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PFSI PennyMac Financial Services

Participants
Stan Kurland Executive Chairman
David Spector President and CEO
Andy Chang CFO
Doug Jones Chief Mortgage Banking Officer
Call transcript
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Operator

Good afternoon and welcome to the fourth-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'd like to begin by introducing Stan Kurland, PennyMac Financial's Chairman.

Stan Kurland

Isaac. you, Thank

organization in dedicated would transition the on role PennyMac our And are of at past success team and As have management and we to my the take industry. I achieved. the proud incredibly like years. believe reflect in have a Financial, built XX the our I I I'm personal we employees moment unmatched the of to depth

Investment synergistic Financial operating REIT Trust, unique this Mortgage including leading with PennyMac well platform, best-in-class banking a mortgage established the its we our partnership as has have manage company that as enterprise. Pennymac capabilities as which

the and economic risk infrastructure, well our us residential people, includes our across in sustain governance a variety mortgage management, platform environments. market of positions focus on to Our advantage which competitive

in but to the relinquish board, the team am chairman chairman I day-to-day continued As on ongoing returns forward while my the and responsibilities to build growth my stockholders. the board. my for will involvement of as I the as to company our of continue foundation look the providing superior, confident place management continue future long-term that of growth, I responsibilities established

to to the officer, David like call chief full-year fourth-quarter PennyMac pass I'd XXXX and the and who Financial's president Now, company's Spector, review on executive will results.

David Spector

for we Thank you earnings Stan. consecutive for second records achieved as company's exceptional fourth-quarter the income earnings performance PennyMac operating the Financial's quarter. operating pre-tax and reflected

diluted share segment $X.XX. improved servicing PennyMac income segment. Our million of net results outstanding the earnings in of were operating Financial performance our per driven in or and by performance earned production $XXX.X

the end quarter. up from Book value per increased share $XX.XX prior at the $XX.XX, of to

the dividend per all by declared of principal quarter in quarter volumes XXXX pre-tax addition, the $XXX.X prior XXXX quarter balance, prior the bringing a for from Production $XX.X directors from driven quarter channels. and million, $XXX.X total up fourth-quarter our XXX% of year was segment In and up from XXX% fourth of of volume XX% unpaid from board the the $X.XX cash production income Total was quarter production record up share. to billion for the PFSI's of XX% fourth billion. across the

to in channel, in lock direct the and up UPB, the billion XX% and in from prior fourth up X% record quarter XXXX. Direct from non-delegated were of quarter $XX.X PFSI's and went consumer of PMT totaled $X.X channel. finally, XXX% quarter XXXX. from prior the fourth and channel XX% up quarter a And went UPB, fulfilled in billion to correspondent while broker up of was $X.X conventional of consisting the locks, XXX% XXXX. the billion $X.X direct of the $XX.X prior government acquisitions Of this, loans for UPB, quarter from volume up locks from XX% lending billion billion fourth quarter correspondent from the up

per valuation-related and hedging primarily items million $XXX.X impact a of other and earnings losses. a $XXX.X net in driven these items, fair share. reduction net value increase fourth quarter quarter Continuing and on the The to a million income in of a of The versus recorded results million in XXXX. loss pre-tax of $X.X the of segment million $XX.X a X. loss prior pre-tax Slide pre-tax $XX.X quarter $X.XX were this million by in diluted segment servicing in which The MSR included was

completion included Excluding of environment. million systems in a from prior the XX% $XX.X XX% servicing million, valuation-related following servicing down $X.X expenses vendor primarily of quarter our XXXX. The from segment quarter-over-quarter up pre-tax was due growth reduction income fourth and quarter the expenses operating items, to the for lower the

was from our prepayments. growth billion X% the from driven This quarter of the loan end and by elevated UPB, servicing XX, XX% increase record totaled activity portfolio in prior significant which As continued provide of to XX, increase $XXX.X of despite December portfolio an production XXXX. December

$X.X Investment $X in delivered I common as from for up XX, the of income unchanged December prior was in $XX.X the pleased Our segment September Net that from full-year XX, XXXX. equity, pre-tax to management million am of XX% in of fourth was new a note $XXX common $X.X PMT management most of million Segment in million, new million XX% fourth we quarter later totaled manage, in $XXX REIT investment billion revenue million the essentially quarter up from quarter of up equity. total million the Mortgage Pennymac XXXX. of and quarter. quarter Trust, approximately assets from raised under which that the XXXX, raised $X.X and the prior the as raised

the After portfolio bulk of Financial MSR a approximately completed PennyMac Ginnie quarter end, UPB a of $X.X with acquisition Mae billion.

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

economy with strong the rates. Looking U.S. ahead, remains low interest

the federal the XX-year increased funds monitor employment to The XX it objectives. its it current as bond the basis the Federal indicated the maintain Reserve inflation balance quarter, yield has rate for fourth expects that treasury maximum and target X% continues target to between In points.

volumes. fixed-rate However, time increased the XX the points basis period. over More again, have support recently, continued elevated rates same for average mortgage providing declined refinance mortgage XX-year

appreciate, higher. we will XXXX continued In Home and economists continue forecasts with through pace. continue their recent have at more have to at Most delinquencies. Low forecast appreciation pace to major a months, home drive wage historically U.S. economy XXXX, these those support origination forecast, believe strong but to growth. prices a low a rates of price in generally low increased line slower albeit economists and levels unemployment continued

down X.X% X.XX% U.S. and XXXX. of at from was September XX X.XX% XX, mortgage the end rate of delinquency December at as The total

mixed spreads, credit saw investments. we to CRT Looking this quarter at results related

result more higher seasoned note on speeds, with of underlying rates Spreads a spreads originations higher lower note CRT prepayment modestly. CRT widened whereas tightened securities as recent on rate with

going forward. Financial's let's Now, PennyMac performance and turn discuss Slide for our to X expectations

ago, annual growth The and compounded a XX%. value public of has been in initial PFSI's value strong returns book over on rate offering by we years equity. book our successfully growth Since at a driven grown half six have

has the XXXX, challenging see on lenders an the returns chart market on varying Financial can equity As throughout we delivered environments. unprofitable, ROE on many of XX.X%. origination made an earned right, In PennyMac PFSI that you in of delivered Despite XXXX market these ROE XX.X%.

to forward, different expect mid-teens market Looking ROEs expect and we we XXXX, higher. across PFSI be earn this to for ROE environments

recent business returns is size model Our nearly has our ago. three to has by the as the portfolio our servicing over confidence time in the from versus production in Furthermore, doubled income servicing, of the between which business in operating and grown balance these in our stability contributes driven years returns. years substantially

Now, XXXX in talk let's since about the largest Low market. turn originations. rates the made UPB to large to opportunity of prior financial Slide market in with origination interest the mortgage approximately crisis, trillion X and $X.X the

low of As currently, forecast activity in Bankers Mae, to elevated support $X almost and UPB. XXXX. I origination the estimates rates earlier, average origination Mortgage Fannie from mentioned in continue Associations trillion volume And Freddie Mac

origination that mortgage a PennyMac a demonstrated are the large we suggesting third to the over States. the Inside opportunity Finance X% Financial's estimates for years, of and ability Mortgage producer United its largest now growth. grow in market represent approximately half the of loans residential share last we and market six

we we've highly the scale PFSI's to investments achieved, success competitive are the in market. critical in The make and technology, mortgage with size combined

driven channel expanding growth opportunity in systems continue our the capacity. direct portfolio, Our while correspondent leadership where lending to we of position also which significant has of expands servicing consumer the our channel, improve the

correspondent direct lending and broker ahead, be market. expect production we will fluctuations volumes overall the influenced our of channels by growth, consumer while our share somewhat Looking in be to drivers tend to origination market

of the equity in partnership and synergistic infrastructure the the of invest and to have those market. positions in for with including we nonagency continued PMTs loans credit, Lastly, events place for changes in products, the in mortgage success home PFSI lines securitize

poised is growth across its significant Financial PennyMac mortgage total, businesses. banking In for

Now, X technology environment we businesses. let's quarter, ongoing to completion across in of discuss Last the turn servicing and our technology. announced our systems Slide our investments

environment. capabilities our are further We efficiencies of and the focused production enhancing on systems

to our are same lending Ellie and platform. based and platform broker Mae's channel, encompass we objective the direct direct correspondent next-generation proprietary cloud channels transition consumer our leveraging In the eventually lending to platform systems onto with migrating digital our

for an direct channel, consumer We history platform further efficiencies process portfolio providing channels. our and currently sales enhanced help operational recapture in data consistencies, transaction our increased experience and in are enable customer improved as of In our the addition MacForce, believe overall will will acquisition utilizes to customers this This we drive to an acquisition new lender. distribute to mortgage and conversion that analytics new developing industry-leading an customers, high-quality leads associates. initiative

to MAC associates self improved operating communication engaged remain in interactions regularly releasing by direct our more portals. we In PennyMac are our MAC resulting and consumers updates and service the POWER origination facing customer efficiency. enables with with utilizing to features, and focused overall channels, highly

Our POWER the enables portal manage originate to pipelines, and remaining brokers to efficiently all loans process. while effectively loan through and PennyMac their the broker connected

enhancements to optimize production execution management to bidding margin pricing, across our make best Finally, loan we to channels. continue and our systems

banking that, operational who our With will to in Jones, mortgage results I'd like review banking businesses. mortgage introduce chief officer, PFSI's Doug

Doug Jones

Thank you David.

the loans PennyMac country Financial of quarter, We’ve Let's XXXX. acquisitions XX.X% driving largest reported share data a According correspondent from was Inside year market PennyMac review third to begin share increased full-year ago. Financial's in the with the Mortgage XX.X% mortgage trends and a businesses. fourth-quarter our across prior Finance, the in of industry the market XX% our XX.X% by both quarter by to and in producer in the up

and fast levels, winning correspondent We our expect a key share the business leadership support service combined market to believe industry turn commitment going network, to our our from high And this we our consistently times, success seller with in forward. to is

We market as and investments ago channel larger capture by refinance we provided X.X% share this year consumer quarter, allowed low opportunity up made Financial's us PennyMac X.X%, this direct X.X% reached the in last from estimate in to interest rates. the a have that quarter

continued we and from quarter. fulfillment approved channel Our channel. position to also brokers have in investments made benefit direct we capacity and quarter grew this add broker over market And the

fourth our almost X.X% its and now up servicing of the growth in X.X% debt the mentioned, in outstanding U.S., that X.X%, XX September XX, and from quarter, we at David all XXXX. service we December portfolio As estimate continued mortgage

$XX.X loans, quarter, of billion by totaled the XX% were from UPB were production let's government XXXX. to discuss the our XX% in XXX% in quarter Correspondent conventional XX quarter prior acquisitions fourth and Now turn up XX% from fourth acquisitions of Slide and the correspondent and PMT highlights. loans.

from Government XX% the from totaled fee, of fulfillment in acquisitions, the $XX.X quarter prior XX% the UPB, from quarter for up XX% $XX.X Conventional totaled XXXX. quarter in XXX% earns fourth quarter billion fourth billion the and a prior from correspondent acquisitions of quarter up PFSI up in loan which and the UPB, XXXX.

non-delegated to Our increased UPB. quarter million quarter $XXX in over acquisitions

PFSI's billion consisting correspondent and the XX% from the lock government prior XXXX. $XX.X volume, from of in UPB, of and fourth quarter X% was lock volume, non-delegated quarter up

Delegated our government quarter correspondent quarter $XX.X million $XXX consecutive second Inside locks up the in improved the this Mortgage aggregator made less were in the lock and in Non-delegated quarter. from Finance, largest and United down record from dominated the the competition who PennyMac prior have to environment volumes reflecting from banks XX% totaled billion quarter historically of According an from acquisition aggressive States UPB, XX% channel. XXXX. for the prior volume fourth X% UPB,

correspondent remains improvement in the modest a PFSI's we market competitive, have margins. seen While

XX was quarter. volumes XX rate. from result fee Revenue paid increased modestly the and per fallout-adjusted quarter loan by record loan points, basis lock for production PFSI its fourth fees points PMT third conventional a of fulfillment higher up correspondent a as the PMT's Fulfillment basis acquisition in in

UPB, of basis Purchase for of fee total weighted correspondent quarter. money accounted acquisition which percentage in XX correspondent in is believe origination market larger significantly our XX percentage basis the slightly prior a the up than average we a points, overall As points conventional volume, was the loans channel from XX% fulfillment

from at nearly of The the quarter. number end, of prior XXX up end correspondent XXX sellers rise to to also quarter on the at continued our network

elevated, acquisitions commitments interest $XX.X remained of volumes rate at correspondent $XX.X total XXXX, billion lock January Looking and production in UPB. in UPB loan with monthly billion of

capacity UPB the Now, XX up Slide we prior quarter the of build larger our our quarter sales in billion direct consumer let's fulfillment and as and channel, continue XXX% highlights. production turn from scale, consumer loans from discuss the out address direct We’ve opportunity. fourth of add XX% in to market XXXX to originated and $X.X to

XXX modestly basis higher in to As David basis from generation XXX enhanced improve, quarter. use decreased earlier, Strong analytics of continues points points discussed our data to operational quality driving channel lead prior the efficiency. in billion billion and consumer Margins committed UPB of end January December up pipeline XX. billion $X.X our $X.X from of at the and direct in in the month, billion of originations, in $X.X performance channel locks continued $X.X a with at of the

Now, let's turn broker our direct channel XX highlights. Slide review to and

to million Broker Lock third in quarter, prior direct of up the in quarter totaled the UPB, volume from investments UPB brokers fulfillment a made originations totaled from fourth combination process. further from scale $X.X XX% and the growth billion the have and our in operations $XXX approved and of driven the fourth up quarter XXXX. quarter, quarter and X% by XXX% in we

Additionally, make quarter trend expect increased and significant we over the continue portal XXXX. in X% POWER brokers quarter number to enhancements our approved of up we as XXX, that to in

million. finally, million originations and million January at committed in totaled XX. the locks $XXX $XXX And to up totaled direct broker In January, UPB, was pipeline $XXX

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

grew fourth and portfolio the XX% December billion servicing the from X% XXXX. quarter, in of UPB XX, from to at up September up Our end $XXX.X XX

Quarterly prior quarter, Financial's prior which offset portfolio of in billion the for includes remained the by quarter. PennyMac the during growth high servicing modestly quarter. of of portfolio, the record from decreased serviced Freddie prepayment which $XX.X Prepayment fourth reported quarter. owned was the in XX.X% rights majority subserviced XX% Mac and PMT, volume production Fannie UPB the runoff. to the driven loans in mortgage Mae of of speeds in down speeds XX.X% UPB, prepayment from $XX.X by by PennyMac XX% mostly modestly fourth Mae, Ginnie speeds are owned in Financial's portfolio Similarly, billion

The and delinquency on our subservicing low. XX-plus rates day own portfolios remained

early third of as from rate Our XX, unchanged owned delinquency seasonality, prior subserviced reported portfolio X.X%, The of The fourth our from up environment continued reflecting day quarter, from delinquency December billion slightly EBO buyouts period income. rate rate XX-plus portfolio Mae a future quarter. totaled low volume a the X.X% the while of of interest Ginnie to had expected in to is securities. support year-end the of $X.X quarter loan which elevated volumes UPB drive

like officer. the to Financial's chief Now, Chang, financial to over PennyMac Andy I'd turn discussion

Andy Chang

Doug. you Thank

XX, successfully million $XXX management proceeds, $XXX the again raised I $X.X Slide results end, to Turning investment of equity management highlight XX% in the XX. December, capital total in assets In Net majority fourth will totaled bringing quarter, was million. our September segment. at billion year under the PMT raised up equity net in which with raised from to in XXXX

you factors information. earnings encourage key as the the management in in were a Revenues I unchanged increase the offset summarizes some detailed fourth results. in in on was trends of segment press more PFSI's for reduction investment results Starting to incentive and quarter. release fees. our on read base Slide impact We fees PFSI's slide This hedging will essentially of our financial performance-based XX, management by highlight the modest for

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

of We the The recorded lower to totaling our activity were quarter. by prepayments asset $XXX.X higher gains year These fair gains expectations represented X% driven at value offset MSR MSR rates faster-than-expected gain primarily value and the the approximately in September partially fair value fair end fourth were at million. value of prepayment fair due future by mortgage XX. in on

interest the ranged quarter production more the treasury for hedging the in $XXX.X and volatility mortgage year by XX-year evidenced which the market activities. million due earnings from include as nearly ended hedge losses, environment a in incurred gain We value and was of hedge one by given fair rates costs yield costs. and September strong the a MSR below rights servicing the our the was our given XXXX higher start X.XX%. from at to to The hedging other X% in the year than which and challenging of year offset at half fourth

in Given a the is execution XXXX. great we financial to risk our pride management rate major and this an environment, take achievement interest contributor successful record performance the in of

Slide prior profitability down million our quarter was of million $XX.X from fourth discuss and income, to million, excluding turn changes let's from XXXX. Now, quarter the and up in segment. servicing the $XX.X $XX.X valuation-related XX the of Pretax in

third Operating our by and SSE, quarter, portfolio, portfolio from flows, November. servicing by $X.X larger the revenue larger a lower Despite servicing a grew from income million balances a rates. lower of system the completion income driven of to $X.X quarter increased driven decreased over million from MSR in expenses deposits proprietary in lower earnings decreased cash expenses reduction offset vendor servicing custodial quarter, by following fee and operating realization seasonally due partially

remained Interest shortfall to and fourth quarter. quarter expense the million relative elevated in prior the increased $X

And revenue loans by increased finally, in income EBO bought related the million from quarter driven from third re-performance $X out of increased periods. prior

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

David Spector

Andy. performance company's per XXXX. quarter in segment ability successfully and you the Financial driven interest in PennyMac our XX% to share direct market fourth and across by our the businesses volatility. rate and year delivered in value Thank growth record rights mortgage characterized production earnings. channels grew substantial all a of Book throughout contributor this its our hedge significant risk consumer was rate lending our outstanding a inherent share profitability year in for by this Each in major grew channel of year, production servicing to interest the

our foundation large and maturing, our our to servicing by the customers. the and business greater model, our also continue XX% continue opportunity strong our drive operating and million servicing portfolio technology while across portfolio. market to With growing Our to for provided efficiency business for better share year, balanced X.X grew more investments than gains the capture service

across on different earn environments. expect PFSI to a mid-teens market We equity return

ROE a PFSI XXXX. expect higher in we to However, deliver

conclude like with we review, as my closely leadership gratitude and he this continues the thank earnings Stan of personal last for involvement his I for I to also chairman would to board. like working I over and him and PennyMac company XX vision with his the express As to support guidance of would look years. forward as the his

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

End of Q&A

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

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