Mr. Cooper's earnings soar on Flagstar asset acquisition

Mr. Cooper more than doubled its net income under standard accounting principals in the fourth-quarter with mark-to-market adjustments favoring it this time around, and significant year-over-year growth in the unpaid principal balance of loans it services.

The company earned $204 million in the period, outpacing the S&P Capital IQ consensus estimate of $174.37 million. The previous fiscal period, Mr. Cooper earned $80 million, and for the year-ago fourth quarter, the company recorded $46 million in net income. For the full year, Mr. Cooper recorded $669 million in earnings, exceeding an estimated $639.37 million.

The contrast in earnings over time reflects growth in its servicing portfolio to nearly $1.56 trillion in UPB as it closed on its Flagstar asset acquisition, and favorable quarterly adjustments to valuations. Portfolio size was up 26% in the quarter and 57% compared to a year ago.

"This is by far the largest customer acquisition in our history," Mr. Cooper CEO Jay Bray said of the Flagstar deal during the company's earnings call. 

The acquisition has increased the company's portfolio to a size 50% larger than its closest competitor, Bray said.

"The Flagstar acquisition drove a substantial increase in scale," President Mike Weinbach said during the company's earnings call, noting that subservicing now dominates the portfolio.

Shortly after the call, the company's stock was trading higher at around $107.50 per share. It opened at a level approaching $102.

Mr. Cooper will be selectively reviewing what it anticipates will be ongoing consolidation in the business for future acquisitions, Bray told analysts who asked about the possibility. 

Servicing's $393 million in fourth-quarter pretax operating income included a positive, net $92 million market-to-market adjustment. Removing the adjustment brings the number closer to $300 million. 

While servicing results beat estimates, origination earnings underperformed by five cents on an earnings per share basis, according to analysts at Keefe, Bruyette & Woods, which attributed this to higher than anticipated expenses and lower income than forecast in some categories.

Origination generated $46 million in fourth quarter pretax operating income.

Bray promised the company would be investing in its origination platforms to improve their performance. Mr. Cooper is seeing growth in the home equity channel it started two years ago, in line with industry trends. It plans to lean into this.

The company has made progress, Weinbach said, noting that the company has grown to become a top five correspondent lender from one that was not even in the top 10.  

When asked about why Mr. Cooper sold Flagstar's third-party origination business, executives indicated the broker channel involved was a better fit for buyer A&D Mortgage.

Weinbach said a decision to purchase servicing from an originator it knew would solicit customers aggressively and pay a price that reflected that weighed down the company's recapture ratio temporarily during the quarter.

The corporate segment incurred $51 million in expenses and the company's Xome unit, which recently named a new leader, was a "slightly larger drag" this quarter, said Kurt Johnson, Mr. Cooper's chief financial officer.

Mr. Cooper still sees value in Xome, an online real estate and foreclosure sales unit, and is considering revamping some of its operations to improve it, Bray said.

The Ginnie Mae market segment has experienced a "small but consistent deterioration" in loan performance industrywide, Johnson noted, referring to a corporation within the Department of Housing and Urban Development that guarantees securitizations of government-backed loans.