Onity Group Inc. Q2 FY2025 earnings call

• Second quarter delivered robust net income and continued to grow book value, demonstrating sound strategy and high-caliber execution.
• Balanced business is delivering sustainable results across origination and servicing amid market volatility.
• Reaffirming annual adjusted ROE guidance, underscoring commitment to strong shareholder returns.
• Continuing to drive growth in total servicing portfolio while executing prudent asset management, steadily increasing owned MSR portfolio.
• Originations team delivered 35% year-over-year growth in Q2 versus industry's 23% growth, leveraging enterprise sales approach and investing in technology/process optimization.
• Consumer Direct team improving recapture capability, with refinance recapture rate for past 12 months from own channel at 88% and continuing to invest in talent, technology, etc. to improve capability.
• Servicing platform built strong, recognized by multiple entities for top-tier performance, with lower servicing operating expenses versus large nonbank servicer average.
• Investing in AI, robotics, etc. across 4 categories to improve business performance and competitiveness, with AI investments delivering process improvements.

Originations segment: Second quarter Originations adjusted pretax income was slightly lower year-over-year, primarily driven by interest rate volatility in April that impacted origination profitability by over $4 million. Consumer Direct continued strong recapture results, with the refinance recapture rate for the past 12 months where the previous loan was originated by the consumer direct channel at 88%. Servicing segment: The servicing segment remained a solid contributor to adjusted pretax income with $31 million for the quarter. Forward servicing experienced growth in average UPB with higher revenue both sequentially and year-over-year, but the revenue lift was offset by higher runoff in Q2. Reverse servicing pretax income declined in the quarter primarily due to negative valuation adjustments on reverse buyout loans, but the reverse channel provides scale, cost-effective hedge, product suite breadth, and operational expertise.

• 2025 adjusted ROE guidance maintained at 16% to 18%.
• Second quarter adjusted ROE was 14%, year-to-date adjusted ROE at 17.9% which is at the upper end of the 2025 guidance.
• Maintaining financial objectives unchanged following strong second quarter net income.

• Market volatility may impact origination revenue and margins.
• Uncertainty in interest rate volatility could affect refinancing opportunities and industry consolidation.
• Uncertainty regarding the valuation allowance of deferred tax asset.

Q: 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?

A: The professional expenses can vary occasionally based on setting up financing structures, paying legal fees or litigation activities which could wax or wane. There's nothing particularly significant in the change, and expenses this quarter are fairly normalized.

Q: On M&A, we think of deal as more origination focused. Do you have a view on M&A activity in servicing?

A: Look, over the past 2 - 3 years, there's been a balance in M&A activity between servicing platforms. As higher interest rates stay longer, it puts pressure on origination - focused shops and we'd expect some consolidation there. M&A activity in servicing depends on supply - demand in the marketplace. If bulk markets continue to be robust with large influx of MSRs at reasonable prices, those looking to grow servicing scale would look to the bulk market. If bulk market volume diminishes and demand for MSRs and servicing assets is still high, some M&A activity on the servicing side will continue, but it's a trade - off between M&A and bulk market.