PFSI - Earnings call transcript Q1 2019 | PennyMac Financial Services, Inc.

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Christopher Oltmann

Good afternoon and welcome to the first quarter 2019 earnings discussion for PennyMac Financial Services, Inc. The slides that accompany this discussion are available from 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 turn the discussion over to Stan Kurland, PennyMac Financial’s Executive Chairman.

Stan Kurland

Chris. you, Thank

in Slide which reflect with that Financial’s quarter effectiveness our hedging production first in on our adverse Let’s value of largely the interest X. offset rate results of trends improving and significant mortgage servicing quarter to volatility financial an lower impact rights, begin mortgage rates PennyMac addition were during strategies. resulted the the by

Total of XX, diluted $X.XX. Financial margins PennyMac net lending and the billion $XX.X quarter of quarter primarily earnings up earned from volume impacted XXXX. of increased per XXX% quarter XXXX. quarter the by or both $XX.XX in in $XXX.X was share share servicing segment gains volumes XX% conventional $X.X the change decrease from fulfillment value of And For $XX.XX channel. the Valuation-related ago, from UPB, XX% quarter, down $X.XX the MSR spread XXXX, year quarter down totaled and in XX% XX% the consumer driven prior included higher for locks XX% in net in a in of from UPB, recorded from first UPB, down XXXX. income government from to fair quarter. up to values, $XX.X correspondent quarter Book and origination $XX.X income million, Acquisition income $X.X quarter, share first the in million XXXX. prior from first acquisition by prior per the direct lending million, a the of per million valuation-related XX% million $XXX.X first up the resulted which and from were locks $X.X Direct but $XX.X correspondent pre-tax and XX% billion servicing prior of fee prior totaled in items pre-tax first from $XX totaled or segment and XX% the liability. quarter XXXX. billion first from in the finally, per quarter hedging quarter at the our due by Production December prior and driven non-delegated quarter volume of $X.X and down UPB, share. from in income The value quarter losses revenue largely pre-tax of excess offset XX% $XX.X primarily from adversely the fair by XX% and million million the volume loan million billion This the up of

for valuation-related early first $XX.X and the of related from large buyout as loans by items, of increased cash the higher quarter the million, The declined, from are quarter down this with Excluding income to buyout re-perform pre-tax realization combined flows operating expenses revenues redelivered. to volumes X% are were was muted Strong rates servicing volumes. amortization future and quarter periods XXXX. these and fourth expected early segment XX% generally as benefit

in billion quarter billion to MSR X% end, net loan $XXX.X driven acquisitions additions growth results our grew under approximately management and from XX, by $XXX.X from raised fees up $X.X March quarter-over-quarter XX% in pre-tax $XX.X last from bringing $X quarter, at billion fees and issuance and in from UPB shares the prior base from management PMT’s our first XX% up management. XXXX. proceeds December net XX, X, and at Investment million of common in the quarter in revenue UPB portfolio the to up during assets XX% while XX, XXXX, quarter million up quarter servicing March in on in $X.X from Segment Continuing XX% of net assets down of million bulk as of billion XXXX from December quarter from our first UPB Our XXXX, from production Management incentive XX, $X.X of XXXX, from the driven delivered financial runoff. first by highlights was million, the of $X.X XXXX. million, Slide segment of from quarter, performance-based improved income up $XXX increased under PMT

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

conditions rate quarter rate than quarter the saw XX of first Federal average increases basis was for average on points prior further refinancing in this driving increase in XXXX Reserve fixed a providing significant the year. The volumes. market quarter expectations for improved the aided clarity greater The lower rate the by XX-year

upward activity, the Lower at the December. rates purchase Application improvement, we As modest forecasts shown at buying to expected Association head on traditional the home market, as of the a positive home while Macroeconomic the indicators revisions, also same Bankers improved by as Refinance seen end compared of supported to such into sales March end have of affordability. time purchase origination a are season. X,XXX money have Mortgage measure at have Index the impact was XXX

credit supported We tightened first sentiment quarter, reversing March XX, employment the lows, points and in the in of transfer to investments their and an during regarding improvement improved the near finally, widening fourth quarter. strong strength also levels the credit quarter. XXXX, of Credit delinquency XX securities And by the overall basis risk spreads continued during market economy remain saw on trends. the GSE XX U.S. all-time at

highly and well to combined talk This positions PennyMac let’s PennyMac value the to the unique book drivers servicing production turn model growth model, enabled and Financial’s Financial. with and industry an have participants been by adapt X competitive share as operations, business. company about our market. with Management balanced gain business for growth Slide Investment to profitability large consistent mortgage Now,

for interest to first this we in slowed by compete the with the somewhat quarter, the as the and market trend Financial struggle for has has slow of on the In seek acquisition through Although we improved Within totaling focused offers expanding of launched volumes, of are in $XX.X approximately our MSR broker growing but XXXX the UPB market are of competitors origination near direct a further remained business exit active activity acquisitions and broker increasing million correspondent billion to altogether. technology-enabled coupled volume active the we the during a may differentiated The in non-delegated or PennyMac capabilities, market and relationship. rates in high opportunities consolidation market market, the lending, term, number channel, rates for self-service evidenced client pace likely been portfolios with recent expect touch running seeing to continue month. in degree rate community decline clients lending long-term. at $XXX channel commitments from interest to pace of each per correspondent growth provide experience in continue the platform we by a lower, this We UPB. early that With expect of is in service. lock a mortgage sale. high presently presented our bulk

good start, leverage a robust channel is and become continuing are technology operational a to this our to leader capabilities we time. While over

market opportunity flexibility portfolio. in consumer-facing changing on developing refinance tremendous of of and The portal is successfully direct to nimble we purchase development the critical remain At our executing conditions. and and additional remaining the ability quarter, strategies Our channel introduced and by focused of consumer significant HELOC this our by over money optimizing products opportunities channel servicing our increased technology product servicing to adapting component of non-portfolio expanded the origination upon first and time, increase for to of same pivot growth we customers. direct its one X.X success the by example portfolio X our to earnings presented The a large availability recently opportunities states. the from into million platform new growing opportunity volume. a consumer long-term successfully our In quarter represents and a is

our in We prime also a launched correspondent channel. non-QM product

time volumes on PMT our to new expect As driving tranches residual growth return equity, continued products business. risk over the overall profiles with PMT’s to invest in return Investment of grow, securitizations accretive favorable of from Management we

harness one in far initiatives and in reliance are technology Financial have I at successfully execution. of least the be a All this on their is companies. slide going on have cost PennyMac successful will companies market for realize dominated common differentiate advantages. mortgage platform to be those and of discussed who forward by one Leadership will thus thing to the technology that able

banking We successfully scalability business same and and competitive implement across to business, our of our allows technologies in mortgage advantage. a our while to and key continue and the us is new industry speed, develop furthering improve growth opportunities profitability facilitating new at the time channels in accuracy Scale to sustained invest operations. to

implementation Executive of our I process of current to over in to David address predictive Spector, scale to capture an initiatives and operating David in Lastly, capacity the With increase our now efficiencies end-to-end direct the improve lending Financial’s the Officer, that, use first algorithms PennyMac we and redesign will would to turn pricing that management maintaining effectiveness and increasing to operational quarter. data opportunities. discussion place have section. of across his our margins discuss the in like to expense and and Examples include while President fulfillment Chief efficiencies company performance refinancing lead conversion discuss during analytics

David Spector

Thank Stan. you,

remained quarter. increased by the the businesses review the PennyMac to quarter, grew a first declined market Inside largest fourth largest producer in in volumes. mortgage continued with X. that of start Financial’s and correspondent reported the direct market Page refinance was the across PennyMac slightly data competition, estimate market share first Finance, consumer driven in a on trends share According by Let’s result Financial channel loans We as servicer while of eighth PennyMac’s industry share Mortgage strong of

now up we portfolio Our debt United XX, of X.X% outstanding quarter, first grow to X% XXXX. from service in that in servicing almost the States, estimate the we mortgage at all and December continued

year channel, quarter launched Lastly, first to the over the in last in of share broker point market lending grown nearly full direct our has first X.X year, operation. of

Now $XX.X acquisitions the accounted by or let’s the or down UPB billion UPB XX% of XX% in in quarter total for in year-over-year. UPB, quarter, in the billion the turn $X.X prior quarter year-over-year. up XX% XX% billion Slide UPB up discuss acquisitions the and correspondent quarter, comprised XX% correspondent acquisitions UPB, in from of and total but down to totaled prior in production quarter billion in correspondent loan from of Correspondent billion Conventional quarter, acquisitions from while prior highlights. first XX% $X.X XXXX. acquisitions $X.X Government first seasonally in PMT down in first the $X.X X

by Our volumes unique increased abilities CRT have PMT’s ability been investments. to execution conventional create our supported loan and

and government volume our its totaled We XX% lock which the growth quarter primarily year. driven XX% UPB in from last on prior XX% quarter non-delegated quarter. billion $X.X and million down in locks UPB, the of billion release volume totaled quarter, million were increased to $XXX volume lock growing first government continue quarter late in down non-delegated and last from the year-over-year. to focus prior Total following Non-delegated by non-delegated XX% volume correspondent the quarter-over-quarter government of up year. XX% prior Delegated $XXX during the from $X.X UPB,

correspondent in were market up points as essentially basis the XX weighted its the unchanged to basis in points, fee competitive, fulfillment basis they stabilizing remains XX While on margins XX was by previous facilitate at loan average from appear PMT be to quarter. production points. quarter paid the The behalf prior

increase at to totaled year, Interest in to April sellers April’s up significantly UPB, XXXX. billion last volumes sellers also of from X% from billion lock which We XXXX. end from $X.X correspondent were approved increased $X.X $X.X in end, billion the of up also prior commitments increase rate number a acquisitions billion approved XXX XXX in of $X.X of up UPB, with correspondent total April from the quarter. acquisition the at April loan in quarter of continued in

X from basis Slide prior points result totaled by UPB, Consumer production fallout the direct consumer a and in up quarter. prior highlights. lock driven rate the rates. production to consumer increased billion mortgage the increased volume Revenue quarter turn $X.X basis to quarter XX% and first term discuss let’s the points in in quarter, XXX Now, direct in of as XXX direct per activity refinance lower adjusted from

continues the and prioritize to funded of data Our loans. are ability to analytics help improve into portfolio as source and predictive being to our originations servicing increasingly improve those conversion leads deployed leads processes from

also operational and investments direct in consumer our We to continue technology make channel.

improve proprietary pull reduce to and these is fulfillment channel group for and we enhancements efficiency a mortgage broader process resulting Our has expect new in this through developed drive increased increase capabilities fulfillment scale and customer end-to-end to the fulfillment rates. cost Overall, satisfaction. that business,

direct We million the totaled insurance recent commitments m.a.c., up the of at have substantially XXXX. from the the portal, UPB, XXXX. finally, Similarly, that second totaled April, consumer for interest was capabilities $XXX also continued us also to offer. of of April, refinement our $XXX rate million April in $XXX on In enhance in in in products we a April mortgage And consumer-facing up up $XXX the emphasis quarter. million pipeline with from lock million, the to into of of end April growth $X positioning billion committed originations well

bringing leaders. quarter let’s the direct in first at quarter, seasonally quarter-over-quarter, UPB the turn intense channel originations and channel In added to down we lower Slide in total direct origination XX Now quarter, volumes review Broker XX broker the brokers XXX totaled price million end. and driven $XXX brokers, among to slightly highlights. competition approved by

our continued also as known portal, POWER. enhance broker of We otherwise capabilities the to

of was of platform provide best our our use enhance POWER more April, million In we for pricing locks January correspondent granular million and significantly to at proprietary industry-leading $XXX XX. up million quarter, April were committed UPB. from pricing in This portal capabilities ability pipeline channel incorporated our $XXX at clients. originations million the some $XX were broker to in UPB execution in The the XX, to $XXX

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

quarter continued of which billion portfolio and XX, grew by quarter from higher Mae expand Portfolio first to in $XX.X March this by speeds Similarly, MSRs, totaling slightly XX% which was the we being Fannie X prepayment XXXX many $XXX.X at loans have Lower PennyMac during Prepayment quarter. UPB. up from population. driven mostly Mae and speeds this the X.X% Freddie eligible buyout be activity PennyMac includes and bulk completed mostly and drop December from prior mortgage drove production prepayment during helped rates owned portfolio, of also our XX, prior Financial’s billion Ginnie to Mac to in servicing MSRs in of own in acquisitions Financial’s the includes originated X.X% XX.X% end from during EBO XXXX. quarter, Our supplemented X% up the refinancing the which of X.X% quarter. The PMT, the portfolio, UPB rates increased sub-serviced increased the XXXX, quarter. activities to for during resulted the with growth

the in EBO from First $XXX UPB, transactions XX% totaled quarter million up prior quarter.

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

PMT result and capital of positive of higher well the both during the quarter, solid the MSRs performance investments of first in program To net a $X.X raise issuance $XXX shares time common shares, XXX,XXX its million years. the first raised for $XXX common GSE PMT’s credit quarter strategies Our PMT’s growth raising that by fee continued a the performance remains. that in first the investment were equity investment marking in and performed potential several PMT’s equity management fees quarter. segment PMT driven revenue net incentive growth, approximately Furthermore, of proceeds launched of million additional transfer delivered organically risk activity of earned raised management result X has million. as PMT as strong and of the the for fund issued investment an these to through first core quarter, created outlook during issuance total a proceeds. million In PMT this under with at-the-market program common

financing investments securities a million, settled and inaugural replaced assets benefits improved deals. Lastly, The and repurchase additional the better securitized for term totaling new term structure returns from equity. cost. its the life also structure financing of the CRT which we secured pioneered of a notes with agreements financing X-year issuance PMT’s related expected on The at X groundbreaking structure the similar were short-term CRT through first alignment $XXX provides

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

Andy Chang

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

future million lower which prepayment by $XXX.X asset Our first our hedging consistent were $X.X driven recorded on MSR to comprises quarter, $XX.X the million, losses value for approach value MSR fair importance for and across fair the a to from strategy associated volatility of totaling different mortgage $XXX.X net rate rates. fair was asset. profitability managing of impact million is in in activity value change the the of interest our portion our the we Financial’s first interest on ESS growth increased fair environments cost and expectations by of a PennyMac the risk. the due fair value and approach loss highlight the The gains interest value losses in of of offset the liability. moderate MSR value in million and hedging book expertise gain quarter. rate the largely comprehensive designed rates In hedging of

revenue, Now basis. first our resulting prepayment realization let’s higher $XX.X million XX down larger income, partially of to the offset dollar flows growth, XXXX. by from on an increased by increasing profitability only Pre-tax Slide from excluding ago of and portfolio modestly Operating due year turn expenses all-time the modestly was of million prior cash the portfolio quarter Higher lower activity operating down quarter changes, was to a a in in and mortgage versus driven million, an rates. valuation-related a segment. discuss and $XX.X of from high servicing $XX.X

of last of average percentage expenses a the from realizing and servicing quarter economies to portfolio the were prior we are of in significantly year, the servicing. demonstrating flat quarter operating scale UPB, As the first down

revenues expenses like over activity. I $XX were that, income. and periods. driven volumes, quarter with lower ago which than year back lower driven than to by million remarks. excluding included in due changes, quarter, the than And XXXX, higher prior were EBO prior a income, we would earnings Our million future in $X.X revenues modestly hurricane-related some large elevated EBO-related quarter period for the EBO the valuation-related it lower first EBO-related turn of to expect to to EBO-related than pre-tax by Stan prior benefit closing

Stan Kurland

Thank you, Andy.

improvement. highlight of our to results a to of environment core both banking the quarter’s adapt platform our continuous ability balanced changing market This and mortgage culture

efficiency proprietary technology costs and are We greater third-party We leadership to further and and maintaining advantages management these initiatives of on and competitive mortgage from competition of believe position the our solutions realize through utilizing operations. in the Financial and focused scale expense our benefits capturing the quality across our high while organization, market. lower will solidify U.S. differentiate PennyMac further effectiveness

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

Christopher Oltmann

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

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

PennyMac Financial Services (PFSI) 6 May 192019 Q1 Earnings call transcript