Earnings call transcript: Onity Group’s Q2 2025 exceeds EPS forecasts, stock rises

Onity Group Inc (ONIT) reported its second-quarter earnings for 2025, showcasing a notable performance by surpassing earnings per share (EPS) expectations. The company reported an EPS of $2.40, significantly above the forecast of $1.78, marking a 34.83% surprise. Despite missing revenue forecasts with actual revenue of $246.6 million against the expected $257.35 million, the market responded positively. Onity’s stock rose by 1.96% in regular trading and further increased by 3.38% in pre-market trading, reaching $38.27. According to InvestingPro analysis, the stock is currently fairly valued, with analysts setting price targets between $50 and $55, suggesting potential upside.

Key Takeaways

• Onity Group’s EPS of $2.40 exceeded forecasts by 34.83%.
• Revenue fell short of expectations, with $246.6 million reported.
• Stock price increased by 1.96% in regular trading and 3.38% in pre-market.
• Continued investment in AI and technology driving operational efficiency.
• Maintained guidance of 16-18% adjusted ROE for 2025.

Company Performance

Onity Group demonstrated robust financial performance in Q2 2025, doubling its net income year-over-year to $20 million. The company maintains an impressive gross profit margin of 94.9% and has delivered a remarkable 53.37% return over the past year, as reported by InvestingPro. The company continues to leverage its technological investments, particularly in artificial intelligence, to enhance operational efficiency and customer service. Despite a challenging market environment with fluctuating interest rates, Onity outperformed industry averages in loan originations and maintained top-tier servicing performance. For deeper insights into Onity’s financial health and future prospects, investors can access the comprehensive Pro Research Report, available exclusively on InvestingPro.

Financial Highlights

• Revenue: $246.6 million (missed forecast of $257.35 million)
• Earnings per share: $2.40 (exceeded forecast of $1.78)
• Annualized ROE: 17%
• Book value per share: $60 (5% increase year-over-year)

Earnings vs. Forecast

Onity Group’s EPS of $2.40 significantly outperformed the forecasted $1.78, resulting in a 34.83% positive surprise. This marks a noteworthy achievement, considering the company’s historical trends of steady earnings growth. However, the revenue fell short by 4.18%, indicating potential challenges in meeting sales projections.

Market Reaction

Following the earnings release, Onity’s stock rose by 1.96% during regular trading hours and saw an additional 3.38% increase in pre-market trading, reaching $38.80. This movement positions the stock closer to its 52-week high of $41.27, reflecting investor optimism despite the revenue shortfall.

Outlook & Guidance

Onity Group maintains its guidance of a 16-18% adjusted ROE for 2025, with expectations of servicing as the primary earnings contributor. The company is focused on expanding its servicing portfolio while integrating AI technologies to drive efficiency and innovation.

Executive Commentary

CEO Glenn Messina emphasized the company’s strategic positioning: "We believe our balanced business is well positioned for this dynamic market environment." He also highlighted the integration of advanced technologies: "Our vision is to integrate robotics, large language models, and machine learning across all operations."

Risks and Challenges

• Interest Rate Volatility: Continued fluctuations could impact loan origination volumes.
• Revenue Shortfall: Meeting future revenue targets remains a challenge.
• Industry Consolidation: Potential consolidation could alter competitive dynamics.
• Macroeconomic Pressures: Broader economic conditions may affect financial performance.
• Technology Integration: Ensuring seamless integration of AI and robotics is crucial for operational success.

Q&A

During the earnings call, analysts inquired about variations in professional services expenses and the potential release of deferred tax assets. The discussion also touched on merger and acquisition possibilities within the servicing and originations market, highlighting Onity’s strategic focus on growth and efficiency.

Overall, Onity Group’s strong EPS performance and strategic investments in technology have positioned the company favorably in a volatile market, driving positive investor sentiment despite some revenue challenges. InvestingPro data reveals additional insights about Onity’s performance, with several more ProTips available to subscribers. The company’s Financial Health Score stands at "FAIR," with particularly strong momentum and relative value metrics, suggesting resilience in current market conditions.

Full transcript - Onity Group Inc (ONIT) Q2 2025:

Emma, Call Moderator: Good day, everyone, and welcome to today’s Onabies Group Second Quarter Earnings and Business Update Call. At this time, all participants are in a listen only mode. Later, you will have an opportunity to ask questions during the question and answer session. Please note this call is being recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn today’s program over to Vali Hardell.

You may begin.

Vali Hardell, Investor Relations, Onity Group: Thank you, Emma. Good morning, everyone, and welcome to Onity Group’s second quarter twenty twenty five 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, Glenn Messina and Chief Financial Officer, Sean O’Neill. 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 and the appendix to the investor presentation. Now I would like to turn the call over to Glenn Messina.

Glenn Messina, Chair, President and Chief Executive Officer, Onity Group: Thanks, Valerie. Good morning, everyone, and thank you for joining our call. We’re looking forward to sharing a few highlights for the second quarter, as well as review our strategy and financial objectives to deliver long term value for our shareholders. Let’s get started on slide three. I want to start with three key themes today.

First, for the second quarter, we delivered robust net income and continued to grow book value, demonstrating our sound strategy and high caliber execution. Second, our balanced business is delivering sustainable results across origination and servicing amid market volatility. Finally, we are reaffirming our annual adjusted ROE guidance, underscoring our commitment to strong shareholder returns. Let’s turn to slide four to review a few highlights for the quarter. Despite volatile and unpredictable market conditions, we delivered steady financial performance in the second quarter, with GAAP net income attributable to common shareholders of $20,000,000 or $2.4 per share fully diluted, reflecting an annualized ROE of 17%.

Adjusted pretax income of $16,000,000 and an annualized adjusted ROE of 14% reflect a $4,000,000 unfavorable impact of market volatility on originations revenue and margins, as well as increased MSR runoff from higher prepayments and reverse asset fair value changes compared to prior periods. Average servicing UPB continued to grow steadily, fueled by year over year originations volume growth, which exceeded total industry originations growth for the same period. And finally, book value increased to $60 per share, up 5% versus prior year. We believe the structural changes we’ve made to our business over the past several years have positioned us to successfully and profitably navigate volatile and unpredictable market conditions. Let’s turn to slide five to discuss the market environment in the second quarter and our expectations for the balance of the year.

The second quarter unfolded consistent with the expectations we discussed at our last earnings call. We saw high financial market volatility in the early part of the quarter, which adversely impacted origination revenue and margins and increased MSR hedging costs for a brief period. Despite challenging market conditions, origination volumes were strong and the Mortgage Bankers Association Refinance Application Index was up 43% over prior year. Another M and A transaction was announced with Bayview Purchasing Guild and several economists improved their outlook for the economy versus the end of the first quarter. Looking ahead, we’re expecting continued interest rate volatility and uncertainty.

The Mortgage Bankers Association and Fannie Mae estimates for originations volume growth has been lowered to 14% year over year, largely due to interest rate expectations and slower home sales. Refinancing opportunity will be tied to interest rates and consumers are likely to refinance at the earliest opportunity. The longer rates stay high, the more likely it is there will be continued industry consolidation. And while the economy has been strong thus far, the longer term picture is less clear. We believe our balanced business is well positioned for this dynamic market environment, including elevated interest rates and unpredictable periods of market volatility.

And as always, we’re maintaining agility to find opportunities to create value for shareholders. Let’s turn to slide six for more about our balanced business. We believe our scale in both servicing and originations enables us to perform well with high or low interest rates. As you can see, even with the sharp increase in interest rates from 2021, our total business is delivering improved performance, driven today by our servicing platform. As in 2021, if interest rates were to materially decline, we believe industry originations volume and margins would typically expand, while servicing runoff would increase.

In this scenario, we would expect originations to deliver most of our earnings. Given the current outlook for interest rates, we expect servicing will continue to be the predominant earnings contributor for 2025, with industry originations volume projected to increase modestly. Let’s turn to slide seven for more about our growth options. We’re continuing to drive growth in our total servicing portfolio while executing prudent and opportunistic asset management. We’ve been steadily increasing our owned MSR portfolio, consistent with our objectives to retain more MSRs to grow book earnings and book value, as well as reload our portfolio for recapture opportunity.

Ending total servicing in the second quarter is up approximately $5,000,000,000 or 2% year over year, with $36,000,000,000 in servicing additions, net of runoff, more than offsetting opportunistic asset sales and planned transfers to Rhythm. Dynamic asset management is an integral element of our strategy. And last year, both Onity and MAV took advantage of the robust bulk market to opportunistically sell MSRs above our book value. In the case of the MSRs Onity sold, these were an instrumental component of our corporate debt refinancing strategy. With respect to the assets sold by MAT, we recognized our pro rata share of favorable fair value realization, commensurate with the 15% joint venture interest we maintained at that time.

I believe our agility and ability to replenish the growth in the portfolio while executing our asset management actions highlights the power of our originations capability and success of our growth strategy. Please turn to slide eight to discuss originations growth. In the second quarter, our originations team delivered 35% year over year growth versus the industry’s 23 growth over the same period. Origination drives replenishment and growth in our servicing portfolio through all market cycles, leveraging an enterprise sales approach to deliver our wide range of products, delivery methods, and services. We’ve continuously invested in technology and process optimization to enhance the customer experience, reduce cost structure, and improve scalability and competitiveness of our platform in both business to business and consumer direct channels.

We’re launching new and upgraded products and services to expand our addressable market opportunity, provide access to higher margin market segments, and create alternatives for our consumer direct platform to maintain operating capacity for surges and refinancing activity. To highlight how far we’ve come in originations, the second quarter twenty twenty five funded volume was almost equal to the level we recorded in the second quarter twenty twenty one, with a market opportunity that was twice the size of the current market. Now please turn to slide nine to discuss the progress we made in our recapture platform. Our Consumer Direct team is continuing to improve our recapture capability to industry top tier performance levels, while working to ensure we maintain flexibility to address mortgage rate volatility. As you can see on the left, funded volume in our Consumer Direct platform was up 2.4 times versus the 2024, with an interest rate environment that is not much different between the two periods.

Based on our refinance recapture benchmarking for the quarter and the last twelve months, excluding home equity products, we believe our platform is performing better than several of our public, non bank, third party origination focused peers and the ICE reported average. And for the second quarter, our refinance recapture rate is slightly above all three of our peers. Even more notable, our refinance recapture rate for the past twelve months, where the previous loan was originated by our consumer direct channel is 88%. This points out the significant upside in recapture as we continue to improve our first time recapture capability. To that end, we continue to invest in talent, technology, predictive analytics, products, and marketing to further improve our capability.

Let’s turn to slide 10 to discuss our servicing platform. We’ve built a strong servicing platform, and our team is delivering top tier performance on multiple dimensions. We service or subservice 1,400,000.0 loans on behalf of more than 3,900 investors and over 120 sub servicing clients, including forward, reverse and business purpose residential mortgages. We’ve been recognized by Fannie Mae, Freddie Mac and HUD for industry leading servicing performance. And we again compared favorably in the Mortgage Bankers Association twenty twenty five servicing cost study, with our fully loaded servicing operating expenses materially lower versus the large non bank servicer average for performing and non performing loans.

Our continuous improvement in customer experience is evidenced with high satisfaction ratings from our borrowers and sub servicing clients. Most recently, Fitch upgraded all six of our residential servicing ratings and Moody’s upgraded our second lien servicer ratings following their upgrade of all of our forward servicing ratings in 2023. Fitch noted the upgrades reflect our effective enterprise risk management controls and processes and continuous technology enhancements, among other attributes. While we are not the largest servicer in the industry, we deliver top tier performance for customers and investors, and we are positioned to fiercely compete with anyone regardless of size. Let’s turn to slide 11 to discuss our technology strategy.

We’ve been investing across four categories of AI, robotics, natural language processing, vision, and machine learning to improve business performance and competitiveness on several dimensions. Our technology journey began almost seven years ago with the replacement of our core business systems and transition of our infrastructure to a cloud based environment to create a solid, stable foundation for continued development. We’ve cultivated our own robotic process automation center of excellence and Technology Innovation Lab, which supports projects of increasing size and complexity, focused on four desired outcomes: drive cost leadership, accelerate revenue growth, maximize customer retention, and deliver superior operating performance. I’m proud of what the team has accomplished through focused and purposeful investment to enable a highly competitive servicing and origination platform, top tier refinance recapture performance and an improved customer experience. We continue to utilize this 4x4 approach to technology development and innovation to ensure our investments are aligned with delivering outcomes that matter most to our stakeholders.

Let’s turn to slide 12 to see what we’ve accomplished and where we are taking our technology program. We believe our AI investments have delivered meaningful process performance improvements, creating value for all Anaty stakeholders. Robotic process automation, optical character recognition, and neural network based data extraction have been deployed in over 190 processes, completing the work of roughly 400 people, saving approximately fifty seven thousand hours per month of manual efforts year to date. We are leveraging machine learning and predictive analytics to predict borrower behavior, which helps us maximize retention and collections outcomes. And 88% of our customer increase this year have been resolved through our digital interface channels supported by natural language processing and GenAI.

Our vision for the future of AI in our business is to integrate robotics, large language models, and machine learning across all operations to eliminate inefficiencies, reduce cost, and elevate accuracy. Transforming every process with data enabled intelligence and unifying operations under a single AI driven framework, where every process is optimized, every decision is data informed, and every outcome is superior. The opportunity here is exciting, and the potential impact is incredibly powerful. Now I’ll turn it over to Sean to discuss our results for the quarter in more detail.

Sean O’Neill, Chief Financial Officer, Onity Group: Thanks, Glenn. Please turn to Slide 13 for a recap of our net income. 2025 continues to be a strong year for us and you can see that with net income up two times year over year and GAAP return on equity of over 17% for the second quarter. Our adjusted return on equity was 14% and we’ll discuss that on the following slide. Our ability to deliver steady net income added approximately $3 to book value per share year over year.

This quarter, we continued to add scale to our servicing platform and grew our originations business in an uncertain interest rate and geopolitical environment. Please turn to Slide 14 for a historical trend of our adjusted pretax income, which is positive for the eleventh straight quarter. We posted a good second quarter for adjusted PGI. However, it was lower than the 2024 due to several factors. First, we added about $7,000,000 of pretax income from both growth in owned MSRs and from lower debt interest expense resulting from our 2024 debt restructuring.

Offsetting those gains was the absence of a 15% equity return on MAV, April volatility impairing originations margins and a fair value mark on reverse servicing assets. Finally, MSR runoff was higher than a year ago, partially due to higher prepayment speeds. This component of runoff was approximately $8,000,000 higher than a year ago. The year to date adjusted ROE is 17.9% at the upper end of our 2025 guidance. We continue to maintain our adjusted ROE guidance at 16% to 18% for full year 2025.

As discussed, GAAP ROE was 17% and the appendix has a walk from net income to adjusted PTI to help you understand the differences. Now let’s turn to slide 15 for the pre tax income results on our origination segment. Originations adjusted PTI was slightly lower year over year, driven primarily by the interest rate volatility we experienced in April that impacted our originations profitability by over $4,000,000 Consumer Direct continued another strong quarter of recapture results. This quarter, our recapture rate outpaced our closest peers. We also saw higher lot volume versus last year and continued strong performance in the improved closed end second product that we launched in the first quarter.

Reversa Ridge maintained profitability amid an uncertain interest rate environment where higher rates for an extended period have limited the amount of benefit a reverse borrower can realize on a new loan. Overall, we’re pleased with the performance of originations business. We continue to operate profitably in a variety of rate environments. Slide 16 gives you the volume and margin review of the origination segment. The left side shows improved volumes for the consumer direct and B2B origination channels on a sequential quarter and year over year basis with flat to declining margins.

Reverse experienced lower volume on lower margins, but was still able to deliver a profitable quarter. Consumer Direct’s recapture was helped both by better data analytics and improved processes to better connect loan officers with borrowers interested in refinancing. The graphs on the right show the extreme impact that market volatility had in the month of April, where pronounced dip in margins in the various channels drove a $4,000,000 revenue impact in that month alone. Absent extreme market volatility, originations would likely have posted a growth quarter versus a slight decline. Please turn to slide 17 for the servicing segment performance.

Our servicing segment remained a solid contributor to adjusted pretax income with $31,000,000 for the quarter. Forward servicing experienced a growth in average UPB with higher revenue both sequentially and year over year. The revenue lift from servicing growth was offset by higher runoff in Q2, driven by more owned MSR and higher prepay speeds. While reverse servicing pretax income declined in the quarter, primarily driven by the negative valuation adjustments on reverse buyout loans, the reverse channel continues to help us in a number of ways. It delivers scale to our servicing platform.

It typically provides a cost effective hedge to forward MSR. It adds to the breadth of our product suite, which helps attract and retain corresponding clients. It provides us with operational expertise to acquire assets that generate significant liquidity on subsequent securitizations on our OLED shelf. And as a reminder, reverse servicing has been profitable 12 of the 13 quarters prior to this quarter. With respect to delinquency, our owned MSR portfolio exhibited improved delinquency stats in the second quarter both sequentially and year over year.

There’s an MSR valuation page in the appendix on page 25 with more details. Finally, we continue to pursue new subservicing clients and anticipate subservicing additions over the next four quarters. Please turn to slide 18 for an assessment of our improved hedging performance. Our MSR hedge strategy continues to perform well and as intended. Our strategy is designed to mitigate interest rate risk and our hedge has been effective in minimizing the impact of interest rates on our MSR valuation, as you can see in the graph.

Over the last two plus years, we have increased our hedge coverage ratio such that by the 2023, we were seeking to hedge the majority of our interest rate risk. When we compare our results with information in the public domain, we believe we provide an effective MSR hedge at a relatively efficient cost versus our peers who hedge a significant portion of their book. Given that an MSR hedge is dependent on interest rate markets and related derivative markets, we frequently review and assess our hedge strategy to manage risk and optimize liquidity and returns. As such, we adjusted our hedge target to 80% to 100% range following the April market volatility and we were pleased with the quarterly results. We will continue to assess our hedge strategy going forward as we have done in the past.

On slide 19, we continue to confirm our guidance for 2025. Our financial objectives remain unchanged and following another strong GAAP net income quarter, we are maintaining the guidance we provided for 2025 details are shown here. Note that our adjusted ROE guidance is not dependent on the release of some or all of the valuation allowance that offsets our deferred tax asset, but is rather driven by our view of the strength of our operating businesses. Overall, I’m pleased to report another good quarter that grew book value per share and delivered a continued strong return on equity for our shareholders. Back to you, Budd.

Glenn Messina, Chair, President and Chief Executive Officer, Onity Group: Thanks, Sean. Let’s turn to Slide 20 for a few comments before we open the call for questions. For the second quarter, we delivered sustained robust net income and book value growth, demonstrating our sound strategy and high caliber execution. Our balanced business is delivering steady results across origination and servicing amid market volatility. And we’re reaffirming our annual adjusted ROE guidance underscoring our commitment to strong shareholder returns.

We believe the changes we’ve made to our business over the past several years has positioned us to successfully and profitably navigate volatile and unpredictable market conditions. Our execution is driven by our experienced business team, who are relentlessly focused on delivering on our commitments and providing excellent service to our customers. All of this comes together to suggest a share price that we believe has significant upside, and we intend to continue to take the necessary actions and maintain agility in a dynamic market to harvest that value for the benefit of all shareholders. Overall, we could not be more optimistic about the potential for our business. With that, Emma, let’s open up the call for questions.

Emma, Call Moderator: We’ll take our first question from Bose George with KBW.

Bose George, Analyst, KBW: Hey guys, good morning. Actually, first, just one on expenses. 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?

Glenn Messina, Chair, President and Chief Executive Officer, Onity Group: Good morning, Bose. Sean, do you want to take that?

Sean O’Neill, Chief Financial Officer, Onity Group: Sure. Bose, professional expenses can vary occasionally based on either setting up financing structures where we’re paying legal fees or other litigation activities that could either wax or wane. There’s nothing particularly significant, I think, in the change that you’re looking at.

Bose George, Analyst, KBW: Okay, Thanks. And then actually just a couple on the deferred tax asset. Can you just walk through the variables that determine whether all of it comes back or some of it comes back? And then from a credit counterparty standpoint, your capital obviously increases. Do counterparties see your capital levels as being improved once a deferred tax asset increases your equity?

Or do they kind of look through that?

Sean O’Neill, Chief Financial Officer, Onity Group: Sure. I’ll do it in reverse order. Basically, as the deferred access as the deferred tax asset flows through and hits the equity, as you just described, that’s kind of the normalized view of any corporation. And so we expect that most counterparties will view that as an improvement in total equity or book value. With respect to the various components that we have to assess before we make a decision on the degree of the valuation allowance that is lifted, the simplest thing to do is look at the various deferred tax asset lines that sit in our K.

We only update it once a year. So the 2024 ks has all the GTA components. And there you can see the various aspects that we have to do analytics on as part of a tax planning process. So I can’t really go into the details of each line item. The simple ones are the federal and the state tax NOLs.

Those are pretty static and unremarkable. And then the other line items are where the variation can occur.

Bose George, Analyst, KBW: Okay. Actually just one more on the DTA. Do they expire or most

Glenn Messina, Chair, President and Chief Executive Officer, Onity Group: of them sort of indefinite?

Sean O’Neill, Chief Financial Officer, Onity Group: Some of the bulk of our federal NOLs are indefinite. They’re post 02/2017 when the last tax law changed the timing of NOLs. Some of the state NOLs will expire over time. They’re also used on a FIFO basis. So we typically anticipate we can use those prior to any expiration.

Bose George, Analyst, KBW: Okay, great. Thanks.

Emma, Call Moderator: We’ll take our next question from Randy Binner with B. Riley Securities.

Tim D’Agostino, Analyst, B. Riley Securities: Hi. Thanks for taking the question. This is Tim D’Agostino on for Randy Binner. On M and A, we think of Gilda as more origination focused. Do you have a view on M and A activity in servicing?

Thank you.

Glenn Messina, Chair, President and Chief Executive Officer, Onity Group: Hey, Tim. So, look, I do think for, if you look over the past two years, maybe three years, there’s been somewhat of a balance in M and A activity between some servicing platforms that have gone up for sale, where people have essentially purchased them for scale and just adding either MSRs or subservicing UPB. But I think as we know, as the higher interest rates stay for longer does put pressure on origination focused shops, and you would expect to see some consolidation there. Look, in terms of whether or not there’ll be continued M and A in the servicing sector is really going to be a function of the supply demand for servicing in the marketplace. And to the extent that the bulk markets continue to be robust with a large influx of MSRs at reasonable prices, think people who are looking to continue to grow servicing scale would look to the bulk market.

To the extent that that volume diminishes, then I think you may be able to see demand is still high for MSRs and or servicing assets, you’ll continue to see some level of M and A activity on the servicing side. But it’s a trade off between do you do M and A or do you go to the bulk market fundamentally? That really is what I think

Sean O’Neill, Chief Financial Officer, Onity Group: people are looking at in the industry.

Glenn Messina, Chair, President and Chief Executive Officer, Onity Group: Okay. Thank you so much for the color. That’s it for me. Great. Thanks, Tim.

Emma, Call Moderator: Once again, that is It appears there are no further questions at this time. I will now turn the program back over to Glenn for closing remarks.

Glenn Messina, Chair, President and Chief Executive Officer, Onity Group: Thanks, Emma. And I’d like to thank our shareholders and key business partners for supporting our business. And I’d also like to thank and recognize our Board of Directors and global business team for their hard work and commitment to our success. I look forward to updating everyone on the call on our progress on the next quarter earnings call. Thank you.

Emma, Call Moderator: This does conclude today’s program. Thank you for your participation. You may disconnect at any time.

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