Mr. Cooper Group Inc.

Hello, and welcome to Mr. Cooper's third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to hand the conference over to begin.

Good morning and welcome to Mr. Cooper Group's third quarter earnings call. My name is Ken Posner and I'm SVP of Strategic Planning and Investor Relations. With me today are Jay Bray, Chairman and CEO, Chris Marshall, Vice Chairman and President, and Kirk Johnson, Executive Vice President and CFO. As a quick reminder, this call is being recorded and you can find the slides on our Investor Relations webpage at investors.mrcoopergroup.com. During the call, 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're not undertaking any commitment to update these statements if conditions change. I'll now turn the call over to Jay.

Thanks, Kieran, and good morning, everyone, and welcome to our call. Let's dive in with a review of our quarterly highlights on slide three. Starting with financial performance, we were delighted with operating ROTCE of 13.8%, which is back within our target range. And at this point in the cycle, double-digit return on equity is a powerful validation of our balanced business model and a major differentiator from our peers, whose results are much less consistent. Tangible book value was up nicely in the quarter to $62.78, and there's a lot of good news here. You're seeing the benefit of continued strong operating results, the gain from the trust collapse we mentioned last quarter, and the accretion from closing the HomePoint acquisition, which came in consistent with our guidance. Now turning to operations, the portfolio reached $937 billion. And based on what we've seen from public disclosures, it appears that Mr. Cooper is now the number one servicer in the country. This is an amazing accomplishment for the company, especially as I think back to our humble beginnings in the 1990s. And I want to pause for a second and say thank you to our investors, our partners, clients, and all our other stakeholders for placing your trust in us, and especially to my fellow Coopers for your tireless work on behalf of our customers. Servicing generated $301 million in pre-tax income, although bear in mind the gain from the trust collapse contributed $67 million. And there were some other one-time items in there as well, which Chris will elaborate on. Originations reported EBT of $29 million, which is excellent performance considering the rate environment. And Zones saw strong sales momentum and generated a small profit this quarter, as we guided you to expect. Third quarter was a very busy period for us. In addition to Home Point, we closed the acquisition of Roosevelt Management, which provides us a professional team in the RIA infrastructure for our asset management strategy. And I'm pleased to report we've already kicked off the capital raising process for our first MSR fund. Turning to capital management, we repurchased 1 million shares for 58 million. And since the WMIH merger established Mr. Cooper as a fully independent public company, our stock price has tripled. But we still trade at a persistent discount to Tangible Book, which looks to us like a major disconnect given our consistent growth and our double-digit ROTCE. Despite growth and return of capital, we reported record liquidity and very strong capital ratios. This was partially due to the self-funding nature of the HomePoint acquisition, which we pointed out when we announced the deal, and primarily due to our sound practices around capital and liquidity planning. As the market's leading servicer with 4.3 million customers, balance sheet strength is the foundation for all our strategic initiatives. Finally, I'd like to mention the well-deserved recognition we received from Fortune and the Great Place to Work Foundation. who rank Mr. Cooper as one of the best workplaces in financial services and insurance. This is a positive reflection on our people and on the purposeful, inclusive work environment that we have created for them. Now let's shift to slide four and talk about a very important theme in the mortgage industry, namely the ongoing retreat of banks from the sector, which is creating a major growth opportunity for us. As most of you are aware, banks used to dominate the mortgage industry with close to 100% market share in both originations and servicing. Today, however, that share has fallen to around 40%. One of the drivers was the Basel III capital regime rolled out in the aftermath of the global financial crisis, which introduced higher capital standards for mortgages and MSRs. These standards came on top of severe operational challenges. As some of you will recall, Mr. Cooper's growth began to take off at this point when we acquired $200 billion plus portfolio from Bank of America. Fast forward to today and a new set of regulations is on the horizon called Basel III Endgame. These regulations once again include tighter requirements for mortgages and MSRs at the same time that rising rates are pressuring profitability and operations. We expect to see banks see more share in the mortgage sector creating attractive growth opportunities for best-in-class operators like Mr. Cooper. Moving to slide five, while banks were dialing back, Mr. Cooper made a commitment to serving mortgage borrowers and to continue making the necessary technology investments to do so efficiently. And the result, as I mentioned already, is we are now the industry's largest servicer. We're also the most efficient. The annual MBA benchmarking survey is the authoritative study of mortgage industry performance. And as you can see, we've steadily brought down our servicing costs over the last few years to the point where we are now 33% more efficient than the large banks in the survey and nearly 50% more efficient than midsize banks. If you consider our scale, cost advantage, industry leading retention, and the depth of our expertise, there's really no one in the industry who can compete with us in servicing. Now, let's move to slide six and talk about where we're going from here. Given the attractive yields available in the bulk market, as well as new subservicing agreements in place, we will exceed our $1 trillion strategic target in the first quarter of next year, at which point we'll return to update you with a new set of strategic targets and a comprehensive plan to achieve them. For now, I remind you that we have several strategic initiatives underway many of which are focused on technology investment and cost leadership, both in servicing and originations, as well as winning new subservicing clients. In closing, I'd like to highlight once again the disconnect between a dominant platform of strong growth prospects and double-digit returns and a stock that trades at a discount. If we continue to execute, there should be meaningful upside in both our stock and our high-yield notes. And before I turn it over to Chris, let me address something that you no doubt noticed in the press release. Chris has shared with us his intention to retire by year-end 2024. Chris joined us in January 2019 as Vice Chairman and CFO and quickly enhanced the finance function, implementing bank-like processes, as well as pushing for efficiency gains and deleveraging. This served us extremely well when the pandemic hit a year later, being well prepared for adverse scenarios, we were able to substantially expand our liquidity. In 2021, we promoted Chris to president and gave him a mandate to oversee operations, where he took our process discipline to the next level, leading to higher profitability across the enterprise and improvements to the customer experience, as well as architecting some new directions within our technology strategy, including the investments agents. In his remaining time with us, Chris will continue to lead operations with a goal of driving continued strong portfolio growth and return on equity, in addition to overseeing the capital raise for our first MSR fund. As I look back on these five years, Chris has brought to Mr. Cooper a special kind of energy, an intense focus on the needs of our customers, our team members, and investors, and a real sense of urgency to deliver results. Chris, the improvements you made at Mr. Cooper will endure, and we know you will continue to make a big impact on the company ahead of your retirement. I'll add that we put in place a process to identify a successor, and while no one can replace Chris, the initial feedback indicates a very high-level interest from some exceptionally talented candidates, which shouldn't be a surprise given how well the company is performing. So more on this in due course. Chris?