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PFSI PennyMac Financial Services

Participants
Chris Oltmann Investor Relations
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 Third Quarter 2018 Earnings Discussion for PennyMac Financial Services, Inc. The slides that accompany this discussion are available from PennyMac Financial’s website 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 would like to turn the discussion over to Stan Kurland, PennyMac Financial’s Executive Chairman.

Stan Kurland

Chris. you, Thank

heightened Slide also of the stock. announce with that platform Financial’s quarter origination we environment third the ownership capacity participants our Let’s a will to the power with structure all X. the today of demonstrate smaller key and rate completed rising earnings of equity I banking simplifying among benefits common presentation. our results to implications later industry conversion backdrop a to publicly adjusting am expand on begin market. a PennyMac class competition a pleased comprehensive against single corporate I in our corporate traded of and reorganization, mortgage my bit

share increased solid PennyMac per million forma diluted along from value share. Book the earnings third $XX.XX the of per $XX.XX was company’s pre-tax XX. Pro For to share June prior earnings investment management. per from results with $XX.XX servicing of Financial and per for earned $XX.X book income value quarter, at our increased and segment from contributions quarter, reorganization, production the $X.XX. share

quarter $XX.X million X% the the of in billion income servicing prior of down third $XX.X from down third production quarter third of the from pre-tax down down prior recorded from The XX% of the $XX.X from and volume XXXX. XX% X% million, and prior government of $XX.X segment and XXXX. were locks Acquisition $XX.X the XXXX. quarter Our the from quarter UPB, UPB, and segment lending third million the direct $XX.X quarter up million, up XX% origination quarter the from was and income Total quarter totaled XXXX. and in from up in XX% in billion prior correspondent quarter pre-tax

included third pre-tax $X.X Valuation-related the million a servicing and third for liability. $XXX decrease we million Furthermore, change values, to an from quarter offset fair term the $XX the of of term total hedging for notes million, terms. valuation-related in increase from notes fair XXXX. quarter Excluding million additional more income secured items XX% of excess associated favorable from $XX.X prior segment and MSR XX% for August, quarter the partially $XX.X down activities due a a refinanced $XXX million of was value and the by million $XXX servicing MSR-secured of issued decrease million spread in in X-year at of items,

this nearly interest cost reduce million, We redemption expect by after expense transaction of $X.X the quarter. to million $X debt annual a onetime recognizing

servicing We quarter billion and portfolio from MSR which continue grow XX% XX growth this of in X% $XXX.X bulk of was billion $XX.X September the previously completion to our announced to UPB portfolio, XXXX. totaled in end, XX, at from Contributing acquisitions. June UPB up

segment the investment the prior more completed assets $X.X approximately UPB private After which Turning Financial investment additional the the up prior to PennyMac the quarter-end, the in from income pre-tax in Net delivered will acquisition billion, wind-down we XXXX, September David a of completed later Mae of Ginnie as XX, discuss with portfolios bulk in presentation. in two MSR of funds. management detail million billion, up XXXX. down of the management our quarter X% X% $XXX,XXX and quarter Slide of $X.X $X.X third $X.X quarter-end from million, X, were under from and

percentages now demand of trade ticker stockholders universe inclusion the the by the U.S. the take the company represented mortgage discuss and potential finance $XXX card Turning and under auto significant by liquidity the contributing on and debt stock. of Stock million equity opportunities mortgage to the shareholders converted by PennyMac’s result holders Over the York a increased This market single has be the stock are expand to and external of has I market reorganization between XXx our eligible time, making a reporting want residential moment of of allocation New all the to increases to continues to benefits change increase, billion, in to float $X.X on market investor completed in loans financial a PFSI. of PennyMac classes eliminates to to certain been for class will class percentages also stock, nearly no significant of outstanding all transaction the The equity held Slide ownership with corporate take from simplifies moments almost market stock different to of review outstanding, beginning The with X, far, largest a larger indices. publicly $XX we remains credit percentage company income the by equity few to transaction, than expect I debt. the Exchange available to for Effective held broader key Financial common trillion the stock today, stock. our capitalization like The which X. in There single Slide a PFSI’s thereby and public management. reorganization traded ownership and as or transaction. would as common to consumer

consumers increase. inventories new still purchase projected and the mortgage of trends low both interest industry by on years disappointed economic growth higher chart over who recently Low adjusting the unemployment market right favorable driven originations. mortgage As rates. and money demographics driving key wage modest bottom total versus in existing purchase seen Despite are because the of sales the originations as predict have expectations in primarily slide, such real growth to home-buying can forecasts be from home mortgage housing among are several next and millennials the the continued

right the mortgage Slide industry industry that turn by to independent talk about let’s on refinance many Now, smaller The the show robust the result. mortgage the how market graphs fragmented operators share X gained a margins rates, is mortgage as higher market our has share expectations in for become and going fragmented servicing the today forward. and The lower highly of recent consolidation volumes with production participants enabled and and years. in

half the compete X markets, participants production servicing market production of the XXXX, X XX% nearly represented servicing a for comparison, account market while top the many other and of rest. the top participants and in XX% whereas today of As just for the

As consolidation driven among mortgages mortgage decline have driving remains intensive rates market purchase fewer, believe have access that their continued an be will market increasing cycle. mortgage customer to refinance willingness Successful and more margins and experience operationally are and mortgage participants with loans capital opportunities participants, demand companies diminished an ability lower. scale competitive strong stronger shifting end-to-end technology faster. more that move higher, Traditionally, less and size as is invest business consolidation will volumes meet technology pace has in we easier compete pressure the accelerate intensive such They money with and operationally through refinance operational further to of market significantly a and focus ready to efficiently. this have for to expertise, those to will for to in

industry technologies our a base. focus customer an our growing advantages new PennyMac steady critical due products to to expertise, our long-standing operational putting role to As play competitive introducing emerging and on in for determination leader, work significant our enjoys

of PennyMac X public New capabilities mortgage its Exchange discuss turn Financial XXth XXXX. leader currently The year and of PFSI’s in to York on in operations the and Now, Slide is a May unique as let’s went market. Stock in U.S.

mortgage We highly leading have PennyMac a leadership their and capable management become that senior specialist. a to the and residential non-bank Financial experienced grown reason team is has

are and prudently established portfolio in have Finance, mortgage we an leader. organically producer publication We industry According largest industry ourselves the the the and largest have currently to fourth Inside country. eighth Mortgage as servicing

producer. largest second largest government and correspondent We also producer are the the insured

In record developing market and have and efficiently our meet to our advantages, immense and broad share opportunities to products to profitably for technology in of our competitive us gives have including track of operations to capture Our and bring deploying needs. new proprietary ability future pursue ability customer proven capabilities efficiencies scale consistently XX-year history, the to we that unique us range mortgage a market a allowed increase growth.

utilize In addition, creates external manager residential opportunities provider, in Financial PMT, is PennyMac PennyMac our investments sheet platform. or went to a assets track of where record in growth unique created the Investment market partnership PFSI Mortgage and services by in invest focused tax-efficient the PMT Since our on mortgage to continued have success. built for and with a its we REIT Trust, mortgage balance public XXXX,

share our that During doubled has to X.X%. loan more time, production than market

value tripled nearly for pro $XX.XX Our of X.X%, loan from book our share tripled share to share to has $X.XX has our forma September XX per as per nearly per share market reorganization. and servicing

is uniting specialized a with and PFSI’s regarded our leading PMT. throughout Now, and as discuss production PMT’s let’s with us legacy-free, PFSI’s PFSI turn leading provides advantage, non-bank X Slide highly platform scale, a platform partnership operating industry a strengths and large operations. operating distinct a This and scalable residential vehicle. synergistic mortgage technology competitive specialist driven partnership servicing as to industry tax-efficient with with investment mortgage

in own experienced and earlier, investment sheet mortgage mentioned $XXX funding. a with a its of its team risk with well company I $X in mortgage-servicing the seasoned XX PMT As mortgage and balance we grown IPO more million have significant management in become assets are capitalized investor than highly diversified from The to billion production. has sourced and of credit residential leading of from time year. rights has September at we transfer its at this credit, GSE sources

non-QM product for expected we by organically growth equity in expand opportunities lines these for prime and activities. attractive presented assets create future. The explore from development opportunities loans, benefits of mortgage to PMT invest PennyMac as are the both home the Financial new market the credit this will in mortgage securities As and new to such created PMT in non-agency

to Now, PFSI’s discuss XX initiatives growth. Slide let’s turn for strategic and

curtail growth expertise, while Financial and to in to the in industry operational in investment others afford technology access ability invest scale future the capital, operations. Our mortgage prospects efficient PennyMac

its We have strategic to to PFSI ensure several positioned overarching well continue growth. in place is initiatives

growth in on and to potential broker is with production, market with direct. increase as a focus consumer First channels highest the continuing share for such

our deployment of investment continued is technology. the in Second

We new ability our on considerable opportunities and have business placed facilitate technologies innovative our to emphasis operations. profitably to developing scale enable

segments to better customer the million pursuing through the can smaller rate originations brokers of offer power and our recapture needs of and include the correspondent correspondents improving our higher growth which and a by our Initiatives for address unions, their to are correspondent servicing we customers. including Within growth borrowers. from of origination and prime new better to community drive brokers our functionality represents to as within increase the of growing lead Access PFSI’s drive giving products potential volume, growing are that credit efficient who enhancements in to broker portfolio, we portal, the improving drive share MAC suite process production to banks with and a continue portfolio the market, implementing adding In In more consumer or non-portfolio capturing new PMT’s processing opportunities existing non-delegated we of volume correspondent production capabilities, such approved and generation channel, market. and to total about growth, affinity full pipelines. customer environment, Lastly, of market non-agency Mortgage process management Center, include PennyMac the production consumer-facing and mortgage number servicing allowing maximizing products transparency volumes risk capabilities from of segment, activities meet our to our them XX% originations products increase increased to maximize smoother benefit automation relationships within in initiatives X.X manage our to investments. including drive and make growth can potential and direct increasing expertise continuing strategies conventional direct, HELOCs current number increasing and order

acquisition committed portfolios. strategic remain bulk of MSR to addition, we In the continued

We servicing enhancing further its operating system platform efficiencies. our are also capabilities and to

expected our growth activities. Finally, successful of PMT execution from investment management and our is earnings additional facilitate for to initiatives increase investment opportunities

David Spector

businesses. Financial’s Slide volume begin with the XX, and On of Stan. share trends you, across Thank review PennyMac let’s market

As largest in high PennyMac the according in producer smaller volume an largest all-time loans eighth PennyMac XX% volume increased remained the fourth servicer and market. the as Financial of Stan profitably mentioned, Inside up Mortgage grew its mortgage to share a channel with market correspondent we country Finance. to

up under of slightly consumer at rebounded Our the volume quarter. We from this as debt in that billion, over $X.X outstanding increased from States XX% quarter-end, market X.X% X.X% Again, now United our the quarter. servicing assets estimate prior were at quarter we June our the Management share net XX. portfolio management mortgage Investment direct up represents business, all from in prior

totaled quarter non-bank and Now quarter, competition XX in highlights. from XX third quarter, decrease in fee for fulfillment reflecting of PMT, acquisition XX% UPB XX% for was volume prior loans. Government the year-over-year. commitments government-insured quarter acquisitions or of was prior basis from in XX of in for volume market performed of the totaled in in the which money loan weighted the total billion XX% fulfillment fallout-adjusted from and billion billion locks third quarter third let’s and the in prior PMT X% prior XXXX. X% prior was third Total lock down the from the Purchase UPB, in acquisitions quarter turn from $XX.X the quarter. prior third capabilities in UPB the X% previous up correspondent and conditions heightened quarter, from X% XX% lock XX correspondent third and improved by and XXXX. acquisitions, from third points the the reflecting XX% up quarter. in points, in year-over-year. for Slide down XX% per up average XX% billion billion billion basis basis in UPB, UPB the and from billion for down Government in participants points for a to the XX% government third accounted the quarter in the third and of correspondent $XX.X quarter quarter accounted UPB the production $XX.X basis discuss $X the $X.X Correspondent up conforming services in from prior UPB, XXXX. acquisitions XX quarter $X.X loans quarter execution quarter, quarter, quarter totaled points among The Revenue the Conventional market Financial during in in $X.X for up the our third in PennyMac year-over-year, quarter our unique quarter

We continued are our we with growth our seeing and in non-delegated mortgage products correspondent encouraging results. conventional production

introduced $X.X to loan expected $X.X Interest up have We billion $X.X UPB, billion XXXX. meaningful in is strong billion UPB help which to in products volumes total in October, with October up government October channel, XXXX. $X.X production lock in correspondent rate Monthly billion in acquisitions from from in drive recently remained of commitments this totaled growth. also October

direct reflects has mentioned October at reflecting our the in money lock cash-out pipeline inception portal of totaled the Increased $XXX Consumer online down funded in discuss continued quarter XX. turn adjusted the in the the to and the XX, only the direct million billion which third highlights. Now third in XX% UPB at in XX for totaled XX was functionality in consumer we XXXX. to of from ongoing launched of basis X% quarter mitigate helped transition production Slide let’s prior more April, and from quarter, we lock XXX captured XX% the up transition. intensive rate Stan the growth September direct points in originations prior and streamlined direct down interest $XXX in refinances the its volume The slightly portal, UPB, as the of fallout million successful quarter earlier. revenue decline $XXX to in from in loans. commitments XXX from to production consumer from accounted enhancements basis in volumes $X.X September quarter to purchase through million successfully and $XXX points October MAC, million loans the per committed quarter consumer substantially which loans refinances, operationally

XX channel discuss and turn highlights. to Broker let’s Slide Direct Now

in by third UPB in channel. the our growth continued our $XXX.X sales in institutionally totaled the Originations up and addition in by volumes in brokers approved million we’ve driven broker seen $XX.X the are million of quarter, from quarter, We effort. substantially XXX the the encouraged focused prior build-out of

center-based supplemented and enhancements brokers’ we POWER greater by process portal, control. by our specialists the process call broker-facing loan-level Additionally, growth management, giving and are making our to driving transparency continue

providing one full portal, together with to loans, central their Our suite better and serve featured the brokers all government platform on offers them a clients. conventional of ability

features, LPMI, HomeReady channel in of November. October continued increased with otherwise as product XX. $XXX XX known added their positive million pipeline of $XX at volumes origination jumbo products including also committed $XX Mae’s total trajectory Direct a million in insurance, and originations October and with have and prime We lender-paid product million as to of plans Fannie Broker new launch locks million. from The $XX September to mortgage

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

bulk the storms X% of grew $XXX.X acquisitions, the proactively Quarter-over-quarter comparison, the looking organic Harvey customers was those these in the recent billion affected affected hurricanes of we activities completed our at the quarter up last in and to servicing of areas, Our quarter was quarter, of $X.X end believe the located acquisitions year, by loans portfolio XX% loan completed not material Irma of $X.X we in is loans limited. XXXX. affected. Hurricanes to Florence and growth Financial’s engaging with portfolio quarter servicing over By providing assistance billion the billion XX,XXX exposure After In X.X third million billion in were from prior Michael, and XXX,XXX in impact end, regions third PennyMac additional way from from are by and earnings. quarter. customers at those production our in to Approximately portfolio UPB during UPB and our the and we are of servicing UPB $XX.X the settlement. pending and in MSR driven bulk an

investment management the segment. Slide Next, let’s turn review to and XX

of continued PMT under on from driven contribution prior $XXX,XXX $X.X fees As PMT’s based increased the up strong performance. by was end. quarter The mentioned earnings slightly earlier, were net billion, incentive management capital has its CRT of correspondent mortgage and successfully that at PMT’s its assets. liquidation XX, result loans distressed only represented production. investments MSRs portfolio activities transitioned from assets X% from And towards distressed September

on MSRs, securitizations. PMT organic focused is organically While non-agency other CRT and as and strategy HELOC sourced growth its investment it pursuing remains of strategies such

Now Officer, Financial’s I’d Financial quarter’s like discussion to third Chief PennyMac to results. the the over to review turn Andy Chang,

Andy Chang

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

is volatility strategy moderate rates prepayment activities driven value value hedging future, increase the while of the asset impact value considering quarter, quarter. which reduction rates Our $XX $X.X of during expected The to by the in gains activity income. a the in the designed also offset by hedging third driven and in in fair the primarily liability, interest fair MSR were impact of asset expectations $XX.X In resulted lower of and we from ESS on totaling our and the by fair on prepayments. the gains MSR recorded rates increase the for production-related mortgage in million higher million mortgage associated a largely the MSR also million,

Now let’s our results. company’s of to review financial profitability the Slide The continues segment. be servicing major a and segment to contributor XX go to servicing the

expense this excluding was $XX.X $XX.X adversely quarter refinancing in affected results XXXX. recognized to For valuation-related The of pre-tax the term million prior the in interest $X.X the of third million quarter third were and in $XX.X million due versus quarter, by in million August. notes the changes, quarter income,

$X pipeline higher deliver a the going of annual flows As servicing some million driven resulting buyouts of higher in performance this income core from term securities financial realization remains cash portfolio modification in segment to to I also greater Mae contribution lower revenue capture Stan result a increased, in revenue by Ginnie custodial greater lower PennyMac during servicing operations. higher with refinancing a efficiencies was increased will to servicing a and expect offset increased by continues of And turn the from earlier, increase strong, expenses due interest grow to Operating loan Stan earnings EBO-related remarks. and Overall, EBO-related and to of business Financial’s portfolio as notes interest revenue, over the from MSR and forward. approximately larger to an The as for volume to the we rates. partially our closing it quarter. would margins and our we due deposits. savings redelivery like mentioned reduced of the that, interest back

Stan Kurland

you, Thank Andy.

development higher As our out from rates, growth by production the mortgage to earnings initiatives stands strong growth. results from servicing the our operational on channel PennyMac of market business continues and Underlying and increasingly The capacity focused the over the to continuing competition portfolio development contributions management deliver will has to to been Financial technologies adjust product drive become of across and strength efficiency. time. meaningful success team greater and our new our

the be to and expect in will We see ones mortgage scale compete. that have the market, and consolidation successful technological to capabilities firms the size,

are to solidify in residential confident positioned the from place well are taking the in and changes to technologies make to producer mortgage investments we benefit continue further cost-efficient market. leading, our that as We mortgages position of a

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

Chris Oltmann

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

Relations Q&A website please our department or at Investor www.ir.pennymacfinancial.com any you. For [No our session Thank questions, call this XXX-XXX-XXXX. event] at visit for