PennyMac Financial Services, Inc. (NYSE:PFSI) Q3 2018 Earnings Conference Call Transcript

Oct 31, 2018 • 08:00 pm ET

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PennyMac Financial Services, Inc. (NYSE:PFSI) Q3 2018 Earnings Conference Call Transcript

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Presentation
Operator
Christopher 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 two of the presentation. Thank you.

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

Executive
Stan Kurland

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

For the third quarter, our Production segment results increased from the prior quarter, along with solid earnings contributions from Servicing and Investment Management. PennyMac Financial earned pretax income of $61.7 million and diluted earnings per share of $0.57. Book value per share increased to $21.47 from $21.19 per share at June 30. Pro forma for the company's reorganization, book value was $20.65 per share.

Our Production segment pre-tax income was $25.7 million, up 35% from the prior quarter and down 63% from the third quarter of 2017. Acquisition and origination volume totaled $17.9 billion in UPB, up 12% from the prior quarter and down 6% from the third quarter of 2017. Total correspondent government and direct lending locks were $11.1 billion in UPB, down 6% from the prior quarter and 16% from the third quarter of 2017.

The Servicing segment recorded pretax income of $33.6 million dollars, down from $54.6 million in the prior quarter and up from $24.5 million in the third quarter of 2017. Excluding valuation-related items, pretax income for the Servicing segment was $29.9 million, down 17% from the prior quarter and 19% from the third quarter of 2017. Valuation-related items for the third quarter included $60.9 million of increase in MSR fair values, partially offset by a $53 million decrease from associated hedging activities, and a $1.1 million decrease due to the change in fair value of excess servicing spread liability.

Furthermore, in August, we refinanced $500 million of MSR-secured term notes and issued an additional $150 million for a total of $650 million of five year secured term notes at more favorable terms. We expect the transaction to reduce annual interest expense by nearly $7 million, after recognizing a one-time debt redemption cost of $4.6 million this quarter. We continue to grow our servicing portfolio, which totaled $284.5 billion in UPB at quarter-end, up 8% from June 30 and 19% from September 30, 2017. Contributing to this growth was the completion of $11.6 billion in UPB of previously announced bulk MSR portfolio acquisitions.

Turning to slide four. Our Investment Management segment