Mr. Cooper Group Inc.
Q1 2019 Earnings Call Transcript

Published: 1 May 2019

[Operator:]

Good day ladies and gentlemen and thank you for standing by. Welcome to Mr. Cooper’s first quarter earnings call. At this time, all participants are in a listen-only mode. If anyone needs assistance during the conference, just press star and zero for an operator. Later we will have a question and answer session, and to participate on that section of the call, press star and one. Thank you. Now it’s my pleasure to turn the call to Mr. Ken Posner.

[Ken Posner:]

Good morning and welcome to Mr. Cooper Group’s first quarter earnings call. My name is Ken Posner, and I’ve SVP of Strategic Planning and Investor Relations. With me today is Jay Bray, Chairman and CEO, and Chris Marshall, Vice Chairman and CFO. Let me start by reminding you of a few things. First, we’ll be referring to slides that can be accessed on our Investor Relations webpage at investors.mrcoopergroup.com. Second, this call is being recorded. Third, during the call we may refer to non-GAAP measures which are reconciled to GAAP results in the appendix to the slide deck. Finally, during the call we may make forward-looking statements. You should understand that these statements could be affected by risk factors that we have identified in our 10-K and other SEC filings. Further, we’re not undertaking any commitment to update these statements if conditions change. I’ll now turn the call over to Jay.

[Jay Bray:]

Thanks Ken, and good morning everyone. We had a busy first quarter at Mr. Cooper with strong operational momentum to report in each of our segments. Before I dive into the quarterly numbers, though, I’d like to put the results into some context. As you know, Mr. Cooper is a market leader among non-bank servicers with a 10-year track record of almost 40% annual growth in our servicing portfolio. We believe that growth reflects several sources of competitive advantage which our team has worked tirelessly to develop, including industry-leading home ownership preservation through our loss mitigation expertise, robust home finance solutions for our customers and best-in-class recapture capabilities, a low-cost platform, a strong compliance record, and our uniquely customer-centric culture. As you know, 2019 is a year of integration and investment for us, designed to position this world-class platform for strong profitability and continued growth. Our focus this year is on integrating three recent acquisitions

[Chris Marshall:]

Thanks Jay, and good morning everyone. Let’s start with a high level review of profitability on Slide 6. As Jay mentioned, we reported a net loss of $2.05 per share, largely driven by a mark to market of $293 million. As you know, we have an exposure to declining interest rates which we partially manage through our recapture and origination capabilities, as well as the use of excess spread financings and growth in our sub-servicing book. While those offsets continue to grow, they don’t cover our entire exposure. So far in the second quarter, mortgage rates have reversed part of this decline, and if they remain at this level we’d expect to recover some of that mark at the end of Q2. Now if you’ll turn to the table on the right, you’ll see we’re estimating operating profitability at 8.7% ROTCE, so let me explain how we get there. Under acquisition accounting rules, there’s a 12-month period to refine initial purchase price accounting interest. We made a couple of adjustments in the first quarter, which you will see impacted goodwill and tangible book value, as well as earnings. One adjustment was related to the Day 1 valuation for our reverse portfolio under the WMIH merger, which we mentioned in our 10-K is remaining under review. This adjustment resulted in a $9 million cumulative effect to earnings in the quarter. The other adjustment related to the acquisition of Assurant, which included an earn-out and an associated contingent liability, and based on current calculations we’ve reduced the amount of that liability by $11 million. In addition to these tow accounting items, we’re backing out $20 million in merger and integration charges related to the Pacific Union and Seterus acquisitions, and then a third adjustment relates to our MSR amortization policy which is based on original costs, so when we back out the mark to market, we’re leaving in $25 million [indiscernible] the difference between carrying value and cost, which makes our operating results more indicative of the underlying profitability. The last adjustment adds back intangible amortization. Now if you look through these items, you’d see that on an operating basis, net income was $36 million and ROTCE was 8.7%, which is a starting place from which to project the path for higher returns over time. Turning to Slide 7, this is another presentation of pre-tax operating income organized by segment. In summary, I’ll comment that the story for the first quarter should be very simple and clear

[Ken Posner:]

Thanks Chris. I’m going to ask our operator to start the Q&A session at this time.

[Operator:]

[Operator instructions] Our first question is from Bose George with KBW. Your line is open.

[Bose George:]

Hey guys, good morning. Can you remind us how much Project Titan expense is left for the remainder of the year, and also I can’t remember, have you mentioned what the integration expenses remaining are as well?

[Chris Marshall:]

Yes, good morning, George. Titan spending is going to remain at about its current level, which was about $10 million in the quarter, through Q4. It may ramp down a little bit, but you should expect it to stay at these current levels. Then I think the question was integration expense--Assurant, and I think--well, I’ll go through each of them. Assurant integration expense is about $8 million in the quarter, and that will drop off gradually as we get through the next two quarters and finish systems integration. I won’t try to give you exact guidance on that, but it will decline as each of the systems gets completed. Then with regard to the Seterus and Pacific Union acquisitions, I’m not sure I have the exact number, but I would guess that the remaining integration costs are about half of what they were this quarter. As you probably know, Seterus, we did that in two pieces. We initially boarded the loans as sub-servicing. We’ll actually close on the MSR purchase, so there will be some slight costs there, and then we still have a hold-over of certain personnel from Pacific Union that will continue into next quarter, so about half the level.

[Bose George:]

Okay, great. Thanks. In terms of the longer term profitability of Xome, is there a way to think about the timeline to get to even where you were before the Assurant acquisition, sort of the trajectory to get back there?

[Chris Marshall:]

Well, if you think of Assurant--we’ve talked a lot about Assurant getting to breakeven, and we expect that to happen by the end of the year. As we’ve said, we feel actually better than we did last quarter about getting there maybe even sooner. If you were to remove the Assurant overhang, Xome’s profitability would still be a little bit lower than it was prior to the acquisition just because of the low delinquencies and headwinds. I’m not sure I want to give you exact guidance on a number, but you should see their profitability change significantly once we complete systems integration. I would think of it as largely flat with where we were before the integration, before adjusting for delinquency and volume changes.

[Jay Bray:]

I think there’s some momentum there, Bose. If you look at new clients, you look at--I think to Chris’ point, we’re a little ahead now on the integration itself, and we also are getting some tailwinds from rate environment, certainly helping a couple of the businesses, so I think the latter half of the year you’ll definitely see improvement.

[Bose George:]

Okay, thanks. Then just one on the--you know, the operating ROTCE that you guys broke out, obviously that makes sense. The way you show your servicing profitability, is there a plan to make that consistent as well since now one includes the $25 million and one excludes it?

[Chris Marshall:]

I’m not sure we’re going to change that. The whole idea on isolating the fair value to cost is to try to show the underlying profitability of the platform based on where we buy things. That’s how we’ve presented it historically, so I don’t think we’re going to change that; but we’re hopefully providing enough information that you can make any adjustments on your own.

[Bose George:]

Absolutely. Great, thanks.

[Operator:]

Thank you. Our next question comes from Mark Hammond with Bank of America High Yield. Your line is open.

[Mark Hammond:]

Thanks, good morning Jay, Chris and Ken. I had two questions. The first, if you could walk through that Slide 25 that you included or introduced this quarter, and just walk me through what it means?

[Chris Marshall:]

Slide 25? We’ve had a lot of questions about cash flow and specifically what amount of cash flow is required to maintain the portfolio at a steady state. We’ve gotten that from a number of people, so there’s actually two slides here - 25 and 26, and these are purely illustrative charts to try to give you an idea using this quarter and normalizing for non-recurring or non-cash charges to show you--again, using EBITDA. Slide 25 is a walk-through to give you an idea of what discretionary cash flow is, and then the following page gives you an idea on how much discretionary cash would be required to maintain the portfolio at its current level and current mix.

[Jay Bray:]

Effectively, Mark, if you look at what--we’re trying to present what additional cash we would need to maintain at a steady state. You can look at that on UPB or an economic basis. I think on an economic basis on 26, you’re effectively--if you look at the right-hand side of the page, we think we’re at 96% replenishment rate with the new MSRs we’re creating because you don’t really have a co-invest associated with that, so from an economic standpoint, that’s really what we’re trying to present on that page. The two--you have to kind of link the two pages together.

[Mark Hammond:]

Yes, I do really like the introduction of them from the credit side. Then dovetailing with that and the potential cash flow generation of the company, what’s the time frame of getting to that target leverage that you put out, that five times?

[Chris Marshall:]

There isn’t any specific time. I think we are just trying to remind people. That’s how we’ve always operated. There shouldn’t be any assumption that we have changed our target leverage ratio, and over the long term that’s where you should assume we will be. But hopefully what we’ve shown here is that we are generating cash flow at a healthy rate and I think our messaging was clear that we will communicate any specific plans to de-lever when and if we--you know, the board feels it’s appropriate to start paying down the debt. In the meantime, you should expect to see us allowing cash balances to build and beyond that, we wouldn’t comment on any specific schedule to pay down the debt.

[Jay Bray:]

You probably recall, Mark, prior to the merger we significantly reduced the debt to EBITDA ratio using free cash flow and repurchased over $600 million of debt, so I think we’ve got a track record of doing it. To Chris’ point, the timing is kind of to be determined.

[Mark Hammond:]

Thanks. The last one is on that five times, is that net or gross of cash?

[Chris Marshall:]

That would be gross of cash.

[Mark Hammond:]

Okay, perfect. Thank you.

[Operator:]

Thank you. Our next question comes from Kevin Barker with Piper Jaffray. Your line is open.

[Kevin Barker:]

Good morning. First off, I’d like to say all the new disclosures that you put out there are extremely helpful. I think it’s a great step forward and I appreciate you putting them out there. Just to follow up on some of the leverage comments, do you have a goal for a debt to equity or debt to equity excluding the DTA? I understand you have a debt to EBITDA numbers and those are what the focus is from some of the rating agencies, but the tangible common equity ratio and the debt to equity ratio are important metrics for the GSEs and FHFA, so do you have any color there?

[Chris Marshall:]

I’m not sure we’d offer any specific goals, Kevin. I have to apologize - I didn’t hear--I as having trouble hearing your exact question. I think what you’re asking is do we have additional metrics that are of interest to the GSEs?

[Kevin Barker:]

Do you have a goal for a debt to equity , or debt to equity excluding the DTA?

[Chris Marshall:]

No, we don’t have--we haven’t communicated and we don’t have any specific metric that we’re managing to for debt to equity excluding the DTA.

[Jay Bray:]

I think, Kevin, we run--obviously we’re well in excess of any GSEs or FHA [indiscernible] requirements. That’s very, very important to us, and Ken can lead the charge here, we’ve run sensitivity and stress case scenarios around that as well, so we feel very confident that we’ll be more than adequate for our partners there. But to Chris’ point, I don’t know that we set a specific target that we can talk about today.

[Kevin Barker:]

Okay. I asked the question because the GSEs require a 6% tangible common equity ratio, and that’s in reference to that comment. In regards to the cash flow slide on Page 25, to follow up on some of those questions, what was the discretionary cash flow in 2018 compared to the $51 million that was disclosed in the first quarter of ’19?

[Chris Marshall:]

I’m not sure I have that number in front of me, Kevin, but we’d be happy to walk through that with you after the call. That’d be easy enough to calculate.

[Kevin Barker:]

Okay. Going back to your guidance on the 6 basis point average pre-tax operating margin in the servicing segment, is that in relation--is that apples to apples to the 7.5 basis points you disclosed in the first quarter or the 6.8 basis points?

[Chris Marshall:]

No, it would be apples to apples to the 7.5 basis points. I think if you went back to last quarter, we said we thought overall servicing profitability would be somewhere about 6.5 basis points for the year, and so we are really just reinforcing that guidance. We knew we had the trust collapse in the first quarter - that benefit was about twice the level, it was $20 million of benefit. We generally average about $10 million a quarter from one-off items that tend to occur just about every quarter, so if we looked out for the next six or eight quarters, we’d have some transactions expected, so that’s one element. The other element is CPRs were low in the quarter. We would expect them to rise a little bit next quarter, so that number 6 may be slightly different quarter to quarter, but I think that’s a good number for you to expect us to average over the balance of the year.

[Kevin Barker:]

Yes, because the amortization expense was very, very low this quarter.

[Chris Marshall:]

Right.

[Kevin Barker:]

Do you have an expectation for amortization expense in the second quarter versus the--I believe it was $23 million this quarter?

[Chris Marshall:]

We track CPRs and payoffs and every metric possible, so we do have numbers but they change as we go, so I’d rather not give you any guidance now because it may be materially different. But we do expect CPRs to rise maybe 200 basis points.

[Kevin Barker:]

Okay, that’s fair. Then gain on sale improved significantly in the origination segment as interest rates declined through the quarter, and we saw the primary-secondary spread expand. Do you have an update on where gain on sale margins are running through April versus what you recorded in the first quarter?

[Chris Marshall:]

Again, we track those daily. I’m not sure I have that, but we can talk to you about that offline. But more importantly, I would just say we feel very good about originations in the second quarter overall, not just gain on sale margins, volumes. Just about every metric looks very, very good. If you don’t mind, we’ll address that question after the call. I don’t have that data in front of me.

[Jay Bray:]

Kevin, if you look at originations in the first quarter, our funded volume was up I think overall 5%, the market was down 17% - now obviously, some of that is due to Pacific Union, and then our rate locks were up over 22%. We’re seeing, to Chris’ point, a lot of momentum in originations still, so feel good about that at the moment.

[Kevin Barker:]

Do you expect the gain on sale margins in the first quarter to be sustained through the rest of the year?

[Chris Marshall:]

Yes, I don’t think we’d want to make that forecast. That would be terrific if they are, but we wouldn’t be the ones to forecast that.

[Kevin Barker:]

Okay, I’ll get back in the queue. Thank you for taking my questions.

[Operator:]

Thank you. Our next question is from Doug Harter with Credit Suisse. Your line is open.

[Doug Harter:]

Thanks. Last quarter, you guys talked about starting to look at the possibility of hedging the MSR portfolio. Can you just give us any updated thoughts on where you are on that decision?

[Chris Marshall:]

Nothing really has changed. We are taking a fresh look at the pros and cons of hedging, but you shouldn’t expect any change in our strategy, which has been to manage rate exposure through originations and expanding use of excess spread, and the growth in sub-servicing. You should expect us to constantly look at hedging, and we are--largely because I’ve just recently joined the company, I’m probably taking a more comprehensive look, but I don’t want anyone to read into it that there is a change afoot. So we’ll do that over time, this is something that we are planning to wrap up in the back half of the year, but don’t expect any change unless we--I guess if we are going to change, we’ll clearly communicate that to you.

[Doug Harter:]

Great. It looks like you guys added a little over $30 billion to the servicing balance beyond Pacific Union, Seterus in the quarter. Can you just give some additional detail as to what that looked like?

[Chris Marshall:]

It was a mix. We bought about $14 billion in MSRs and picked up about $16 billion in UPB from existing sub-servicing customers, and I think we commented on the fact that we expect that some of that sub-servicing may drop a little bit in future quarters, but slightly. It was a mix of customers, there’s not any specific number, but just shows that there are good flows coming in across the board and there were a few opportunities for us to buy some pools that we thought were at good values.

[Doug Harter:]

Thank you, Chris.

[Operator:]

Thank you. Our next question is from Giuliano Bologna with BTIG. Your line is open.

[Giuliano Bologna:]

Hi, thanks for taking my questions. Starting off, [indiscernible] thinking about the cash question, the cash comments you made earlier in the call, should we think about any kind of upper bound in terms of the amount of cash that you’d want to hold on your balance sheet or leave undeployed?

[Chris Marshall:]

No, I wouldn’t guide you to any number at this point. I think you should think of cash flow as something that is just part of the overall capital allocation decisions that the company makes, and I guess what we’re trying to make clear is we will probably see cash balances grow, but at the same time we will revisit that question along with the broader capital allocation discussion with our board each quarter. If something does change that’s material, we’ll let you know, but there’s not an exact number that we’re guiding you to expect.

[Jay Bray:]

I think you should think of it as not necessarily not deployed, because typically what we will do with excess cash is pay down operating debt throughout the quarter, so we’ll use that cash, if you will, to pay down advance lines, pay down origination lines, etc. so there will be some benefit from that, from a deployment standpoint.

[Giuliano Bologna:]

That makes sense. Kind of extending on that point, in terms of deleveraging, you can obviously pull down on some of the operating debt on a quarterly basis, or intra-quarter How should we think about deleveraging as a whole? Would you rather take out maturities as they become due or buy back some debt in the market?

[Chris Marshall:]

I’d rather not give you a specific plan there, because we will--we’re going to be opportunistic. It would all depend on what market conditions are. Obviously we do know what our maturity schedules are and we have to plan for those accordingly, but we want to not just retain but create additional optionality so that we can react to things that might happen in the market.

[Jay Bray:]

Historically if you look again back to the debt pay down prior to the merger, it was a combination. We paid down some maturities as well as opportunistically bought debt in the market.

[Giuliano Bologna:]

That makes sense. Going back to the originations business, in terms of thinking about the cadence of volumes there, obviously the core business came down a little bit, but how should we think about the mix going forward in terms of the original core business versus the PacU contribution?

[Chris Marshall:]

First of all, we said PacU has been performing as expected. I would just normalize that for three months and assume that what happened in the first quarter is a good proxy for what the mix should be going forward.

[Giuliano Bologna:]

That makes sense. Thank you for answering my questions, I appreciate it.

[Operator:]

Thank you. Our next question is from Henry Coffey with Wedbush Securities. Your line is open.

[Henry Coffey:]

Good morning everyone, and again I’d like to add my thanks for the additional disclosure and the new template. A couple of questions, just to make sure we have those numbers right. I know some of this was covered, so. You have $20 million in merger related costs - that does not include Titan, or it does include Titan?

[Chris Marshall:]

It does not.

[Henry Coffey:]

Okay, and then--

[Jay Bray:]

That, Henry, was related to the Pacific Union, Seterus predominantly.

[Henry Coffey:]

Okay, but--then the--yes, so that’s a fairly solid benchmark there, and the fair value amortization mark, that’s the--the technical term is change in fair value from realization of cash flows. Is that correct, that’s what that is, or is that something else?

[Chris Marshall:]

Which number are you referring to, Henry?

[Henry Coffey:]

The fair value amortization of $25 million.

[Chris Marshall:]

That’s the difference between fair value and cost of the MSRs that paid down in the quarter.

[Henry Coffey:]

Okay. It’s not confusing to me because I’ve see it this way forever, but your credit quality is getting better, your CPRs are going down, but because of the change in interest rates, you got hit with a pretty hefty mark. What should we expect going forward, given the fact that the fundamental performance of the MSRs seems to be very favorable?

[Chris Marshall:]

Are you asking specifically about a mark, or are you--

[Henry Coffey:]

Yes, what should we expect in terms of a--I think in terms of fundamental performance, it should be getting better, but in terms of fair value marks, is there anything that would result in a negative mark of this size again, or do you think that you pretty much adjusted to the current interest rate environment?

[Chris Marshall:]

Well, the vast majority of the mark is rate related, so there’s no expectation for any other type of negative mark. If rates were to fall significantly, yes, we would see additional mark. Where we are so far this quarter, it looks like rates have come back. They’re maybe about a third of the way back from the decline we saw last quarter, and so if we were to end the quarter today, I’d say that’s a rough proxy for what we might see in terms of a reversal and a positive mark. But more importantly, I think you made the point earlier, what we’re seeing here is very healthy growth in our UPB even over and above the deals we announced. - we had $30 billion of growth in UPB and a nice mix of purchased and sub-servicing growth. Profitability - while we are saying profitability may normalize at a slightly lower level, we feel very good about profitability of the servicing platform and we think you should too. Originations, that was an incredibly strong quarter, but we feel very good about the second quarter and we feel although Xome is feeling the pressure of the Assurant integration, we feel pretty good about Xome coming back. So overall, we think the company, while we don’t like having a big negative mark any more than anyone else, we think if you look past that, the company is positioned for very strong profitability in the future.

[Henry Coffey:]

Just two more quick questions. Gain on sale margin improved from 0.5 to 0.7, or 20 basis points. Could you add a couple of--you know, another digit to that, because 0.5 is a pretty wide number, 0.7 is an equally potentially wide number in something that’s measured in basis points. It looks like it was a 20 basis point improvement, but I was wondering if we could put another digit into that.

[Chris Marshall:]

I tell you what - we will track down a number and we’ll get to you right after the call.

[Henry Coffey:]

Great. Then finally, a more complex question. In terms of your equity capital and your tangible book value, the DTA as a defining element, I’ve looked at it, I’ve come up with my own assumptions, but I’m an outsider looking in. Is there any risk that you might have to revalue that asset in lieu of your current outlook, or have you looked at all those factors and walked away and said, this is just a rock-hard asset, we don’t need to worry about someone changing it, we’re not--there’s no anxiety around this one?

[Chris Marshall:]

I have no anxiety around this one. I would remind you, we’ve got a $300 million valuation allowance against our DTA. If anything, I think we have upside to recapture that.

[Henry Coffey:]

All right, thank you very much.

[Operator:]

Thank you. Our next question is from Sam McGovern with Credit Suisse. Your line is open.

[Sam McGovern:]

Hey guys. In your prepared remarks, you commented that you may de-lever, you may take advantage of opportunities in the market. In the latter scenario, how should we think about how high you might take leverage and for how long, and how focused are you on maintaining your corporate credit ratings?

[Chris Marshall:]

I think our corporate credit rating is important and I wouldn’t guide you to expect that we’re adding leverage. I think our message was clear that we intend to pay down our debt in a responsible way, but as opposed to giving a specific schedule, all we’re saying is our cash flow is healthy, we expect our profitability to grow and in turn our cash flow to continue to grow. If anything, what we’re saying is we just may allow our cash balances to build so that we have some optionality, as opposed to just calling debt early and paying it down. That’s just a clarification.

[Jay Bray:]

I 100% agree with that. I think you will not see additional corporate leverage, corporate debt leverage. We have no plans at all, and to Chris’ point, through operating earnings, cash flows, we will map out a plan to de-lever over time.

[Sam McGovern:]

Perfect, thank you very much. I’ll pass the line.

[Operator:]

Thank you. Ladies and gentlemen, as a reminder, to ask a question, just press star and one. Our next question is from Dan Carroll with Inherent Group. Your line is open.

[Dan Carroll:]

Hey guys, a couple quick questions. First similar to Henry’s question, on the deferred tax asset, it looks like it actually went up a little bit in the quarter. Is that partially because of a release of any valuation allowance, or was it something else? Within that, how much was that of gross NOL actually used on offsetting cash taxes? Two, if you guys can just talk a little bit more - I know you have a chart in your deck about customer sat, but also the other non-financial measures you guys track, including employee engagement and regulatory compliance, just how you’re doing on those especially given everything that’s going on with the integrations. Thanks.

[Chris Marshall:]

Let me start with regard to the DTA. That grew because we had both a GAAP and a taxable loss, so we didn’t use the DTA to avoid any cash taxes. I’d just go back and reiterate that the profitability of the company going forward looks very strong. That’s what we use to project the value of the DTA, so I’m not sure if I maybe was confusing on my earlier question, but that’s why the DTA grew, not related to any valuation release.

[Dan Carroll:]

How would you have a taxable loss in the quarter if all the loss is from a write-down?

[Jay Bray:]

There are timing differences, right, in the MSR mark for tax purposes, and that’s really what drove the increase in the DTA. We can walk you through that offline in detail, but that’s really what drove it.

[Dan Carroll:]

Sure, okay. [Indiscernible].

[Jay Bray:]

On the employee--look, I think our engagement levels have never been higher. We are actually in the month of May rolling out our next employee engagement survey, which is kind of the great places to work survey methodology, and ultimately our goal is to be a top 50 great places to work, and I think we’re on the path to do that. If you look at the priorities that our employees have communicated to us through the surveys from last year, we have addressed the top five items that they wanted to focus on, they’ll tell you, when I have breakfast with Jay, when we have town halls and we have employee engagement and interaction, it’s quite good, and we’re seeing that in turnover metrics, we’re seeing that again in engagement metrics, and I would expect the survey will be great, and I expect it will kind of lead us to the next items that we want to focus on. On the customer side, same story - I mean, we’re seeing complaints are at an all-time low, we have a customer health index that we’ve worked a lot on, where we measure engagement from a digital standpoint, just overall engagement, those metrics are good. I think the first quarter, when you board that many customers, you’re obviously going to experience some longer call times, hold times, etc., and we expected that and we communicated that, frankly, to our customers. When you look at the underlying metrics, I think it’s very healthy and moving in the right direction.

[Dan Carroll:]

Great, thanks guys.

[Operator:]

Thank you. Our next question is from Kevin Barker with Piper Jaffray. Your line is open.

[Kevin Barker:]

Just wanted to check up on Assurant. Was there a write-down of the acquisition and did that impact some of the profitability this quarter, and where did that come through?

[Chris Marshall:]

It did, Kevin. It was--as part of the Assurant acquisition, there was an earn-out associated with that deal, and associated with that earn-out there was a contingent liability recorded. So just looking [indiscernible] the fair value of that, and based on our assumptions this quarter, we released $11 million of that contingent liability.

[Kevin Barker:]

Okay.

[Chris Marshall:]

If you back that out of Xome, there were also about $11 million of non-operating items in the quarter, so they sort of balance, but yes, that write-down directly impacted Xome.

[Kevin Barker:]

Okay.

[Jay Bray:]

Kevin, back to your question on capital earlier, we can walk you through the math, and I think we’re today at 16% on the ratio that GSEs are looking for. I think we’ve got a lot of cushion there, but offline I can walk you through how that’s calculated.

[Kevin Barker:]

Okay, that’s helpful. Then a follow-up on the Pacific Union acquisition, I believe they put out an 8-K earlier in the quarter where it appears they lost $32 million in 2018, which I believe includes $9 million of mark over the MSR - correct me if I’m wrong there. Could you just lay out the path to profitability at Pacific Union and what you’re doing in order to get Pacific Union to be profitable in 2019 versus what they reported in 2018?

[Ken Posner:]

Kevin, it’s Ken, I’ll take that question. You’re correct on Pacific Union’s 2018 result, but bear in mind a couple of things were going on there. First, they were in the process of downsizing and taking some charges, given the weak market conditions in 2018, and they got through that and restored profitability. Then additionally, their results include a mark to their MSR to conform to our pricing models, so that’s all done. So as we commented in that 8-K, they made a positive contribution to the origination segment EBD in the first quarter, so not to say there couldn’t be some more cost savings going forward, but they are now making a positive contribution.

[Kevin Barker:]

You’re saying--

[Jay Bray:]

Yes, and as you would naturally expect, Kevin, there’s a lot of expense that’s been taken out from a corporate perspective, so that’s certainly a piece of it as well, as Ken alluded to.

[Kevin Barker:]

So you’re saying they were profitable near the end of the year on a quarterly basis, and then the loss on the yearly basis was related to earlier in the year, and then you have additional operating expenses that you’re able to take out, is that right?

[Jay Bray:]

That’s right.

[Chris Marshall:]

That’s correct.

[Kevin Barker:]

Okay, all right. That’s all I had at this point, thanks.

[Operator:]

Thank you. We have a follow-up from the line of Giuliano Bologna with BTIG. Your line is open.

[Giuliano Bologna:]

Thank you for taking my follow-up. Just one quick question on the reverse book. How should we think about the run-off of that book and the capital associated with that book, and how fast that could be released as the reverse book runs down over time?

[Chris Marshall:]

Well, let me see if I can give you a succinct answer. With reverse, part of the run-off you’re seeing goes back to the fourth quarter when we said we had a very high level of assignment activity, and as a result of that we had a significant benefit in the fourth quarter. I think year over year, we’re running off at about 30%, and I think that is probably a good number to assume going forward at that same level. In terms of capital being released, I’m not sure I have a breakout that I could refer to. I’d be happy to follow up with you and talk in detail about it, but in terms of the run-off of the book, that’s what you should assume.

[Giuliano Bologna:]

Thank you, I appreciate it. That was all for me. Thank you.

[Operator:]

Thank you. This concludes our Q&A session for today. I would like to turn the call back to Kenneth Posner for his final remarks.

[Ken Posner:]

Thanks very much, Carmen. We look forward to following up with everybody and reporting in second quarter.

[Operator:]

With that, ladies and gentlemen, we thank you for participating in today’s conference. This concludes the program and you may all disconnect. Have a wonderful day.