Mr. Cooper Group Inc.

Good day, and thank you for standing by. Welcome to the Mr. Cooper Group first quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's 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. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Ken Posner. Please go ahead.

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, Chris Marshall, Vice Chairman and President, and Jamie Gow, Executive Vice President and CFO. As a reminder, this call is being recorded. Also, 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 Jay.

Thanks, Ken, and good morning, everyone, and welcome to our call. As we all know, the first quarter was extremely volatile, with the conflict and humanitarian crisis in Ukraine shocking the markets, further supply chain disruptions leading to headaches for many industries, accelerating inflation forcing the Fed into action, and the sharpest increase in mortgage rates in many years, if not decades. and really all of this has pushed the originations industry into a period of severe retrenchment. But for Mr. Cooper, this kind of environment demonstrates the benefits of our balanced business model, which by design includes a much higher contribution from servicing than most of our peers. The key themes for us in this environment are, first, very robust growth in book value. Second, a sharp ramp in servicing profitability in the coming quarters. And third, the monetization process for zone. We'll talk more about these themes in a moment. First, though, let's review the quarter's highlights. For the first quarter of 2022, we generated very, very strong net income of $658 million. And as a result, tangible book value increased to $52.01 per share, which is an impressive 62% year-over-year gain. Net income included operating results, which were in line with our guidance, the gain from the SAGENT transaction, which we closed in March, and an MSR mark of $552 million, which was higher than what we previously guided to as interest rates continued to rise through quarter end. On a gap basis, our return on tangible equity was 74%. On an operating basis, the return was 8%, which is below the target range of 12% to 20%, which we guided you to expect in most environments. The next couple of quarters are a transitional environment for us. We expect our returns to trough in the second quarter, after which we're projecting a sharp ramp in servicing profitability, driven primarily by higher interest rates, which should carry us by fourth quarter back into our target ROTCE range. Zeroing in on the segments, operating earnings were in line with our guidance, with servicing contributing $7 million in pre-tax income and originations contributing $157 million. What was exciting to us was the growth that we achieved as we took the portfolio to $796 billion, which was up 12% sequentially and 27% year over year. Frankly, we've made faster progress towards our strategic goals than even I anticipated. What you're seeing is that we can be extremely nimble when the opportunity presents itself, because our team knows the market inside and out, and our operations and technology are completely unmatched. This quarter's growth sets the stage for strong recurring annuity-like cash flow, which in the current rate environment will last for years and years to come. Turning to capital management, we repurchased 700,000 shares for $35 million during the quarter. With the recent sell-off in our stock price, we've shifted our focus from MSR acquisitions to stock repurchase, which is exactly what you would expect us to do as stewards of your capital, and we'll talk more about this in a moment. The balance sheet continues to be a good story. At March 31st, our capital ratio was 27% of assets, and our cash and liquidity remained strong. Our stakeholders should feel confident in Mr. Cooper's ability to serve our 3.9 million customers, even in a volatile environment. Now let's turn to slide four and let's talk about the outlook for the rest of 2022. To start with, our servicing portfolio puts us in position to benefit from higher interest rates, thanks to dramatically lower amortization. We believe servicing profitability bottomed in the first quarter, and by the end of the year, we should be generating at least $100 million per quarter in pre-tax income from this segment. This projection primarily reflects the impact of higher interest rates, which obviously lie outside our control. But what we can control is how we run the platform. And in that regard, we're extremely focused on continuing to lower our costs and deliver an even better customer experience with the goal of driving higher returns in 2023 and beyond. Turning to originations, you'll see us operating with consistent profitability, albeit at lower levels, as this is clearly not the time to chase volume or market share. We've already taken several steps to adjust our capacity, and you'll see us doing more. Having said that, we have hundreds of thousands of customers with equity in their homes whom we can help with cash-out refis, which is a product we're very experienced with. and we have strategic initiatives underway to drive efficiencies, including Project Flash, which will help us sustain our margins. Now let's talk about the zone. As you recall, back in February, we were commenting that activity got off to a little bit of a slower start than we'd expected as servicers were moving forward cautiously on foreclosures, wanting to make sure their borrowers had every possible opportunity to avoid it. But there's no mistaking the growing backlog in REO. In the last two months, we've seen much higher inflows, and in March, our inventories hit an all-time high. We continue to project revenues ramping up in the back half of the year, which supports a very strong outlook for 23. And in a moment, Chris will give you an update on our strategic thinking for zone. Finally, I want to return to the theme of capital allocation. Over the next few quarters, we expect to acquire MSRs at a more measured pace. This will give us the chance to digest recent purchases, further strengthen our cash position, and let sellers' expectations cool after the recent run-up in rates. With our stock trading at a discount to book value, we're looking for opportunities to buy back more shares while at the same time managing our capital and liquidity conservatively. And with that, I'd really like to thank every single team member at Mr. Cooper for your hard work, which produced such exceptional results, and for your dedication to our customers. Now, Chris will take you through more details on originations, servicing, and zone. And following Chris, Jamie will take you through the financials. Last week, I'm excited to say we promoted Jamie to Executive Vice President and CFO, and I couldn't be more pleased with the experience and leadership he's brought to the companies. Over the last three years, he's really built a world-class team of finance, accounting, and tax professionals, significantly improved our processes and controls, and managed the sale of the reverse portfolio to a very successful outcome. Jamie's promotion will allow Chris and his role as president to shift his full focus to the business units. And with that, I'll turn the call over to Chris.