- Pretax Operating Income: $219 million, up 46% year over year.
- Operating ROTCE: 15.3%, up nearly 400 basis points from a year ago.
- Tangible Book Value (TBV): $68.67, a 17% year-over-year increase.
- Stock Repurchase: Share count reduced by 4% over the last year; additional $200 million approved for stock repurchase.
- Servicing Pretax Income: $288 million, up 58% year over year.
- Servicing Portfolio: $1.2 trillion at the end of the quarter.
- Originations Pretax Income: $38 million.
- Flagstar Acquisition: $1.4 billion in cash; includes $1.2 billion in MSRs and advances, $270 billion in subservicing UPB, and a third-party lending platform.
- Subservicing Mix Post-Flagstar: 52% of the total portfolio; owned MSRs at 48%.
- Servicing Revenue Growth: Up $162 million year over year (37%).
- Servicing Expense Growth: Up $24 million year over year (16%).
- Originations Refi Recapture: 73% this quarter.
- Correspondent Volumes: $2.1 billion.
- MSR Portfolio Coupons: 18% of the portfolio has coupons of 6% or higher.
- MSR Valuation: 153 basis points of UPB; multiple of 5.3x the base servicing fee.
- Hedge Losses: $103 million; 72% realized coverage.
- Excess Servicing Strip Sale: $27 million gain; $222 million in cash generated.
- MSR Delinquencies: Declined to 1.0%, a new record low.
- Liquidity: $3.2 billion at quarter end.
- Capital Ratio: 28.4% before Flagstar acquisition; pro forma 26% post-acquisition.
Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Mr. Cooper Group Inc (COOP, Financial) reported a 46% year-over-year increase in pretax operating income, reaching $219 million.
- The company achieved a 17% year-over-year increase in tangible book value (TBV), now at $68.67 per share.
- The servicing team delivered exceptional results with $288 million in pretax income, up 58% from the previous year.
- The acquisition of Flagstar's mortgage operations is expected to enhance scale and operational leverage.
- The company maintained a strong balance sheet with a capital ratio above the stated target range and ample liquidity.
Negative Points
- The originations environment remains challenging, with pretax operating income at $38 million, despite being at the high end of guidance.
- Amortization expense increased by $47 million sequentially, reflecting portfolio growth and seasonality.
- The company anticipates macroeconomic headwinds in 2025, including rising amortization and lower deposit yields.
- The integration of Flagstar's operations will add new team members and expenses, potentially impacting short-term efficiency.
- The company expects amortization expense to be a headwind in 2025 due to record low CPRs likely increasing.
Q & A Highlights
Q: What was the rationale behind the Flagstar acquisition? Was it mainly about size and scale, or were there other attractive aspects?
A: Jay Bray, Chairman and CEO: Strategically, the deal made perfect sense for us. It includes the acquisition of MSRs similar to our portfolio and additional subservicing on our platform. We are very excited about it.
Q: Will there be any need to raise equity as part of the Flagstar transaction?
A: Jay Bray, Chairman and CEO: No, absolutely not. Kurt Johnson, CFO: We continue to repurchase stock and see value in our stock at its current trading levels.
Q: Can you provide guidance on the earnings accretion expected from the Flagstar transaction?
A: Jay Bray, Chairman and CEO: The MSR acquisition is consistent with our past acquisitions, providing mid- to high-teen returns. The subservicing will blend with our existing book, and we expect the transaction to be at the high end of our ROTCE range.
Q: How will the Flagstar acquisition impact your operating expenses in 2025?
A: Michael Weinbach, President: We will add new team members from Flagstar, increasing expenses. However, we will continue to invest in the platform to realize operating leverage and drive cost per loan down.
Q: How much of the $1.4 billion Flagstar acquisition is equity versus debt, and how much goodwill will be created?
A: Kurt Johnson, CFO: About $1.2 billion is for MSRs, funded through MSR lines, making it a debt transaction. The exact amount of goodwill is still being finalized.
Q: How do you value the MSR under the COOP platform compared to NYCB's balance sheet?
A: Kurt Johnson, CFO: We likely value it higher due to our low-cost production and high recapture rate. Approximately 20% of the portfolio has an above 6% coupon rate, offering attractive refinance opportunities.
Q: Do you expect continued opportunities for consolidation in servicing, and will it be larger platform transactions or bulk pools?
A: Jay Bray, Chairman and CEO: It will be a combination. We have been acquiring bulk MSRs for 20 years and expect this to continue. Opportunities like Flagstar will also present themselves over time.
Q: How are you preparing for increased recapture volume in your origination capacity?
A: Michael Weinbach, President: We are investing in the platform to be more scalable and efficient. We have added staff and are ready to ramp up quickly when rates move.
Q: How do you expect the Flagstar acquisition to impact your subservicing portfolio and overall business mix?
A: Michael Weinbach, President: The acquisition will bring us closer to our ideal 50-50 mix between owned and subservicing. We are excited about deepening relationships with existing partners and developing new ones.
Q: How will the Flagstar acquisition affect your MSR hedging strategy and liquidity?
A: Kurt Johnson, CFO: We will maintain a 75% hedge ratio and expect to have significant liquidity post-transaction. The acquisition will increase our MSR line capacity.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
