All right. Welcome, everybody, and thank you for joining us today at the Sidoti June Small-Cap Conference. My name is Brendan McCarthy. I'm an analyst here with Sidoti, and I'm very pleased to welcome Onity Group. Ticker is O-N-I-T. Joining us from the firm will be Executive Vice President and CFO, Sean O'Neil. Before I hand it over, a quick reminder, the Q&A tab is located at the bottom of your screen. Feel free to type in any questions throughout the presentation, and we can save time for Q&A at the end. With that said, Sean, take it away.
Thanks, Brendan. Morning, everyone. Apologies for the slow start. Some technical difficulties down here in Miami. Thanks very much for your interest, and let me walk you through the quick story of Onity and take you through a few numbers. So f irst of all, this is the overview we have and what we're focused on, as we grow our company. We're basically in two businesses, loan originations, mortgage loan originations, and mortgage servicing rights, which is an MSR ownership. We're driving our growth through more originations, focusing on MSR recapture, as well as subservicing, which is where we service for other people. That's a fee-only business. It wouldn't be a presentation in 2026 if you didn't see the letters AI. We'll have a slide where we show you how we use AI technologies to drive recapture, have some real live data for you.
Yes, we're getting actual results from that. No, we're not firing half of our company because of AI. Generating capital, repositioning our reverse business. We just announced, approval for a successful sale of the bulk of our reverse business to Finance of America. That will allow us to redeploy that capital in the forward space and lock up a very profitable multi-year subservicing agreement. Another growth avenue is we're deploying that capital to grow the forward high-yielding MSRs, repurchase shares, and consider other investments. Finally, the last slide will show you how we have a more attractive price to book compared to our peers. This is a good placemat to give you a grounding of who we are. Over there on the left, you see the services offered. That's what I commented on earlier. In the middle, you see our servicing book.
This book is about $328 billion of unpaid principal balance. That's UPB. Think of your mortgage at home. If your mortgage at home is $500,000, so that's the unpaid principal balance. Every mortgage we service, you add up all those numbers, that gives you the servicing book. The graph in the middle shows you that about half of that is owned, meaning we're the servicer, we take full risk, we hedge that asset, and you get paid more. Higher risk, higher reward. The 50% on the right, the dark blue, represents. Sorry, I've switched them around, but they're the same number, so it doesn't matter. The subservicing represents where we service for others. There, you get paid a thinner fee stream, so it's a lower margin business, but it's very low risk and it's basically infinite ROE. It's very interesting business in that way.
You'll hear throughout this where I'll talk about capital-light growth. Capital light means we're trying to acquire MSRs. If we don't have all the capital we need, we'll partner with one of our capital partners. They'll own it. We'll subservice it on their behalf. If we have the cash or the capital to buy an MSR, that goes into the owned bucket. In terms of some industry ranks, you see there where we stack up against other non-bank mortgage companies in terms of servicing, subservicing, and correspondent lending. There's two different channels we participate in. One is called correspondent or third-party originations, and the other is called consumer direct, where we use our own loan officers. Adjusted ROE, 17%. Year-end servicing UPB. This is all the last 12 months trailing ratios. Book value per share, $74. Diluted book value per share, probably around $68.
Compare that to our current price, which is in the high 30s. That's where you get the 50% discount to book, making us a pretty attractive value play. Debt-to-equity ratio is about 3: 1. Here you see the strategy, balance, and diversification. The balance is between the origination business and the MSR business. Talk about that in a minute. Capital-light growth, I commented on. Industry-leading cost structure. We are somewhat smaller than some of our competitors, yet we compete very effectively because we've worked with process improvement and technology for years now to continue to drive a lower cost structure. We're not just saying that. There's data from the MBA, which is the Mortgage Bankers Association, where they blind pool dozens of people in this industry, and we have very competitive top quartile cost structures. Top-tier operating performance.
We get a lot of awards from Fannie, Freddie, and HUD. Those are the agency servicers or agency GSEs that take care of the Fannie, Freddie, and Ginnie Mae assets. Dynamic asset management. That means, we look at our MSR book and other assets, any assets for sale at the right price, we sometimes rotate the assets out, when people are interested in paying what is significantly more than our book value. Our operating focus for the year is accelerate growth, differentiate performance, and elevate the customer experience. We have two kinds of customers, institutional customers when it comes to subservicing or originations, and then retail customers who are the actual borrowers that we service the MSRs for. Here's a quick overview of the U.S. mortgage market in case you're new to it. The small blue graph is the annual volume in trillions of dollars.
It's a roughly $1.8 trillion-$2.2 trillion market the last couple of years. You assume that a mortgage has a weighted average life for a wall of, call it, seven years. That gets you to a servicing of $14.8 trillion. Just multiply the $2 trillion by seven. It's been higher in years past, lower in years past, and that means there's about $15 trillion of servicing volume out there. Of that, $4 trillion is sub-serviced, so the rest is owned. On the right you can see the growth projections for both the servicing market, the originations market. New single-family home sales is a pretty big driver.
Some of you may be thinking, "Well, is the mortgage market going to grow if the Fed increases rates?" Mortgages tend to grow slower as rates are higher, and that's why we have a balanced business model, because the MSRs that we own get more valuable as rates go higher. They're offsetting businesses. As rates go up, our servicing business makes more money, and as rates go down, our origination business makes more money. We have a slide on that. Really important is that bottom comment on the right based on the Basel III endgame outcome. Some of you may have been reading about that. Fed Chairman, Michelle Bowman had some comments back in February. There may be regulation changes around Basel III that the OCC, the FDIC, and the Fed have all agreed on, and they have already put out for comments.
There may be inactions or changes to that Basel III regulation that make it much easier for banks to hold MSRs. We see this as an opportunity. It means there's more folks that may come into the market that don't have scale and need sub-servicers. It's just something else to consider in terms of the market dynamics. Here's some of our performance trends over the last couple of years. Upper left, revenue, then you see adjusted pre-tax income and GAAP net income. The difference between the two is adjusted pre-tax income removes primarily MSR fair value net of hedge. Pretty much our entire sector reports some type of operating or adjusted income number like this, because some analysts and investors like to strip out the MSR and the hedge because that's a very interest rate-sensitive product.
We focus on both, so we give you both data points. Obviously, GAAP net income's pretty important because it drives book value per share, which you see down there on the right. Fairly consistent trend of growing revenues, growing book value per share. The GAAP net income has become more dependable over the last couple of years, as has the adjusted pre-tax income. First quarter of 2026 was a strong quarter for adjusted revenue, but our first negative quarter for adjusted pre-tax income in about four years. You can see there that adjusted pre-tax income was a -6. GAAP net income was still a +7. I'll talk about that in a minute. The biggest driver there was something we call MSR runoff. Rates dropped significantly back in February. This was a long time ago, right?
If you remember back in February, the 10-year treasury was coming down, and the 30-year fixed rate mortgage was coming down even faster. Right before the war in Iran started, the 30-year fixed rate mortgage went under 6%. In the month of February, there was massive refinancing. When that happens, you make money on the origination side, but your MSRs run off on your servicing side, and that caused a servicing loss. It usually isn't on a month-per-month cycle. The cycle lags a little bit. Your origination proceeds can come somewhat later than your MSR runoff, depending on the timing. Had strong volume for originations, $14 billion. That's again measured in UPB, and that was up 2x year-over-year.
Within originations, there's a consumer direct channel that generated $1.2 billion of activity, up four times year-over-year, and the PTI was up pretty strongly as well. Servicing gets measured on ending servicing UPB, that's the number I quoted earlier, as well as how much we're adding to the servicing book, which we consistently are showing growth there. Can you see the- did I just lose the screen, or can you guys see it still?
We can still see it. It looks good.
Okay, good. I just clicked off of something. You've got originations and servicing complementing each other. This is what I talked about earlier in terms of a balanced business model. Here you have the last four years, and you can see in a year like 2021, originations, the dark blue, made a lot more money than servicing. Just a year later in 2023, servicing generated pretty much all the net income of the company. That's as this cycle swings in 2022, you might be asking what happened. Well, that's when rates went up, origination markets backtracked. The second half of 2022 was very difficult, and then by 2023, you were making all your money in servicing. That makes it tough for a pure-play originator to stay in business. Some of them didn't, some of them got acquired.
In 2025, you saw the pendulum swing back and start to favor origination somewhat again. Off on the right, you can see how each of these businesses react to rates up or rates down. Did the slide advance or no, Brendan?
It did not.
Okay
me.
Hang on a second. Let me see if I can find it, bring it back.
There we go.
Okay. Does it say originations volume on the left?
Yes.
Okay. Originations volume up 2x. This is a measure of how much revenue and how much volume you can generate in originations, and as you can see, 2025 was a very strong year. We measure something called recapture, which is pretty important. Off to the right, you can see how we compare to the industry average. You see banks on the far left of that right-side graph. Banks aren't very good at recapture. Why? Banks do a lot of stuff, and mortgages are one of 30 things they focus on. All we do are mortgages. People that are large non-bank mortgage originators, think names like Rocket, Cooper back when it existed. Potentially Guild Mortgage, Better Mortgage, LoanDepot. All these companies do is mortgages. We're a little more focused than banks.
We compare ourselves to the industry average, and we focus on the non-banks, and even amongst that crowd, we pick some of the best non-banks, which are the gray ones that publicly disclose the recapture. We either beat or we're competitive with that crowd. Recapture indicates how well you go in and get someone who has an MSR with you to refinance the mortgage with you. If that happens successfully, you make more money, you replace the MSR with a new MSR. If you fail at that, someone else gets your MSR, it disappears, and you don't generate revenue on it anymore. It's a pretty important thing to focus on. This is the servicing portfolio. This is our other business. Here you can see it's up 14% over the last two years.
Industry growth, which is very easy to measure because it's all publicly available data, grew by 6%. We're growing faster than the industry. Off to the right, that pie chart tells you how our owned and subservicing book breaks up. The owned is the green, the subservicing is the blue. There you can see on the right of the green, we predominantly own Fannie and Freddie. We also call these GSEs. We own Ginnie Mae's down at the bottom, and you see a thin sliver called PLS. That stands for private label securitization. Maybe think non-QM. For those of you who've heard that term, it stands for non-qualified mortgage. That's a PLS. Think jumbo mortgages, closed-end seconds, debt service coverage ratio loans. That's all different examples of PLS. It's just a loan that doesn't meet Fannie , Freddie, and Ginnie guidelines.
Quite a few people have non-agency mortgages. That's what that sliver represents. Here's an AI slide for you. It shows how we're focusing on the borrower journey to maximize recapture. That was that important thing I talked about earlier. Here we're focusing on leads and making sure machine learning is helping us get the leads that are more likely to result in a new loan. There's a lot of nuances there that computers are pretty good at figuring out when you give them a lot of data. That's driving our ability to grab the best leads that result in a new loan, and that grew pretty substantially over the last year as we started to implement technology. Lead to rate lock is also important. A lead means someone reaches out and talks to you.
Locking your rate means you're pretty committed to that mortgage. The next step is, does the loan fund? The other thing we have to do is use AI to help the entire platform, both on the servicing and on the origination side. There you can see we're extracting documents and doing this automatically with very high accuracy, that allows us to do a lot more analysis as well as have the appropriate collateral documents for a mortgage, which comes in handy if you need to sell the mortgage at some point. Here's our capital allocation strategy. We prioritize organic growth. Think buying more of the assets that can produce mid-teen returns in terms of ROE. Expanding our products and services. Think new origination products. On the subservicing side, we're focusing deeply on, say, commercial subservicing, which is much higher margin.
Another facet we try and consider is optimize liquidity and drive long-term returns. That's how we think about capital management. We're always focused on optimizing shareholder return. All of the executives at Onity are shareholders, some of them quite significant ones, so we're aligned with the shareholder. Here's our guidance for the full year. We updated our ROE range. Took it from 13% to 15% to 10% to 15% in the first quarter update. That was due to the rate volatility. If you think about where the rates were in February and where they were by April, was somewhat significant. We don't mind if rates go up or if rates go down.
It's when rates go up and down, up and down, up and down, that makes it a little more difficult in this market because you have dynamic hedging, you have to hedge your MSRs and your origination pipeline. If rates are bouncing around a lot, that gets somewhat expensive. You're hedging with basic treasury derivatives or other mortgage derivatives. Other things we're focused on for the guidance are servicing UPB growth 5% to 15%. High hedge effectiveness. Here we like to protect the value of our MSR, we try and hedge away almost all of the interest rate risk. We've been quite successful the last nine quarters doing that. We also focus on efficiency ratio. Just means we grow revenue faster than we grow costs. Something pretty much all companies should focus on.
Here's the price to book slide for you. We are lagging behind our peers. IMB stands for Independent Mortgage Bank. We're a non-bank mortgage company. Here you can see our price to book. This is all based on Q1 releases. At the end of Q1 when everyone released their earnings, we were at a 0.5 price to book. Some of our bigger competitors range from 0.8 up to 1.6. We're quite competitive in terms of generating very similar ROE to these competitors. You can see analyst consensus on the right. We're covered by about three different analysts, that's their consensus in terms of share price. In the middle, you see our book value per share. You see what the stock would look like at a 1.1 premium to book. That's it.
I'll end on the slide I started with, where we're driving growth, both originations and MSR recapture, as well as deploying capital to grow the high-yielding MSRs, continuing to use technology as well as process improvements, generating excess capital for the forward business by repositioning our reverse, and then finally, the price-to-book comment I just made. I'll stop there and see what questions people have.
Great. Thank you, Sean, for the overview here. We can open the floor for Q&A. Why don't we start just looking at the balance sheet? Can you talk about what the ideal mix is between your originations growth versus MSR growth and, maybe, picturing a longer-term scenario where that mix can optimize the highest ROE?
Yeah. You can plan for all kinds of originations growth, but it is somewhat market-dependent, meaning it's easier to grow originations when rates are declining. The way we think about the balance sheet and the impact of the two businesses is we continuously support both businesses, but you have to have the ability to flex up and down your originations OPEX or operating expense based on what rates are doing. And so there, we continuously monitor our consumer direct. That's the most time-intensive people and labor-intensive business channel that we have. Also generates the highest margins. What you do is if that volume is declining, you have to cut costs in that channel, but you tend to still get very decent volume from the originations correspondent channel. That's the one where we're like a top 10 correspondent lender.
That's where you're buying mortgages from very small originators who can't deliver to Fannie, Freddie, or Ginnie, or choose not to because there's much higher capital and liquidity requirements to be able to deliver to the agencies. That's a thinner margin business, but it's very scalable, far fewer people. While it generates net income, it can flex volume up or down very rapidly. The other thing we have to consider as we grow the origination business is liquidity, because originations is typically a liquidity consumer. Servicing is a liquidity provider. You either have to balance those two or if you want to grow originations faster, you have to sell some of your assets and replace it with better assets that you can generate organically.
Got it. You mentioned you recently sold the reverse mortgage business. I think you mentioned $70 million to $80 million in proceeds. Can you walk us through the decision there and potential use of proceeds?
Sure. We sold the bulk of the business, but we still have about 45% of the UPB. However, that only represents about 30% of the fair value. Most of the fair value is going to leave the balance sheet as measured by equity, or contribution to our total equity or tangible net worth. We'll still be a reverse servicer probably for the next four to five years. We think about 70% of that book will run off in the next four years. We also have the option to attempt to sell that book in the future. The component that we sold to Finance of America, that's the one we just reported two weeks ago, got regulatory approval to proceed. That will generate the numbers you quoted.
When we see capital like that made available, we go back to our capital allocation sheet that I had up earlier, there we try and consider, what's the best use of this capital? Is it to buy more assets? That's organic growth. Is it to consider M&A prospects that'll get us into new channels more effectively and faster, what's the payback on that? Do we want to buy back stock or do we want to buy back debt? There's other options as well, that's kind of like the big four. Do you want to buy assets, another company, improve your leverage ratio, and/or buy back stock? We've done all of these things over the last couple of years. We de-leveraged heavily in 2023 and 2024, brought our high-yield debt down by about $140 million and tried to maintain a consistent debt-to-equity ratio.
At this point in time, we're focused on de-leveraging by growing the equity, not by reducing our high-yield debt. We just announced our second share buyback of the year, we did that. Maybe put that announcement out probably two weeks ago that we got board approval. We had done another share buyback in the first quarter. That one completed, we replaced it with another one. We also are constantly looking at MSRs, because in addition to originating MSRs, you can buy them on the bulk market or in a flow market. Those are some of the areas that we look at to allocate capital.
Understood. We have a question on the recapture rate. How can investors think about the recapture rate? What factors influence that rate? Are you satisfied with the current range that rate has trended at?
Even though our recapture rate is good, that would be back on Page 10. I'll just flip back to that. Hopefully it went back to Page 10 or is going there. Even though our recapture rate's very strong, it's better than industry average, we're not happy with it. We're always trying to make it better. It's one of those metrics that doesn't matter whether you hit your internal objective in the first quarter, the third quarter, you're always looking to get it even better because every percent you can improve and recapture, protects your MSR book and generates gain on sale overnight. It's a win-win for both our businesses. The various factors that drive that range from how connected are you to a customer? You have to remember, we get our customers from a couple of ways, right?
If we originate the loan directly through our own loan officers, that's got a very high recapture rate because loan officer XYZ knows the borrower, has connected with them in the past, and has a very good chance of refinancing their loan when it comes in the money, and we track that very carefully, of course. The more difficult one is loans you buy from someone else, like your correspondent market. That's where you have to take the time early on when they're not in the money, so to speak, and make connections with those borrowers. It's a combination of leveraging technology, old-fashioned modelling, and getting in front of the customer and ensuring you have good connectivity with the customer. Are there other products you can offer the customer? Like a customer who's not in the money still may want a closed-end second or a HELOC.
A customer who doesn't like rates may want some different rate modification options available to them. The more you connect with the customer, as well as leveraging technology, that's what's going to help you drive recapture.
Understood. That's helpful. Turning to the 2026 guidance, I think you mentioned you recently trimmed the adjusted ROE outlook by a couple percentage points. What macro assumptions are kind of baked into that guidance outlook, and what would cause variation there for the year?
Yeah. What we had to look at there was it's not just a question of rates higher for longer, it's a question of are the rates volatile? Is the 10-year Treasury moving rapidly up and down? Think of the price of oil as a proxy for what the 10-year Treasury might have been doing over the last couple of months. The 10-year's been pretty consistent, hovering in a band, but when it has a lot of volatility intraday or intra-week, that still creates some hedging volatility, as well as origination volatility. Think about as the 10-year drops and the 30-year fixed rate mortgage drops, they're highly correlated, but not perfectly. There's a Treasury-to-mortgage spread that widens and tightens as well.
As rates drop, you start to ramp up more of your origination production, and if they drop a lot, you start hiring people. If they turn around and pivot and go back up two weeks later because of some other geopolitical activity and people flock to Treasuries because it's still somewhat a haven for safe money, then you have to pull back on everything you were just doing. If you're actually out there hiring loan officers, then rates turn around and pivot back up, not only does your hedging get more expensive, but then you're like, "Okay, how long do I want to carry excess loan officers on my payroll?" Loan officers are like any salesperson in any industry. If you can't feed them, they will leave anyway, right?
There's a lot of volatility that can be disruptive to the P&L. Rates are never static, don't get me wrong, but if they're moving in a general trend, it's somewhat easier to predict where they're going. Think periods of time like last April when we did Liberation Day with the tariffs. That was an incredibly difficult three-week period to hedge anything that was interest rate related. Basis hedges were widening inordinately, meaning even if you put on what would normally be an appropriate hedge, it didn't always effectively hedge your outcome.
That makes sense. That's helpful. Last question here. I believe you mentioned the stock is currently trading at a pretty steep discount to book value. How's that discount trended over time compared to where it is now? Maybe you can tie in the buyback authorization, how investors can think about the company buying back shares.
Yeah. The stock's traded, I don't have the data right in front of me, but it's basically been in a 45% to 60% discount to book for the last couple of years. We've been trying to erase issues that could create that proclivity for discount to book. Obviously, it's something we're focused on. We focused on removing any regulatory overhang or litigation concerns the market might have. That pretty much was accomplished by 2022 and 2023. We focused on kind of mainstreaming and upgrading the technology of the company during that same period. Focused on improving net income variability. That was a big focus on the hedge in 2023 and 2024. From end of 2023, early 2024 onwards, the hedge got far more effective at offsetting most of the interest rate risk. Delevered the company in 2023 and 2024 as well.
Now we think the remaining issues are they continue to be the market wants consistent net income production and growth. We're also a small cap with a very small float. We're just not going to get the attention from some of the very large wire house names or asset managers that have to take a fairly large position to be meaningful. Which means it's an opportunity for investors who are willing to do a little bit of homework.
That's great. Sean, we'll conclude there. We really appreciate the time and the overview today.
Thank you very much, Brendan. Appreciate the time.
Thanks, everybody. Thanks for joining.