PFSI PennyMac Financial Services

Stan Kurland Chairman
David Spector President and CEO
Andy Chang CFO
Call transcript
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Good afternoon, and welcome to the Third Quarter 2017 Earnings Discussion for PennyMac Financial Services, Inc. The slides that accompany this discussion are available from PennyMac Financial's website at

Before we begin, please take a few moments to read the disclaimer on slide 2 of the presentation. Thank you.

Now I would like to turn the discussion over to Stan Kurland, PennyMac Financial's Executive Chairman.

Stan Kurland

Chris. you, Thank

our slide the with our Financial strong strength delivered and Let's quarter, X. driven for of ongoing the third segments, from mortgage by results franchise. Servicing begin reflecting PennyMac market-leading solid Production contributions

Financial third $X.XX. XX of of $XX.X pretax the $XX.XX June increased value year from to diluted For $XX.XX share, earned per per up at and from earnings income and a PennyMac quarter, share Book million $XX.XX per ago. share

repurchased shares average $X.X of we $XX.XX A approximately stock at of Class share. quarter, cost common million the During XXX,XXX per price PFSI a an and of

up continued billion this pretax income segment volume quarter. XXXX. direct contributions and prior quarter Servicing UPB, primarily UPB, growth in correspondent in from the and ago. consumer from correspondent, by quarter in quarter driven prior Production the our was XX% XX X% third UPB, XX% third segment from to the prior in $XX.X from X% were of losses prior and a government which XXXX. quarter year direct third totaled X% million, quarter of portfolio, million $XX.X in from and results and from billion million million down September June channel the income up period, $XXX.X billion recorded from Our the These of Servicing XX the X% were third and $XX.X the up quarter the in the the X% compared These the Total from from pretax strong was pretax $XX of down $XX.X Total The of XXXX. and $XX.X up quarter for both XX% down XXXX. locks of quarter production reflect consumer results

transferred successfully UPB acquisitions. previously from settled we of quarter, in billion MSRs $XX.X the During

is pleased second-term million our with structure, MSR note, and note successfully Ginnie a are $XXX to financing we X-year We discuss addition pricing our our term very later. compared X-year will transaction more importance to detail This from This was meaningful a first this capital Mae a in the facility I also improved issued facility. and note.

pretax unchanged MSR valuation-related recorded million essentially a $X.X recognized investment Continuing resulted million The from third Servicing in from pretax million of the segment managed this million of of the billion, of by of and under quarter in due offset decrease liability servicing XXXX. million Financial assets up third the up previously funds and million $XX proceeds $XX.X the $XX.X for quarter of in received PennyMac value fair quarter. excess all substantially X, was the million, changes, slide prior management Excluding included in $XX their our which XX related by totaled $X.X gains. from Investment Valuation-related the $XXX,XXX $XX a on and September distribution income in successfully assets $X.X and A carried were quarter partially income by June $X.X down million, sale PFSI. in XX, XXXX. completed Management changes $X.X highlights to interest from remaining of $XXX,XXX, in of Net gain hedging the million values, quarter the XXXX. previous segment spread losses with

third all Mortgage to -- steadily at of tracking environment. and refinance consistent bond then, September, the XX% market levels lowest same increased and of reaching hovering thus as declined to for in levels highest by primary far, level XXXX. Freddie currently slide is yield about lower they the to with X survey, mortgage MBA's turn look response rate XX-year fixed Application early in tracked the below in early Mac's its the rates, activity, of by year declines. as quarter let's the index, the increase level, XX-year last mortgage around The in time closely the reported but the have at September. treasury Now rates, second X%, average current market increased the XXXX reversing application year. Since their

credit shown uptick As macroeconomic recent and concentrated of increases September. slowdown interest September sales in growth. remain The slowed home been hurricanes. despite quarter Recent month other index recent at consumer about recent led loans fundamentals a new remaining rates, X.X% of temporary, renewed activity delinquency Financial be September which levels since has the the from result by delinquencies affected in delinquencies remains the to According credit appears spring. levels strong, expected increase refinance has and supportive last of with Services, what as XXXX XXXX slowed The total was is high performance credit areas products, and U.S. end as subsequent the to long-term the increased. at delinquency sales third to a to rates first increases since recent existing disasters home Black X% loan delinquency auto in with July the Both the such the recent rate Knight the the during sales temporary in residential was multi-year cards. peak. mortgages low have mortgage data strength, natural of during

positioned discuss and Financial's to franchise future how for production X is well Now slide let's growth. turn PennyMac

market finance total drive homes those origination demand billion also purchases. increase of purchase As the expected to mortgages by ago. total on money demand end the $X.X XX% originations U.S. X trillion, the chart is by for for expected purchase larger are years to is to The approximately mortgage to the considerably XXXX. market $XXX Strong forecasted left purchase indicates, than

succeed have built in platform a production to mortgage market. our We normalized

X we capture all production, months first our the volumes also Our XXXX. year in market-leading is produced X geared notable have more volume that XXXX. this of substantial of for of accounted quarters than What correspondent franchise to XX% is for of the which money XX% we in first purchase is did

consumer and channels we share broker for direct to new our market to our business. growth direct production continued In expect addition, contribute

key transformational financing Financial's of over structure significantly developed discuss capabilities MSR is next last companies. slide the financing have PennyMac PennyMac financial go how several Let's a development nonbank the to years. X in Financial's maturity and

Our levels collateralized low that which are strong features supported and mature assets debt among strong mortgage nonbank well capital PFSI public and by structure, distinguishes by earnings, companies.

Financial's PFSI's maintain capital our in MSR Financial's We sources structure and notes The return diversify also total The investors This provides to leverage, a on bridge to PennyMac different long-term the financed of term solution loans maturities. financing next structure of issued to which allows aligned to duration and better improves Mae have asset note equity of with future for or term out from XX% with aggregation banks financing financing our important are of to our are in warehouse as created invest structure MSR such provides MSRs note cost-effective assets. lines Ginnie financing largest that funding growth. Most comprises assets mortgage asset, sale, which that to an institutional our X as the MSR grows. transitional, other provides asset to and banks. short us staggered include the variable Ginnie PennyMac issuance duration addition are Mae held for

bringing issued quarter, XX. total $X.X Trust, PMT subsidiary, X preferred to in Early the publicly total to PennyMac under we life business. that and turn PNMAC Combined at Mortgage some accomplishments the Management, Investment proceeds PMT, funds. Management private achieved third to slide traded PFSI's or million, for XXXX. September manages in management discuss through million in have significant Capital issuances milestones shares PennyMac significant gross preferred $XXX REIT, investment Recently, net Investment X.X X a manage. we let's its assets for entities $XXX share the limited of million Now million Financial,

illustrates, over As PMT's in left the public XXXX, a of we and time as raising PMT appropriate. initial track beginning built chart growing offering on capital the successful record have with

capital strong assets recent facilitated market credit transfer investment organically raises generated Our PMT's of the GSE growth conditions MSRs. risk significant and and were in particular, potential strategies, by

XXXX to the Financial interest, portion third fund's side with vehicles, $XX in at limited we to of substantially third-party recognized Moving successfully the all as final dissolution PennyMac the page, opportunity assets a performance. a of valued of of the carried occur investment received which significant expected life be completed which funds, remaining million to carried currently the the the right The related established sale funds remaining XXXX. the previously interest of to August, quarter, $X.X early in received investor. the represents in million, will in the

United enable our that developed technology considerable examples second slide of highlight businesses. loans, systems platform. position us PennyMac Throughout turn States. variety to evolution, incorporating On utilizing systems largest product management X, to developing This as leading Financial's scale X we focused on to production grow flexibility, margin discuss platform. and of enabled the the and industry-leading to a nonbank PennyMac profitably in These loan integral mortgage pricing is our our and correspondent technology granularity we slide producer operations, pricing to internally provides developed efficiently speed proprietary to include in next technology several technology achieve unique attributes. have how Financial's our market has innovative Let's

system loan and optimizes sophisticated awaiting loans of a and product inventory sales that price on securitization a helps manage have we through also options. that actively mortgage receive of us We another the analysis our pricing

for bulk the our manage developed to expand loans correspondent-seller and business, channel MSR effective acquisitions. relationships we have as process and consumer utilization our grow activities. navigate our we and will continue broker direct Finally, direct of and acquisition to to origination development the systems remain integral technology The into

capabilities. XX form strategy later track on developed leverage technology is discuss platform new have new will of in technology quarter. combine And our of direct play we Now our of centerpiece channel. broker launch to and and centralized slide initiative state-of-the-art on model. let's technology broker how focus sale innovative channel with for our out direct PFSI's the turn loan the the will fulfillment that to will POWER The launch PennyMac's broker broker engagement this this proprietary the the industry-leading platform will

Brokers broker focus approximately account information, $X.X through Our seamless origination to CRM our Broker contact manage team. and will channel market. for for transparency, an managers sophisticated developed on featuring mortgage and campaigns track brokers customer XX% mortgage communicate Financial. fulfillment directly every activities consistency these attractive with sales track the total our POWER marketing and the opportunity functionality of portal represents ability exceptional activities. service communication and brokers and with The manage broker direct delivery with broker day. that and maintain been offer is growth teams can our platform trillion leads, between pipeline new sales It PennyMac pipeline a loan, functions, process sales has provides of the every on integration

produce profitably and to We volumes to leadership expect ability broker high to leverage and leading position direct market position our achieve platform launch of our a time. loans proven successfully over

and support have and mortgage origination our of considerable capabilities division invested anticipated volumes. effort time develop the to broker expand We the fulfillment platform to our

We Residential greater that servicing is optimal accuracy across our channel. efficiencies Continuing our new servicing processes, business portable experience. technologies an look production requires our technologies technology order go further drive these channels. and scale to times, to operation to across the solutions of cost consumer improve implemented processing enhancements the and the reduce mortgage also savings, direct cost operations. to returns. customer discussion, XX of many to and In in our we increase loan efficient have automate rollout structure servicing slide a our other enhance And next are with technology to let's review our realize

our This new or into have So portal, have others order receive time response modules, internally leverage previously. servicing lending enhancement X call our interactive third-party loan has our reduces XXXX, PennyMac a and improves closing in available the of been is representatives. times allows developed is example and voice been successfully online processing. automation to technology. manual servicing consumer need far, these and for of seconds rolled demand compared for channel, lines in turnaround center modules servicing consumer to and of Financial's One integrated payoff XX which and X demands, which system, payoff out we of to some direct reduces customer service our technology days This direct

and and curtailments. in costs differentiates other these long-term investments better actions loan reduced improves with are we this record fees than item keyed as Another XX%. growth. facilitate by Financial PennyMac I and us enhancements, are items grows from research example business make potential handle Through our XXX which in-house to servicing us These internally We have drives more returns The such tool delivering is technology to unscheduled payments, our By actions occur. reducing processing We mention team significant. business dealing savings our on doing improve and transactions developers is shortage enhanced refine, to a of support this to implementing loans would The in investing process the can to cash auto-documentation technology, cost and intelligence with This employ technology documentation leverage and payment capability stockholders. volumes our high from continually manually we allows escrow as continue like the ultimately functionality, strong experience, activities. competitors and ability developed to it the production as by our last to scale approximately as systems. Servicing currently cost efficiency use and a those our payments. savings portfolio taken effectively to

of million in significant amounts technology by the were is the on capitalized expensed incurred. as have company development. million our been the years, balance $XX $XX we proprietary Over X Only sheet, approximately invested meaning software have costs past

XX go profitability. segment discuss Next, let's the to slide to Servicing

term results $XX.X For excluding we were third and buyout, versus $X.X strong increase quarter, last the on third levels of versus loans quarter loans the segment volume revenue government acquisitions and increased re-performance million These offset Ginnie segment Early loans million quarter EBO-related full this bulk quarter. partially quarter by income, pretax million million Mae XXXX. the additional driven growth, from Servicing eligible, saw notes changes. third normalized and expenses, performance to prior This income, compared was quarter. portfolio excluding was higher financing was the of effect of quarter. in the $XX.X in increase pools. by a by including driven delinquent last in defaulted buyouts and driven of issuance $XX.X in losses primarily valuation changes, Servicing or credit recent This provisions by $XX.X was pretax our the of million of of valuation-related substantial

a operating per acquisitions to saw expenses increased from also staffing related and We modest unit transfers. bulk increase the recent in servicing

each the expect and in time. scale efficiencies, in and improved on of are noted discussion realize investing which we and David the I drive to Executive my PennyMac quarter PennyMac that, like in operational savings I turn over Financial's Spector, servicing to our I With to performance. results As to result the third greater over technology, focused Officer, economies business cost on we would profitability conclude businesses. overview of now Financial's discussion President to the Chief review of in

David Spector

across quarter Stan. a you, volume of Thank On slide with XX, trends of shares United that Xth third the PennyMac market third largest Inside fourth review let's begin the and in Finance. during up loans the Financial ended States Correspondent Financial's according producer the servicer. mortgage businesses. for the the we consumer And to PennyMac was share largest we estimate quarter as direct market quarter, were and modestly. both Mortgage

States. essentially business, net in prior And the under $X.X were mortgage United the billion, management Additionally, estimates unchanged serviced Investment that quarter. from outstanding assets our X.X% market all of indicate we debt Management

year-over-year. quarter UPB volume quarter, $X.X prior to acquisitions in UPB, the in slide quarter billion $XX.X in down Total loan X% the conforming XX quarter, from Correspondent XX% XX% Government third correspondent acquisitions billion correspondent for quarter, XX% billion in quarter, year-over-year. while quarter, X% PennyMac acquisitions $XX from prior up totaled UPB second in the the $XX.X XX% from and totaled for or up while the third PMT UPB up perform the from services lock was totaled down third Now quarter $XX.X in year-over-year. accounted of X% in for and down the billion billion billion turn the UPB the $XX.X fulfillment down locks billion while production. year-over-year. let's down from X% Conventional in which Financial total PMT third XXXX. in Government for discuss by XX% in $XX.X in quarter, and in third of prior the the quarter quarter from UPB, acquisitions UPB in previous

of driver Continued from for The important differentiating strong an correspondent our production prior quarter. the correspondent of volume up be the the purchase-money volume for continues to third quarter, PennyMac. Purchase-money of production correspondent XX% accounted XX% demand was growth. purchase-money primary in factor production total loans slightly quarter's orientation this during

of add At our to end seller third quarter, continued of XXX also We to quarter. the XXX the relationships. second at we seller had the up from end relationships, the

$X.X billion at lock volumes, UPB. in rate interest loan UPB, commitments Looking acquisitions in correspondent totaled totaled $X.X October billion while

let's Now quarter. slide second interest down committed direct $XXX and of XX% X% volumes Consumer the at quarter, third the up lower The quarter, mortgage to end $X.X the direct rates totaled the Consumer was billion in turn pipeline the volume from discuss benefited production year-over-year. from during million. in consumer XX UPB third production. while direct quarter

the was more improves XXXX. from cost, XX% the quarter loans quarter by lock also rate fulfillment third the income reduced in from and opportunities more than lock pipeline X.X In as of We committed in also third were recapture improved operating XX% consumer profile than a million XX. in successfully The the and $XXX The interest of quarter. similar efficient of The locks. continued quality of UPB, quarter rate compared The of $XXX to XX% growing of realization in fallout large in totaled processing locks improved commitments million while prior prior million from of $XXX to October, resulted utilization our in Fallout in volume originations October the UPB rate resources. million more direct customers. driven of Servicing interest interest was commitments our UPB. portfolio and fallout

servicing to Now let's our slide discuss turn XX, loan business. and

billion the quarter, XX% and previous third performance X.X% portfolio X% Servicing the the the The quarter. XXXX. up remained third servicing due were credit the to days quarter. from the more $XXX.X quarter up portfolio in portfolio, of in third our from during or loan Mortgages of from grew XX second strong Our quarter past of UPB unchanged

However, and detail in I will in related disasters we expect recent touch that delinquencies increase to the a servicing slide. topic cost States, the modest the following in United more on in in

the own August X the Servicing prepayment bulk interest the rose sub-serviced the operations Financial's CPR and XX.X% the quarter. by fair by decline activity. of on. to previously MSR the PennyMac in MSR and release Funds. successfully CPR payoff owned PMT, servicing XX.X% related to loans in conventional of to team our sales in asset portfolio prior Investment from in the rates PMT third increased asset, the boarded activity impacted increase And for adversely during completed MSRs Chang of levels which discuss later quarter. transactions quarter, XX.X% increase During Andy The servicing The the drove for value an conforming prior in from the X.X% will portfolio, our settled

Now includes in XX XX% and Irma servicing the and the let's and sub-servicing the California. of populations number PMT, California turn own servicing by to loans Florida with customers which footprint discuss areas in our Harvey Texas, large recent response to The and of natural wildfires. areas Servicing affected slide is by national located performed of our portfolio, Hurricanes impacted and consistent our these in is Approximately for disasters.

Also customers to to We website, in call need. assessing includes: are to affected providing measures. from and related assistance various in customer affected on extended with our increased and provide a areas mortgage gather investor e-mail hours monthly volumes moratorium to working we've and the customers enhance assistance our social our payments. systems media, including provided multiple those are service customers charges, customers agencies reporting; our to to insured proactively centers disaster engaging forbearance credit handle and The our channels, applicable negative late and guidelines on via suppressing following call information

a help includes charity need. initiated fundraising also with assistance by employees PennyMac in company match to effort Our a those

support to PennyMac offer have homeowners affected to we addition, front-line experts in help In to and dispatched the need assistance. communities of servicing

natural these to impact expect We disasters the modest. from be financial

cost disasters. We in to we lead affected also assist customers expect by as delinquencies which impacted temporary additional these in natural increase servicing a areas, may

with adding are addressed Most of by for damage and volumes insurance staff increased government coverage to modification overtime handle activities. assistance. and We flood delinquent servicing borrowers utilizing will be property homeowners' in insurance,

that loans or to on not is incur expect We property incremental defaulted insurance covered losses uninsured damage for VA certain FHA by government guarantees.

losses offset mitigation and loss EBO in other opportunities. may increased for example, increases by be However, and future costs income income,

Now to the let's review turn XX slide Investment to segment. Management

June discuss the distressed we XX. by mentioned third into which, in earlier, funds assets the and on closed that, $X.X to the quarter, transfer from to under financial transition its sold investor. investment turn billion, we be over sell results. to funds investments MSRs X held we Chief managed early correspondent PMT I'd risk Officer, substantially and Last like that production. third net assets from a As third-party continues to loans the to resolved announced expect their management agreements after will were assets The of that sales remaining into will to the by entered With essentially whole Financial capital credit quarter, remaining limited Financial's life funds unchanged quarter's that or now liquidated. Andy Chang, the PennyMac XXXX, be all

Andy Chang

for and Slide X segment. the the table David. results last an shows Financial's you, third figures of Stan overview for reviewed the by earlier, these XX quarters. is operating quarter PennyMac Thank trends

a impact through XX earnings. quarter Let's the turn a to at also moderate take rate third strategy seeks considers and changes comprehensive production-related impact of hedging PennyMac on our income. interest slide Financial approach the that hedge of look to

partially designed with is to changes hedge associated strategy movements instruments. significant value using rate fair interest Our offset MSR

points hedge basis partially of $XX flattening, the in MSR during losses were losses. a on charges quarter. offsetting Stan and the the at yield rates where earlier, curve rebounded fair asset mortgage value combination contributed of lowest declined the the MSR ultimately within activity of and million, mentioned but XXXX, quarter. beginning a $XX activity which This totaling liability contributed valuation quarter The during to of spreads the were to they to of levels the higher-than-expected million, mortgage value As impairment their due prepayment few of gains fair fair to ESS tighter change and value

interest rate points lock prior commitments and Total direct quarter, lock adjusted commitment slide Government take XX let's million points basis basis quarter, segment gains XX quarter. margins the look for held account, loan our consumer segment. mortgage from points lock the Production consumer were in the the third revenue includes a in quarter. the prior from origination up adjusted direct prior for other the X% gross X% and loans fallout per results slightly revenues net revenue lock from basis go fallout quarter. on and the to closer by which quarter. channel. sale, the up at of third XX Now Production margin Production was the $XXX up fees, pull XX own The interest XX PFSI's in points increased on from net from XXX basis increased primarily basis income decreased points, for quarter, for prior prior for to X through correspondent was driven revenue,

quarters. The We million, quarter. the PMT. have as past XX% at headcount prior was Fulfillment rate unchanged basis business. driven growth. increase from several correspondent the the Production points, quarter XX segment on have higher quarter, that incentive-based and margins which over million, technology reflects adjusted driven how prior prior XX% a during the Production revised beginning this by $XX.X revenue by weighted direct increase fulfillment from low consumer fee from average acquisitions the by loan expenses quarter was in report quarter ranges margins the fallout were we up of lock end fee compensation, production better and the basis an margins $XX.X the costs conventional points manage lock the to remained volume, seen presentation we of

and primarily carried and loans loan in MSR $XX.X held securitizations, re-performing the performing and government and million These value in $XX.X or with segment. Let's million, prior revenues compared segment in for of ESS Net net The of million $XX.X third amortization sale fair EBOs, the brought value third flows increase status purchased the prior lower MSRs primarily increase to for XX previously on quarter Amortization value resulting amortized in of revenue through of Servicing the million, in cash of included flows. activity. $XX.X loan the in resulting hedging and $X.X prior fair reduced in loans million, totaled which to performance from of in slide fees XX% the servicing $XX.X were fair turn review net included XX% for quarter, of a Valuation-related growth servicing cash value out losses of in million. realization million financial $XX liability quarter. the totaled modifications. are an driven at securitization from loan impairment servicing of the $XXX.X $XXX.X gain losses at back the gains mortgage of million and versus prior fees quarter. fees. of servicing from loans gains loan quarter $XX resulted changes related million guaranteed higher-than-expected cost of quarter, by and Ginnie an the MSR loan Net fees, realization Mae Servicing $X.X fair prepayment million known million by insured portfolio increased as

servicing on recent Servicing quarter net higher for and expense and by by the with expenses acquisitions $X.X payoffs. offset a Additionally, loan from MSR interest the portfolio were interest shortfall prior segment million, loans balance transitional declined a partially million, from the interest higher increase expense our by increased sheet, interest driven income and held EBO on expenses associated larger quarter, by driven transfers. bulk X% $XX

$XX.X the MSRs increases rate account their PennyMac at value. LOCOM, of XX. fair the rates Financial on asset. accounted MSRs The UPB at these less than value and are MSRs of ESS at greater its loans to Financial's UPB X.X%. XX. and when note MSRs in on MSRs are fair to equal cost $XXX.X of accounted than fair Now of portion Financial's September assets, billion is underlying fair or September MSRs rates a and PennyMac are discuss fair loans in for the UPB amortized above related for to of interest liability. carrying MSRs MSR rise for remaining accounted all underlying MSRs LOCOM of billion are $XX.X value, billion totaled loans of value originated MSRs the XX of lower decreases let's and purchased when sheet. at We was at fall. those balance X.X% The note significant or rates our interest to or with subject value. PennyMac turn modestly The our purchased A when valuation slide their the value under an portion for generally

were turn the XX slide from million, performance it investment the fees fees at that, other the from Stan any revenues include financial let's previous to The decrease an XX% in some carried of PMT, driven interest to and XX% driven fees Now due PMT of expense funds, Investment private expenses and by revenues prior remarks. of quarter-over-quarter Segment Management to loss million, would of $X base the from $X.X segment. and Investment management revenue. Management the Funds. allocations I quarter, quarter. revenue were increase comprised look $X.X primarily lower like back with million over to PMT. turn And for performance earned any the from funds the management from Investment Segment closing to carried down was incentive a interest by

Stan Kurland

Thank you, Andy.

and represent including Financial's PennyMac for growth initiatives, of assets significantly substantially a progress our new common we capital significant the to enhances PFSI's We of the capital potential, opportunity to made make on which Investment PMT the and the capital in shift paradigm back ensure issuances, term success. raising pursuing significant buy number note growth access to This in in our Funds year, continue our a sale have of strides long-term that stock. initiatives all to

our enabling highly As in competitive other our We U.S. broker the have an leader to significant POWER introducing mortgage all initiatives access help businesses, mortgage and that dynamic developed the market. the we now and allowing success to origination to solutions, long-term direct be channel a broker these unique we our ensure us XX% are contribute of mortgage and should Financial into banking in entry technology believe additional PennyMac our where market. continues of platform,

with Lastly, by Thank Investor Relations or email out any our to reach we encourage to investors phone. questions you. team


Services, Inc.'s discussion. quarter This earnings Financial concludes PennyMac third

Relations For Investor call at please XXX-XXX-XXXX. Thank website you. at any questions, or our visit our department