Mr. Cooper Group Inc.

Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. Should you require any further assistance, please press star 0. I would now like to turn the call over to your host, SVP, Strategic Planning and Investor Relations, Ken Posner.

Good morning, and welcome to Mr. Cooper Group's first quarter earnings call. My name is Ken Posner, and I'm SVP of Strategic Planning and Investor Relations. With me today are Jay Bray, Chairman and CEO, and Chris Marshall, Vice Chairman and CFO. As a quick reminder, this call is being recorded, and you can find the slides on our Investor Relations webpage at investors.mrcoopergroup.com. During the call, we may refer to non-GAAP measures, which are reconciled to GAAP results in the appendix to the slide deck. Also, we may make forward-looking statements, which you should understand could be affected by risk factors that we've identified in our 10-K and other SEC filings. We are not undertaking any commitment to update these statements if conditions change. I'll now turn the call over to Jake.

Thanks, Ken, and good morning, everyone, and welcome to our first quarter call. We'll start with the highlights on slide three. This was an exceptionally strong quarter for Mr. Cooper, with $561 million in fully tax-affected net income, or $5.92 per share. Let me comment on two separate themes driving these results. The first is operating performance. This quarter, we generated a record $363 million in pretax operating income. That's equivalent to an ROTC of 43%, which, by the way, is the eighth consecutive quarter in which we've outperformed our minimum 12% target. This is a story about innovative technology, world-class operational and financial discipline, and a culture of people working together to help our customers. The second theme is the natural offsets in our balanced business model. which you saw in the $373 million mark to market on our MSR. This is a reminder that when interest rates go up and originations start to cool, we enjoy offsetting benefits from servicing. Tangible book value rose 22% to $31.97 per share. Let me give you some perspective on this metric. If you look back to the WMIH merger, which closed in the third quarter of 2018, TBV per share has increased by nearly 50 percent since then, and this despite well over $1 billion in negative MSR marks as interest rates were falling in 2019 and early 2020. While there was some volatility along the way, we've demonstrated solid profitability and resilience, which speaks once again to the balance in our business model and those offsets between servicing and originations. Let's drill down further into the operating results. Originations generated pre-tax income of $362 million on record fundings of $25 billion. In fact, we had record fundings in both DTC and correspondent. Servicing turned in a really good quarter with $109 million in EBO revenues, pushing the margin back up to 3.7 basis points. Also, we had 3% growth in the portfolio, or 12% annualized, and I was pleased to see the growth engine firing on all cylinders with good performance out of DTC and correspondent, plus strong co-issue acquisitions and wins in subservicing, and we remain optimistic about bulk opportunities in the coming quarters. Thanks to excellent operating results, we ended the quarter with a very robust cash position of $674 million And this is despite growing the portfolio and repurchasing $148 million in stock. So as you can tell, I could not be more pleased with our results. But now let's talk about the outlook. With mortgage rates up 50 basis points in the quarter and much of that move in March, there's been a great deal of commentary in the market about how the origination industry is now passing through an inflection point. And that's correct. This is the point in the cycle where some of the weaker players are forced to cut prices to sustain volumes. We warn you to expect this in the correspondent channel, and we are now seeing very intense price competition there. Further, higher mortgage rates have led to pressure on refi volumes in our DTC channel. Given the shift in the environment, we're looking for our originations profitability to normalize rapidly. Specifically, we're projecting pre-tax profits down from $363 million in the first quarter to somewhere between $200 and $225 million in the second quarter. This is not the first origination cycle we've been through, and we feel good about our people, platform, and technology. Margins in the correspondent channel may be under pressure, but the channel will still provide us with new servicing customers and also gives us natural exposure to the strong purchase market. In fact, historically, the purchase mix in our correspondent channel has averaged 63%. Additionally, DTC has tremendous experience with cash-out refinances. And as Chris will explain, we're already pivoting in that direction. Let me return to the theme of balance in our business model. Because of EBO revenues, we're going to enjoy a very profitable year in servicing. Then, as amortization slows, servicing margins will start to expand. When short rates finally go up, we'll make more money on custodial deposits. Plus, if mortgage rates rise further, we would expect additional positive marks on our MSR that would build book value. I can't give you exact guidance on how originations and servicing will offset each other because that depends on a lot of factors, including interest rates, the yield curve, and competitive intensity in the origination sector. But what I can tell you is that we still expect to generate strong earnings and very strong cash flow in 2021. Plus, we're expecting to receive $400 million in cash when the sale of Titles 365 closes in the second quarter. By the time we reach the second half of the year, we should have a small war chest of cash, which will allow us to invest significantly in the servicing portfolio, or depending on our stock price, retire a significant amount of shares. In closing, as you think about the outlook for Mr. Cooper, I'd encourage you to think first about our demonstrated operational strength, and second, about the natural offsets in our business model. And finally, think about how we can deploy this cash to generate shareholder value. And with that, I'll turn the call over to Chris.