Q2 2020 PennyMac Financial Services Inc Earnings Call (Pre-Recorded)
Question for Pennymac Financial Services, Inc.
The slides that accompany this discussion are available on Pennymac financials web site at IR Dot Pennymac financial dotcom.
Before we begin let me remind you that our discussion contains forward looking statements that are subject to risks identified on slide two that could cause our actual results to differ materially.
Thank you.
Now I'd like to begin by introducing David Spector, Pennymac financials, President and Chief Executive Officer, who will review the company's second quarter 2020 results.
Thank you Isaac.
Getting back financial reported record earnings in the second quarter, driven by core production in servicing results, partially offset by fair value losses on mortgage servicing rights and associated hedging and other losses.
Net income was $352.7 million per diluted earnings per share of $4.39.
Book value per share increased 15% to $34 in 26 cents from $29.95 at the end of the prior quarter.
In June we repurchased in the Blackrock Foundation, approximately 7 million shares of PFS size common stock or approximately 9% of our total shares outstanding.
The shares repurchase at a price of $34 per share.
Finally, I'm pleased to note that PFS size board of directors increased the quarterly cash dividend to 15 cents per share a 25% increase from the prior quarter.
Production segment pretax income was a record $538.1 million up 124% from the prior quarter and up 448% from the second quarter of 2019.
Driven by record volumes in the direct lending channels and record margins across all of our channels.
Direct lending locks were a record $13 billion, an unpaid principal balance up 31% from the prior quarter and 177% from the second quarter 2019.
Of these $8.9 billion when the consumer direct channel all $4.1 billion were in the broker direct channel.
Government correspondent lock volume was $12.9 billion in you PB down 13% from the prior quarter, reflecting a temporary slowdown in the origination market for government loans early in the quarter from the impact of Cobot 19.
Government correspondent lock volume was up 7% from the second quarter of 2019.
Total production volume for the quarter was $37.6 billion in new PB up 6% from the prior quarter end up 56% from the second quarter of 2019.
And finally correspondent acquisitions of conventional loans fulfilled for PMT totaled $18.9 billion in new PB up 17% from the prior quarter and up 76% from the second quarter of 2019.
Continuing on to slide for the servicing segment reported a pretax loss of $62.4 million versus pre tax income of $170.8 million in the prior quarter and a pre tax loss of $2.7 million in the second quarter of 2019.
The segment results this quarter were primarily driven by valuation related items.
In addition related items included $108.4 million in MSR fair value losses.
And $15.1 million in hedging another losses, driven by elevated hedge costs and fair value losses on options due to decrease in volatility.
The net impact of these items was a pre tax loss of $123.5 million and a $1.13 cents decrease in diluted earnings per share.
Pre tax income excluding valuation related changes for the servicing segment was a record $86.9 million up 105% from the prior quarter and 84% from the second quarter 2019, primarily driven by a large contribution from early buyout activities and a lower realization of MSR.
Cash flows.
As of June Thirtyth, our servicing portfolio totaled $388.3 billion in new PB, an increase of 1% from the end of the prior quarter and 16% from June Thirtyth 2019.
Our investment management segment delivered pre tax income of $4.7 million up from $3.8 million in the prior quarter and up from $4 million in the second quarter 2019.
Segment revenue was $10.5 million up 7% from the prior quarter and 2% from the second quarter of 2019.
Net assets under management totaled $2.2 billion as of June Thirtyth of 23% from March 30, Onest driven by an increase in PMT book value.
Now, let's turn to slide five and discuss PFS size unique business model.
The success, we enjoy today is a direct result of the unique business model, we organically built our unwavering focus on risk management and a track record of successful capital management.
Pennymac financials recognized as an established leader in the mortgage industry with scale and both loan production and servicing which continues to drive profitability across different market environments.
Additionally, 42% of our production year to date has been purchase money loans significantly higher than the industry average.
Our expertise to managing risk since the company's founding in 2008 has enabled pennymac financial to remain a consistent and constructive source of new capital for consumers seeking to purchase a home or refinance or existing home.
This commitment is demonstrated by our strong balance sheet with low levels of leverage versus competitors and the well developed and sophisticated enterprise risk management systems and infrastructure that we have built.
Further pennymac financial continues to be recognized as a leader in capital markets operations and interest rate risk management, which includes our successful history of hedging mortgage servicing rights.
He said additional disciplines have been critical to our success, including during the cold 19 crisis and in the current market environment.
Finally, this management team has a track record of successful capital management with retained earnings driving book value growth.
In fact, since our initial public offering more than seven years ago, we've grown book value at a compound annual growth rate of 25%.
Additionally, we have repurchased over 8 million common shares since 2017 introduced a quarterly dividend last year as an important component in the structure of providing long term sustainable stockholder returns.
Now, let's turn to slide six and review PFS size earnings growth.
The faster growth of our consumer and broker direct lending channels significant contributor to PFS size increased earnings power.
As you can see in the upper left chart on this page the growth in production pre tax income has been driven by the profitable growth of the direct lending channels.
PFS size, capturing this growth as a result of significant investments we've made in technology and infrastructure to further scale. Our end to end mortgage fulfillment process, coupled with increased hiring to grow the operating platform in growth of our servicing portfolio.
Notably production segment pretax income for the first half of 2020 was $778.2 million up significantly from $527.1 million for the full year of 29 team.
As Doug will review later Pennymac financial represents under 2% market share in its direct lending channels with substantial opportunity for continued growth in the future.
As you can see on the chart on the upper right operating earnings for the servicing segment provide a core earnings contribution driven by the growth of our servicing portfolio and increased scale.
Our operational results in 2020 are tracking towards a record year with pre tax income excluding valuation related changes of $129.2 million for the first half of 2020.
Compared to $146.8 million for the full year 2019.
Investment management is the smallest contributor to our pretax income but has grown in recent years with the growth in PMT equity.
So our prospects for the US economy remains uncertain given the present market environment, we expect PFS size exceptional financial performance to persist into 2021.
Now, let's turn to slide seven to discuss economic developments affecting our businesses.
Challenges in the us economy reflect the impact of Coca 19, as a recent resurgence of the virus weighs on states plans to reopened.
The opening plans, including a return to physical work locations are now on pause in over 80% of the country and economic recovery is expected to be more gradual than previously forecast.
According to the Bureau of Labor statistics, the unemployment rate reached a recent high of 14.7% at April Thirtyth.
While leading economists forecast a gradual recovery to 6.9% by the end of 2021.
New request for mortgage forbearance have decreased substantially since March and April and borrowers are beginning to exit forbearance plans is that continue over zoo, making payments or obtain assistance through government supported loan modification programs.
And recently, despite relatively tight levels of supply economists have begun to forecast home price decreases in metropolitan areas with heavily affected economies.
Fiscal stimulus benefits from the federal government have begun to roll off with an extension or further stimulus remaining uncertain as Congress is yet to resolve differences on several issues, including the jobless benefit liability protections for business eight to state and local governments and direct payments to Americans.
Liquidity in the financial markets has largely rebounded since March and April hub. However markets continued to reflect uncertainty related to the long term impacts of cobot 19.
The improved liquidity during May and June resulted in a significant recovery in the fair value of credit related assets and in particular government sponsored enterprise credit risk transfer investments that gained in value.
Now, let's turn to slide eight to discuss Pemex opportunity in the mortgage origination market.
Economic forecast for total originations in 2020 have increased to nearly three trillion dollars the highest level since 2003 and forecast for total originations in 2021 have recently increased to 2.3 trillion dollars similar to the strong market we saw in 2019.
These forecasts are supported by all time, low mortgage rates, which continued to drive robust refinance and purchase mortgage demand.
Forecast for purchase mortgage originations have also increased recently as a result of higher demand.
Putting in suburban areas. Additionally, sales of previously owned homes posted their largest ever monthly increase in June and sales of new homes have been above consensus expectations.
Gain on sale margins remain elevated more specifically in the direct lending channels driven by capacity constraints.
While corresponding gain on sale margins of decrease from record levels seen early in the quarter as other market participants have returned.
As I mentioned earlier as a result of our capital structure risk management disciplines, and significant technology and infrastructure investments made in recent years Pennymac was able to successfully capitalize on the market opportunity and continue to originate fund and settle loans throughout the crisis.
On the next side, we will discuss some of the investments we've made to drive our continued growth, including a new milestones in production technology.
I am excited to announce the completion of the development a p. three.
The new portal facing our correspondent sellers that Leverages Pemex proprietary technology and Ellie Mae's next generation encompass digital lending platform for best in class experience.
Importantly, pithree seamlessly integrates with Pemex proprietary loan bidding system that instantly prices loans for unique characteristics and required returns.
We believe that this new system will improve the overall experience for our customers. While also increasing the speed at which we can deploy updates or system enhancements.
In a rapidly changing mortgage market environment.
Through July 30, Onest, approximately 80% of our correspondent clients have been migrated on to peak three and almost $9 billion and lock volume has been processed.
Mac or consumer direct portal is a state of the art system that takes steel mortgage process and makes it something more efficient customer centric and transparent.
Borrowers are able to interact with their loan applications online from end to end via our portal backed by superior service.
Max efficiencies have enabled Pemex loan officers to assist a growing number of customers each day and have allowed for incremental productivity, which is especially important in a time, we're managing capacity to consumer demand is critical.
Power our broker direct portal provides our increasing base of brokers and efficient and secure self service delivery platform, enabling the exchange of data and information for loan originations with a focus on zero defects.
Power creates a seamless experience for brokers and ultimately the consumer.
Our investment in production technology and process efficiencies will continue across all channels as we further scale or business with plans to eventually consolidate all of our channels onto a single cloud based system.
As you are aware in servicing technology last year, we announced the completion of SSC, our proprietary workflows driven servicing says.
SSC has been instrumental to our performance during this covert crisis, providing automated solutions for forbearance management, while enabling our servicing associates to service customers with cobot related hardships in an effort to find them the solution best fit for their specific needs.
Now I'd like to turn it over to Doug Jones, Pennymac financials, chief mortgage banking officers to discuss PFS size market share trends.
Thank you David.
Our correspondent acquisition volumes increased slightly during the quarter and we estimate our market share in the channel was 16.7% essentially unchanged from 16.6% and the prior quarter and up from 13.2% year ago. We also estimate that this quarter panamax market share and consumer direct was 1%.
Essentially unchanged from the prior quarter and up from 0.6 of 1% a year ago. The year over year increase reflects our success in growing the consumer direct channel and we are confident in our ability to continue growing this channel.
Our broker direct channel market position grew quarter over quarter, reaching an estimated 1.8% market share up from 1.5% and the first quarter and 1% and the second quarter of 2019.
Pennymac entered the broker channel early in 2018, and I'm happy to announce we are already among the top 10 in the channel.
As David mentioned, our servicing portfolio grew slightly in the second quarter and we estimate that we serve us over 3.4% of all mortgage debt outstanding in the US unchanged from March 30, Onest and up from 3.1% at June Thirtyth 2019, now, let's turn to slide 11 and discuss correspondent production.
Highlights.
Correspondent acquisitions by PMT totaled $29.9 billion, a new PB and the second quarter up slightly from the prior quarter and up 40% from the second quarter 2019, 37% of panties acquisitions, where government loans and 63% or conventional loans.
Loan acquisitions in the quarter total $11 billion in new PB down 19% from the prior quarter as a result by temporary slowdown in the origination market for government loans, which has since recovered.
International correspondent acquisitions for which PFS Sai earns a fulfillment fee totaled $18.9 billion in new PV up 17% from the prior quarter and 76% from the second quarter of 2019.
Fulfillment fees paid by PMT for its loan production increase as a result that PMT strong conventional on acquisition volumes and a slightly higher fulfillment fee.
As a percentage of conventional correspondent you PV the weighted average fulfillment fee was 28 basis points up from 26 basis points in the prior quarter.
Government correspondent locks were $12.9 billion, and new PB down 13% from the prior quarter and up 7% from the second quarter 2019.
Higher margin best efforts commitments increased to 38% of lock volume in the second quarter up from 23% and the prior quarter enabled by Pennymac capital and expertise to efficiently hedge production pipelines across different market environments around.
Revenue per fallout adjusted government lock in the second quarter was 163 basis points up significantly from 76 basis points in the first quarter.
Government correspondent margins were at all time highs in April and while they have since decrease they remain above pre cove at levels.
Purchased loans on our correspondent channel accounted for 40% of total acquisition volume down from 58% in the prior quarter looking at July 2020 volumes remain elevated with total correspondent loan acquisitions of 12.7 billion.