Mr. Cooper Group(COOP) - 2023 Q2 - Quarterly Report

Report Overview This document is the Quarterly Report on Form 10-Q for Mr. Cooper Group Inc. for the quarterly period ended June 30, 2023 - This document is the Quarterly Report on Form 10-Q for Mr. Cooper Group Inc. for the quarterly period ended June 30, 2023[67][80] - The company's common stock is traded on The Nasdaq Stock Market under the symbol COOP[67] - As of July 20, 2023, 66,848,546 shares of common stock were outstanding[439] PART I: FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for Mr. Cooper Group Inc. as of and for the periods ended June 30, 2023, and 2022, along with detailed notes on accounting policies and financial details Condensed Consolidated Balance Sheets Total assets increased to $13.14 billion as of June 30, 2023, from $12.78 billion at year-end 2022, primarily driven by a rise in Mortgage Servicing Rights (MSRs) and Advance, warehouse and MSR facilities, with total liabilities also growing to $9.07 billion from $8.72 billion Condensed Consolidated Balance Sheet Highlights (in millions) | Balance Sheet Item | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $517 | $527 | | Mortgage servicing rights at fair value | $7,149 | $6,654 | | Total assets | $13,144 | $12,776 | | Liabilities | | | | Advance, warehouse and MSR facilities, net | $3,512 | $2,885 | | Unsecured senior notes, net | $2,676 | $2,673 | | Total liabilities | $9,065 | $8,719 | | Total stockholders' equity | $4,079 | $4,057 | Condensed Consolidated Statements of Operations For Q2 2023, net income was $142 million ($2.07 diluted EPS), compared to $151 million ($2.03 diluted EPS) in Q2 2022, while six-month net income significantly decreased to $179 million in 2023 from $809 million in 2022 due to prior-year gains Consolidated Statement of Operations Summary (in millions, except per share data) | Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $486 | $599 | $816 | $1,651 | | Total expenses | $278 | $328 | $539 | $666 | | Net income | $142 | $151 | $179 | $809 | | Diluted EPS | $2.07 | $2.03 | $2.57 | $10.74 | Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2023, net cash from operating activities sharply decreased to $149 million from $2,582 million in the prior-year period, while investing activities used $576 million and financing activities provided $412 million Net Cash Flow Summary (in millions) | Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Operating activities | $149 | $2,582 | | Investing activities | ($576) | ($885) | | Financing activities | $412 | ($2,109) | | Net decrease in cash | ($15) | ($412) | Notes to Condensed Consolidated Financial Statements The notes detail significant corporate activities, including acquisitions and a change in MSR valuation method, alongside accounting policies and breakdowns of key financial instruments and segment data - In Q2 2023, the company acquired certain assets from Rushmore Loan Management Services for $34 million, accounted for as an asset acquisition[91] - The company entered into a merger agreement to acquire Home Point Capital Inc. in May 2023, with the transaction expected to close in Q3 2023[113] - Beginning in Q2 2023, the company changed its valuation method for MSRs and excess spread financing from a static discount rate to a stochastic Option Adjusted Spread (OAS) model[175][202][126] MSR Portfolio by Investor Pool (in millions) | Investor Pool | UPB (June 30, 2023) | Fair Value (June 30, 2023) | | :--- | :--- | :--- | | Agency | $431,876 | $6,848 | | Non-agency | $27,600 | $301 | | Total | $459,476 | $7,149 | Management's Discussion and Analysis (MD&A) Management discusses the company's financial performance, strategic initiatives, and market trends, providing a detailed breakdown of segment results and an analysis of liquidity and capital resources - Strategic priorities include growing the servicing portfolio to $1 trillion in UPB, achieving a 60% refinance recapture rate, and strengthening the balance sheet[251] - The company anticipates continued strong earnings from the Servicing segment, supported by portfolio growth, including the pending acquisition of Home Point Capital's $84 billion UPB portfolio[224] - The Originations segment is expected to operate at lower profitability levels in the second half of the year due to high mortgage rates and seasonality[252] Servicing Segment Results The Servicing segment's income before tax was $243 million in Q2 2023, up from $226 million in Q2 2022, driven by a larger portfolio of $882 billion UPB, despite lower mark-to-market gains on MSRs Servicing Segment Performance (in millions) | Metric | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Total revenues | $368 | $395 | | Total expenses | $159 | $143 | | Income before tax | $243 | $226 | - The total servicing portfolio UPB increased to $882.0 billion at June 30, 2023, from $803.6 billion at June 30, 2022[292] - 60+ day delinquency rates improved, decreasing to 2.0% of loans at June 30, 2023, compared to 2.7% at June 30, 2022[317] Originations Segment Results The Originations segment reported income before tax of $38 million in Q2 2023, down from $62 million in Q2 2022, primarily due to lower funded volume of $3.8 billion amidst high interest rates, though refinance recapture rate increased to 79.9% Originations Segment Performance (in millions) | Metric | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Total revenues | $97 | $182 | | Total expenses | $59 | $125 | | Income before tax | $38 | $62 | Originations Key Metrics (in millions) | Metric | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Funded volume | $3,822 | $7,767 | | Recapture percentage | 23.5% | 29.2% | | Refinance recapture % | 79.9% | 59.7% | Liquidity and Capital Resources As of June 30, 2023, the company held $517 million in cash and cash equivalents with $10.75 billion in total available borrowing capacity, having repurchased 3.3 million shares for $146 million during the first six months of 2023, while remaining in compliance with all financial covenants - Cash and cash equivalents were $517 million as of June 30, 2023, with total available borrowing capacity of $10.75 billion, and $1.78 billion immediately available[3] - During the first six months of 2023, the company repurchased 3.3 million shares of common stock for a total cost of $146 million[3][109] - The company was in compliance with its seller/servicer financial requirements for FHFA and Ginnie Mae as of June 30, 2023[373][339] Market Risk Disclosures The company's primary market risk is interest rate risk, which affects MSRs, mortgage loans, and derivatives, leading to an increased MSR hedge ratio to 75% as of June 30, 2023, with a hypothetical 25 basis point rate increase resulting in a $4 million net decrease in fair value - The company increased its target hedge ratio on the net duration risk of its MSR portfolio from 25% at year-end 2022 to a target of 75% as of June 30, 2023, to mitigate risk in a declining rate environment[421] Interest Rate Sensitivity Analysis (in millions) | Hypothetical Rate Change | Change in Fair Value of Assets | Change in Fair Value of Liabilities | Net Change | | :--- | :--- | :--- | :--- | | Down 25 bps | ($72) | ($69) | ($3) | | Up 25 bps | $64 | $68 | ($4) | Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2023, the company's disclosure controls and procedures are effective at a reasonable assurance level[58] - No changes occurred in the company's internal control over financial reporting during the three months ended June 30, 2023, that have materially affected or are likely to materially affect internal controls[37] PART II: OTHER INFORMATION Legal Proceedings The company is involved in routine legal proceedings, with management estimating an aggregate reasonably possible loss of $2 million to $4 million in excess of accrued liabilities as of June 30, 2023, not expecting a material adverse effect on financial position - The company recorded legal-related expenses of $12 million and $21 million for the three and six months ended June 30, 2023, respectively[185] - Management estimates the aggregate range of reasonably possible loss for legal matters is $2 million to $4 million in excess of any accrued liability as of June 30, 2023[185] Risk Factors There have been no material changes or additions to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes to risk factors from the Annual Report on Form 10-K for the year ended December 31, 2022 have been reported[404] Share Repurchases During Q2 2023, the company repurchased 1.212 million shares for $57 million, with $67 million remaining under the October 2022 authorization, and an additional $200 million authorized in July 2023 Share Repurchases for Q2 2023 (in thousands, except price) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2023 | 0 | $0.00 | | May 2023 | 616 | $45.46 | | June 2023 | 596 | $48.54 | | Total | 1,212 | N/A | - In July 2023, the Board of Directors authorized an additional $200 million for the company's stock repurchase program[428] Other Information On June 14, 2023, Chairman and CEO Jay Bray entered into a pre-arranged stock trading plan (Rule 10b5-1) to sell up to 300,000 shares of company common stock between September 2023 and September 2024 - CEO Jay Bray entered into a Rule 10b5-1 trading plan to sell up to 300,000 shares of common stock[430] Exhibits This section lists the exhibits filed with the 10-Q report, including various loan and security agreements, amendments, and officer certifications - Exhibits filed include the Agreement and Plan of Merger with Home Point Capital Inc., various amended loan and security agreements, and certifications by the CEO and CFO[431][64] Glossary of Terms Glossary This section provides definitions for industry-specific and company-specific terms used throughout the report, such as Mortgage Servicing Right (MSR), Unpaid Principal Balance (UPB), Ginnie Mae (GNMA), Fannie Mae (FNMA), and various types of servicing advances and loan products - Defines Mortgage Servicing Right (MSRs) as the right and obligation to service a loan and receive a servicing fee[48] - Defines Servicing Advances as funds advanced by the servicer for principal, interest, taxes, and insurance on behalf of borrowers, which are reimbursable[30][419] - Defines Unpaid Principal Balance (UPB) as the amount of principal outstanding on a mortgage loan, used to estimate future revenue for a servicer[397]