Good day everyone and welcome to this Onity Group’s Second Quarter Earnings and Business Update Conference Call. At this time all participants are in a listen-only mode but later you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note today's session is being recorded and I'll be standing by should you need any assistance. It is now my pleasure to turn today's program over to Senior Vice President of Corporate Communications, Dico Akseraylian. Please go ahead, sir.

Good morning and welcome to Onity Group's Second Quarter Earnings Call. Please note that our earnings release and presentation are available on our website at onitygroup.com. Speaking on the call will be Chair, President, and Chief Executive Officer; Glen Messina, and Chief Financial Officer, Sean O'Neil. As a reminder, our comments today may contain forward-looking statements made pursuant to the Safe Harbor provisions of the federal securities laws. These statements may be identified by reference to a future period or by use of forward-looking terminology and address matters that are uncertain. Forward-looking statements speak only as of the date they are made and involve assumptions, risks, and uncertainties, including those described in our SEC filings. In the past, actual results have differed materially from those suggested by forward-looking statements, and this may happen again. In addition, the presentation and our comments contain references to non-GAAP financial measures, such as adjusted pretax income. We believe these non-GAAP measures provide a useful supplement to discussions and analysis of our financial condition because they are measures that management uses to assess the performance of our operations and allocate resources. Non-GAAP measures should be viewed in addition to and not as an alternative for the company's reported GAAP results. A reconciliation of these non-GAAP measures to their most directly comparable GAAP measures and management's reasons for including them may be found in the press release in the Appendix to the Investor Presentation. Now I will turn the call over to Glen Messina.

Thanks, Dico, and good morning, everyone and thanks for joining our call. We're looking forward to sharing a few highlights for the second quarter and reviewing our strategy and financial objectives to deliver long-term value for our shareholders. Please turn to Slide 3. I'll begin with three key themes today. First, we delivered strong and compelling financial performance in the second quarter. We reported our seventh consecutive quarter of improved adjusted pre-tax income and the highest level in 11 quarters. We also continue to deleverage, increase book value, and deliver year-to-date return on equity on both a GAAP and an adjusted basis that is well above our target. Second, this quarter is the clearest demonstration yet that our strategy and financial objectives are sound and our ability to execute and deliver results is consistent and strong. Finally, we believe with the continued execution of our strategy and financial objectives, positions Onity to close the valuation gap to our peers and analyst price targets. And that would translate into substantial value creation for our shareholders. Let's start to explore the second quarter in more detail on Slide 4. Our financial highlights for the quarter reflect improved performance across many of our key financial metrics. We reported adjusted pre-tax income of $32 million, which results in an annualized adjusted ROE of 28%. Both metrics have materially improved on a sequential quarter and year-over-year basis driven by strong performance in both servicing and originations. We reported net income of $11 million and GAAP ROE of 10%. These results include heightened hedge costs from significant interest rate volatility. Average servicing and subservicing UPB increased on a year-over-year and sequential quarter basis, driven by $19 billion of total servicing additions for the quarter. We continue to focus on driving capital-light growth while we increased MSR…

Thank you, Glen. Please turn to Slide 8 for second quarter financial performance. This was a strong sequential quarter for financial results, both GAAP and adjusted pre-tax income. We continued the positive themes from the first quarter with both our servicing and origination businesses, extending their profitable trend. This resulted in a much increased adjusted pre-tax income as well as a positive GAAP net income in growth and book value per share this quarter. Starting with the blue column to the right of the table, GAAP net income was positive $11 million versus the prior quarters $30 million. Operational performance, as reflected in our adjusted PTI, was up $32 million for the quarter, driven by outperformance in both servicing and originations. Our MSR valuation adjustment net of hedge somewhat offset our strong adjusted PTI, but we had robust returns with a 10% GAAP ROE and an adjusted pre-tax ROE of 28%. Other key shareholder metrics include diluted earnings per share of $1.33 and $1.37 increase in book value per share to approximately $57. I'd like to point out that over the last two quarters our book value per share has grown an impressive $4.59, or 9%. Total liquidity remains strong in the quarter, ending at over $230 million. Finally, total servicing UPB grew by about $14 billion, bringing the quarter average to $305 billion. Please turn to Slide 9. The second quarter was another sequential quarter improvement in adjusted pre-tax income and adjusted ROE, reflecting the execution of our strategy and financial objectives. Our financial objectives start with sustained adjusted pre-tax income performance and reduced earnings volatility. Next, we focus on improving ROE and capital ratios, including de-leveraging metrics. Finally, we capitalize on market cycle opportunities. This can range from selling or buying MSRs at the right time to some…

Thanks, Sean. I'd ask everybody now to please turn to slide 16. The Financial results Sean just covered are powerful, and a direct result of our actions to transform the business. Our evolution starts with our culture, our people, and focusing on our mission, which is to create positive outcomes for homeowners, clients, investors, and communities. For those not as familiar with the company, our actions are guided by our five-point strategy and our financial objectives. Balance and diversification to deliver strong financial performance through interest rate cycles. Prudent capital-light growth to reduce capital demand and interest rate risk exposure. Industry-leading cost structure to enhance our competitiveness, value proposition, and financial performance. Top-tier operating performance and capabilities to enable positive outcomes for borrowers, clients, and investors and improve the customer experience. And dynamic asset management to enhance earnings and cash flow. Our financial objectives remain consistent, sustaining adjusted pre-tax income performance through growth and continuous cost improvement, reducing earnings volatility associated with MSR fair value changes, improving return on equity and capital ratios by reducing debt and driving capital-light growth, and capitalizing on market cycle opportunities to enhance cash flow and returns. I'd like to briefly discuss how these strategies drive our performance and create value for shareholders starting on slide 17. Our continued focus on balance and diversification positions us to operate profitably in both high and low interest rate environments. For instance, while Originations today is a modest earnings contributor, in 2021 when interest rates were lower, Originations drove our earnings. As interest rates have risen, profitability and servicing has increased, offsetting the contraction in origination earnings. This balance between origination and servicing positions our business to deliver strong, consistent financial performance through interest rate cycles. Let's turn to Slide 18 to review our originations capabilities. With the…

Mr. Messina, I’d be happy to do. Thank you. [Operator Instructions] We'll hear first today from Bose George at KBW.

Hi, everyone good morning. I wanted to start with just a question on leverage. So you spoke about potential transactions over the next few quarters that could reduce leverage further. Would they look sort of like the preferred Waterfall? Could you see MSR sales where you switch that to subservicing? Or just give us a little color on what some of these could look like. Thanks.

Good morning Bose. Yeah. Some of the transactions we are thinking about are really more in the asset management realm. So it's more of executing similar asset management transactions we've done in the past which have been great cash flow generators for the business, and we have been able to use that cash flow to help delever our corporate debt.

Okay. That makes a lot of sense. Thanks. And then just switching over to the Waterfall deal, a couple of little questions. What's the step-up after year five on the coupon?

Yes. Sean, do you want to take those questions? Sean O’Neil: Sure thing. Yes, Bose the step-up is 2.5% per year.

Per year. Okay. And then just on the MSR that you'll be acquiring, what's the unlevered yield? And then what's in general, on the reverse, how does the returns on that compared to the forward servicing? Sean O’Neil: In terms of reverse servicing, the returns are very strong. It just happens to be a smaller business. It's a smaller pool of either subservicing candidates or just fewer assets to originate and own. So as you can imagine, there is a correspondent and a broker market on the originations reverse side that we do participate in to acquire the reverse MSRs, but that doesn't have quite the volume that the forward market has, continues to be profitable for us. And then what was the question more specifically on just the Waterfall transaction within reverse?

Yes, just the expected, sort of the way to think about the return on that, either ROE return on the asset or you just ways to think about the return from that deal? Sean O’Neil: We haven't disclosed any returns yet because we are waiting for the deal to close and receive final valuation on both the assets and the preferred, but we expect that it will be a strong return, as I mentioned it is both accretive to cash and earnings per share.

Okay. Great. Thank you.

Bose, maybe to help you frame that a little bit. As we think about target returns and yields that we are seeing in the marketplace generally, GSE MSRs are probably in the 9% to 10% range, Ginnie Mae's in the 11% to 12% range. And your reverse servicing tends to be a little bit higher than Ginnie's around 12% to 13%. So that is how we see the economics based on our economic modeling assumptions.

Okay. Great. Very helpful. Thanks again.

Next we'll hear from the line of Derek Sommers at Jefferies. Please go ahead.

Hi, good morning everyone. I was wondering if you could talk about the growth you guys saw in the correspondent co-issue originations, maybe kind of break that down between what was correspondent and what was co-issue and then kind of also seeing some pretty healthy incremental margins there and talk about those dynamics as well.

Yes. I will provide some high-level comments then, Sean, I know you've got a page in the appendix, you can take us through some of the details on the specific channel details. But Derek, we saw -- yes the origination team did a great job in the second quarter, 55% increase in MSR originations volume. The B2B channels for us have been a core staple for our business. We do pretty much everything in the correspondent space, mandatory best efforts, non-delegated and we participate in the MSR exchanges, SMP, CRX and Ginnie Mae pit. And our approach is, look, we are on a relative basis, agnostic to the delivery channel. Our customer wants to deliver product to us through. And if it makes more sense for them to go through the MSR exchange, it's great. If they want to go through mandatory best efforts non-del. Great, then we'll support that as well, too. So it's all part of a comprehensive strategy to meet the customer at the place where they want to transact and do business. Sean, maybe you could take us through some of the details on originations? Sean O’Neil: Sure thing. Good morning Derek. If you look at Page 26, you'll see -- we don't split out volumes between co-issue and correspondent. But you can see collectively that we just call that B2B or business-to-business. You can see collectively that, that channel increased substantially both in volume and in margins. So it's not like we were paying up to get more volume. We just have a pretty deep and broad range of corresponding clients that we work with, and we also participate heavily in the various agency MSR exchange markets. Obviously, the co-issue just results in an MSR moving over. So you can also look at funded volume on loans and make some inferences from that as well.

Got it. Thank you. And then just staying on Page 26, is there any kind of color you guys could give on kind of run rates for August and the consumer direct channel have been trending? It seems like the 30-year rate is starting to cooperate with us a little bit.

Generally for Consumer Direct, look, the team has done a great job. As you can see by quarter, they've been inching up their performance from a funded volume perspective. And look we laid out in our investor presentation, we've got portions of our portfolio stratified by note rate band. And assuming that the average consumer typically is willing to refinance it with a 50 basis point incentive our team is poised and ready to go. So as mortgage rates are coming down, our team is on it. And they are engaging with customers and doing everything they can to drive higher and better recapture rate, which is already performing at 1.7 times the industry average. And again, we think there's upside to industry best practice levels.

Got it. Thank you for the color. That’s all from me.

Our next question today comes from Eric Hagen at BTIG.

Amortization expense on the servicing portfolio in the quarter. Do you have that handy?

Eric, your -- the first part of your question, it was chopped off. We didn't get your full question.

Looking for the amortization expense on the MSR portfolio in the quarter, if you guys have that handy?

Yes, Sean do you have that handy it may have been in our press release. Eric, MSR valuation adjustments net for June 30, 2024 was $32.7 million.

Okay. Yes, looking for the -- just the cash flow amortization expense portion of that. But maybe we could switch to like how you guys are hedging the MSR portfolio for lower rates? I mean do you feel like there is a lot of mark-to-market risk in the MSR, if the Fed does cut rates? How does the outlook for MSR volatility maybe change your outlook for buying back the debt that you guys are focused on doing. Thank you.

Yes. Eric, as you know we continue to target a relatively higher hedge coverage ratio than we have in the past. We are still operating in that 90% to 110% range, with an eye towards falling rates. We want to protect book value and hedge that MSR as tightly as we can. We're evaluating our hedging strategy continuously to optimize the basket of instruments and make sure that we're maintaining that strong hedge performance. Generally speaking, I'd say we are still seeing bids in the MSR bulk market that are at or above the [kind of bear] (ph) for MSR. And that's as recently as trades that occurred this past week, quite frankly. So I don't know that we're actually seeing any degradation in market levels of MSR pricing with the prospect for declining rates. So that's not something we are necessarily concerned about here in the very near term. Yes. So we -- again, I think we've got good hedge coverage, good hedge protection. And we've got a recapture platform that's outperforming industry average by a wide margin with, I think good upside potential.

Yes, that's helpful. Following up on the leverage. I mean, do you have a target leverage range in mind as you repurchased some of the unsecured debt? And with the leverage -- would that range maybe change if rates were lower? Or how do you see that range kind of evolving with rates?

Yes. So obviously, we consider our leverage targets in the context of what's happening in the overall market. Right now our objective is to continue to drive the leverage down to peer normative levels. Look, it takes time to get there. We recognize that. I think we've delivered substantive progress in a very short period of time and hit our target -- our near-term target about mid-year and demonstrated that with a Waterfall transaction we could drive it even lower. And as Sean mentioned, we are considering additional transactions to drive the leverage even lower. I think as you know, a large portion of our capital structure, actually the largest portion of our capital structure is not really corporate debt, either the Onity Group debt or the PHH debt, it really is MSR financing. And MSR financing will decline as MSR values decline, and that's one of the reasons why we hedge. And we hedge with a high hedge coverage ratio, so that it's fundamentally any -- the design is such that any margin calls in MSR that is offset by cash proceeds from our hedge and our derivatives. So the derivative portfolio basically will help fundamentally pay back and deleverage the MSR debt.

Okay. That’s very helpful.

[Operator Instructions] And we have no signals from our phone audience. I'd like to turn it back to the Onity leadership team for any additional or closing remarks.

Great. Jim, thanks so much. And look, I would like to thank our shareholders and key business partners for their support of our business. I'd also like to thank and recognize our Board of Directors and Global Business team for all their hard work and their commitment to our success. And I look forward to updating everyone on our progress on our next quarter earnings call. Thank you.

Ladies and gentlemen, this does conclude today's teleconference and we do thank you all for your participation. You may now disconnect your lines, and have a great day.