PennyMac Financial Services Q1 2023 Earnings Call Transcript

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Provided by Quartr
April 27, 2023

There are 3 speakers on the call.

Operator

Good afternoon, and welcome to the Q1 2023 Earnings Discussion for PennyMac Financial Services Inc. The slides that accompany this discussion are available on PennyMac Financial's website at pfsi.pennymac.com. Before we begin, let me remind you that our discussion contains forward looking statements that are subject to risks identified on Slide 2 that could cause our actual results to differ materially as well as non GAAP measures that have been reconciled to their GAAP equivalent in our earnings presentation. Now I'd like to begin by introducing David Spector, PennyMac Financial's Chairman and Chief Executive Officer, who will review the company's Q1 2023 results.

Speaker 1

Isaac, in one of the most challenging mortgage origination markets in recent history, PennyMac Financial delivered solid net income and continues to distinguish itself as a best in class mortgage company. Annualized return on equity for the quarter was 4% with net income of $30,000,000 or $0.57 in earnings per share. We remained active in stock buybacks during the quarter, repurchasing $45,000,000 in common stock. Although repurchase levels were down from prior quarters, We prefer to maintain flexibility to address potential risks and opportunities as the market environment continues to evolve. Dan Perotti, PFSI's Senior Managing Director and Chief Financial Officer, will provide greater details surrounding the drivers of our with strength in servicing profitability offsetting the loss in production income.

Speaker 1

Total production volumes in 1st quarter, including acquisitions made by PMT, were $22,800,000,000 in unpaid principal balance, essentially unchanged from the prior quarter. With prepayment speeds at multiyear lows, these volumes continue to drive the organic growth of our servicing portfolio, which ended the quarter at nearly $565,000,000,000 in UPB. In PFSI's Investor Management segment, PMT had a strong quarter with earnings in excess of the dividend level, which drove an increase in its book value per share. With mortgage interest rates currently still above 6%, The most recent third party forecast for 2023 originations range from $1,600,000,000 to $1,800,000,000,000 down meaningfully from 2022. While many industry participants have taken the appropriate steps to reduce capacity, The pace of this reduction has been slow and we believe overcapacity still remains.

Speaker 1

That said, Average quarterly origination forecasts for the remainder of 2023 are meaningfully higher than the industry's estimated origination volumes in the Q1. Consistent with our own expectations as we move into the more typical home buying season. Originations in 2024 are currently expected to approach more normalized levels, with estimates suggesting an origination market above $2,000,000,000,000 As Dan will discuss later, the primary contributor to PFSI's strong financial performance in recent periods has been its large and growing servicing business. We have demonstrated that even in a challenging origination environment, our large servicing portfolio, Multi channel production capabilities and balanced business model have positioned the company well to continue making progress towards achieving its long term goals. PennyMac Financial's servicing business is a critically important asset and has driven much of the success that we have enjoyed in mortgage banking.

Speaker 1

Our large servicing portfolio provides strong and consistent cash flows, enabling us to remain profitable while also continuing to invest in the technology supporting our businesses. We also view our multichannel production approach as a unique competitive advantage And our centralized cost efficient fulfillment division, which supports all three channels, provides us the ability to allocate resources towards channels where we see the most opportunity in the current market environment. The correspondent channel tends to represent a larger percentage of total industry originations in a purchase centric market as many correspondent clients are independent mortgage banks, Community banks and credit unions that maintain strong ties with borrowers in their local communities. PennyMac has also developed many strong relationships with purchase focused builder owned mortgage companies, which combined with the exit of other correspondent channel participants has driven the consistency of our acquisition volumes in recent quarters despite a much smaller origination market. Investments we've been making in the channel have resulted in an extremely low cost structure, allowing us to operate efficiently, while also driving the organic growth of our servicing portfolio.

Speaker 1

Importantly, this growth drives opportunity in future periods When the borrowers we add to our servicing portfolio may also represent low cost leads for our consumer direct lending division. Similar to our sellers in the correspondent channel, mortgage brokers across the country also maintain strong relationships with real agents and realtors in their local communities. These relationships provide brokers consistent access to the purchase market as evidenced by the fact that 86% of total originations in this channel during the quarter were purchase loans. To be successful in the broker channel, it is essential to support our broker clients with the technology, tools and products they need to best serve their communities. Several prominent participants have recently exited the broker channel and we believe our continued commitment drove higher volumes and a meaningful increase in market share quarter over quarter.

Speaker 1

Our consumer direct division serves to protect the value of our servicing portfolio in a declining interest rate environment. Loan officers in our Internet and call center based consumer direct lending division are leveraging the investments we have made in our technology platform to offer borrowers loan products best suited to their needs. While volumes in this channel have been constrained in recent periods, The higher note rate servicing we have been adding through our correspondent channel positions us well in the future when mortgage rates decline or there are periods of interest rate volatility. We saw some of this activity late in the Q1 when interest rates declined due to stress on the regional banks, which drove the increase in lock volumes in this channel from the prior quarter. PennyMac has a long history of investing in and deploying leading mortgage banking technology with a focus on increasing self-service capabilities and transparency throughout the loan origination process.

Speaker 1

We also believe it is critical to ensure that the investments we are making support the timely rollout of new products and other key features that our customers and business partners need to succeed in any origination market. In correspondent, we completed a multiyear technology initiative, which has resulted in an industry leading and flexible loan delivery platform that we call P3. P3 is not only easy for our nearly 800 correspondent sellers to use, But the embedded automated quality control process provides a continuous feedback loop to ensure high quality underwriting and minimal loan defects, which benefits both parties over the long term. As mentioned previously, we recently released Power Plus in our broker direct lending division and in beginning very positive feedback from the brokers who have utilized the system. Making sure brokers can provide flawless closing execution and the best price possible for their customers has been the focus of and we believe these features are critical for the success of brokers in the prevailing competitive origination market.

Speaker 1

Notably this quarter, we expand our list of product offerings with the release of an all new jumbo product called Optima Jumbo for our approved broker partners. In the Consumer Direct division, we recently introduced additional CRM capabilities to drive increased lead conversion and loan officer efficiency. We have also established more direct lines of communication with potential borrowers, ensuring we can speak to them how they want and when it's most convenient for them. While still early in its development, we are excited and supportive of the potential contributions from artificial intelligence in the loan manufacturing process. We are continuously looking for ways to streamline our business functions and maximize efficiency, and we will continue to assess opportunities that leverage the latest state of the art technology available.

Speaker 1

I believe PennyMac Financial is Though the environment remains challenging, it is currently our expectation that PFSI's return on equity will trend toward its pre COVID range from 2023. I will now turn the call over to Dan, who will review details of our financial performance.

Speaker 2

Thanks, David. PFSI reported net income of $30,000,000 in the Q1 or $0.57 in earnings per share for an annualized return on equity of 4%. Strong operating profitability in our servicing segment was partially offset by increased losses in our production segment and net fair value declines on MSRs and hedges primarily due to elevated hedge costs. PFSI's Board of Directors also declared a Q1 cash dividend of $0.20 per share. As David mentioned, we continued repurchasing stock.

Speaker 2

In the Q1, we bought back nearly 800,000 shares for $45,000,000 at an average price of $59.01 per share. Through April 25, We bought back nearly 200,000 shares for $11,000,000 at an average price of $61.26 per share. Book value per share was down slightly from the prior quarter end, primarily due to the annual issuance of additional common stock related to our equity compensation awards program. PFSI reports financial results through 3 segments: Production, Servicing and Investment Management. In the Q1, the Production segment reported a pretax loss of $20,000,000 The servicing segment reported a pre tax income of $57,000,000 and the investment management segment reported pre tax income of $300,000 Overall production, including volumes acquired by PMT was solid in the Q1, down only 1% from the prior quarter, while industry volumes are estimated be down approximately 17%.

Speaker 2

PennyMac widened its leadership position in correspondent lending as our strong capital position and consistent commitment to the channel provide our partners with the stability and support they need to successfully navigate the challenging mortgage market. We estimate that over the past 12 months, we represented 17% of the channel overall and we believe our market share has been meaningfully higher in more recent periods as correspondent sellers seek high quality partners like Penny In April, we estimate total correspondent acquisitions will be $6,300,000,000 and lots will be $6,800,000,000 As David mentioned, we see strong trends in our broker direct lending division as volumes, margins, market share and the number of brokers proved to do business with us all increased from the prior quarter. Over the last 12 months, we believe we represented approximately 2.2% of the total originations in the channel. In April volumes continue to be strong with estimated originations of $600,000,000 and locks of $900,000,000 We estimate the committed pipeline at April 30 will be $1,000,000,000 In Consumer Direct, originations were down slightly from the prior quarter. However, activity was up meaningfully in March, as David mentioned, which drove an increase in lock volumes from the prior quarter.

Speaker 2

Our market share in the channel remains low, In April, we estimate total originations in the channel will be $500,000,000 and LOX will be $800,000,000 We estimate the committed pipeline at April 30 will be $1,000,000,000 As you can see on Slide 11 of our earnings presentation, we saw increased revenue contributions from all three channels and slightly lower The increased loss from the prior quarter reflects timing of revenue and loan origination expense recognition and hedging pricing and execution changes, which had a positive impact in the prior quarter, but a negative impact in this quarter. Pretax income in our servicing segment was down from the prior quarter due to net fair value declines on MSRs and hedges, while the prior quarter included net gains on MSRs and hedges. Excluding valuation related changes, servicing pretax income was $94,000,000 up from $79,000,000 in the prior quarter. Loan servicing fees increased primarily as a result of continued portfolio growth and the earnings we recognized from placement fees on custodial balances and deposits increased due to higher short term interest rates despite seasonally low custodial balance levels. Income from EVO related activities increased $13,000,000 from the prior quarter, although we expect a lower contribution in coming quarters due to the higher interest rate environment.

Speaker 2

Partially offsetting these revenue increases were higher operating expenses up from a seasonal low in the 4th quarter and increased interest expense driven primarily by higher short term rates and the issuance of a $680,000,000 term loans secured by Ginnie Mae MSRs and servicing advances, which I will speak about later. In order to protect the value of our MSR asset, We utilize a comprehensive global hedging strategy. This strategy is designed to moderate the impact of interest rate changes on the fair value of our MSR asset and also considers production related income. The fair value of PFSI's MSR before recognition of realization of cash flows decreased by $90,000,000 during the quarter, driven by lower market interest rates. Hedge gains totaled $47,000,000 and were impacted by $32,000,000 in hedge costs, which were elevated due to significant interest rate volatility.

Speaker 2

The net impact on MSR and hedge fair value changes on PFSI's pretax income was $43,000,000 and the impact on earnings per share was $0.59 As expected, delinquencies declined seasonal highs at year end and servicing advances outstanding for PFSI's MSR portfolio decreased to approximately $427,000,000 from $520,000,000 No principal and interest advances are outstanding as prepayment activity continues to sufficiently cover remittance obligations at this time. In PFSI's Investment Management segment, net assets under management were $2,000,000,000 at quarter end, up slightly from the prior quarter due to PMT's strong financial results. Now I would like to briefly talk about PFSI's strong capital and liquidity position, which you can see on Slide 24 of our earnings presentation. Overall leverage increased from December 31, primarily due to higher balances of loans held for sale. However, non funding debt to equity remained low at 1.2x at March 31st.

Speaker 2

During the quarter, we further strengthened our balance sheet, opportunistically raising $680,000,000 in the form A 5 year term loan secured by Ginnie Mae MSRs and servicing advances at an attractive price of SOFR plus 300 basis points. Looking ahead to upcoming maturities, the secured term notes due in August of this year can be extended for 2 years at PFSI's discretion. Finally, given our demonstrated access to liquidity and financing, we feel PFSI is extraordinarily well positioned to continue executing even in a potential recessionary environment with higher delinquency levels. And with that, I would like to turn it back to David for closing remarks.

Speaker 1

Thank you, Dan. As you can see, I'm very excited for PennyMac Financial's future. Our servicing portfolio continues to grow and and brokers turn their attention to PennyMac and its best in class mortgage platform as a trusted and innovative business partner. For these reasons, I am confident in PennyMac Financial's ability to continue profitably executing against our strategic plans, while also continuing to grow as a respected leader in the mortgage industry. We encourage investors with any questions to contact our Investor Relations

Operator

This concludes PennyMac Financial Services, Inc. 1st quarter earnings discussion. For any questions, please visit our website at pfsi.pennymac.com or call our Investor Relations department at 818-264 4,907. Thank you.

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PennyMac Financial Services Q1 2023
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