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PFSI PennyMac Financial Services

Participants
Chris Oltmann IR
Stan Kurland Executive Chairman
David Spector President and CEO
Andy Chang CFO
Call transcript
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Chris Oltmann

Good afternoon and welcome to the Second Quarter 2019 Earnings Discussion for PennyMac Financial Services, Inc. The slides that accompany this discussion are available on PennyMac Financial’s website at 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

a Slide our exceptional with segments, Financial’s quarter rate segment second by of disciplined Let's the servicing hedging performance X. rights. across reflect interest and production our operating profitability inherent business focus all earnings on increased execution in begin risk in PennyMac continued mortgage of driven our

PennyMac $X.XX for of earnings per Financial earned share net income second of quarter. $XX.X million or diluted the

price at at of approximately repurchased XX,XXX of a we company. strategy weighted stock support the it average see which quarter stock the During the below to $XX.XX, PFSI shares value our levels reflects when common of is intrinsic our is we trading

pre-tax the quarter of from XXX% lending value per production channels. last the second share income share prior from higher million, the by at direct driven segment volumes of in was XXX% up quarter and to Book margins $XX.X per and from $XX.XX quarterly record $XX.XX end XXXX, Production increased quarter. our

totaled the volumes volume in prior second of lock XX% up $XX.X principal XXXX.PFSIs $XX.X billion locks XX% from of non-delegated the correspondent of and from quarter in up Production channel, and quarter and unpaid XX% correspondent, XX% XXXX. quarter consisting the from prior was the the quarter billion in government from UPB, balance, second

in loan volume fulfillment from resulting of totaled from nearly double totaled billion volume XX% XXX% of second quarter locks in $XX.X second and the fee from UPB, million correspondent revenue. acquisition the quarter and in in $X.X quarter quarter conventional lending And the prior Direct UPB, up the of $XX.X XXXX prior XX% the up XXXX. billion finally

reduction $X.X pre-tax from million this in in $XXX.X largely the by items, on decrease net hedging a recorded quarter results which million, $XX.X the related income were the values, a by prior the share. X, of $XXX.X these $XX.X Page loss MSR diluted gains. items highlights impact earnings servicing The quarter second XXXX.The driven offset and in million net and Continuing a in of per million down quarter of segment pre-tax quarters million in $X.XX primarily other valuation included was of

Excluding pre-tax portfolio XX% the $XX.X servicing of the the as XX% XXXX.The second as from record quarter up million, was of items, prior segment a valuation the well income and from reflect large results efficiencies. scale strong for servicing growing related and continued realization quarter our operating

in as same from strategic quarter UPB servicing of net Our our XX, growth. year X% continued prior at an to billion production period the last activities loan portfolio portfolio the provide over XX% $XXX.X increase acquisitions and totaled June and bulk

its management billion in as during address up Investment significant million, of $X.X of XX, Management XXXX.Net and million, under $XX.X delivered and manage $XXX million of million we in up XXXX.Segment investment the XX% from Investment $X.X Trust, prior second Mortgage REIT prior quarter from approximately new quarter revenue raised segment that totaled March from up quarter $X the XX outlook. income and assets XX% was PennyMac XX% million positive equity as the common in pre-tax quarter second $X.X the the opportunities of to the from Our quarter June

Now market let's discuss Slide current to and turn the X environment.

tariffs of by short-term direction economy impact treasury bonds a the with lower the to Federal less rally The for tensions. outlook supports growth economic global outlook certain. decision of in a becoming the recent the in the forward, Looking and heightened the uncertainty long-term over by of around coupled weakening primarily trade U.S. ongoing view Reserve concerns rates is and driven yesterday's slowdown

market and the year the points activity affordability buying end the a first the quarter in greater mortgage home rate of the midst XX summer Reflecting season. purchase quarter these driving basis of ended uncertainties, refinance the improved at XX lower from boost fixed average to the than

XXXX market mortgage for lower origination loans rates, agency have for mortgage-backed the securities in held now vintages. and in of upward. recently estimate with the to response are size higher mortgage the forecasts In been refinance an XXXX eligible approximately of issued currently even revised that more in XX% We percentage

Purchase Credit trends grow originations strong rates are to remain consistent the next two the markets single-digit by over still price home by expected percentages employment few aided supported and by low last over years, moderating healthy, years. appreciation.

more more or is those at in as lows issued delinquencies, mortgage slightly days historical XX, spreads recently of CRT June fell XX level seasoned to a is rose by XX.However the on XX is XX but slightly or level near serious their which delinquent indicator points. tightened Spreads delinquent March One days more a elevated result prepayment of on more basis securities widened years. lowest while few CRT securities from activity,

Financial’s turn PennyMac of review let's Now Slide I’ll to history X, financial performance.

six For XX publicly year as Exchange. York PFSI, a end our over New operation the on traded years June the marks company of Stock and XX in

growth reported see As has our company. a than XX% the public IPO as grown threefold from a compounded you can of with since more rate annual our first the book since chart, value quarter we

sophisticated record spanned performance and the expertise strength approach and has of team. to and of the a track management of our mortgage variety conditions balanced Our banking experience risk market of reflects our model, management

designed sustainability and of talk economic let's turn was our cycles. X Now ensure some book across PennyMac in model industry. value about business performance and the Slide a leader driving to mortgage as grow factors resiliency Financial’s and to the

our rate MSR environments. business asset interest built the pipeline and volatility impact value Our on production the on mitigate of strategy different which management of across our mortgage interest and foundation of to of designed been rate rate risk key fair a a has risk management, is of mortgage governance part sophisticated

production operations primary We market consumer are broker of and a direct direct leader the including in mortgage in channels with correspondent, each lending.

production centralized supported are our division. channels of efficient our and by fulfillment All highly mortgage

providing portfolio steadily has servicing time our model is large grown components of which over essential Other benefits. scale our balance increasing

distinct portfolio a us the ability advantage. provides Our grow to organically

Another broad us makes key PMT. each Investment segments to and differentiator platform unique PFSI companies. consistent of our is for disciplined among tax with our profitability mortgage and capabilities of PMT’s leveraging record investment synergistic track approach produced has operational both of Management efficient The partnership along driven a capital business success business strategic the with our PFSI's strong foundation.

further market investments to long-term These our arise. and objectives as Fundamental achieving competitive substantial our to enables opportunities make maintaining to workflow advantage they our us leading and position investments quickly technology ability respond efficiencies. in to drive that is

one current The market for example. opportunity volume is just refinance increased

routes to centralize driven origination that tasks driving specialists process a of consistently data workflow tasks the faster mortgage systematically levels throughout have developed We fulfillment and speeds process, quality. with identifies processing required those high

in created We a optimized for each loans each system our a The and system optimize analyzes best of to bidding have of characteristics. also execution production granular multitude credit loan attributes channels. proprietary to pricing pricing develop

focused for on proprietary enhanced multiyear mortgage solution efficiency improved scalability X.X our customers. now technology servicing increased workflows automated is and to service complete and Our largely and million levels expected is provide

grow the Lastly, would Financial talking only spend not minutes the mortgage I I continue of to market. but in like sustain will a leadership reasons position it’s to of about PennyMac believe couple some

our will are strong enhanced investments capital expertise our excellence, position continuous operational and success the we across expand banking possess market and our which to further technology presence. in We for us leadership and position operational to allow scale, distinction market. comprehensive by mortgage platform, our Our businesses the continued sizable leverage technology, ability the believe in us mortgage

Executive and David that, Chief PennyMac over discussion now Officer to during like performance operational to to I Financial’s Spector, the With would President turn discuss our the quarter.

David Spector

you, Thank Stan.

that market share over remain three of reported the grown servicing years. According share a across with last to years. Let's Mortgage maintained we trends over market number Financial’s last both market production in businesses. PennyMac Financial’s two review businesses start by industry mortgages, insured Inside the a of one data government and producer We the PennyMac Finance, its position

the In the although rates and down share as from substantially. increased market share direct expansion PennyMac’s market given market the grew consumer decline. we've somewhat quarter, estimate first market year-over-year, We correspondent mortgage conventional that significant our

significantly we our channel in our continued direct build broker in to channel. Market this grew share capabilities as out

grow over March we estimate As Stan in from portfolio mortgage outstanding up debt in mentioned second our and ago. X.X% a continue service States, XX our that to and at X.X% of we the United earlier, now X% the servicing quarter year

discuss XX% government split almost highlights. acquisitions Now production acquisitions. second Slide Correspondent in and X billion second conventional correspondent loan of insured prior up PMT in quarter quarter the let's quarter XX% from between UPB, turn XXXX, from the evenly to by totaled $XX.X and the and

quarter and billion billion of XXXX.conventionalconforming up $XX.X from and Government from UPB, in XXXX. second acquisitions UPB, the insured the quarter the loan billion $XX.X in the in $X.X prior XX% from prior billion totaled in $X.X quarter of second acquisitions totaled quarter XX% up

in the prior XX% the million business totaling second lock the XXXX. from quarter grow with UPB, quarter quarter. government prior in and billion in also of Our from non-delegated was non-delegated $XX.X and Total up quarter correspondent continued volume the from XXX% XX% UPB, volume to up $XXX

the the prior were UPB $XXX quarter, locks from up and XX% $XXbillion prior government total XX% Delegated the in lock quarter up XX% second in in UPB, million quarter quarter. the from from XXXX.Non-delegated volume

to XX unchanged While essentially competitive, as basis the the at correspondent be market points. prior appear stabilizing quarter margins remains were from they

down lenders totaled the of incentives of million program. that of behalf in the in notable warehouse Fulfillment loan paid consumer PMT stability quarter, from second margins wind relief is million declined up reflecting by The one and to $XX.X quarter. its orderly significantly, on that production provided facilitate prior the the $XX.X by fees our

fulfillment quarter points PMT. facilitate to acquisitions UPB, loan the a discretionary points As successful reductions to weighted XX basis fee correspondent average previous basis the in of conventional was percentage by XX reflecting compared

number clients the UPB driven of end, increase exceeding reflect in We interest a to. created, the processing our correspondent loans this volumes fulfillment a the of to slight commitments technology quarter acquisitions production with The also record high demonstrated prior XXX rate billion at scalability sellers quarter. accustomed to times correspondence simultaneously levels continued service sellers at in we've continue maintaining are billion each quarter, July's to total approved end loan of performance in $XX approved the lock correspondent $XX.X in while quality XXX UPB. strong churn from platform increase centralized up

lower $X rates. from This production second the second servicing capture from pivot XXX% operational turn the billion totaled successful consumer and Now, direct our opportunities quarter in driven increased production prior from volume in significant direct resulting volumes up let's the reflects our the quarter address of and UPB, the focus to quarter Slide XXXX, portfolio. mortgage of within highlights. XX% refinance XX to Consumer increase by we discuss

made expanded efficiency. yield benefits in that we’ve capabilities process investments the as our success, this greater in such with capacity fulfillment end-to-end Behind mortgage operational

it than this loans a in quarter XX% As more improved quarter. did direct consumer processed result, in to lending group rate quarter XX% pull-through the our from prior last XX% and the

in quarter. totaling adjusted direct benefit points Revenue basis XXX from in XXX the from commitments increased quarter. our lock totaled And continue million in UPB, basis per in with finally, Volumes committed consumer third rate in fallout points strong $XXX pipeline direct billion the results to July, was positioning interest rates lock UPB. for consumer up similarly July channel us the lower the in quarter prior originations to substantially, in production $X.X in also

channels and have originations Slide in in XX the $XXX development to driven from second prior approved. totaled the direct by we quarter, this brokers broker by direct significantly channel Broker focus in turn let’s number UPB up $XXX the of in and million XX% quarter, million increase our highlights. Now evidenced continued review

continue Lock the in will totaled are the that in million XXX% enhance to capabilities up UPB, and quarter of closing known power, to second continuing broker seeing and quarter further the upgrades first from volume in our as engagement feedback We're from up higher in from portal, of brokers million quarter also $XXX XXXX.We $XXX the our signs otherwise loan improve top incorporate the experience. of deploying system. and encouraging enhancements the

strength continued In quarter. in and committed million in at UPB. the was XX, totaled $XXX direct UPB locks million The originations pipeline broker million totaled into July $XXX third July, reflecting $XXX

let’s to Now and servicing turn SlideXX highlights. discuss

XXXX.Portfolio billion loan grew activities, at quarter of XX, to $XX.X in XXXX X% UPB $XXX.X this runoff. UPB quarter, second of billion by and net growth $XX.X XX, in end billion servicing June of driven in the XX% up from production was portfolio March Our the from

XX.X% quarter. the PennyMac Fannie portfolio, the of XX.X% and for prepayments Mac, is which XX.X% Mae, financial Ginnie portfolio, own mostly Freddie in increased MSRs speeds PennyMac’s prior Similarly to service sub-serviced majority the the during Mae to by Prepayments increased quarter. from X.X% and of owned which from prior PMT includes speeds

The prior day rates and low plus the XX and delinquency unchanged quarter. on portfolios sub-serviced remain were own our in

XX of sub-serviced X% delinquency delinquency portfolio portfolio ahead our X.X%. June rate XX, and day of own of reported as of Our rate plus

to in The will buyout the the discuss decrease during which volume Mae which we expand early available the and revenue increased modifications also continues to opportunities from later rates presentation. quarter pools for opportunities in on transaction Ginnie try loan

UPB and million $XXX modifications this the $XXX transactions $XXX The prior quarter million, million up in the up quarter prior of from EBO million, the totaled in loan totaled $XXX UPB of quarter. from

related investment Now to let's management XX% this has prior and with to year increased June this Slide opportunity CRT of XX, organic generated review totaled conventional turn strong segment.Net as up results Management from and under $X.X Investment and XX billion quarter. the investments seeing production. the assets is MSR PMT

raise the to in equity new $XXX Of was offering equity in underwritten amount, an this As shares. successfully a million million quarter. $XXX able PMT million to during of X.X raised result, equity was common

equity raised million or common its in Additionally, equity shares PMT ATM aftermarket $XX to common issued program. from

and addition segment as result, a assets In growth the Management million, $XX.X revenue XX% Investment to to in driving previous year-over-year. grew management, of under quarter PMT also are up strong fees, growth results incentive in from the and our in XX%

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

Andy Chang

David. you, Thank

release financial factors We will couple for I our earnings of some next key highlight on on in slides. second further you trends details. the to the read and quarter our press encourage of results

our results on quarter. hedging of for impact successful earnings the summarizes second XX the Slide

of strategy fair into taking value comprehensive moderate income. hedging rate while changes asset, production interest of is Our impact designed on the to the related MSR our also account

reduced activity losses losses fair recorded asset, of for million MSR quarter, value at second expectations by the elevated the were XX.These on fair March value driven we value In prepayment or $XXX.X fair our due totaling X% fair costs other gains to hedge and a in mortgage and $XXX.X added losses which rates. by lower to the were million. largely MSR were future hedging by value offset of total ongoing

our of approach. earlier management on interest the profitability risk value mentioned consistent be different an book rate Stan successful our interest without cannot As comprehensive focus and growth rate environments achieved across execution

profitability prior second the turn XXXX.Record $XX.X million driven million of let's segment. was Now Slide XX this and to changes the by combined up portfolio $XX.X with management. income from the results million servicing and growth in were $XX.X quarter, our related valuation in discuss operating the quarter excluding effective of Pre-tax quarter in expense second quarter

expenses scale achieve As a of percentage to of the average economies servicing portfolio the operations. decline, continued to in servicing UPB, continued we operating our demonstrating

driven Our pre-tax the the David in quarter. million environment were and previously. earnings included increase than higher was to eligible income for related buyout excluding the consumer $X valuation profitably prior interest that related EBO by opportunities current The that in modifications loans rate expanded loan changes discussed

turn to would Stan with it to remarks. I back closing that, some for like And over

Stan Kurland

Andy. you, Thank

unmatched deliver is of handle growing to that platform has and the across standards strong environments. believe Financial operating market we the different of quality loans large at volumes an highest to in PennyMac built performance industry mortgage

to increased the market reflects as technology ability years. and production our enhancements, and operational in the in significant the fulfillment swiftly past over investments Our division the mortgage several ongoing react opportunity to loan such in

to the while anticipate servicing this Given Financial long-term second the the drive is for present market PennyMac portfolio exceptional performance. continued to year throughout persist half our of we of performance environment, earnings growth anticipated

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

Chris Oltmann

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

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