in connection with the HLSS Acquisition.

Because Ocwen is the servicer of the loans underlying the MSRs related to the transactions contemplated by the Purchase Agreement, New Residential pays Ocwen a monthly base fee pursuant to the applicable Sale Supplement relating to the applicable MSRs equal to 12% of the servicing fees collected thereon in any given month. This monthly base fee payable to Ocwen is expressed as a percentage of the servicing fees actually collected in any given month, which varies from month to month based on the level of collections of principal and interest for the mortgage loans serviced. Ocwen also receives a performance-based incentive fee to the extent the servicing fee revenue that it collects for any given month exceeds the sum of the monthly base fee and the retained fee. The performance-based incentive fee payable in any month is reduced if the advance ratio exceeds a predetermined level for that month. If the advance ratio is exceeded in any month, any performance-based incentive fee payable for such month will be reduced by 1-month LIBOR plus 2.75% (or 275 basis points) per annum of the amount of any such excess servicer advances.

The specific terms of the fee arrangements with respect to each pool of mortgage loans may be documented pursuant to the Sale Supplements in each case having an initial term of up to eight years (commencing on the date of the applicable Sale Supplement).

13

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2015
(dollars in tables in thousands, except share data) 
 

If Ocwen and New Residential do not agree to revised fee arrangements at the end of such term, New Residential may direct Ocwen to transfer servicing to a third party, and New Residential may keep any proceeds of such transfer.

The Purchase Agreement provides that New Residential will purchase from Ocwen servicer advances arising under specified servicing agreements as the servicer advances arise. The purchase price payable by New Residential for such servicer advances is equal to the outstanding balance thereof. As of April 6, 2015, the outstanding balance of servicer advances acquired from Ocwen equaled $5.6 billion.

In addition, the Purchase Agreement contemplates that New Residential may cause Ocwen to use commercially reasonable efforts to transfer servicing of the related mortgage loans to a third-party servicer upon the occurrence of various termination events. Certain termination events may have occurred under the Purchase Agreement because of downgrades in certain of Ocwen’s servicer ratings but New Residential has agreed, subject to certain limitations, not to cause Ocwen to use commercially reasonable efforts to transfer servicing of the related mortgage loans to a third-party servicer with respect to such downgrades before April 6, 2017.

The Purchase Agreement and Sale Supplements include various Ocwen warranties, representations and indemnifications relating to Ocwen’s performance of its duties as servicer.

Pursuant to an amendment to the Purchase Agreement executed in connection with the consummation of the HLSS Acquisition, such Purchase Agreement and the related Sale Supplements were amended, among other things, to (i) obtain Ocwen’s consent to the assignment by HLSS of its interest under the Purchase Agreement and each sale supplement thereto, (ii) provide that HLSS Holdings will not direct the replacement of Ocwen as servicer before April 6, 2017 except under the circumstances described in the amendment, (iii) extend the scheduled term of Ocwen’s servicing appointment under each sale supplement until the earlier of 8 years from the date of the related sale supplement and April 30, 2020 (subject to an agreement to commence negotiating in good faith for an extension of the contract term no later than six months prior to the end of the applicable term) unless certain servicer ratings thresholds are not met on the 6 year anniversary of the related sale supplement, in which case the related term would expire on such anniversary, and (iv) provide that Ocwen will reimburse HLSS Holdings, subject to specified limits, for certain increased costs resulting from further S&P servicer rating downgrades of Ocwen. Through September 30, 2015, New Residential has accrued $8.5 million in connection with clause (iv), which is included in Other Income, and which was received in October 2015. In addition, pursuant to such amendment Ocwen agreed to sell to New Residential the economic beneficial rights to any right of optional termination or “clean-up call” of any trust related to any servicing agreement in respect of certain servicing fees New Residential acquired from HLSS and to exercise such rights only at New Residential’s direction. New Residential agreed to pay to Ocwen a fee in an amount equal to 0.50% of the outstanding balance of the performing mortgage loans purchased in connection with any such exercise and to pay costs and expenses of Ocwen in connection with any such exercise. Optional termination or clean up call rights generally may not be exercised until the outstanding principal balance of serviced loans is reduced to a specified balance.

HLSS Management, LLC (“HLSS Management”) (a subsidiary of HLSS acquired by New Residential in the HLSS Acquisition) has a professional services agreement with Ocwen that enables HLSS to provide certain services to Ocwen and for Ocwen to provide certain services to HLSS Management which remains in effect following the HLSS Acquisition. Services provided by New Residential under this agreement may include valuation and analysis of MSRs, capital markets activities, advance financing management, treasury management, legal services and other similar services. Services provided by Ocwen under this agreement may include business strategy, legal, tax, licensing and regulatory compliance support services, risk management services and other similar services. The services provided by the parties under this agreement are on an as-needed basis, and the fees represent actual costs incurred plus an additional markup of 15%.


14

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2015
(dollars in tables in thousands, except share data) 
 

2. OTHER INCOME, ASSETS AND LIABILITIES
 
Other income, net, is comprised of the following:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Unrealized gain (loss) on derivative instruments
$
(14,239
)
 
$
4,799

 
$
(22,498
)
 
$
2,355

Gain (loss) on transfer of loans to REO
1,272

 
5,167

 
1,075

 
11,861

Gain on consumer loans investment
14,385

 

 
33,342

 

Fee earned on deal termination

 
5,000

 

 
5,000

Other income (loss)
6,346

 
323

 
6,318

 
323

 
$
7,764

 
$
15,289

 
$
18,237

 
$
19,539

 
Gain (loss) on settlement of investments, net is comprised of the following:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Gain (loss) on sale of real estate securities, net
$
24,454

 
$
3,668

 
$
31,230

 
$
65,444

Gain (loss) on sale of residential mortgage loans, net
226

 

 
32,851

 

Gain (loss) on settlement of derivatives
(39,406
)
 
(2,403
)
 
(48,227
)
 
(6,186
)
Gain (loss) on liquidated residential mortgage loans
123

 
782

 
246

 
782

Gain (loss) on sale of REO(A)
(1,914
)
 
(159
)
 
(9,751
)
 
(801
)
Other gains (losses)
108

 
(950
)
 
(6,790
)
 
(1,405
)
 
$
(16,409
)
 
$
938

 
$
(441
)
 
$
57,834


(A)
Includes approximately $3.2 million loss on REO sold as a part of the residential mortgage loan sales described in Note 8 during the nine months ended September 30, 2015.

Other assets and liabilities are comprised of the following:
 
Other Assets
 
 
 
Accrued Expenses
and Other Liabilities
 
September 30, 2015
 
December 31, 2014
 
 
 
September 30, 2015
 
December 31, 2014
Margin receivable, net
$
60,841

 
$
59,021

 
Interest payable
 
$
14,562

 
$
7,857

Other receivables(A)
23,571

 
1,797

 
Accounts payable
 
19,875

 
28,059

Deferred financing costs, net(B)

 

 
Derivative liabilities
 
29,364

 
14,220

Principal paydown receivable
920

 
3,595

 
Current taxes payable
 
1,883

 
2,349

Receivable from government agency(C)
58,384

 
9,108

 
Contingent consideration (Note 1)
 
50,000

 

Call rights
414

 
3,728

 
Settlement payable
 
9,100

 

Interest receivable
35,755

 
8,658

 
Other liabilities(F)
 
8,642

 
20

GNMA EBO servicer advance receivable(D)
62,552

 

 
 
 
$
133,426

 
$
52,505

Other assets(E)
19,203

 
9,516

 
 
 
 
 
 
 
$
261,640

 
$
95,423

 
 
 
 
 
 


15

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2015
(dollars in tables in thousands, except share data) 
 

(A)
Primarily includes a receivable from Ocwen related to their servicer rating downgrade, funds in transit from the EBO loan repurchase agreement counterparty, and claims receivable related to residual securities owned.
(B)
Deferred financing costs were reclassified as an offset to the related debt obligation in June 2015 pursuant to ASU No. 2015-03 (Note 1).
(C)
Represents claims receivable from FHA on EBO and reverse mortgage loans for which foreclosure has been completed and for which New Residential has made or intends to make a claim on the FHA guarantee.
(D)
Represents an HLSS loan to a counterparty collateralized by servicer advances on GNMA EBO loans.
(E)
Primarily includes prepaid expenses.
(F)
Primarily includes accrued retention bonus and severance arrangements for HLSS employees.

As reflected on the Condensed Consolidated Statements of Cash Flows, accretion and other amortization is comprised of the following:
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
Accretion of servicer advance interest income
 
$
256,045

 
$
153,790

Accretion of excess mortgage servicing rights income
 
87,874

 
37,703

Accretion of net discount on securities and loans
 
35,239

 
30,127

Amortization of deferred financing costs
 
(18,691
)
 
(7,675
)
 
 
$
360,467

 
$
213,945


3. SEGMENT REPORTING
 
New Residential conducts its business through the following segments: (i) investments in Excess MSRs, (ii) investments in servicer advances, (iii) investments in real estate securities, (iv) investments in real estate loans, (v) investments in consumer loans, and (vi) corporate. The corporate segment consists primarily of (i) general and administrative expenses, (ii) the management fees and incentive compensation related to the Management Agreement, (iii) corporate cash and related interest income, and (iv) secured corporate loans and related interest expense during the periods outstanding.
 
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:
 
Servicing Related Assets
 
Residential Securities and Loans
 
 
 
 
 
 
 
Excess MSRs
 
Servicer Advances
 
Real Estate Securities
 
Real Estate Loans
 
Consumer Loans
 
Corporate
 
Total
Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
38,477

 
$
105,135

 
$
28,984

 
$
8,888

 
$

 
$
857

 
$
182,341

Interest expense

 
64,291

 
5,150

 
4,651

 
530

 
2,936

 
77,558

Net interest income (expense)
38,477

 
40,844

 
23,834

 
4,237

 
(530
)
 
(2,079
)
 
104,783

Impairment

 

 
1,574

 
(3,341
)
 

 

 
(1,767
)
Other income
10,227

 
(12,554
)
 
(28,354
)
 
(1,530
)
 
14,386

 

 
(17,825
)
Operating expenses
168

 
10,341

 
766

 
2,845

 
66

 
18,716

 
32,902

Income (Loss) Before Income Taxes
48,536

 
17,949

 
(6,860
)
 
3,203

 
13,790

 
(20,795
)
 
55,823

Income tax expense (benefit)

 
(4,852
)
 

 
(1,405
)
 
325

 

 
(5,932
)
Net Income (Loss)
$
48,536

 
$
22,801

 
$
(6,860
)
 
$
4,608

 
$
13,465

 
$
(20,795
)
 
$
61,755

Noncontrolling interests in income (loss) of consolidated subsidiaries
$

 
$
7,230

 
$

 
$

 
$

 
$

 
$
7,230

Net income (loss) attributable to common stockholders
$
48,536

 
$
15,571

 
$
(6,860
)
 
$
4,608

 
$
13,465

 
$
(20,795
)
 
$
54,525



16

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2015
(dollars in tables in thousands, except share data) 
 

 
Servicing Related Assets
 
Residential Securities and Loans
 
 
 
 
 
 
 
Excess MSRs
 
Servicer Advances
 
Real Estate Securities
 
Real Estate Loans
 
Consumer Loans
 
Corporate
 
Total
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
87,874

 
$
256,087

 
$
66,699

 
$
32,408

 
$
1

 
$
1,822

 
$
444,891

Interest expense

 
151,377

 
12,171

 
15,929

 
1,054

 
12,877

 
193,408

Net interest income (expense)
87,874

 
104,710

 
54,528

 
16,479

 
(1,053
)
 
(11,055
)
 
251,483

Impairment

 

 
3,294

 
2,408

 

 

 
5,702

Other income
18,415

 
835

 
(37,655
)
 
20,063

 
33,342

 
(2,880
)
 
32,120

Operating expenses
517

 
12,604

 
769

 
14,557

 
177

 
61,500

 
90,124

Income (Loss) Before Income Taxes
105,772

 
92,941

 
12,810

 
19,577

 
32,112

 
(75,435
)
 
187,777

Income tax expense (benefit)

 
7,565

 

 
(2,942
)
 
324

 

 
4,947

Net Income (Loss)
$
105,772

 
$
85,376

 
$
12,810

 
$
22,519

 
$
31,788

 
$
(75,435
)
 
$
182,830

Noncontrolling interests in income (loss) of consolidated subsidiaries
$

 
$
22,332

 
$

 
$

 
$

 
$
(5,158
)
 
$
17,174

Net income (loss) attributable to common stockholders
$
105,772

 
$
63,044

 
$
12,810

 
$
22,519

 
$
31,788

 
$
(70,277
)
 
$
165,656


 
Servicing Related Assets
 
Residential Securities and Loans
 
 
 
 
 
 
 
Excess MSRs
 
Servicer Advances
 
Real Estate Securities
 
Real Estate Loans
 
Consumer Loans
 
Corporate
 
Total
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments
$
1,673,008

 
$
7,499,775

 
$
2,428,729

 
$
784,184

 
$

 
$

 
$
12,385,696

Cash and cash equivalents
237

 
151,833

 
6,169

 
9,090

 
12,344

 
168,639

 
348,312

Restricted cash
499

 
162,728

 

 
1,720

 

 
92

 
165,039

Derivative assets

 
1,318

 

 

 

 

 
1,318

Other assets
34

 
179,950

 
2,103,217

 
101,737

 
2,362

 
68,553

 
2,455,853

Total assets
$
1,673,778

 
$
7,995,604

 
$
4,538,115

 
$
896,731

 
$
14,706

 
$
237,284

 
$
15,356,218

Debt
$

 
$
7,038,079

 
$
3,034,649

 
$
719,568

 
$
40,264

 
$
186,520

 
$
11,019,080

Other liabilities
350

 
29,582

 
1,090,460

 
7,563

 
416

 
182,696

 
1,311,067

Total liabilities
350

 
7,067,661

 
4,125,109

 
727,131

 
40,680

 
369,216

 
12,330,147

Total equity
1,673,428

 
927,943

 
413,006

 
169,600

 
(25,974
)
 
(131,932
)
 
3,026,071

Noncontrolling interests in equity of consolidated subsidiaries

 
219,538

 

 

 

 

 
219,538

Total New Residential stockholders’ equity
$
1,673,428

 
$
708,405

 
$
413,006

 
$
169,600

 
$
(25,974
)
 
$
(131,932
)
 
$
2,806,533

Investments in equity method investees
$
213,318

 
$

 
$

 
$

 
$

 
$

 
$
213,318

 

17

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2015
(dollars in tables in thousands, except share data) 
 


Servicing Related Assets

Residential Securities and Loans







Excess MSRs

Servicer Advances

Real Estate Securities

Real Estate Loans

Consumer Loans

Corporate

Total
Three Months Ended September 30, 2014













Interest income
$
12,914


$
50,967


$
11,179


$
22,526


$


$
1


$
97,587

Interest expense
3


25,157


1,932


5,065


1,149


1


33,307

Net interest income (expense)
12,911


25,810


9,247


17,461


(1,149
)



64,280

Impairment






1,134






1,134

Other income
60,722


22,948


955


14,950


22,490


(1
)

122,064

Operating expenses
103


4,796


169


3,163


632


16,448


25,311

Income (Loss) Before Income Taxes
73,530

 
43,962

 
10,033

 
28,114

 
20,709

 
(16,449
)

159,899

Income tax expense (benefit)

 
7,403

 

 
306

 
92

 


7,801

Net Income (Loss)
$
73,530

 
$
36,559

 
$
10,033

 
$
27,808

 
$
20,617

 
$
(16,449
)

$
152,098

Noncontrolling interests in income (loss) of consolidated subsidiaries
$

 
$
25,726

 
$

 
$

 
$

 
$


$
25,726

Net income (loss) attributable to common stockholders
$
73,530

 
$
10,833

 
$
10,033

 
$
27,808

 
$
20,617

 
$
(16,449
)

$
126,372


 
Servicing Related Assets
 
Residential Securities and Loans
 
 
 
 
 
 
 
Excess MSRs
 
Servicer Advances
 
Real Estate Securities
 
Real Estate Loans
 
Consumer Loans
 
Corporate
 
Total
Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
37,703

 
$
153,790

 
$
41,939

 
$
28,300

 
$

 
$
1

 
$
261,733

Interest expense
1,294

 
86,885

 
9,513

 
6,454

 
4,170

 
500

 
108,816

Net interest income (expense)
36,409

 
66,905

 
32,426

 
21,846

 
(4,170
)