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Section 1: 10-Q (10-Q)

nsm-20200630
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________________________________________________________________
 FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______                    
Commission file number: 001-14667
404799611_nsm-20200630_g1.jpg
________________________________________________________________________________________________________
Mr. Cooper Group Inc.
(Exact name of registrant as specified in its charter)
Delaware 91-1653725
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
8950 Cypress Waters Blvd, Coppell, TX
 75019
(Address of principal executive offices) (Zip Code)
(469) 549-2000
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $0.01 par value per shareCOOPThe Nasdaq Stock Market
____________________________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12(b)-2 of the Exchange Act.
Large Accelerated Filer¨Accelerated Filerx
Non-Accelerated Filer¨Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  x
Number of shares of common stock, $0.01 par value, outstanding as of July 24, 2020 was 92,021,981.



MR. COOPER GROUP INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 
  Page
PART I
Item 1.
Consolidated Balance Sheets as of June 30, 2020 (unaudited) and December 31, 2019
Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2020 and 2019
Consolidated Statements of Stockholders’ Equity (unaudited) for the Three and Six Months Ended June 30, 2020 and 2019
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2020 and 2019
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2


PART I. Financial Information

Item 1. Financial Statements
MR. COOPER GROUP INC.
CONSOLIDATED BALANCE SHEETS
(millions of dollars, except share data)
June 30, 2020December 31, 2019
 (unaudited) 
Assets
Cash and cash equivalents$1,041  $329  
Restricted cash260  283  
Mortgage servicing rights, $2,757 and $3,496 at fair value, respectively
2,763  3,502  
Advances and other receivables, net of reserves of $216 and $175, respectively
668  988  
Reverse mortgage interests, net of purchase discount of $127 and $114, respectively
5,709  6,279  
Mortgage loans held for sale at fair value3,179  4,077  
Property and equipment, net of accumulated depreciation of $75 and $55, respectively
115  112  
Deferred tax assets, net1,391  1,345  
Other assets2,174  1,390  
Total assets$17,300  $18,305  
Liabilities and Stockholders’ Equity
Unsecured senior notes, net $2,261  $2,366  
Advance facilities, net 475  422  
Warehouse facilities, net 4,031  4,575  
Payables and other liabilities2,460  2,016  
MSR related liabilities - nonrecourse at fair value1,173  1,348  
Mortgage servicing liabilities48  61  
Other nonrecourse debt, net4,707  5,286  
Total liabilities15,155  16,074  
Commitments and contingencies (Note 16)
Preferred stock at $0.00001 - 10 million shares authorized, 1 million shares issued and outstanding, respectively; aggregate liquidation preference of ten dollars, respectively
    
Common stock at $0.01 par value - 300 million shares authorized, 92.0 million and 91.1 million shares issued, respectively
1  1  
Additional paid-in-capital1,114  1,109  
Retained earnings1,034  1,122  
Total Mr. Cooper stockholders’ equity2,149  2,232  
Non-controlling interests(4) (1) 
Total stockholders’ equity2,145  2,231  
Total liabilities and stockholders’ equity$17,300  $18,305  

See accompanying notes to the consolidated financial statements (unaudited).
3


MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(millions of dollars, except for earnings per share data)
 Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Revenues:
Service related, net$12  $137  $(41) $221  
Net gain on mortgage loans held for sale618  262  949  428  
Total revenues630  399  908  649  
Expenses:
Salaries, wages and benefits248  238  494  453  
General and administrative171  254  369  482  
Total expenses419  492  863  935  
Interest income76  162  194  296  
Interest expense(177) (187) (369) (376) 
Other income, net  1  1  16  
Total other expenses, net(101) (24) (174) (64) 
Income (loss) before income tax expense (benefit)110  (117) (129) (350) 
Less: Income tax expense (benefit)37  (29) (31) (76) 
Net income (loss)73  (88) (98) (274) 
Less: Net loss attributable to non-controlling interests  (1) (3) (1) 
Net income (loss) attributable to Mr. Cooper73  (87) (95) (273) 
Less: Undistributed earnings attributable to participating stockholders1        
Net income (loss) attributable to common stockholders$72  $(87) $(95) $(273) 
Net income (loss) per common share attributable to Mr. Cooper:
Basic$0.78  $(0.96) $(1.04) $(3.00) 
Diluted$0.77  $(0.96) $(1.04) $(3.00) 

See accompanying notes to the consolidated financial statements (unaudited).
4


MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(millions of dollars, except share data)
Preferred StockCommon Stock
Shares
(in thousands)
AmountShares
(in thousands)
AmountAdditional Paid-in CapitalRetained EarningsTotal Mr. Cooper Stockholders’ EquityNon-controlling InterestsTotal
Equity
Balance at March 31, 20191,000  $  91,042  $1  $1,095  $662  $1,758  $3  $1,761  
Shares issued under incentive compensation plan—  —  19  —  —  —  —  —  —  
Share-based compensation—  —  —  —  5  —  5  —  5  
Net loss—  —  —  —  —  (87) (87) (1) (88) 
Balance at June 30, 20191,000  $  91,061  $1  $1,100  $575  $1,676  $2  $1,678  
Balance at March 31, 20201,000  $  91,970  $1  $1,108  $961  $2,070  $(4) $2,066  
Shares issued under incentive compensation plan—  —  52  —  —  —  —  —  —  
Share-based compensation—  —  —  —  6  —  6  —  6  
Net income—  —  —  —  —  73  73  —  73  
Balance at June 30, 20201,000  $  92,022  $1  $1,114  $1,034  $2,149  $(4) $2,145  

See accompanying notes to the consolidated financial statements (unaudited).

5


MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(millions of dollars, except share data)
Preferred StockCommon Stock
Shares
(in thousands)
AmountShares
(in thousands)
AmountAdditional Paid-in CapitalRetained EarningsTotal Mr. Cooper Stockholders’ EquityNon-controlling InterestsTotal
Equity
Balance at January 1, 20191,000  $  90,821  $1  $1,093  $848  $1,942  $3  $1,945  
Shares issued / (surrendered) under incentive compensation plan—  —  240  —  (2) —  (2) —  (2) 
Share-based compensation—  —  —  —  9  —  9  —  9  
Net loss—  —  —  —  —  (273) (273) (1) (274) 
Balance at June 30, 20191,000  $  91,061  $1  $1,100  $575  $1,676  $2  $1,678  
Balance at January 1, 20201,000  $  91,118  $1  $1,109  $1,122  $2,232  $(1) $2,231  
Shares issued / (surrendered) under incentive compensation plan—  —  904  —  (5) —  (5) —  (5) 
Share-based compensation—  —  —  —  10  —  10  —  10  
Cumulative effect adjustments pursuant to the adoption of ASU 2016-13—  —  —  —  —  7  7  —  7  
Net loss—  —  —  —  —  (95) (95) (3) (98) 
Balance at June 30, 20201,000  $  92,022  $1  $1,114  $1,034  $2,149  $(4) $2,145  

See accompanying notes to the consolidated financial statements (unaudited).
6


MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions of dollars)
Six Months Ended June 30,
 20202019
Operating Activities
Net loss$(98) $(274) 
Adjustments to reconcile net loss to net cash attributable to operating activities:
Deferred tax benefit(49) (76) 
Net gain on mortgage loans held for sale(949) (428) 
Interest income on reverse mortgage loans(117) (167) 
Provision for servicing and non-servicing reserves11  30  
Fair value changes and amortization/accretion of mortgage servicing rights/liabilities999  695  
Fair value changes in excess spread financing(101) (74) 
Fair value changes in mortgage servicing rights financing liability12  11  
Fair value changes in mortgage loans held for investment  (3) 
Amortization of premiums, net of discount accretion34  (25) 
Depreciation and amortization for property and equipment and intangible assets37  45  
Share-based compensation10  9  
Other loss8    
Repurchases of forward loan assets out of Ginnie Mae securitizations(2,092) (715) 
Mortgage loans originated and purchased for sale, net of fees(23,110) (15,727) 
Sales proceeds and loan payment proceeds for mortgage loans held for sale and held for investment26,606  15,429  
Changes in assets and liabilities:
Advances and other receivables313  249  
Reverse mortgage interests751  1,056  
Other assets(616) (118) 
Payables and other liabilities417  31  
Net cash attributable to operating activities2,066  (52) 
Investing Activities
Acquisitions, net of cash acquired  (85) 
Property and equipment additions, net of disposals(26) (27) 
Purchase of forward mortgage servicing rights, net of liabilities incurred(31) (409) 
Proceeds on sale of forward and reverse mortgage servicing rights43  279  
Net cash attributable to investing activities(14) (242) 
Continued on following page. See accompanying notes to the consolidated financial statements (unaudited). 
7


MR. COOPER GROUP INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(millions of dollars)
Six Months Ended June 30,
 20202019
Financing Activities
(Decrease) increase in warehouse facilities(544) 1,173  
Increase (decrease) in advance facilities58  (40) 
Repayment of notes payable  (294) 
Proceeds from HECM securitizations  398  
Proceeds from sale of HECM securitizations  20  
Repayment of HECM securitizations(168) (434) 
Proceeds from issuance of participating interest financing in reverse mortgage interests99  156  
Repayment of participating interest financing in reverse mortgage interests(598) (1,004) 
Proceeds from the issuance of excess spread financing24  437  
Settlements and repayments of excess spread financing(110) (119) 
Issuance of unsecured senior debt600    
Repayment of nonrecourse debt – legacy assets  (6) 
Redemption and repayment of unsecured senior notes(698)   
Repayment of finance lease liability(1) (2) 
Surrender of shares relating to stock vesting(5) (2) 
Debt financing costs(20) (1) 
Net cash attributable to financing activities(1,363) 282  
Net increase (decrease) in cash, cash equivalents, and restricted cash689  (12) 
Cash, cash equivalents, and restricted cash - beginning of period612  561  
Cash, cash equivalents, and restricted cash - end of period(1)
$1,301  $549  
Supplemental Disclosures of Cash Activities
Cash paid for interest expense$89  $74  
Net cash paid (refunded) for income taxes$3  $(1) 

(1)The following table provides a reconciliation of cash, cash equivalents and restricted cash to amount reported within the consolidated balance sheets.
June 30, 2020June 30, 2019
Cash and cash equivalents$1,041  $245  
Restricted cash260  304  
Total cash, cash equivalents, and restricted cash$1,301  $549  

See accompanying notes to the consolidated financial statements (unaudited). 
8


MR COOPER GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(millions of dollars, unless otherwise stated)

1. Nature of Business and Basis of Presentation

Nature of Business
Mr. Cooper Group Inc., collectively with its consolidated subsidiaries, (“Mr. Cooper”, the “Company”, “we”, “us” or “our”) provides servicing, origination and transaction-based services related to single family residences throughout the United States with operations under its primary brands: Mr. Cooper® and Xome®. Mr. Cooper is one of the largest home loan originators and servicers in the country focused on delivering a variety of servicing and lending products, services and technologies. Xome provides real estate services including real estate brokerage, title, closing, valuation and field services to lenders, investors and consumers. The Company’s corporate website is located at www.mrcoopergroup.com. The Company has provided a glossary of terms, which defines certain industry-specific and other terms that are used herein, in the MD&A section of this Form 10-Q.

Mr. Cooper, which was previously known as WMIH Corp. (“WMIH”), is a corporation duly organized and existing under the laws of the state of Delaware since May 11, 2015. On July 31, 2018, Wand Merger Corporation (“Merger Sub”), a wholly-owned subsidiary of WMIH merged with and into Nationstar Mortgage Holdings Inc. (“Nationstar”), with Nationstar continuing as a wholly-owned subsidiary of WMIH (the “Merger”). Prior to the Merger, WMIH had limited operations other than its reinsurance business that operated in runoff mode. As a result of the Merger, shares of Nationstar common stock were delisted from the New York Stock Exchange. Following the Merger closing, the combined company traded on NASDAQ under the ticker symbol “WMIH” until October 10, 2018, when WMIH changed its name to “Mr. Cooper Group Inc.” and its ticker symbol to “COOP”.

Basis of Presentation
The consolidated interim financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the SEC. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Reports on Form 10-K for the year ended December 31, 2019.

The interim consolidated financial statements are unaudited; however, in the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair presentation of the results of the interim periods have been included. Dollar amounts are reported in millions, except per share data and other key metrics, unless otherwise noted.

The Company evaluated subsequent events through the date these interim consolidated financial statements were issued.

Basis of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, other entities in which the Company has a controlling financial interest and those variable interest entities (“VIE”) where the Company’s wholly-owned subsidiaries are the primary beneficiaries. Assets and liabilities of VIEs and their respective results of operations are consolidated from the date that the Company became the primary beneficiary through the date the Company ceases to be the primary beneficiary. The Company applies the equity method of accounting to investments where it is able to exercise significant influence, but not control, over the policies and procedures of the entity and owns less than 50% of the voting interests. Investments in certain companies over which the Company does not exert significant influence are accounted for as cost method investments. Intercompany balances and transactions on consolidated entities have been eliminated. Business combinations are included in the consolidated financial statements from their respective dates of acquisition.

Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates due to factors such as adverse changes in the economy, changes in interest rates, secondary market pricing for loans held for sale and derivatives, strength of underwriting and servicing practices, changes in prepayment assumptions, declines in home prices or discrete events adversely affecting specific borrowers, uncertainties in the economy from the COVID-19 pandemic, and such differences could be material.

9


Recent Accounting Guidance Adopted
Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326), (“ASU 2016-13”) requires expected credit losses for financial instruments held at the reporting date to be measured based on historical experience, current conditions and reasonable and supportable forecasts, which is referred to as the current expected credit loss (“CECL”) methodology. The update eliminates the initial recognition of credit losses on an incurred basis in current GAAP and instead reflects an entity’s current estimate of all expected credit losses over the life of the asset. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss. The new standard will reflect management’s best estimate of all expected credit losses for the Company’s financial assets that are recognized at amortized cost. The guidance was effective for the Company as of January 1, 2020, with a cumulative-effect adjustment to retained earnings as of that date.

Based upon management’s scoping analysis, the Company determined that reverse mortgage interests, net of reserves, advances and other receivables, net of reserves, and certain financial instruments included in other assets are within the scope of ASU 2016-13. Certain financial instruments within these respective line items have been determined to have limited expected credit-related losses due to the contractual servicing agreements with agencies and loan product guarantees. For advances and other receivables, net, the Company determined that the majority of estimated losses are due to servicing operational errors and credit-related losses are not significant because of the contractual relationships with the agencies. For reverse mortgage interests the Company determined that the guarantee from Federal Housing Administration (“FHA”) on Home Equity Conversion Mortgage (“HECM“) loan products limits credit-related losses to an immaterial amount with substantially all losses related to servicing operational errors. For other assets, primarily trade receivables, the Company determined that these are short-term in nature (less than one year), and the estimated credit-related losses over the life of these receivables are similar to those resulting from the Company’s existing loss reserve process. For each of the aforementioned financial instruments carried at amortized cost, the Company enhanced its processes to consider and include the requirements of ASU 2016-13, as applicable, into the determination of credit-related losses.

On January 1, 2020, the Company adopted ASU 2016-13 using the modified retrospective method for the above-mentioned financial assets. Results for reporting periods after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded transition adjustments aggregating to a net increase of $9, or $7 after tax, to retained earnings and a reduction of $7 to the advances and other receivables reserve and a $2 reduction in the other assets reserves, as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13.

In connection with adoption of ASU 2016-13, the Company updated its accounting policies as follows:

For certain financial instruments included in advances and other receivables, net, and certain trade receivables and accrued revenues included in other assets that within the scope of ASU 2016-13, the reserve methodology was revised to consider CECL losses. The revised CECL methodology considers expected lifetime loss rates calculated from historical data using a weighted average life to determine the current expected credit loss required. Due to the nature of the financial instrument, reverse mortgage interests, net of reserves, and advances and other receivables had limited impact from the adoption of CECL to the reserve methodology. See Note 4, Advances and Other Receivables, Net, Note 5, Reverse Mortgage Interests, Net, and Note 7, Other Assets, for additional information.

Factors that influenced management’s current estimate of expected credit losses for certain advances and other receivables and certain trade receivables and accrued revenues included the following: historical collection and loss rates, passage of time, weighted average life of receivables, and various qualitative factors including current economic conditions.

Factors that influenced management’s current estimate of expected credit related losses for certain reverse mortgage interests included the following: historical collection and loss rates, foreclosure timelines, and values of underlying collateral.

Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement