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PFSI PennyMac Financial Services

Participants
Chris Oltmann Senior Vice President of IR
Stan Kurland Executive Chairman
David Spector President and Chief Executive Officer
Andy Chang Chief Financial Officer
Call transcript
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Chris Oltmann

Good afternoon, and welcome to the Second Quarter 2018 Earnings Discussion for PennyMac Financial Services, Inc. The slides that accompany this discussion are available from PennyMac Financial's Web site at www.ir.pennymacfinancial.com.

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

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

Stan Kurland

Chris. you, Thank

and Slide the with platform Financial's quarter smaller rate second the adjusting industry Let's to capacity power X. of demonstrate a environment interest rising earnings of market. banking competition our results among backdrop participants begin origination a PennyMac heightened comprehensive against mortgage

the our to continued by from increased the per strong quarter, driven market While to quarter. earned rates, segment the environment PennyMac origination continued the of share $XX.X pretax production higher production servicing volumes, results this income while higher $X.XX. adjust earnings deliver million to earnings segment contribution from Financial diluted and prior of

an quarter, stock share $XX.XX year per average Class repurchased we share ago. shares XXX,XXX share. A Book the value at of to per of common cost $XX.XX $XX.XX per $XX.XX, from PFSI and a at price During a increased at of approximately million XX March $X.X

in of income a up $XX.X the the second and Our from up and production Total second X% pretax and totaled second the from income quarter Servicing million, the from was billion down million loss in origination XXXX. million, $XX were the segment, quarter and government XX% prior $XX.X XXXX. billion modestly in pretax of UPB, prior from XX% of from million quarter second direct UPB, of in correspondent down significantly and lending XXXX. prior The locks $XX.X $XX.X recorded X% the of XX% volume Acquisition quarter XX% the quarter down and segment from up from the quarter improved prior $XX.X quarter XXXX. down quarter of from

$X million increase fair second from excess from income segment hedging change the decrease second of a items, million, by a quarter quarter in the million XXX% spread related activities, $XX.X due the included XXXX. the from valuation values, value fair was in liability. $XX.X associated $XX.X million for down related servicing decrease for Valuation and and quarter up items to a MSR prior X% of pretax Excluding partially offset servicing the

our portfolio, in UPB end, a June the end billion to prior and at year which servicing totaled from XX% quarter continue from X% ago. XX, We grow up quarter $XXX.X

Turning to Slide X.

into ownership are Private National reorganization the traded of of and National Mortgage June stock management billion, cash This pretax Acceptance publicly investment PennyMac in million, quarter share quarter David partnership delivered presentation. the tax bulk our of more up stockholders million per $X.XX distributions UPB into be in $X a from down end $XX.X from under discuss on $X.X $X.X a a that common subsidiary completed ago. corporate Acceptance prior A Our in MSR essentially X% common to Class from operating Also, simplify Today, quarter a the segment from the of company's we of income private unchanged prior After XXXX, approximately class assets from of billion, were one-time portfolios Company, and a in XXXX. registration announced we XX resulted XXXX. to entered from cash will $X.X end, second previous the corporate August Private excess Financial management the all Net would million XX, and for stock. dividend agreements or single and special, on August XX, of today, that acquire PFSI record distribution detail convert filing later paid common in obligations. structure a stock quarter equity Mortgage year Ginnie which statement of Company Mae represents of with down tax-related principal in to PFSI PFSI's

Web Relations Investor our visit please information, more For site.

current market near during the before Now high X.XX%, and than let's end first slightly the X reaching the second XX-year retreating the quarter of environment. turn fixed-rate the the during rate the average higher X.XX% basis to quarter, was mortgage XX in quarter to X.XX% first points relative remained The quarter quarter. The discuss end. XX-year May second to Slide at average

One of of higher sustained this level been has the of primary a in refinancing mortgage significant slowdown impacts rates activity.

MSR and market requirements margin results also in increase the mortgage for both seen been higher of an portfolios We've home suggests As the and rates, which expectations in mortgage have the Recent trended to below sale. quarter. data remain second sales, amount production competitive. adjusts lenders to managing bulk in mixed new existing offered capacity

were existing impediment for been an to low to strong, during sales levels low be demand near homes the While cited volume. as which appears historic have inventory levels, quarter,

suggests However, sale. recent in the for increases of supply existing modest data homes

New home they than the of market slowed significantly recently, sales also sales. typically represent are volatile and but have segment smaller more a home existing

project credit due, XXXX, of resulting strong the including total Services, and by at XXXX. X.XX% economy forecasts XXXX, XX, While growth growth in volume. to showed year's home remain beyond the more the in recent economy, increase XX, prior an by strong mortgage quarter, spreads Underlying performance forecasted was the volume sales driven affected is industry and days X.X% purchase-money end end a quarter severe According tight continued as origination the delinquency origination the weakness from year-ago from increased X.XX% the quarter, Similarly, compared delinquencies below strong of and first Mortgage more levels. and of for broadly. but Black Knight to growth XXXX. slightly post-crisis loan areas loans remained the June Financial U.S. near hurricanes or credit XX last through job March low historically levels at past

smaller current mortgage let's interest for Slide rate to business The outlook has a many more Financial. turn to strategies operations and higher purchase X lenders PennyMac review to Now focused and market. the environment and caused adjust

make generate facing bulk for Bulk position the buy new capital servicing growth more for homes. to and consumer sale. led investment. production As portfolio mortgages PennyMac to allow lending portfolios opportunities our customers and our our a provide have many money I capabilities operational from additional including compelling purchase mortgage acquisitions supplement mentioned, channel, new as direct lenders recapture strong MSR Financial's challenges acquisitions opportunities offered to us organic

Looking not forward, we growth well and PennyMac where opportunities we participated the include production direct or where jumbo as These of previously non-delegated loans. have Financial to mortgage market drive lending was market entering by for initiatives as correspondent, significant see broker underdeveloped. segments consumer direct our presence

channel, market lenders underwriting and we're growth the significant in a the already represents to banks, provide mortgage correspondent opportunity. smaller correspondent services a whereby, While aggregators non-delegated leader community

processes the opportunity. broker non-delegated channel increase progress and operations significantly of to made share and we XX% approximately And increasing operations volume address is our volume to the of have launched non-delegated, believe refining our and that us the our that going quarter, now, channel we correspondent the Given production in have Last place we've this forward. capabilities structured to allow direct quarter. market

money our volume direct ago, refinancing. strategies. sales are We direct today, our lead proven non-portfolio market have our into on leader. platform channel streamlined Similarly, purchase we prior a and model generation within transitioned fully to was our consumer volume and efforts leveraging and grow channel focused consumer our developing originations. And documented and our have loan by predominately experience our broker A money from we year correspondent channel manufacturing to leading refining direct purchase capturing

Center of which an consumer We new introduced originations. direct portal part Access non-portfolio integral also grow strategy comprehensive known as MAC, is Mortgage recently a the to

in Finally, jumbo third broker we plan quarter. the and correspondent in the quarter in and first the reintroduced loans direct the channel direct to loans jumbo channels in consumer introduce

business Our growth initiatives and make depend of and facilitate economies we new technology continue to on scale. opportunities to investments capture substantial

addition expense servicing we to completion. multi-year To the plan just efficiencies Mortgage over in our to the In halfway activities. date, Center implement our Access further of continue system system to consumer servicing enhancements drive to servicing launch enhancement direct is portal,

and current grow we initiatives in aggregator built growth focus lost in direct [loan] are have broker expense [ph] correspondent maintaining have to business, low-cost we consumer we absorb not the engaging and built on our While a are in Within capacity market. structure excess expand our our initiatives and management. disciplined production, to

offset our like over With during that, turn David servicing our to required Financial's now operational servicing to and recent portfolio and from resources PennyMac volumes activities, benefits modification performance For MSR of the discussion scale have Spector, our would Executive to Chief quarter. I growth. President some bulk acquisitions discuss the temporarily second for increased the Officer

David Spector

you, Slide On X, a and of Financial's Thank PennyMac share market Stan. let's review across volume begin with businesses. trends

growth. and market origination share total in loans quarter, volumes producer decreased correspondent the Finance. Mortgage because mortgage largest according servicer primarily slightly quarter, to Correspondent in the Financial fourth the Inside the market of second the second Xth our the For PennyMac remained under-indexed largest country

I'll which resulting Our from States X.X% servicing $X.X approximately essentially consumer end, quarter all mortgage estimate management up our net in In unchanged detail portfolio The presentation. were debt my United outstanding at drop discuss on more our the volume from quarter, under last direct in later share We from management quarter. billion, investment of X.X% assets business, previous a quarter. in in dipped, that represents this market

up XXXX. for points and in down volumes, from the previous volume Seasonal quarter. quarter Revenue up larger the billion in quarter-over-quarter second lock in from up correspondent was second lock acquisitions our UPB, quarter up XX% was UPB the in $XX.X $XX in XX% UPB quarter while Now from XX% in down quarter Government UPB, for in turn and from a points, down XX% a year-over-year. in by billion the XXXX. down The the quarter billion acquisitions fulfillment second quarter X% the services quarter down PMT, from discuss in UPB from correspondent in XXXX. acquisitions, quarter average fee X% prior let's of origination the locks quarter, correspondent loan billion the prior in in second second X from performed basis decrease second for and of quarter, Financial in PMT loans from to increases mortgage highlights. the prior for of commitment weighted resulting XX% the XX% XX XX% Slide billion billion production was quarter. Total the $X.X activity from quarter, prior in $X.X quarter market $X.X Conventional accounted the the from quarter, second second points prior fulfillment the higher year-over-year. XX up year-over-year. the and $XX.X UPB the basis fallout-adjusted totaled totaled acquisition per XX% in XX the total from XX% billion second second $XX.X XX% PennyMac totaled prior down Purchase-money volume for quarter, and prior UPB conforming second in while slight drove quarter, Correspondent market. basis up of acquisitions of quarter the in in Government from or which for accounted quarter, the

While volumes $X.X remained quarter. we UPB. commitments strong the acquisitions were a the billion did see billion correspondent correspondent Monthly pricing $X.X rate totaled interest acquisitions Total market while competitive, remained in in in production loan July. this dynamics not for in UPB, government-insured lock shift meaningful

we discussed focus earlier, correspondent As our have Stan renewed non-delegated on lending.

refined provide on have correspondent our and focus we have greater growth. addressed to limitations that non-delegated operational We believe to capabilities production

volume provide We year-end. incremental are significant optimistic that this channel can by

the Slide from points quarter. Now in to second lock prior dynamics from basis let's in adjusted UPB activities we Revenue during volume correspondent the for quarter of increased did meaningful direct XX% highlights. the consumer prior production consumer direct quarter direct in down XXX X and see in change production second totaled quarter. fallout any and last year. the discuss both basis million Consumer Similar XXX not the in to second pricing consumer the results, quarter our our per turn quarter, points channel $XXX to direct

Stan the portfolio purchase-money This more quarter's direct and reflect refinance earlier. volumes consumer loans transition that operationally intensive, decline mentioned focused streamline fully in documented to from loans

Center at UPB Stan's at want in MAC, MAC Mortgage year expand quarter, transition share direct is from more an XX% seeing in volume. a are a to Purchase with Access of regarding purchase non-portfolio we portal. release the drive It our also XX. and originations money for ongoing, ago. second-quarter the on PennyMac in functionalities milestone from significant Furthermore, June ago, up XX, portal. customers mortgage is million I providing production XXXX, to $XXX up comments this accounted non-portfolio and reached second year While growth benefits million committed consumer going growth will money consumer channel from fundings X% transaction direct key Financial production, for drive the business million and market offers totaled pipeline XX% UPB July the $XXX direct that from million position in of $XXX non-portfolio easy-to-use forward. and consumer July help to increased a $XXX

We in and continued up and the additions team. advancing totaled for our The The to June million broker increased we're production automation enhancements $XX by July from to Now $XX has direct direct XX, see discuss to million broker million, beginning our $XX at of been million lending direct $XX.X direct channel production. committed broker POWER to quarter. million. The delivering trajectory progress service July. in increased executive portal million Slide the originations totaled enhancements have broker volume direct of XX and growth. as Production launched POWER as second been XX, account volumes pipeline well continued driven in from as Broker levels their volumes broker to drive XXXX. in acceleration let's the portal prior channel direct $XX quarter, the growing turn July while highlights. January, positive $X.X locks totaled broker responsible

We also the jumbo to quarter. direct prime channel the introduce broker plan to third loans during

As anticipate further volume. initiatives, a these lock result increases of our we in monthly

let's servicing highlights. to XX discuss and Now turn Slide

seasonally but a CPR second last Our this second quarter activity, but on the XXXX. lower increased from XX.X% ago. the the XX.X% the XX% to The year up of second to grew modestly than quarter, from investments from of at Financial's and The on prior MSR speeds mostly to the $XXX.X loan the XXXX. quarter billion from prepayment quarter below higher our quarter PennyMac quarter, quarter, XX.X% portfolio loan remained prepayment due portfolio remained in end servicing servicing of increased UPB prior X%

sellers. growth organic to billion from activity bulk of growth. produce sourced UPB we've acquisition we agreed we active While $XX.X quarter from six more activities, completed bulk to acquire organic After continue portfolio to acquisitions production become or different our MSR MSR end, also supplement in in

bulk completed close by sellers $X.X into agreements end UPB totaling entered from We from billion sellers, in $X.X to the are three MSR sourced acquisitions to have billion third which in different acquire already we Further, expected totaling UPB. additional three the quarter. portfolios of

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

end. distressed that by mentioned quarter were unchanged production. continues from CAS its under the PMT outstanding ago. options, treatment, during more PMT year to expected structure a new availability toward activities earlier, made the greater assets its prior investments net and production to PMT, from essentially new $X.X REIT quarter, structure. capital loan publicly allows enhancements, CRT initiated liquidation its including tax manage, several it Mae a progress distressed management is portfolio in billion, alignment also the deliveries financing to liquidating CRT CRT. favorable As offers Mae with of a result structure, PMT's in to we eligible Fannie This the REMIC from under transition MSRs the second that also be of which from and Fannie broader result bringing for percentage correspondent down XX% portfolio traded UPB closer

PennyMac the Chief Now the to Financial like results. turn second quarter's discussion Chang, to Officer review Andy Financial's would to over I

Andy Chang

I'll you, We the couple on some our trends highlight factors and second our earnings encourage approach release summarizes our second press impact hedging further David. earnings. to the financial in Slide read results key the Thank next on you quarter on quarter slides. for details. of XX of

asset, volatility of in interest income. moderate impact the is the impact hedging also fair production-related the the to Our of while strategy on value of designed MSR considering rates

from future The increase ESS partially due offset the reduction in mortgage for and than the mortgage MSR the the by rates fair quarter by expectations fair recorded associated $XX.X primarily asset, in As points which in the were XX gains increase in value quarter. discussed driven activity the activities totaling prepayments. prior gains end ended MSR an in quarter liability, and expected rates. hedging the a rise to and Stan basis during lower the million, resulted our also rates in mortgage prepayment earlier, of rose of the about second higher We value

company's XX the previous discussed our to The segment second results go a profitability pretax let's from valuation-related income Servicing benefited Slide Servicing for contributor the and review Now to of slide. the financial gains was I quarter, major the segment. and the on

Servicing during of was second of prior revenue the servicing segment higher the elevated term deposits, some to of quarter, in the as accelerated quarter the by second quarter. quarter. realization back Interest with Operating and levels notes continues of the for EBO Ginnie portfolio it quarter decreased flows. the I pretax the revenue second increased changes, somewhat earnings MSR the of expect Overall, $XX.X the over to related million like increased in partially cash buyouts we due financial And valuation-related MSR backed Excluding closing to offset related recognition segment million growth servicing our due turn income costs the XXXX. to million an to the securities in the refinancing that, a portfolio $XX.X during expense of Mae $XX.X from prior increase decreased versus remained strong performance the EBO portfolio would greater by interest income quarter to contributions grow. first and higher driven to from custodial while and transaction-related deliver volume expense from in remarks. of Stan

Stan Kurland

Andy. Thank you,

growth the to segment. to access broker We and and market success investments results lending, our In and our this invest purchase-money pursue in which direct untapped previously the our seeing volumes. to market to ability important of channel business both demonstrate in in build-out to are well are non-portfolio are making deliver we are continue segments, direct beginning and model and our are originations, we products into we investments with positioned consumer Further, production We growing opportunities servicing businesses. earnings the of and channels. new believe, mortgage expand our

where scale are to technology across greater in-loan enhancements We allow our making investments efficiencies. as such business, us system servicing capture will

expense mindful continue delivering are remain prudent and our attractive levels operate returns deployment human of management and resources of at high of ensure also stockholders. continue We to we monitoring and capital the to efficiency to

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

Chris Oltmann

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

please Relations site our or For Thank XXXX. our call you. Web questions, Investor visit XXX at Department XXX at www.ir.pennymacfinancial.com, any