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Mr. Cooper Group (NASDAQ:COOP)
Q1 2019 Earnings Call
May. 01, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Mr. Cooper's first-quarter earnings call. [Operator instructions] Now it is my pleasure to turn the call to Mr. Ken Posner.

Ken Posner -- Senior Vice President, Strategic Planning, and Investor Relations

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 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.

And 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 are not undertaking any commitment to update these statements if conditions change. I will now turn the call over to Jay.

Jay Bray -- Chairman and Chief Executive Officer

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 the 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: Assurant, Pacific Union, and Seterus; and completing Project Titan, our servicing transformation initiative. We expect this integration and investment to strengthen our competitive position in the marketplace and to put us on a path to higher and more sustainable investor returns. Now, let's turn to Slide 5 and we'll hit some highlights for the quarter. The declining interest rates in the quarter helped us produce very strong results in the origination segment, where EBT increased by more than four times, to $45 million up from $11 million in the fourth quarter.

This strong result was driven by strong growth in lock volumes and more favorable capital market conditions which led to recovery and gain on sale margins. Also benefiting first-quarter results was the first two months' contribution from the Pacific Union acquisition which closed on February 1. We told you last quarter that the integration was moving forward very smoothly and I'm pleased with our excellent retention of clients and team members, and that volumes and margins are coming in consistent with the guidance we shared last fall when we announced the deal. Our direct-to-consumer travel posted extremely strong results and we believe it is a best-in-class recapture platform.

As you may recall, last fall we rolled out a suite of digital tools for our customers aimed at helping them evaluate the benefits of refinancing across a wide range of different products. We also implemented a sophisticated call routing system that sends customers scored with a high propensity to refinance to a specially trained sales and service team. The early data suggests we're getting an impressive lift in conversion rates and reduction in marketing costs which over time should be additive to our already-strong margins in our direct-to-consumer channel. This initiative is actually a key part of Project Titan, whose benefits should become more visible as we enter 2020.

Meanwhile, the servicing segment continued to produce strong results. Thanks to the Pacific Union and Seterus acquisitions we grew the portfolio to $632 billion, significantly surpassing the full-year 2019 growth target we shared last fall. I am especially proud of our servicing team for seamlessly boarding 440,000 new customers in the space of 35 days. This is an operational feat that I don't think the industry has ever seen before, and well beyond the reach of our competitors.

I'd like to recognize Mike Rawls, our head of servicing, his leadership team, and the hundreds of Mr. Cooper teammates who are involved in the onboarding and are now taking care of these new customers. While additional acquisitions are not a priority for us in the near term, should the right opportunity present itself down the road you should have very strong confidence in our ability to execute. Turning to Xome.

Earnings were limited due to the impact of the Assurant acquisition, but this quarter should be the trough as the integration is moving forward according to plan. During the quarter we consolidated facilities, we did some right-sizing, we completed a large data migration and systems conversion, which set us up for cost savings later in the year. Additionally I am pleased to announce we hired Terry Shafford as CFO for Xome. Terry is a veteran finance executive with a track record of managing important data and technology intensive functions at major institutions like Fifth Third and Bank of America, and I'm confident he'll make a huge contribution to Xome.

Welcome, Terry. While the operational progress at the company was very strong in the quarter, we did incur a non-cash mark-to-market loss of $293 million which resulted in an overall loss of $2.05 per share. This mark was consistent with the overall rate environment and in line with our expectations. To give you a sense of how we view the recurring earnings power of the company, excluding the mark and other non-recurring items, our operating income would have bee $36 million, equivalent to an ROTCE of 8.7%.

As you know, we have a deferred tax asset which we expect to shield earnings for many years to come and therefore I point out that on a pre-tax basis operating income would have been $48 million and ROTCE would have been 11.5%. To wrap up, there's a lot going on at Mr. Cooper and I'm very pleased with our operational progress during the quarter. At the same time, the first quarter was also a reminder that our business is cyclical and that interest rates are difficult to predict but regardless of the environment we believe that the most important thing we can do to position the company for the future is to focus on our core platform by organically generating new customers through originations, lowering costs, delivering a great customer experience and improving profitability.

And on that note, I'll turn it over to Chris. Chris?

Chris Marshall -- Vice Chairman and Chief Financial Officer

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 managed through our recapture and origination capabilities, as well as the use of excess spread financings and growth in our subservicing book.

And while those offsets continue to grow, they don't cover our entire exposure. Now so far in the second quarter, mortgage rate 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 of 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 entries.

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 one 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 was related to the acquisition of Assurant, which included an earnout 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 two 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 cost. So when we back out the mark-to-market, we're leaving in $25 million associated with the difference between carrying value and cost, which makes our operating results more indicative of the underlying profitability. And 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.

Now 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: a very strong rebound in origination earnings and strong and steady results out of servicing. Xome results continue being pressured by the Assurant transition but should improve from this level as we complete systems integrations and reduce certain redundancies. I'll also mention that we've included additional information in the appendix to this deck to help you understand the economics of the business at the segment level.

Now let's talk about the servicing portfolio on Slide 8 which ended the quarter at $632 billion, which is driven by the Pacific Union and Seterus acquisitions. And as Jay mentioned, the servicing team did a fantastic job boarding 440,000 new customers in 35 days, and I want to add my congratulations to all of my teammates involved in that accomplishment. You will note that the subservicing ratio jumped to 48% from 41% last quarter, but that's not reflecting any change in strategy. Rather the MSR we acquired from Seterus initially boarded as a subservicing contract.

We'll take on the MSR asset later in the second quarter and you'll see that reflected in next quarter's ratios. We also saw growth in our existing subservicing relationships, but those volumes will change over time as our clients buy and sell loans. And we expect to see subservicing levels slightly lower next quarter as the result of some planned client sales. Let me comment on the replenishment rate during the quarter.

Total runoff for the owned MSR portfolio was $9.9 billion. During the first quarter, originations of $5.7 billion were equivalent to a replenishment rate of 58%. And if you included the full quarter of Pacific Union's production, the replenishment rate would have been 68% which is up significantly from 47% in the year-ago quarter. As you know, a higher replenishment ratio allows us to sustain the portfolio at a more attractive cost and bulk MSR acquisitions which obviously has positive implications for improvements in profitability and cash flow.

Now with the portfolio at $632 billion, we've exceeded the growth targets we laid out for you last fall and this may be the high-water mark for UPB for the remainder of 2019 as our focus from here will be optimizing profitability. In 2020 and beyond, as we mentioned previously, we're planning for a sustained mid-single-digit growth rate. Now let's turn to the servicing margin which we have historically discussed excluding the full mark and Titan expenses, and on that basis it was 7.5 basis points in the quarter and 6.8 basis points with Titan expenses left in. We're very pleased with this margin, which is in line with the guidance we shared with you last fall.

However, I'd call out for you a $20 million benefit we earned during the quarter from the collapse of a securitization trust. Now, we expect to see the servicing margin benefiting from various large transactions from time to time, largely related to recoveries and claim settlements. But as a general rule, we plan for more modest levels than what you saw in the first quarter. Additionally, while CPRs were low in the first quarter, we expect them to increase from here, and therefore you should expect higher amortization going forward.

And as a result, we are anticipating the servicing margin over the remainder of the year, excluding marks and Titan spending, to average out somewhere around six basis points. Delinquencies were slightly higher in the quarter, but that was entirely due to the boarding of the Pacific Union and Seterus portfolios which had higher delinquency rates. Excluding these acquisitions, our delinquencies would have continued to decline slightly. As the third largest servicer with nearly four million customers, we have a very good insight into health of the consumer and for now, our data points to delinquencies remaining stable at their current low levels.

Now let's switch gears and talk about originations on slide 10. As you know, the origination segment plays a key role in our business model because we originate new MSRs at a lower cost than buying MSRs in bulk transactions at market prices. Strong, efficient origination capabilities improved the company's free cash flow and profitability and is a key part of our strategy to improve returns. This quarter was a case in point, with a four-fold increase in origination EBT to $45 million, and you're seeing the benefit of two months' worth of Pacific Union which is delivering at or above the volume and margin targets we shared with you last fall when we announced the acquisition.

As Jay mentioned, the integration is going extremely well. Now, excluding Pacific Union, our volumes were down slightly reflecting the lagging impact of last fall's rate shot, as well as normal seasonality. The origination margin rebounded to 70 basis points in the quarter reflecting strong increase in lock volume and more favorable capital markets conditions which led to improved gain on sale margins. And so far, in the second-quarter volumes and margins continue to look good.

Now turning to Xome on Slide 11, you can see the results continue to reflect the impact of the AMS integration, but as Jay mentioned, there's a lot of good operational momentum which includes facilities consolidation, right-sizing, systems conversions, and additional to the leadership team. I'd also call out a $2 million cost in the quarter associated with the strategic planning review that will recur. As a result, and with systems conversion remaining on current schedules, we're feeling very good about Assurant reaching break-even by year end if not a little before that. Excluding the impact from AMS, Xome's pre-tax income was roughly flat, reflecting seasonality and very low delinquencies.

While Xome's income is small right now, the unit has strong potential over time to contribute to the company's overall profitability and cash flow and to do so in a way that acts as a natural hedge against higher delinquency environments without requiring the same levels of capital as servicing or originations. In this regard, Xome was an integral part of our plan to drive higher investor returns, but to make that happen we're well aware that we have a lot of disciplined execution remaining. Now if you'll turn to Slide 12, I'll wrap up my comments by addressing leverage and cash flow. From a high-level perspective, adjusted EBITDA as it's defined in our debt covenants is a rough proxy for operating cash flow as it reverses out several non-cash items such as fair value marks, amortization, and depreciation and then nets out the cash cost of originating new MSRs.

As you can see in the first chart, adjusted EBITDA increased strongly in the first quarter thanks to the improved origination profitability. And this led to a reduction in the debt-to-EBITDA ratio. On a long-term basis, we believe the debt-to-EBITDA ratio of four times or less, which is where the company operated historically, is a level that would improve profitability and financial flexibility and leave us with some dry powder to take advantage of market dislocations should they occur. Now we expect the debt-to-EBITDA ratio to decline further over time as EBITDA grows, and you may be seeing us reducing debt when the board and the management team feel market conditions are favorable.

But you may also see us building up cash and liquidity for a period of time, which would offer us the optionality to weigh deleveraging against other uses of cash. So with that, I'll turn it back to Ken to wrap things up.

Ken Posner -- Senior Vice President, Strategic Planning, and Investor Relations

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

Questions & Answers:

Operator

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

Bose George -- KBW -- Analyst

Hey, guys. Good morning. Sorry. I mean it was on the sheet.

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 guys mentioned what the integration expenses remaining are as well?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Yes. Good morning, George. The Titan spending is going to remain at about its current levels, which reached about $10 million in the quarter through Q4. It may ramp down a little bit, but you should expect that they stay at these current levels.

And then I think the question was integration expense?

Jay Bray -- Chairman and Chief Executive Officer

Yeah, to Assurant --

Chris Marshall -- Vice Chairman and Chief Financial Officer

Assurant. And I think -- well, I'll go through each of them. Assurant, Assurant's 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, and we try to give you exact guidance on that. But it will decline as each of the systems gets completed.

And then with regard to the Seterus and Pacific Union acquisitions, I'm not sure I've got 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 subservicing -- we'll actually close on the MSR purchase so it'll be some -- some slight costs there and then we still have a holdover of certain personnel from Pacific Union that will continue into next quarter. So about half the level.

Bose George -- KBW -- Analyst

OK. Great. Thanks. And then actually in terms of the longer-term profitability of Xome, is there a way to think about kind of the timeline to get to, even where you were before the Assurant acquisition, sort of -- yes, the trajectory to sort of get back there?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Well, if you think of Assurant, as we've talked a lot about Assurant getting to break-even. And we expect that to happen by the end of the year, and as we've said, we feel actually better than we did last quarter about getting there maybe even sooner. So 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 in 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.

So I would think of it as largely flat with where we were before the integration, before adjusting for delinquency and volume changes.

Jay Bray -- Chairman and Chief Executive Officer

I think there's some momentum there, Bose. If you look at new clients, you look at I think to Chris's point, we're a little ahead now in the integration itself. And we also are getting some tailwinds from kind of rate environment, certainly helping a couple of the businesses. So you know, I think the latter half of the year will definitely see improvement.

Bose George -- KBW -- Analyst

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

Chris Marshall -- Vice Chairman and Chief Financial Officer

I'm not sure we're going to change that. I mean, 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 why we've -- that's how we present 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 -- KBW -- Analyst

Yes. Absolutely. Great. Thanks.

Operator

Our next question comes with Mark Hammond with Bank Of America High Yield. Your line is open.

Mark Hammond -- Bank of America Merrill Lynch -- Analyst

Thanks. Good morning. 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 -- Vice Chairman and Chief Financial Officer

So 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. And 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, this is a -- on 25 is a walkthrough 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 -- Chairman and Chief Executive Officer

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

Mark Hammond -- Bank of America Merrill Lynch -- Analyst

I do really like the introduction of them from the credit side. And 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 -- Vice Chairman and Chief Financial Officer

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 -- we'll communicate any specific plans to de-lever when and if we -- 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 -- Chairman and Chief Executive Officer

Yes, and you probably recall, prior to the merger, we significantly reduced the debt-to-EBITDA ratio using free cash flow and repurchased over $600 million of debt. So you know, I think we've got a track record doing it. To Chris' point, the economy is kind of to be determined.

Mark Hammond -- Bank of America Merrill Lynch -- Analyst

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

Chris Marshall -- Vice Chairman and Chief Financial Officer

That would be gross of cash.

Mark Hammond -- Bank of America Merrill Lynch -- Analyst

OK. Perfect. Thank you.

Operator

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

Kevin Barker -- Piper Jaffray -- Analyst

Good morning. Well, first off, I'd like to say all the new disclosures you put out there are extremely helpful. I think that's a great step forward, and I appreciate you putting them out there. And then 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 the 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 the FHFA? So do you have any color there?

Chris Marshall -- Vice Chairman and Chief Financial Officer

I'm not sure we offer any specific goals, Kevin, and I have to apologize. I didn't hear -- I was 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 -- Piper Jaffray -- Analyst

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

Chris Marshall -- Vice Chairman and Chief Financial Officer

No. We don't have any -- 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 -- Chairman and Chief Executive Officer

But I think, Kevin, and obviously, we're well in excess of any GSEs or FHA-Ginnie requirements, that's very, very important to us. And we -- and Ken can lead the charge there. 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 -- Piper Jaffray -- Analyst

OK. I asked the question because the GSEs require a 6% tangible common equity ratio, and that's in reference to that comment. And then 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 in '19?

Chris Marshall -- Vice Chairman and Chief Financial Officer

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

Kevin Barker -- Piper Jaffray -- Analyst

OK. All right. And then going back to your guidance on the six basis-point average, pre-tax operating margin in the servicing segment, is that in relation -- is that apples-to-apples to this 7.5 basis points you disclosed in the first quarter, or the 6.8 basis points that you disclosed?

Chris Marshall -- Vice Chairman and Chief Financial Officer

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're -- we are really just reinforcing that guidance, so we knew we had the trust collapse in the first quarter.

That benefit was about twice the level -- you know, 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 transaction expected. So that's one element.

And then the other element is CPRs were lower in the quarter and we would expect them to rise a little bit next quarter. So that six, that number six 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 -- Piper Jaffray -- Analyst

Yes, because the amortization expense was very, very low this quarter. Do you have an expectation for amortization expense in the second quarter versus the -- I believe it was $23 million this quarter?

Chris Marshall -- Vice Chairman and Chief Financial Officer

We track CPRs and payoffs in 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 -- Piper Jaffray -- Analyst

OK. That's fair. And then gain on sale improves 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 -- Vice Chairman and Chief Financial Officer

Again, we track those daily. I'm not sure I have that but we -- 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, but just about every metric looks very, very good. But if you don't mind, we will address that question after the call.

I don't have that data in front of me.

Jay Bray -- Chairman and Chief Executive Officer

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

Kevin Barker -- Piper Jaffray -- Analyst

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

Chris Marshall -- Vice Chairman and Chief Financial Officer

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

Kevin Barker -- Piper Jaffray -- Analyst

OK. I'll get back in queue. Thank you for taking my questions.

Operator

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

Doug Harter -- Credit Suisse -- Analyst

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 in that decision?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Yes, Nothing really has changed. We are taking fresh looks 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 subservicing. So we -- 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 was 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 -- Credit Suisse -- Analyst

Great. And then 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 kind of what -- what's that -- kind of what that looks like?

Chris Marshall -- Vice Chairman and Chief Financial Officer

It was a mix. We bought about $14 billion in MSRs and picked up about $16 billion in UPB from existing subservicing customers. And I think we commented on the fact that we expect that some of that subservicing 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 -- Credit Suisse -- Analyst

Thank you, Chris.

Operator

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

Giuliano Bologna -- BTIG -- Analyst

I guess starting off, were the [Inaudible] was thinking about the cash question, or the cash comments that we 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 -- Vice Chairman and Chief Financial Officer

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.

And 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 -- Chairman and Chief Executive Officer

And 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 -- BTIG -- Analyst

That makes sense. And then have expanded on that point, in terms of deleveraging, I've seen pulldown on some of the operating debt on a quarterly basis or intra-quarter. How should we think about de-leveraging as a whole? Would you rather take out maturities as they come due, or buy back some debt in the market?

Chris Marshall -- Vice Chairman and Chief Financial Officer

I'd rather not give you a specific plan there, because we will -- we're going to be opportunistic. If 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 -- 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 -- Chairman and Chief Executive Officer

And historically, if you look again back to the debt paydown prior to the merger, it was a combination. I mean, we paid down some maturities, as well as opportunistically bought that in market.

Giuliano Bologna -- BTIG -- Analyst

That makes sense. And then kind of 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 Pac-U contribution?

Chris Marshall -- Vice Chairman and Chief Financial Officer

I think -- well, first of all the -- we said Pac-U 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 -- BTIG -- Analyst

That makes sense. Thank you for answering the questions and I appreciate it.

Operator

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

Henry Coffey -- Wedbush Securities -- Analyst

Good morning, everyone. And again, I'd like to add my thanks for the additional disclosure and the new template. Just a couple of questions, just to make sure we have those numbers right. The -- and I know some of this was covered, so OK.

So you have $20 million in merger-related cost. That does not include Titan, or it does include Titan?

Jay Bray -- Chairman and Chief Executive Officer

It does not.

Chris Marshall -- Vice Chairman and Chief Financial Officer

It does not.

Henry Coffey -- Wedbush Securities -- Analyst

OK.

Jay Bray -- Chairman and Chief Executive Officer

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

Henry Coffey -- Wedbush Securities -- Analyst

OK. But -- and then the -- so yeah, 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 to cash flows? So I'm -- is that correct, that's what that is? Or is that something else?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Which number are you referring to, Henry?

Henry Coffey -- Wedbush Securities -- Analyst

The fair value amortization of $25 million.

Chris Marshall -- Vice Chairman and Chief Financial Officer

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

Henry Coffey -- Wedbush Securities -- Analyst

OK. And then, yes, I guess it's not confusing to me because I've seen it this way forever. But your credit quality is getting better, your CPRs are going down, and 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 -- Vice Chairman and Chief Financial Officer

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

Henry Coffey -- Wedbush Securities -- Analyst

Yes. 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 -- that you pretty much adjusted to the current interest rate environment?

Chris Marshall -- Vice Chairman and Chief Financial Officer

Well, the vast majority of the market is rate-related, and so there's no expectation for any other type of negative mark. So if rates were to fall significantly, yes, we would see additional mark. Now where we are so far this quarter it looks like rates have come back. There may be about a third of the way back from the decline we saw last quarter and so at -- you know, 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 subservicing growth, profitability. While we are saying profitability may normalize at a slightly lower level, we feel very good about the profitability of the servicing platform and we think you should, too. And originations, that was an incredibly strong quarter.

We feel very good about the second quarter. So -- and we feel, you know, although Xome is feeling the pressure of the Assurant integration, we feel very good about Xome coming back. So overall, we think the company, while we don't like having the big negative mark any more than anyone else, we think if you look past that, the company's positioned for very strong profitability in the future.

Henry Coffey -- Wedbush Securities -- Analyst

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 -- another digit to that? Because that's the -- 0.5 is a pretty wide number, 0.7 is an equally potentially wide number, in something that's measured in basis points. So I -- you know, it looks like it was a 20-basis-point improvement, but I was wondering if we could put another digit into that?

Chris Marshall -- Vice Chairman and Chief Financial Officer

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

Henry Coffey -- Wedbush Securities -- Analyst

Great. And 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 -- Vice Chairman and Chief Financial Officer

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'd have upside to recapture that.

Henry Coffey -- Wedbush Securities -- Analyst

All right. Thank you very much.

Operator

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

Sam McGovern -- Credit Suisse -- Analyst

Hey, guys. In your prepared remarks, you commented that you may delever or 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 -- Vice Chairman and Chief Financial Officer

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. So 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 -- Chairman and Chief Executive Officer

I 100% agree with that. I think you will not see additional corporate leverage. We've got no plans -- corporate debt leverage. No plans at all.

And to Chris' point, true, operating earnings, cash flows, we will map out a plan to delever over time.

Sam McGovern -- Credit Suisse -- Analyst

Thank you very much. I'll pass along.

Operator

[Operator instructions] Our next question is from Dan Carroll with Inherent Group. Your line is open.

Dan Carroll -- Inherent Group -- Analyst

Hey, guys. A couple of 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? And within that, how much was that, like gross NOL actually used on offsetting cash taxes? And two, if you guys can just talk a little bit more -- I know you have a chart in your deck about customer sat.

But is -- also the other non-financial measures you guys track including employee engagement and regulatory compliance, just kind of how you're doing on those especially given everything that's going on with the integrations? Thanks.

Chris Marshall -- Vice Chairman and Chief Financial Officer

Well, let me start with regard to the DTA. That grew because we had both a gap and a taxable loss. So we didn't use the DTA to avoid any cash taxes. But I just go back and reiterate that the profitability of the company going forward looks very strong, and that's what -- 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 an evaluation release.

Dan Carroll -- Inherent Group -- Analyst

How would you have a taxable loss in the quarter if all the loss was from a writedown?

Jay Bray -- Chairman and Chief Executive Officer

Because there are timing differences, and the MSR mark for tax purposes, 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 -- Inherent Group -- Analyst

Sure, and then [Inaudible].

Jay Bray -- Chairman and Chief Executive Officer

Yes, on the employee -- 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. Ultimately our goal is going to be a Top 50 Great Place to Work. 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've addressed the top five items that they want to focus on. And so I 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 records, metrics, and how we expect this sort of a -- 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. We're seeing complaints are at an all-time low. We have a customer health index that we've worked a lot on that 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 we look at the underlying metrics, I think it's very healthy and moving in the right direction.

Dan Carroll -- Inherent Group -- Analyst

Great. Thanks, guys.

Operator

Our next question is from Kevin Barker with Piper Jaffrey. Your line is open.

Kevin Barker -- Piper Jaffray -- Analyst

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

Chris Marshall -- Vice Chairman and Chief Financial Officer

It did, Kevin. As part of the Assurant acquisition, there was an earnout associated with that deal, and associated with that earnout there was a contingent liability recorded. And so just looking, we have to fair value that and based on our assumptions this quarter, we released $11 million of that contingent liability. So if you back that out of Xome, then they will also about $11 million of non-operating items in the quarter, so they sort of balance.

But yes, that -- that writedown directly impacted Xome.

Jay Bray -- Chairman and Chief Executive Officer

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

Kevin Barker -- Piper Jaffray -- Analyst

That's helpful. And 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 in markup of the MSR. Correct me if I'm wrong, there. Could you just lay out the paths 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 -- Senior Vice President, Strategic Planning, and Investor Relations

You're correct on Pacific Union's 2018 results 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. And then additionally their results include a mark to their MSR to conform to our pricing models. So that's all done.

And 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.

Jay Bray -- Chairman and Chief Executive Officer

And as you would naturally expect, Kevin, there's a lot of expense that's been taken out, right, from a corporate perspective. So that's certainly a piece of it as well, as Ken alluded to.

Kevin Barker -- Piper Jaffray -- Analyst

So you're saying they were profitable near the end of the year on a quarterly basis, and then the loss on a 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 -- Chairman and Chief Executive Officer

That's right.

Ken Posner -- Senior Vice President, Strategic Planning, and Investor Relations

That's correct.

Kevin Barker -- Piper Jaffray -- Analyst

Thanks.

Operator

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

Giuliano Bologna -- BTIG -- Analyst

Thank you for taking my follow-up. Just one quick question on the reverse book. How should we think about the runoff 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 -- Vice Chairman and Chief Financial Officer

Let me see if I can give you a succinct answer. With reverse, part of the runoff 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 give -- refer to. I'd be happy to follow up with you and talk in detail about it, but in terms of the runoff in the book that's what you should assume.

Giuliano Bologna -- BTIG -- Analyst

Thank you. I appreciate it.

Operator

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

Ken Posner -- Senior Vice President, Strategic Planning, and Investor Relations

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

Duration: 57 minutes

Call participants:

Ken Posner -- Senior Vice President, Strategic Planning, and Investor Relations

Jay Bray -- Chairman and Chief Executive Officer

Chris Marshall -- Vice Chairman and Chief Financial Officer

Bose George -- KBW -- Analyst

Mark Hammond -- Bank of America Merrill Lynch -- Analyst

Kevin Barker -- Piper Jaffray -- Analyst

Doug Harter -- Credit Suisse -- Analyst

Giuliano Bologna -- BTIG -- Analyst

Henry Coffey -- Wedbush Securities -- Analyst

Sam McGovern -- Credit Suisse -- Analyst

Dan Carroll -- Inherent Group -- Analyst

All earnings call transcripts