Q2 2025 Onity Group Earnings Call

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Good day, everyone and welcome to today's on and these groups second quarter earnings and business update. Call at this time, all participants are in a listen-only mode later. You'll have an opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing star and 1 on your telephone keypad.

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Thank you, Emma. Good morning, everyone and welcome to anity group. Second quarter 2025 earnings call. Please note that our earnings release and presentation are available on our website at anatrophic chair, president and chief executive officer, Glenn mesina and Chief Financial Officer Shaun O'Neal.

Ations and allocate resources.

Non-gaap measures should be viewed, in addition to, and not as an alternative for the companies reported Gap, results. A Reconciliation of these non-gaap measures to the most directly comparable, gaap measures and Management's reasons for including them. May be found in the press release and the appendix to the investor presentation. Now, I would like to turn the call over to Glenn Mina

Thanks Valerie. Good morning, everyone and thank you for joining our call.

We're looking forward to sharing a few highlights with the second quarter as well as review our strategy and financial objectives to deliver long-term value for our shareholders.

Let's get started on slide 3.

I want to start with 3 key themes today.

First for the second quarter, we delivered robust net income and continued to grow Book value demonstrating our sound strategy and High Caliber execution.

Second, our balance business is delivering sustainable results across Rich nation and servicing amid Market volatility.

Finally, we are reaffirming our annual adjusted ROE guidance, underscoring our commitment to strong shareholder returns.

Let's turn the slide for to review a few highlights for the quarter.

Despite volatile and unpredictable market conditions, we delivered steady financial performance. In the second quarter with gaap, net income attributable, to Common shareholders of 20 million or $2.40 per share, fully diluted reflecting an annualized Roi of 17%

Adjusted pre-teens income of 16 million is annualized and in an annualized adjusted, our we have 14% reflective 4 million unfavorable impact of Market volatility on originations revenue and margins, as well as increased MSR runoff from higher prepayments and reverse asset, fair value changes compared to Prior periods.

Average servicing UPB continued to grow steadily, fueled by year-over-year originations volume growth, which exceeded total industry originations growth for the same period.

And finally, Book value increased to $60 per share.

Up 5% versus prior year.

We believe the structural changes we've made to our business over the past several years, have positioned us to successfully and profitably navigate volatile and unpredictable market conditions.

Let's turn to slide 5 to discuss the market environment in the second quarter and our expectations for the balance of the year.

The second quarter unfolded consistent with the expectations. We discussed at our last earnings call.

We saw High Financial Market volatility in the early part of the quarter, which adversely impacted origination revenue and margins and increased MSR hedging costs for a brief period. Despite challenging market conditions. Urgent Nation volumes are strong and the Mortgage Bankers Association, refinance, application index was up 43% over prior year.

Another m&a transaction was announced with baby purchasing Guild and several economists improved, their outlook for the economy, versus the end of the first quarter.

Looking ahead. We're expecting continued, and straight, volatility and uncertainty.

The Mortgage Bankers Association and Fede May estimates for originations volume. Growth has been lowered to 14% year-over-year, largely due to interest rate, expectations and slower home sales

Refinancing opportunity will be tied to interest rates and consumers are likely to refinance at the earliest opportunity.

The longer rates, stay high, the more likely it is there will be continued industry consolidation and while the economy has been strong thus far the longer term picture is less clear.

We believe our balance business is well, positioned for this Dynamic Market environment. Including elevated interest rates and unpredictable periods of Market volatility.

And as always, we're maintaining agility to find opportunities to create value for shareholders.

Let's turn to slide 6 for more about our balance business.

We believe our scale in both servicing and originations enables us to perform well with high or low Industries.

As you can see, even with the sharp increase in interest rates from 2021, our total business is delivering improved performance driven today by our servicing platform.

as in 2021, if interest rates were to materially decline, We Believe industry, Rich Nations volume and margins would typically expand, while servicing runoff would increase

Used to deliver most of our earnings.

Given the current outlook for interest rates. We expect servicing will continue to be the predominant earnings contributor for 2025 with industry, originations volume projected to increase modestly.

Let's turn to slide 7 for more about our growth options.

We're continuing to drive growth in our total servicing portfolio, while executing prudent and opportunistic asset management.

We've been steadily, increasing our own MSR portfolio, consistent with our objectives to retain more msrs, to grow book, earnings and Book value, as well as reload our portfolio for recapture opportunity.

Ending total servicing in the second quarter is up approximately 5 billion dollars to 2% year-over-year with 36 billion in servicing editions, net of runoff more than offsetting opportunistic, asset sales and plan transfers to rhythm.

Dynamic asset management is an integral element of our strategy. And last year, both aneta and math, took advantage of the robust bulk Market to opportunistically. Sell msrs above our book value

In the case of the msrs on a t sold.

These were an instrumental component of our corporate debt refinancing strategy.

With respect to the assets, sold by math.

We recognized our prorata share of favorable, fair value realization. Commensurate with the 15% joint venture interest, we maintained at that time.

I believe our agility and ability to replenish the growth.

In the portfolio. While executing our asset management actions highlights the power of our original nation's capability and success of our growth strategy.

Please start to slide 8 to discuss originations growth.

In the second quarter, our Rich Nations team delivered 35% year-over-year growth versus the industry's 23% growth over the same period.

Origination drive replenishment and growth in our servicing, portfolio through all Market Cycles leveraging, an Enterprise sales approach to deliver our wide range of products, delivery, methods and services.

We've continuously invested in technology and process optimization to enhance the customer experience, reduce cost structure and improve scalability and competitiveness of our platform in both business to business and consumer direct channels.

We're launching new and upgraded products and services to expand our addressable Market opportunity. Provide access to higher margin market, segments, and create alternatives for our consumer, direct platform to maintain operating capacity for surges in refinancing activity.

To highlight how far we've come and originations the second quarter, 2025 funded, volume was almost equal to the level. We recorded in the second quarter 2021, with a market opportunity that was twice the size of the current market.

Now, please turn to slide 9 to discuss the progress you made in our recapture platform.

Our consumer direct team is continuing to improve our recapture capability to Industry, top tier performance levels. While working to ensure we maintain flexibility to address mortgage rate volatility.

As you can see on the left funded volume in our consumer, direct platform is up 2.4 times versus the second quarter of 2024. With administrate environment, that is not much different between the 2 periods.

Based on our refinance, recapture benchmarking for the quarter and the last 12 months, excluding home equity products.

We believe our platform is performing better than several of our public non-bank, third-party, origination focused peers and the ice reported average.

And for the second quarter, a refinance recapture rate is slightly above all, 3 of our peers.

Even more notable, our refinance recapture rate for the past 12 months where the previous loan was originated by our consumer. Direct channel is 88%.

This points out the significant upside and recapture as we continue to improve our first time, recapture capability.

To that end, we continue to invest in Talent technology, Predictive Analytics products and marketing to further improve our capability.

Let's turn the slide. 10 to discuss our servicing platform.

We've built a strong servicing platform and our team is delivering top tier performance on multiple dimensions.

Mortgages.

We've been recognized by Fannie Mae Freddy Mack and HUD for industry-leading serving performance.

And we again, compared favourably in the Mortgage Bankers, Association 2025 servicing cost study with our fully loaded servicing, operating expenses materially lower versus the large non-bank serer average for performing a non-performing loans.

Our continuous Improvement in customer experience is evidenced with high satisfaction ratings from our borrowers and sub-servicing clients.

Most recently, Fitch upgraded all 6 of our residential serving ratings in Moody's upgraded. Our second lean service, ratings following their upgrade of all of our forward serving ratings in 2023.

Fitch noted, the upgrades reflect are effective, Enterprise risk, management controls and processes, and continuous technology enhancements among other attributes.

While we are not the largest serer in the industry, we deliver top tier performance for customers and investors and we are positioned to fiercely compete with anyone regardless of size.

Let's turn the slide, 11 to discuss our technology strategy.

We've been investing across 4 categories of AI.

Robotics, natural language processing, vision, and machine learning.

To improve business performance and competitiveness on several dimensions.

Our technology Journey began almost 7 years ago with the replacement of our Core Business Systems, and transition of our infrastructure to a cloud-based environment to create a solid stable foundation for continued development.

We've cultivated our own robotic process automation center of excellence and Technology Innovation lab which supports projects of increasing size and complexity focused on 4D desired outcomes.

Drive cost leadership, accelerate revenue growth, maximize customer retention, and deliver superior operating performance.

I'm proud of what the team has accomplished through focused and purposeful investment to enable a highly competitive servicing. And origination platform, top tier refinance recapture performance and an improved customer experience.

We continue to utilize this.

Let's turn to slide 12 to see what we've accomplished and where we are taking our technology program.

We believe our AI Investments have delivered meaningful process performance, improvements creating value for all Audi stakeholders

Robotic process automation, optical character recognition and neural network. Based. Data extraction, have been deployed in over 190 processes. Completing the work of roughly 400 people saving approximately 57,000 hours per month of manual effort to your day.

We are leveraging machine learning and Predictive Analytics to predict bar Behavior, which helps us maximize retention.

And collections outcomes.

And 88% of our customer increased. This year have been resolved through our digital interface channels supported by natural language processing and gen AI.

Our vision for the future of AI. And our business is to integrate robotics large language models, and machine learning across all operations to eliminate inefficiencies reduce cost and Elevate accuracy.

Transforming every process with data-enabled intelligence and unifying operations under a single AI driven framework where every process is optimized.

Every decision is data informed and every outcome is superior.

The opportunity here is exciting.

And the potential impact is incredibly powerful.

Now, I'll turn it over to Sean to discuss our results for the quarter in more detail.

Thanks Glenn. Please turn to slide 13 for a recap of our net income.

2025 continues to be a strong year for us, and you can see that with net income up 2 times year-over-year and GAAP return on equity of over 7% for the second quarter.

Our adjusted return on Equity was 14% and we'll discuss that on the following slide.

Our ability to deliver steady net income at an approximately 3 dollars to book value per share year-over-year.

We continue to add scale to our servicing platform, and grew our originations business in an uncertain, interest rate and geopolitical environment.

Please turn to slide 14 for a historical trend of our adjusted pre-tax income, which is positive for the 11th, straight quarter.

Are due to several factors.

First, we added about 7 million dollars of pre-tax income from both growth and owned msrs and from lower debt. Interest expense resulting from our 2024 debt restructuring,

Offsetting those gains was the absence of a 15% Equity return on Mass.

April volatility is impairing origination margins and the fair value mark on reverse servicing assets.

Finally MSR runoff was higher than a year ago partially due to higher prepayment speeds. This component, of runoff was approximately 8 million higher than a year ago.

The year to date, adjusted Roe is 17.9% at the upper end of our 2025 guidance. We continue to maintain our adjusted Roe guidance at 16 to 18% for full year 25.

As discussed, Gap ROE was 17%, and the appendix has a walk from net income to adjusted PTI to help you understand the differences.

Now, let's turn to slide 15 for the pre-tax income results on our origination segment.

Originations adjusted PTI with slightly lower year-over-year, driven primarily by the interest rate volatility we experienced in April that impacted our originations profitability by over 4 million dollars.

Consumer direct continued another strong quarter of recapture results. This quarter our recapture rate outpaced. Our closest peers.

We also saw higher lot, volume versus last year and continued strong performance in the improved closed. And second product that we launched in the first quarter.

Reverse a ridge, maintain profitability amid an uncertain interest rate environment where higher rates for an extended period have limited. The amount of benefit a reverse borrower can realize on a new loan,

Overall, we're pleased with the performance of our originations business. We continue to operate profitably in a variety of rate environments.

Slide 16 gives you the volume and margin review of the origination segment.

The left side shows improved volumes for the consumer Direct in B2B origination channels on a sequential quarter and year-over-year basis with flat to declining margins. Reverse experience, lower volume on Lower margins, but was still able to deliver a profitable quarter.

consumer directs recapture was helped both by better data analytics and improved processes to better connect loan officers with borrowers interested in refinancing

The graphs on the right show, the extreme impact that market volatility had in the month of April where pronounced dip and margins. In the various channels, drove a $4 million Revenue impact in that month. Alone absent, the extreme Market volatility. Originations would likely have posted a growth quarter versus a slight decline.

Please turn to slide 17 for the servicing segment performance.

Our servicing segment remained, a solid contributor to adjusted pre-tax income with 31 million for the quarter.

Board servicing, experienced a growth in average upb with higher Revenue, both sequentially.

Both sequentially and year-over-year. The revenue lift from servicing growth was offset by higher runoff in Q2 driven by more owned MSR and higher prepaid speeds.

While reversing pre-tax income declined in the quarter, primarily driven by the negative. Valuation adjustments on reverse fee out loans. The reverse Channel continues to help us in a number of ways. It delivers scale to our servicing platform. It typically provides a cost-effective hedge to Ford MSR, it adds to the breadth of our product Suite, which helps attract and retain correspondent clients.

It provides us with operational, expertise to acquire assets. That generate, significant liquidity on subsequent securitizations on our olet Shelf.

And as a reminder reverse servicing has been profitable 12 of the 13 quarters prior to this quarter.

With respect to delinquency our own MSR portfolio. Exhibited improved delinquency stats. In the second quarter, both sequentially and year-over-year. There's an MSR valuation page in the appendix, on page 25, with more details.

Finally, we continue to pursue new sub-servicing clients and anticipate sub-servicing additions over the next 4 quarters.

Please turn to slide 18 for an assessment of our improved hedging performance.

Our MSR hedge strategy, continues to perform well and as intended, our strategy is designed to mitigate interest rate risk and our hedge has been affected and minimizing the impact of interest rates on our MSR valuation. As you can see in the graphs,

Over the last 2 plus years, we have increased, our hedge coverage ratio such that. By the end of 2023, we were seeking to hedge, the majority of our interest rate risk.

Versus our peers who had just significant portion of their book.

Given that an MSR hedge is dependent on interest rate, markets, and related derivative markets.

We frequently review and assess our head strategy to manage risk, and optimize liquidity in returns as such we adjusted our hedge Target.

To 80 to 100% range. Following the April Market volatility and we were pleased with the quarterly results. We will continue to assess our head strategy going forward as we have done in the past.

On slide 19. We continue to confirm our guidance for 2025.

Our financial objectives remain unchanged, and following another strong GAAP net income quarter, we are maintaining the guidance we provided for Q2 2025. Details are shown here.

Note that our adjusted ROE guidance is not dependent on the release of some or all of the valuation allowance. It offsets our deferred tax asset but is rather driven by our view of the strength of our operating businesses.

Overall, I'm pleased to report another good quarter the group book value for share and delivered. A continued strong return on equity for our shareholders, back to you bud.

Thanks, Sean.

Let's turn to slide 20 for a few comments before we open the call for questions.

For the second quarter, we delivered sustained robust net, income and Book value growth demonstrating our sound strategy and High Caliber execution.

our balance business is delivering steady results across the rich nation and servicing amid Market volatility, and we're reaffirming our annual adjusted, re guidance underscoring our commitment to strong shareholder returns

We believe the changes we've made to our business over the past several years have positioned us to successfully and profitably navigate volatile and unpredictable market conditions.

Our execution is driven by our experienced business team who are relentlessly focused on delivering on our commitments and providing excellent service to our customers.

All this comes together to suggest a share price that we believe has significant upside.

And we can to continue to take the necessary actions and maintain agility in a dynamic Market to harvest that value for the benefit of all shareholders.

Overall, we could not be more optimistic about the potential for our business.

With that Emma. Let's open up the call for questions.

At this time, if you would like to ask a question, please press star 1 on your telephone keypad, you may remove yourself from the Queue at any time by pressing star 2 once again, that is star N1 to ask a question. We'll take our first question from Bose George with KBW.

Hey guys. Good morning. Um, actually, first just one on expenses. There was a dip in the Professional Services line item quarter over quarter. Can you remind us, was there something unusual last quarter, and are the expenses this quarter fairly normalized?

Morning BS. Um, Sean, you want to take that?

Sure.

Um, Bose, the professional expenses can, uh, vary occasionally based on either. Um, setting up financing structures where we're paying legal fees or other, you know, litigation activities that could either wax or Wayne. Um, there's nothing particularly, um, significant I think in the change that you're looking at,

Okay, great. Thanks. And then actually just a couple on the Deferred tax asset, can you just walk through the variables? That determine, you know, whether all of it comes back or some of it comes back. Um, and then from a, from a credit, a counterparty standpoint, your Capital obviously increases do counterparties, see your Capital levels as being, um, you know, improved, once I deferred tax asset increases your Equity or do, they kind of look through that?

Sure. Um I'll do it in reverse order. Um you know basically uh as the Deferred access as the Deferred tax asset flows through and hits the equity as you just described. Um that's kind of been normalized view of any Corporation.

And so we expect that most counterparties will view that as an improvement in total um total Equity or Book value. Um, with respect to the various components that we have to assess before we make a decision on the um,

Degree of the valuation allowance that is lifted.

Uh, the the simplest thing to do is look at the various deferred tax asset lines, that sit in our k. Um, we only update it once a year. So the 2024 K has, um, all the DGA components and you know, there you can see the various aspects that we have to do analytics on um, as part of a tax planning process. So I can't really go into the details of each line item.

Unremarkable. And then the other line items are where the variation can occur.

Okay. Actually, there's 1 more in the DTA is that do do they expire or, or most of them, sort of indefinite.

Um, some of the, the the bulk of our federal nols are indefinite uh their post 20000, um end of 2017. When the last tax law changed, the the timing of nols uh some of the state.

um,

nols will expire over time. Uh, they're also used on a fifo.

Basis, so um, we typically anticipate, we can use those prior to any expiration.

Okay, great. Thanks.

As a reminder, that is star 1 to ask a question. We'll take our next question from Randy Binner with B. Riley Securities.

Hi, thank you for the question. This is Tim digest, you know, on for Randy dinner.

On m&a. Um we think of Guild as more origination focused, do you have a view on m&a activity in uh in servicing? Thank you.

Uh, Hey Tim. So, uh, yeah, look, I I do think for, you know, if you look over the past 2 years, maybe 3 years, there's been some of the balance in m&a, activity between, you know, some servicing platforms that have gone up for sale, where people have essentially purchased them for scale and just adding either MSR for sub-servicing upb. Um, but I think, as we know, as you know, the higher, um, interest rates

Uh, stay for a longer. Does put pressure on a rich Nation, Focus shops and you would expect to see some consolidation there. Um, you know, look in terms of whether or not there will be continued m&a in the servicing sector

Is really going to be a function of the supply demand of uh, you know, Supply demand for servicing and the marketplace and the extent that the bulk markets, continue to be robust with a large influx of msrs that reasonable prices. Um, you know, I I think people who are looking to continue to grow servicing, scale would look to the bulk Market to the extent that that volume diminishes. You know, then I think you may be able to see, um, you know, and and demand just a high for for msrs and or servicing assets, you'll continue to see some level of m&a activity on the servicing side. But, you know, it's a trade-off between. Do you do m&a, or do you go to the bulk Market fundamentally? Um, that really is the is

And so I think people are looking at the industry.

Okay, thank you so much for the call. That's it for me.

Great. Thanks. Tim.

Once again, that is star 1 to ask a question, we'll pause a moment to ask questions to queue.

It appears there are no further questions at this time. I will now turn the program back over to Glenn for closing remarks.

Thanks, Emma. And I'd like to thank our shareholders and key business partners for supporting our business. And I'd also like to thank and recognize the board of directors and Global business team for their hard work and commitment to Our Success. I look forward to updating everyone on the call on our progress on the next quarter earnings call. Thank you.

This desk conclude today's program, thank you for participation. You may disconnect at any time.