Mr Cooper Group Inc

NASDAQ:COOP

Q1-2025 Earnings Call

[Kenneth Posner, executive]

Good morning. My name is Ken Posner, and I'm SVP of Strategic Planning and Investor Relations at Mr. Cooper Group. With me today are Jay Bray, Chairman and CEO; Mike Weinbach, President; and Kurt Johnson, Executive Vice President and CFO.

This morning, we'll be reviewing the company's financial performance for the first quarter 2025. You can find the slides accompanying our remarks on our Investor Relations web page at investors.mrcoopergroup.com.

As a reminder, we may refer to non-GAAP measures, which are reconciled to GAAP results in the appendix to the slide deck. Also, we may make forward-looking statements, which you should understand could be affected by risk factors that we've identified in our 10-K and other SEC filings. We are not undertaking any commitment to update these statements if conditions change. With that, I'll turn it over to Jay.

[Jay Bray, executive]

Good morning, everyone. We look forward to sharing our thoughts on our first quarter financial results. But first, I want to note that due to the pending combination with Rocket, which was announced on March 31, we will not be taking questions this morning.

I'll start my comments with some personal thoughts on the combination with Rocket. This transaction is about creating a scaled homeownership experience. By pooling our talent, data and technology, we are going to totally reimagine the homeownership journey from start to finish and harness the transformative power of AI to bring our customers a truly amazing experience. For our investors, the industrial logic is compelling, and this transaction presents the opportunity for our shareholders to participate in the upside of the combined company.

At Mr. Cooper, we've worked for years to perfect our servicing platform, which is digital, efficient and highly scalable. Our multi-decade track record of customer growth and resilient profitability speaks for itself, as does the accolades for operational excellence we've earned from investors and clients. Now by combining our platform with Rocket's iconic brand and marketing capabilities, we're creating a fully integrated homeownership platform with unmatched capabilities.

Finally, as I've shared before, the 2 cultures are very complementary and the integration teams are already synced and planning for how to bring our business together once the transaction closes. I cannot be more thrilled to be part of this joint effort to usher in the industry's future. And with that, I'm going to start on Slide 3 with a review of first quarter highlights. Then I'll turn it over to Mike to take you through a more detailed discussion of operating results, and Kurt will wrap up with financials.

In summary, this was another solid quarter, demonstrating the power of our at-scale platform to produce consistent recurring and predictable results. ROTCE was 16.8%, up from 15.8% last quarter as we are seeing the benefits from the Flagstar acquisition start to flow through, and I'm really pleased that we've moved so quickly into the 16% to 20% guidance range we shared with you just last quarter.

The key themes behind this performance remain the same: operating leverage, fee income and strong execution in our Origination segment. All of this reflecting the investments we've made in technology and operations over many years. That and the talent and great work of our people to whom I will once again say thank you for what you have built.

The balance sheet is in great shape with a super strong capital ratio of 25.5%. Liquidity is already back up to $3.9 billion and consistent performance on our MSR hedge and delinquencies declining in the quarter to 1.1%, which speaks to the sterling asset quality of our book. Balance sheet strength is nonnegotiable for industry leaders, and it's especially important during periods of elevated uncertainty, such as the markets are currently experiencing.

Turning to Servicing. Flagstar was the biggest acquisition in our history, and I'm pleased to report that since closing the transaction last quarter, we have now onboarded all our new customers and team members, and we're right on schedule with integration. Thanks to growth, operating leverage and low speeds, Servicing generated $332 million in pretax income at the high end of our guidance range. Originations outperformed our guidance with $53 million in pretax income. I'd call out very strong momentum in home equity loans and cash out refinances, which we view as a massive long-term growth opportunity regardless of the interest rate environment.

Last quarter, we earned the prestigious SHARP Gold Award from Freddie Mac, recognizing the operational excellence of our Servicing platform. In this quarter, we were thrilled to win Fannie Mae STAR Award. In fact, we were the only servicer in the country to earn STAR recognition in all 3 categories for this award: general servicing, solution delivery and time line management.

This recognition is important because it illustrates a key success factor behind our long-term growth, namely the value we deliver as a servicer to our business partners, including agency, government and private investors and our subservicing clients. We deliver this value because we wake up every morning asking the question, how do we earn and sustain our partners' trust, and you see the result of our focus in these operational scorecards. And with that, I'll turn it over to Mike.

[Michael Weinbach, executive]

Thanks, Jay, and good morning, everyone. If you'll turn to Slide 4, I'll start with the Servicing segment, where we reported pretax income of $332 million in the first quarter, which was up 22% year-over-year. This was at the high end of our guidance range, in part due to slower-than-expected CPR speeds and lower amortization. Earnings also benefited from operating leverage. If you look year-over-year, Servicing operating expenses declined as a percentage of the portfolio by 136 basis points, and that's even before we fully integrated the Flagstar operation onto our platform. Jay mentioned that Flagstar was the company's largest acquisition and the onboarding went exceptionally well as measured by customer delight metrics such as speed to answer, abandonment rate and first call resolution, which have remained consistently at top the industry levels.

Obviously, we have a tremendous amount of experience with large portfolio transfers, and I'd add that we're constantly improving our processes, which has helped make this a very smooth and welcoming experience for our new customers. Also contributing to our strong performance is AgentiQ, which we highlighted for you last quarter following the rollout to the 1,400 agents in our call centers. As a reminder, this AI-powered tool synthesizes the insights gleaned from millions of customer interactions and puts relevant prompts on the screen, allowing agents to empathetically focus on the customer while providing answers quickly and efficiently. With respect to AI in the call center, we're only scratching the surface of what's possible in terms of customer experience and efficiency.

The total portfolio was down slightly in the quarter, ending at $1.5 trillion, which is equivalent to just over 6.4 million customers. As we pointed out last quarter, we shifted about $60 billion in subservice loans to other servicers as was contemplated in the Flagstar transaction. Outside of these deboardings, our subservicing portfolio grew organically by 2% quarter-over-quarter as we're growing with our clients, which includes some of the strongest originators and investors in the industry.

I'd add that we're also in advanced discussions with potential new clients and optimistic about winning new books of business. Our own portfolio was roughly flat quarter-over-quarter at just over $730 billion. We benefited from strong volumes in the correspondent channel and closed roughly $7 billion in bulk acquisitions. We're continuing to analyze and bid selectively on pools that meet our yield targets.

So now let's move on to Slide 5 and talk about Originations, where we generated $53 million in EBT, which was slightly above our guidance range. Volumes were strong in the correspondent channel, where we've made a number of investments and operational enhancements over the last 18 months. During March, we were the #4 originator in this channel.

In the DTC channel, we're enjoying very strong momentum with cash outs and second liens. Cash outs made up 46% of volume, up from 39% last quarter, while second liens grew from 12% to 21%. Putting this in context of customer benefits, during the quarter, we helped over 9,000 customers access equity in their homes and helped nearly 2,000 customers reduce their monthly payments or purchase a new home. Cash outs and second liens are turning out to be a very popular method for customers to tap the equity in their homes. And as you know, they typically use this liquidity for debt consolidation, home improvements and other major expenses.

Regardless of the use, these products cost much less than most credit cards, and that's even before considering the tax deductibility of mortgage interest. So you can make a strong argument that this is one of the most sensible ways for homeowners to access liquidity. We believe there's a long runway to fully meet this demand with 94% of our customers having at least 20% equity in their homes and our customers' total equity in the neighborhood of $700 billion.

Just to update you, our refinance recapture rate was a little over 50% in the quarter. And bear in mind, we don't count second liens in this ratio as some of our peers do. Clearly, the current environment offers limited opportunity for rate and term refis, but our DTC team is very nimble. And with even brief rallies in rates, we can move quickly to help customers save money, as you saw in the third quarter last year. As of quarter end, 21% of our portfolio had note rates of 6% or higher, which is indicative of a sizable opportunity when rates next rally.

I'll wrap up here by adding to Jay's comments about the excitement we feel about joining forces with Rocket. With Rocket's iconic brand and marketing skills, its leading J.D. Power service levels, its highly scalable origination platform and our shared commitment to investing in AI, digital and other technologies, there's so much more we'll be able to do for our customers over time. Whether it's through refis, second liens, purchase mortgages, title insurance or closing services. We think the combination will create a true end-to-end homeownership ecosystem and an incredibly valuable platform with customers for life. With that, I'll turn the call over to Kurt.

[Kurt Johnson, executive]

Thanks, Mike, and good morning, everyone. I'll start on Slide 6 and go through our financials. To summarize, net income was $88 million, which included $255 million in pretax operating earnings, offset by an $82 million negative MSR mark net of hedges and adjustments of $68 million. Mike commented on Origination and Servicing segment earnings, and I'll add that corporate overhead segment expenses of $51 million were in line with our guidance from last quarter.

Let me start by unpacking the adjustments. First, there were $26 million in transaction and transition charges primarily related to the Flagstar integration. Second, as you recall last quarter, we incurred a charge for a legal ruling. This quarter, we took an additional $33 million charge associated with the legal fees, which closes out all liabilities stemming from this ruling. Finally, there were some miscellaneous adjustments associated with losses on equity investments, a slight operating loss from the Flagstar TPO platform, which we sold at the end of the quarter and a positive reserve release related to Home Point acquisition. Full details are, as always, listed in the appendix to today's slide deck.

Turning to the mark-to-market line. We marked down the MSR to reflect falling interest rates and expectations for higher CPRs, leading to a quarter end valuation of 155 basis points of UPB or 5.4 multiple of the base servicing strip. Offsetting this loss were $209 million in hedge gains, which equates to a 72% coverage ratio, slightly below our 75% target. We're extremely pleased with the hedge's consistent performance, which over the last 8 quarters has contributed to stable and predictable results. Our target hedge remains 75%.

Now if you'll turn to Slide 7, I'll briefly touch on asset quality. Our high-quality mortgage portfolio continues to perform extremely well with MSR delinquencies down by 9 basis points to 1.1%. Low delinquencies reflect our thoughtful portfolio construction, which you can see in the high FICO scores and low LTV ratios for our customers as well as our strong loss mitigation capacity, which is one of the key factors that Fannie and Freddie measure in their operational scorecards and which was recognized in our winning the SHARP and STAR Awards.

I'd like to call out our exceptional performance with Ginnie Mae loans, where delinquencies fell by 50 basis points for both FHA and VA loans, significantly outperforming the industry. And I'd love to give kudos to our leaders in servicing and loss mitigation for helping our customers stay in their homes as well as providing great results for our subservicing clients. While we don't try to forecast overall consumer credit cycles, we have deep experience managing delinquent portfolios. Additionally, we have extremely valuable capabilities in Xome and Rushmore special servicing. If the environment turned more adverse, we believe Mr. Cooper and our investors would be extremely well protected.

Turning to Slide 8. I'll end my remarks with an update on our key balance sheet metrics. Liquidity ended the quarter at $3.9 billion, up from $3.4 billion in the fourth quarter as we used operating cash flow to pay down $350 million in MSR lines. It was nice to see liquidity rebound so quickly following the Flagstar acquisition, which speaks to our extremely robust cash flow, running at an annual rate of nearly $1 billion in terms of steady state discretionary cash flow. At the same time, we upsized our borrowing capacity by $200 million and have begun renegotiating our existing MSR facilities to extend maturities through to 2027.

Our capital ratio as measured by tangible net worth to assets ended the quarter at 25.5%, up from 24.4% last quarter. The increase was partially the result of a 21% decline in advances, which reflects typical seasonal trends. Tangible equity also benefited from strong earnings and the absence of stock repurchases during the quarter, which we suspended in advance of the Rocket transaction. Looking ahead, we do not expect to repurchase stock prior to the close of the transaction, which we expect to occur in the fourth quarter of 2025, subject to approval of Mr. Cooper shareholders and the satisfaction of other closing conditions, including customary regulatory approvals.

Finally, I want to comment on our $500 million in senior notes maturing in February 2026, which are now callable at par. Thanks to our strong capital and cash flow generation, we have the option to retire the notes early, which is an option that we are actively evaluating and which should not have a material impact on our liquidity profile given the cessation of our stock repurchases.

With that, I'll close out our remarks. Thank you for your interest in Mr. Cooper.