Mr. Cooper Group Inc.

Good day and thank you for standing by. Welcome to the Mr. Cooper Group Q2 2024 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 a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker at Mr. Cooper Group. Please go ahead.

Good morning, and welcome to Mr. Cooper Group's second 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, Mike Weinbach, President, and Kirk Johnson, Executive Vice President and CFO. As a reminder, this call is being recorded. 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 are not undertaking any commitment to update these statements if conditions change. And I'll now turn the call over to Jay.

Thanks, Ken. Good morning, everyone, and welcome to our call. As you saw from our press release this morning, we've got a lot to cover, including super strong second quarter results and some exciting news, the acquisition of Flagstar's mortgage operations. We'll take you through the materials as we always do, making sure to leave plenty of time for your questions. But before we get into the acquisition, let's start on slide three with a quick review of the quarter, which was quite strong. For the second quarter, pre-tax operating income came in at $219 million, which is up 46% year-over-year. Operating RO2 CE was 15.3%, up nearly 400 basis points from a year ago. At the end of last year, we said we expected ROTCE in a range of 14 to 18% in 2025. We're pleased to be in that range already, and we're feeling positive about our momentum heading into next year. I'm super excited with the 17% year-over-year increase in TBV, which reached $68.67 at the end of the quarter. This was a function of earnings plus stock repurchase. which has reduced the share count by 4% over the last year and by a cumulative 35% since inception. The board approved an additional $200 million for stock repurchase. I would add that despite stock repurchase and asset growth, we've maintained a rock solid balance sheet with our capital ratio still above our stated target range in ample liquidity. Turning to operations, the servicing team produced fantastic results. with $288 million in pre-tax income, up a massive 58% from a year ago. These results reflect strong growth, with the portfolio ending the quarter at $1.2 trillion, together with exceptional efficiency gains. In fact, you couldn't ask for a better demonstration of operating leverage. Now shifting to originations, where the environment remains challenging, pre-tax operating income was $38 million. which was at the high end of our guidance thanks to strong execution in both our DTC and correspondent channels. Now, let's turn to slide four and take you through the transaction with Flagstar. We announced we're acquiring Flagstar's mortgage operation for $1.4 billion in cash. This is a simple transaction structure in that it's an acquisition of assets, not a business combination. The assets include Flagstar's MSRs and advances, which totals $1.2 billion, its subservicing business, with a total UPB of $270 billion, as well as a third-party lending platform. Additionally, we will subservice $9 billion in Flagstar loans remaining on their balance sheet. The total UPB is approximately $356 billion. The acquisition will be funded with cash on hand and MSR line draws. Flagstar's servicing operations will be integrated onto our platform in a quick, efficient, and thoughtful manner. On this note, I'd like to say welcome to Flagstar's team members who will be joining the Mr. Cooper family, and also thank you for all the hard work you've put into growing your business and taking care of your customers. Flagstar's customer-focused culture really lines up well with our core values, and we are excited about the opportunities. Now, if you'll pull up for a moment and think about what this transaction means, first, it's a collaborative win-win for us in Flagstar, which showcases Mr. Cooper's ability to provide a full-service solution. In this case, we help Flagstar solve for their balance sheet goals by selling their MSR asset at a fair price to a credible partner in a single, quick, low-risk transaction. We also help Flagstar simplify its operations by taking on their existing subservicing business, as well as providing servicing for some of their own loans. From an economic perspective, this transaction provides us with excellent returns on capital, thanks to the fee income from subservicing, which comes on top of the market yields on the MSR, and we get a major step up in scale and the opportunity to realize additional operating leverage. If you'll turn with me to page five, I'd like to put this transaction in the context of Mr. Cooper's strategic journey. If you recall, we started talking about the dislocation in the MSR marketplace nearly 18 months ago. Specifically, in our fourth quarter 2022 call, we highlighted a cycle-wide opportunity to acquire MSRs and suggested pools would trade at extremely attractive yields. If you go back and look at our slides or read the transcript, you'll see we pointed to financial pressure on originators and regulatory capital considerations for banks as the drivers of this dislocation. And we even shared with you our proprietary forecast for the bulk MSR market. We anticipated the dislocation, we moved swiftly and decisively to capitalize on the opportunity, and now you see the results. With our portfolio up 79% from year-end 2022, to $1.6 trillion in mortgages and 6.6 million customers. What this shows you is that we are the fundamental best buyers of MSRs. And as a subservicer, we are the best operating partner, period. We have robust operational capacity, we carefully manage our capital liquidity, and we have years of experience in the bulk market, including proprietary data amassed over a decade's worth of acquisitions, which allows us to underwrite assets quickly and accurately. We have relationships with sellers who trust us to close on time and take care of their customers. And we have special tools like Pyro, which is our proprietary patented AI system, which we use for document extraction and classification. And this gives us a major advantage in due diligence, negotiations, and onboarding. As we think about the industry strategically, it's clear that the servicing sector has entered a phase of rapid consolidation. While financial pressure and regulatory capital rules are recent catalysts, what's ultimately driving consolidation is the power of technology to create massive-scale economies, which is the same trend you see in many other sectors of the financial, fintech, payments, and processing industries, where the leaders control very significant market share. Our strategy at Mr. Cooper is to position ourselves for a highly concentrated in-state in mortgage servicing, We have a strong position today, but we are not pausing to celebrate. Instead, we're going to stay focused on building out the industry's most efficient and scalable platform, who will work even harder to provide an amazing experience for our customers and our clients. And we are committed to playing a constructive leadership role in the industry, earning the continued support of all our stakeholders. And with that, I'll turn the call over to our president, Mike Weinbach, to take you through our operational results in more detail.