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Sale might provide salvation for Stonegate investors

November 21, 2015

Greg AndrewsAfter a rocky two years as a public company, perhaps the best path forward for Stonegate Mortgage Corp.—now that the board has given the company’s CEO and founder his walking papers—is to pull the rip cord and sell the business.

That’s a scenario that is getting credence among analysts, especially given that the company’s new management team did not exactly dismiss the idea of a sale during the company’s third-quarter conference call with analysts earlier this month.

“We always look at enhancing shareholder value, and if that were the proper way to do it,” acting CEO Rich Kraemer said, without completing his thought. “As you understand, this is a public company. We’re always for sale daily, so we’d obviously take that into consideration.”

Indeed, a sale could salvage value for shareholders, who’ve seen the price of their stock fall from $16 to around $4.75 since the company’s October 2013 initial public offering.

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The IPO was a crowning moment for Stonegate’s hard-charging founder, Jim Cutillo, who launched the business in 2005, guided it through the calamitous financial crisis, and racked up explosive growth as the economy rebounded.

Stonegate closed 2014 with $167 million in revenue and 1,300 employees. Through acquisitions and its own growth, the company has become one of the largest non-bank players in the business of originating, financing and servicing U.S. residential mortgages.

But it’s a complicated business to run, which helps explain why results have been all over the map. From 2011 through 2014, revenue rose nearly tenfold. And profit was on a nice, upward trajectory as well—until the company slid into the red in 2014 and posted a $30 million loss for the year.

In the third quarter of 2015, the company lost $23 million on revenue of $35 million.

“It is difficult to point out a highlight for the quarter, as this was a substantially weak quarter,” Credit Suisse analyst Douglas Harter said in a report.

That quarter was mostly in the books when the board in early September terminated Cutillo. He stepped down as CEO and resigned from the board but will receive $440,000 in “separation payments” plus $10,000 a month through March for providing up to 40 hours per month of consulting.

Cutillo had baggage beyond Stonegate’s struggles. Last year, IBJ’s Jared Council reported that Cutillo had not earned a bachelor’s degree from Indiana University, as his executive biography and past media information from the company had stated. In addition, a former executive of a Stonegate business partner alleged in a 2012 lawsuit that, after the relationship soured, Cutillo defamed him and said he wanted to bury the executive “in the back yard of a house.”

A Stonegate spokesman did not respond to inquiries. Cutillo did not return a phone message left at his Fishers home.

One reason Stonegate’s performance has been so volatile is that the company owns a huge stash of rights to service mortgages—the business of collecting and disseminating payments. The value of those rights seesaw based on the movement of interest rates and has to be reappraised every quarter.

In the third quarter, a decline in interest rates caused mortgage-servicing rights to tumble $28 million, Chief Financial Officer Rob Eastep said on a conference call with analysts.

He and Kraemer have rolled out a dramatic business plan aimed at stabilizing earnings and boosting efficiency. Toward that end, Stonegate is in the process of closing 74 retail mortgage offices across the country and is developing plans to cut expenses 15 percent to 20 percent by the end of 2016.

“We are acting purposely in order to strengthen the foundation of the company and position it for enhanced profitability,” Kraemer said.

But even if Stonegate gets its performance on track, investors likely would be slow to jump back on board, analysts said. Barclays’ Mark DeVries forecasts the company would continue to trade at a discount to “its more mature and profitable peers, due to persistent execution risks.”

In early November, he left his rating at “underweight” and said he thinks the stock will hover around $5. If the stock price goes higher, he said, it likely would stem from a suitor’s making a bid for the company for a substantial premium.•

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