Good afternoon, and welcome to the Second Quarter 2017 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 minutes 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..

Thank you, Chris. Let's begin with Slide 3. PennyMac Financial’s second quarter results reflect the strength of our platform in a highly competitive market.

This quarter we successfully deployed capital from our initial $400 million term note issuance into MSRs resulting from our organic production and into 4 bulk MSR portfolio acquisitions, totaling $16.2 billion in UPB. We also continued to make solid progress building our broker channel, which we will be launching in the fourth quarter.

For the second quarter, PennyMac Financial earned pretax income of $58 million and diluted earnings per share of $0.44. Book value increased to $16.40 per share, up from $16.01 per share at March 31st, and from $13.29 at June 30, 2016. Looking at earnings contribution by segment.

Our Production segment pretax income was $66.7 million, up 40% from the prior quarter and down 36% from the second quarter of 2016. Total production volume for the quarter was $17.6 billion in UPB, up 18% from the prior period and up 9% from the second quarter of 2016.

Total correspondent government and consumer direct locks were $13.5 billion in UPB, up 21% from the first quarter and up 4% from the second quarter of 2016. These results reflect the strong contribution from both the correspondent and consumer direct channels this quarter.

The Servicing segment recorded a pretax loss of $11.2 million compared to a pretax gain of $13.4 million in the prior quarter, and a pretax loss of $21 million in the second quarter of 2016. Second quarter Servicing segment results included a loss attributable to MSR valuation related changes resulting from a decline in interest rates.

Excluding valuation related changes, pretax income for the Servicing segment was $15.3 million, down 31% from the previous quarter and down 26% from the second quarter of 2016.

We also completed the acquisition of 4 bulk portfolios of Ginnie Mae mortgage servicing rights with a combined UPB of approximately $16.2 billion, including a $4.3 billion portfolio we previously announced.

As a result of strong organic growth and the bulk acquisitions, our servicing portfolio grew to $229 billion in UPB, up 13% from March 31 and up 33% from a year ago. Continuing with our highlights on Slide 4.

The Investment Management segment recorded pretax income of $2.5 million, up from $1.1 million the previous quarter and up from $0.7 million in the second quarter of 2016. Net assets under management were $1.6 billion, essentially unchanged from March 31 and June 30, 2016.

After quarter end, assets under management in our investment management activities are growing due to a $195 million sale of preferred shares by PMT. This is expected to be partially offset by a sale of the remaining assets from our limited-life investment funds, which is expected to reduce assets under management by $145 million once completed.

Also during the quarter, the Board of Directors authorized a stock repurchase program for up to $50 million of outstanding Class A common stock.

We believe the repurchases of common stock have the potential to enhance value for our stockholders given the market price of our common stock and our ability to generate after-tax returns on equity that compare favorably on a risk-adjusted basis to other investment opportunities available to us.

Now let's turn to Slide 5 and look at the current market environment.

The interest rate volatility experienced in the first quarter continued into the second quarter, with mortgage rates as reported by Freddie Mac's Primary Mortgage Market Survey moving up and down within a relatively narrow range through May, but ultimately ending the quarter down 26 basis points from the end of March.

The 30-year fixed mortgage rate ended the quarter at 3.88%, down from 4.14% at March 30. Volatility continued into the third quarter, with the PMMS rate increasing to 3.92% at the end of July. For the second quarter, the decline in yields on the 10-year U.S.

Treasury bond and Agency MBS were smaller at just 9 basis points and 10 basis points, respectively. Despite the decline in rates and the fact that they remain relatively low from a historical perspective, mortgage refinance activity hovered near multi-year lows in the second quarter, as measured by the Mortgage Bankers Association Refinance Index.

In June, the MBA's index reached 1,391, up from 1,271 in March, but well below the index average of approximately 2,000 over the last 5 years. Both new and existing home sales have steadily increased over the past several years, but they have only recovered to levels seen in the early 2000s.

Over the same time period, the number of households in the United States has grown by 15%. Given this trend, we would expect to see further expansion in home sale activity. Credit performance of residential mortgages has improved modestly.

According to the most recent data available, the Mortgage Bankers Association's delinquency survey showed that total residential mortgage delinquencies fell to 4.71% at March 31 from 4.77% for the same period a year ago. Now let's turn to Slide 6, and discuss the impact of PennyMac Financial’s hedge approach on our second quarter's results.

During the second quarter, changes in the fair value of our MSRs resulted in losses due to lower mortgage rates. As I mentioned earlier, mortgage rates were volatile during the quarter and ultimately declined.

This resulted in fair value losses and impairment charges on the MSR asset totaling $36.9 million, driven by higher projected prepayment activity. The change in fair value of the ESS liability and hedge activity contributed to gains of $5.1 million, partially offsetting the portion of MSR valuation losses.

PennyMac Financial’s hedge profile seeks to moderate the impact of interest rate changes through a comprehensive hedge strategy.

Our hedge strategy is designed to partially offset MSR value changes associated with significant interest rate movements using hedge instruments, with the remainder of the offset provided by production income that is expected to result from lower mortgage rates.

Given the relatively modest interest rate decline over the course of the second quarter, we expect most of the MSR value offset to be provided by future production income. Now let's go to Slide 7, and discuss the profitability of our Servicing segment, including the impact of valuation-related changes.

For the second quarter, Servicing segment pretax income, excluding valuation changes, was $15.3 million compared to $22.3 million in the prior quarter and $20.7 million in the second quarter of 2016. Servicing segment results included a number of moving pieces this quarter.

The quarter-over-quarter decrease in Servicing segment pretax income, excluding valuation changes, was primarily due to an increase in credit losses and provisions for defaulted loans.

During the quarter, loans transitioned into defaulted status, resulting in an increase in provisions for defaulted loans and a reduction in provisions for active loans. Combined, the 2 provisions totaled $15.1 million versus $14.6 million in the prior quarter.

The higher provision for defaulted loans is offset when loans transition from active to defaulted status. This quarter, higher operating revenues was offset by an increase in amortization and realization of cash flows resulting from higher prepayment activity during the quarter and expectations for elevated future prepayment activity.

Operating revenues also included an increase in EBO related revenue resulting from increased early buyout activity, funded, in part, by proceeds from the Ginnie Mae MSR term note.

EBO related revenues included $23.4 million in gains on mortgage loans held for sale from the securitization of performing government insured and guaranteed loans, and $9.1 million of interest income from EBO loans. The increase in EBO revenues was offset by higher interest expense, primarily related to the term notes.

Operating expenses for the Servicing segment increased slightly from the prior quarter, but decreased as a percentage of the portfolio. As we grow the servicing asset, we will continue to focus on expense management and take advantage of our scale to drive down unit costs. Let's go next to Slide 8 and discuss our entry into the broker channel.

As mentioned previously, we are preparing to launch our broker channel platform in the fourth quarter. Today, activity that is directed through mortgage brokers, which is also referred to as the wholesale market, represents approximately 10% of the total mortgage origination market.

Methods of originating and documenting loans, usage of automated underwriting systems and compliance have improved such that the quality of broker production is comparable to retail production.

We feel that the broker market presents an attractive growth opportunity given PennyMac's position as a leader in the mortgage market and our proven ability to profitably produce large volumes of loans.

In addition, loan production from the broker channel tends to be weighted towards purchase money transactions, as brokers generally have close connections to their local communities. Purchase money mortgages help to moderate origination volume fluctuations, which occur in the more volatile refinance market.

We have invested considerable time and effort to develop our broker origination platform and enhance the capabilities of our mortgage fulfillment division to support the anticipated volumes.

Over the past year, we have worked to create a robust and efficient broker portal that will deliver on our goal of providing a differentiated experience to the broker community. In addition, we are building systems and workflow routines that will leverage the scale and capabilities of MFD.

These investments should have the added benefit of driving enhancements and greater efficiencies in our consumer direct production channel, which are expected to help reduce production costs and improve service levels going forward.

We have a talented team in place to run the broker channel and will carefully and methodically grow this business, with the objective of becoming a leading participant in the channel over time. Again, this initiative is scheduled to launch in the fourth quarter. This concludes my overview of PennyMac Financial’s second quarter performance.

Now, I'd like to turn the discussion over to David Spector, PennyMac Financial’s President and Chief Executive Officer, to review the operational results in each of our businesses..

Thank you, Stan. On Slide 9, I would like to begin my remarks by reviewing market share and volume trends across PennyMac Financial’s businesses. PennyMac Financial was the fourth largest producer of mortgage loans in the United States during the second quarter, according to Inside Mortgage Finance.

And we estimate that we ended the quarter as the tenth largest servicer. Correspondent production market share for the second quarter was an estimated 11.19%, up from 10.95% in the prior quarter. In our consumer direct business, our market share increased slightly to 0.48%.

We estimate that the market share of our loan servicing portfolio grew to almost 2.1% of all mortgage debt outstanding in the United States. And lastly net assets under management by our Investment Management segment was $1.6 billion, essentially unchanged from the prior quarter. Now let's turn to Slide 10 and discuss correspondent production.

Correspondent acquisitions by PMT in the second quarter totaled $16.3 billion in UPB, up 17% from the first quarter and up 12% year-over-year. Government loan acquisitions accounted for 64% of total correspondent acquisitions or $10.4 billion in the second quarter, up 12% from the prior quarter and up 10% from the second quarter of 2016.

Conventional conforming acquisitions, for which PennyMac Financial performed fulfillment services for PMT, totaled $5.9 billion in the second quarter, up 28% from the prior quarter. Total lock volume for the quarter was $18.2 billion, up 26% from the prior quarter.

Seasonally strong home purchase demand was the primary driver of this quarter's correspondent production volume increase. Purchase-money loans accounted for 82% of total correspondent production during the second quarter, up from 73% in the prior quarter.

The purchase-money orientation of our correspondent production volume continues to be an important differentiating factor for PennyMac. We also continued to grow our seller relationships. At the end of the second quarter, we had 589 seller relationships, up from 557 in the first quarter.

Looking at July volumes, correspondent loan acquisitions totaled $6.1 billion in UPB, while interest rate lock commitments totaled $6.3 billion in UPB. Now let's turn to Slide 11 and discuss consumer direct production.

Consumer direct production volume totaled $1.3 billion in UPB in the second quarter, up 23% from the first quarter and down 16% year-over-year. The committed pipeline at the end of the second quarter was $936 million. Consumer direct volumes benefited from the lower mortgage rates in the quarter.

We also continued to see significant recapture opportunities from our large and growing servicing portfolio of more than 1.1 million customers. As a result, we believe that our portfolio-sourced refinance volume fared better than other consumer direct lenders dependent on the refinance market.

In July, consumer direct originations totaled $497 million in UPB, and interest rate lock commitments were $588 million in UPB. The committed pipeline was $799 million in UPB as of July 31.

We believe that consumer direct origination volumes will remain predominantly driven by leads from our portfolio, even though growing our non-portfolio volume remains a key priority for us.

We doubled our non-portfolio volume quarter-over-quarter and while still relatively small with respect to total volume, it reflects the emphasis we are placing on this growth. Additionally, our large portfolio of FHA loans represents a significant opportunity as those customers look to refinance their mortgage and move into a conventional loan.

The FHA requires mortgage insurance for the life of the loan, and borrowers can potentially realize significant savings in their monthly payment by transitioning into a conventional product where mortgage insurance is not required on loans with loan-to-values below 80%.

As home equity grows, we expect the portion of borrowers in our portfolio who may benefit from this type of refinance to increase. Now let's turn to Slide 12, and discuss our loan servicing business. Our loan servicing portfolio grew to $229 billion in UPB in the second quarter, up 13% from the first quarter and up 33% from the second quarter of 2016.

This significant growth is a result of the four servicing portfolio acquisitions completed this quarter and continued organic growth from our production activities. The acquisitions ranged in size from $2 billion to $5 billion in UPB, amounts that are consistent with our prior acquisitions, and manageable for our servicing transfer operations.

We continued to leverage our expertise in loss mitigation, including growth in successful resolutions for troubled borrowers. In the second quarter, we nearly doubled modification volume to $579 million in UPB compared to $327 million the prior quarter.

Our expertise in loss mitigation enables us to effectively process high transaction volumes, providing much needed payment relief to borrowers and helping them to remain in their homes. Completed modifications also serve as a driver of EBO-related revenue opportunities. Now let's turn to Slide 13, and discuss the Investment Management segment.

As mentioned earlier, net assets under management were $1.6 billion, essentially unchanged from March 31. Our Investment Management segment continues to grow. After quarter end, PMT issued $7.8 million of additional preferred stock for gross proceeds of $195 million.

During the quarter, our two investment funds entered into agreements to sell their remaining assets. These sales are expected to close in the third quarter and will mark a successful conclusion of these two limited life funds that were raised in 2008. When completed, we expect a reduction of assets under management of approximately $145 million.

Once all these transactions are concluded, the capital raised by PMT will more than offset the decline in assets under management from the sale of the fund assets, resulting in a net gain in assets under management of approximately $50 million.

We also continued to successfully manage the transition of PMT's capital from distressed whole loans toward MSR and credit risk transfer investments on its conventional correspondent production. With that, I'd now like to turn over to Andy Chang, PennyMac Financial’s Chief Financial Officer, to discuss the second quarter's financial results..

Thank you, David. Slide 14 is an overview of PennyMac Financial’s results by operating segment. Stan reviewed these figures for the second quarter earlier, and the table shows trends for the last five quarters. Let's now turn to Slide 15 and take a closer look at the results of our Production segment.

Production segment revenues were $130 million for the second quarter, up 19% from the prior quarter.

Production revenue for PFSI's own account, which includes net gain on mortgage loans held for sale, loan origination fees, net interest income and other revenue, increased 17% from the prior quarter, driven by lock volume growth in both correspondent and consumer direct channels, partially offset by lower margins.

Gross margins, which represent the revenue per lock commitment, were 81 basis points, down from 84 basis points in the prior quarter.

Revenue per consumer direct lock, adjusted for expected fallout, decreased to 198 basis points from 218 in the prior quarter, while revenue per correspondent lock decreased to 50 basis points from 53 in the prior quarter. Production margins remained at the low end of the ranges that we have seen over the past several quarters.

Fulfillment fee revenue was $21.1 million, up 27% from the prior quarter, driven by an increase in conventional loan acquisitions by PMT. The weighted average fulfillment fee rate during the quarter was 36 basis points, unchanged from the prior quarter. Production segment expenses were $63.8 million, a 2% increase from the prior quarter.

Let's turn to Slide 16 and review the financial performance of the Servicing segment. Servicing segment revenues were $64.9 million, a decrease of 27% from the prior quarter, primarily resulting from a decrease in net loan servicing fees.

Net loan servicing fees totaled $46.9 million for the second quarter compared with $74.2 million in the prior quarter. Net loan servicing fees included $134.2 million in loan servicing fees, reduced by $55.5 million of amortization and realization of MSR cash flows.

Amortization and realization of cash flows increased 14% from the prior quarter, driven by portfolio growth and a shorter weighted average life expected for the MSR due to the decline in mortgage interest rates.

Net loan servicing fees also included $36.9 million in MSR fair value losses and provisioning for impairment, primarily reflecting higher projected prepayment activity from lower interest rates. In addition, net loan servicing fees included $2.1 million in hedging losses and a gain of $7.2 million due to the change in fair value of the ESS liability.

The net loss in MSR value after hedge losses and ESS fair value changes was $31.8 million. The securitization of re-performing government insured and guaranteed loans resulted in $23.4 million of revenue and net gains on mortgage loans held for sale at fair value in the second quarter versus $24.1 million in the prior quarter.

These loans were previously purchased out of Ginnie Mae securitizations, also known as early buyouts or EBOs, and primarily brought back to performing status through loan modifications.

Additionally, net interest expense declined by $3.9 million, driven by higher interest income from EBO loans held on our balance sheet, partially offset by increased interest expense for the term notes and financing of the EBO loans.

Servicing segment expenses for the quarter were $76.1 million, a 1% increase from the prior quarter, while the average portfolio size grew by 9% from the first quarter. Now let's turn to Slide 17 and discuss the valuation of PennyMac Financial’s MSR asset.

MSRs are a significant portion of PennyMac Financial’s assets, and their fair value generally increases when interest rates rise and decrease when interest rates fall. We account for originated MSRs at the lower of amortized cost or fair value, or LOCOM, when the underlying note rate on the loans is less than or equal to 4.5%.

MSRs related to loans with note rates above 4.5%, and all purchased MSRs are accounted for at fair value. PennyMac Financial accounted for $100.5 billion in UPB of its MSRs under LOCOM at June 30. The fair value of these MSRs was modestly greater than their carrying value on our balance sheet.

The remaining $56.8 billion in UPB of MSRs are accounted for at fair value. A portion of our purchased MSRs are subject to an ESS liability. The UPB of the loans underlying those MSRs totaled $29 billion at June 30. Now let's turn to Slide 18 and look at the financial performance of the Investment Management segment.

Investment management revenues were $6.3 million, up 17% from the previous quarter. Segment revenues include management fees, comprised of base management fees from PMT and the private Investment Funds, any earned incentive fees from PMT, any carried interest from the funds and other revenue.

The quarter-over-quarter increase in revenue was primarily driven by carried interest of $241,000 due to performance of the Investment Funds and also included $304,000 in incentive fees from PMT. Segment expenses were $3.9 million, a 10% decrease from the first quarter, primarily driven by lower compensation expense.

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

Thank you, Andy. PennyMac Financial had a profitable second quarter and has consistently demonstrated an ability to operate successfully in various market conditions. We continued to invest in initiatives to enhance our platform, such as the capabilities we are developing to expand into the broker channel.

In addition, we continue to focus on capturing efficiencies across our business to maximize our competitive advantage and returns on equity. We remain confident that these activities will help ensure our company's long-term financial and operational success.

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

This concludes PennyMac Financial Services, Inc.'s second quarter earnings discussion. For any questions, please visit our website at www.ir.pennymacfinancial.com, or call our Investor Relations department at (818) 264-4907. Thank you..