Q3 2021 PennyMac Financial Services Inc Earnings Call (Pre-Recorded)

<unk> earnings discussion for Pennymac Financial Services, Inc.

The slides that accompany this discussion are available on Pennymac Financial's website at IR Dot Pennymac financial Dot Com Biff.

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 as well as non-GAAP measures that have been reconciled to their GAAP equivalents in our earnings presentation.

Thank you.

Now I'd like to begin by introducing David Spector, Pennymac Financial's, Chairman and Chief Executive Officer, who will review the company's third quarter 2021 results.

Thank you Isaac Pennymac financial again delivered outstanding financial performance in the third quarter, reflecting higher income from production against a normalizing origination market and strong core servicing results, partially offset by fair value declines on mortgage servicing rights and interest rate hedges net.

Net income was $249 million or diluted earnings per share of $3 80.

Representing an annualized return on equity of 29% <unk>.

Book value per share grew 6% to $58 at September 30th.

We repurchased four 2 million shares of <unk> common stock during the quarter for an approximate cost of $257 million and we continued in October with an additional one 4 million shares for an approximate cost of $90 million.

This brings the total repurchases year to date to approximately $790 million and since the beginning of 2020, we have now repurchased over $21 7 million shares or approximately 28% of <unk> common shares outstanding.

<unk> Board of Directors also declared a third quarter cash dividend of <unk> 20 per share.

Additionally, I'm pleased to note that PFS I joined a handful of leading nonbank mortgage companies able to access long term corporate debt at attractive terms and this quarter, we issued $500 million of 10 year senior unsecured notes consistent with our long term growth plans and further strengthening <unk> balance sheet.

Dan Karate PFS <unk> senior managing director and Chief Financial Officer will review additional details of our financial performance later on in this discussion.

In total loan acquisition and origination volumes were $59 billion in the third quarter.

These strong production volumes again led to servicing portfolio growth despite elevated prepayment activity.

Pennymac financial's servicing portfolio totaled $495 billion in unpaid principal balance at September 30th.

Up 5% from the end of the prior quarter and up 23% from September 30 of 2020.

<unk> investment management segment revenues were $9 $8 million down from the prior quarter has no incentive fee was earned for Pmt's performance this quarter.

Net assets under management were $2 5 billion up from the prior quarter due to pmt's issuance of $250 million in preferred shares.

PFS is strong operational and financial results for the third quarter demonstrate the power of the balanced production and servicing mortgage banking model that we have built.

With this experienced management team a strong capital base and a robust risk management processes. We have in place I remain confident that pennymac financial will successfully navigate the upcoming shift in the mortgage market.

Furthermore, given PFS is continued investment in technology and marketing I remain excited for our growth prospects ahead in a rising interest rate environment.

With that I will now turn the call over to Andy Chang Senior managing director and Chief Operating Officer, who will review the mortgage origination landscape and the drivers of profitability for PFS side going forward Andy.

Thank you David.

The origination market continues to be large despite the increase in recent weeks interest rates continue to be historically low and remained consistent with the projections of leading economists.

Current forecast for 2022 originations total three trillion dollars.

It is worth noting that purchase originations are expected to grow to a record two trillion dollars in 2022 up 9% from this year's levels.

While refinance originations are expected to decline to $1 one trillion.

So while industry refinance volumes are expected to decrease significantly we believe the outlook for Pennymac financial remains strong given our large profitable and growing servicing business our position as the largest producer of purchase money loans in the U S and the continued expansion of our direct lending business.

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Pennymac Financial's balanced multichannel production model provides flexibility to optimize profitability across different production environments.

While trends in production margins were mixed across channels in the third quarter.

Pretax income from <unk> production segment increased 35% from the second quarter due to the continued success of our consumer direct lending channel, which had higher margins during the quarter.

Our direct lending channels have an outsized impact on production segment earnings as Dan will discuss later.

As we continue to grow our leadership positions in the direct origination channels. This growth will enhance profitability of our production segment.

Our large and growing servicing portfolio will become an increasingly important component of our earnings as interest rates increase and we believe this provides a competitive advantage relative to other mortgage banks as the industry's origination volumes return to more normalized levels.

The expertise of our deep management team combined with the technology and marketing investments, we are making support panamax growth strategy and a changing mortgage market.

And while we believe the mortgage market will continue to change from a competitive and regulatory perspective, the infrastructure and risk management disciplines that distinguished Pennymac from others in the industry continue to position us well.

Now I'll turn it over to Doug Jones, President and Chief mortgage banking officer, who will discuss our mortgage banking businesses.

Thanks, Andy as you can see on slide seven of our presentation Penny Mac maintained its leadership position in the correspondent channel and we estimate that through the first nine months of this year. We represented approximately 17, 7% of the channel overall.

Total correspondent loan acquisition volume was <unk> $44 billion down 6% from the prior quarter and down 1% from the third quarter of 2020, our correspondent mix was similar to the previous quarter at 65% of acquisitions were conventional loans and 35% were government loans government loan Act.

Physicians in the quarter totaled $15 4 billion.

Down 5% from the prior quarter and down 9% from the third quarter of 2020.

Conventional correspondent acquisitions for which PFS I earns a fulfillment fee from PMT.

<unk> totaled $28 6 billion down 6% from the prior quarter and up 5% from the third quarter of 2020 Gov.

Government correspondent locks were $16 2 billion up 4% from the prior quarter and down 20% from the third quarter of 2020.

Revenue per fallout adjusted government lock in the third quarter was 27 basis points down.

Down from 30 basis points in the prior quarter.

The scale, we have achieved in our correspondent business combined with our low cost structure and operational excellence in the channel allow us to operate profitably through volatile market environment and remain the channel later.

In October our correspondent acquisitions were $12 $9 billion in <unk> and locks were 11 5 billion.

Turning to consumer direct not only did we see records in our overall volumes as David mentioned, but we saw records in both purchase and new customer acquisition activity.

<unk> lock volume for the quarter was a record $788 million up from $740 million in the prior quarter and $474 million in the third quarter of 2020.

Similarly in new customer acquisition or non portfolio interest rate lock commitments were $2 billion up from $1 $5 billion in the prior quarter and up from $920 million in the third quarter of 2020.

Additionally, the positive trend in recapture is expected to continue as capacity increases and prepayments returning to more normalized levels.

In total consumer direct origination volumes in the third quarter were $11 1 billion and interest rate lock commitments were $16 3 billion.

We estimate that our market share in the channel has increased meaningfully since last year and we've accounted for approximately one 4% of total originations in the channel through the first nine months of 2021.

The ongoing success, we see in the channel can be attributed to the increased application of data analytics and the investments we have made in our loan fulfillment and sales processes.

Additionally, I remain excited for the future growth prospects for this channel driven by the continued growth of our servicing portfolio as noted earlier and leveraging the investments we have made and will continue to make in the technology and marketing areas.

Revenue per fallout adjusted lock was 382 basis points in the quarter up from 343 basis points in the second quarter.

In October originations for our consumer direct channel totaled three 6 billion and locks totaled $4 9 billion.

The committed pipeline at October 31 was $6 3 billion.

Lastly, originations in our broker direct channel totaled 4 billion essentially unchanged from the prior quarter lock volume totaled $4 9 billion up 8% from the prior quarter pricing margins in that channel continued to reflect competition between channel leaders and revenue per fallout adjusted lock.

It was 77 basis points.

A modest improvement from 71 basis points in the prior quarter.

We estimate that we now represent two 4% market share in the channel over the first nine months of the year with over 2100 brokers approved to offer our products or approximately 14% of the total population of brokers.

Despite currently elevated levels of competition, we continue to see opportunity in the channel over the long term and remain committed to providing our broker partners and the customers. They serve a superior mortgage experience.

Broker originations in October totaled $1 3 billion and locks one 5 billion.

In the committed pipeline at October 31 was $1 $6 billion.

In total these strong acquisition and origination volumes continue to drive the organic growth of our servicing portfolio. Despite elevated prepayment activity as you can see on slide 11, approximately $37 billion of portfolio runoff in the third quarter was more than offset by the addition of $59 billion in total production.

Yeah.

And we ended the quarter with a servicing portfolio of $495 billion in unpaid principal balance of approximately four 1% of all residential mortgage debt in the U S.

Pennymac Financial's owned portfolio reported a prepayment speed of 27, 2% in the third quarter.

Down from 28, 3% in the prior quarter.

The prepayment speeds of Pennymac Financial's sub serviced portfolio, which includes mostly Fannie Mae and Freddie Mac mortgage servicing rights owned by PMT was 23, 6% down from 24, 7% in the prior quarter.

PFS is owned servicing portfolio, which consists primarily of Ginnie Mae MSR had a 60 day delinquency rate of six 1% down from six 7% at the end of the prior quarter, while our subsurface portfolio, consisting primarily of conventional loans reported a 60 day plus delinquency rate of one 2%.

Down from one 6% at June 30, as borrowers continue to emerge from forbearance plans.

<unk> have completed modifications was $4 7 billion down.

Down from $5 $5 billion in the prior quarter and the <unk> of <unk> loan volume totaled $5 $5 billion down from $6 $8 billion in the prior quarter as a result of a smaller population of loans eligible to be bought out.

I'll now turn it over to Dan who will speak to the financial results for the quarter.

Thanks, Doug as David mentioned earlier <unk> net income was $249 3 million or diluted earnings per share of $3 80.

I will cover each segments results and then briefly review, our forbearance and servicing advance trends.

Production segment pretax income was $330 6 million up 35% from the prior quarter and down 46% from the third quarter of 2020.

As you will see on slide nine we provide a breakdown of the revenue contribution from each of PFS sized loan production channels net of loan origination expenses, including the fulfillment fees received from PMT for conventional correspondent loans.

The direct lending channels have an outsized impact on PFS size production earnings as Andy mentioned earlier.

As you can see consumer and broker direct represented 26% of fallout adjusted lock volume in the third quarter, but accounted for approximately 84% of segment pre tax income.

Production revenue margins in the direct lending channels increased from the prior quarter, while government correspondent margins were down slightly.

Revenue per fallout adjusted lock for PFS is one account was 165 basis points in the third quarter up from 154 basis points in the prior quarter, our cost vary by channel ranging from approximately 10 basis points in correspondent to 140 basis points in consumer direct and as our production mix continues to shift toward direct lending production expenses as a <unk>.

<unk> a fallout adjusted locks are expected to trend higher.

The servicing segment recorded pretax income of $8 million.

Down from pre tax income of $30 $9 million in the prior quarter and down from pre tax income of $111 $7 million in the third quarter of 2020.

Pretax income excluding valuation related items for the servicing segment was $148 $4 million down 15% from the prior quarter and down 17% from the third quarter of 2020.

The decrease from the prior quarter was primarily driven by decreased income from loss mitigation activity.

Operating revenue increased $7 $4 million from the prior quarter driven by an increase in loan servicing fees from a larger servicing portfolio, while operating expenses as a percentage of average servicing portfolio <unk> decreased.

Pay off related expenses, which include interest shortfall and recording and release fees related to prepayments remained elevated but decreased slightly quarter over quarter.

In order to protect the value of our MSR asset we utilize a comprehensive 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.

On Slide 13, you can see the fair value of our MSR decreased by $65 million in the third quarter, including $56 million in fair value increases due to changes in interest rates and $121 million and other valuation declines. These valuation declines were primarily driven by elevated levels of prepayment activity and increases to short term prepayment projections.

Hedging losses totaled $86 million and included $69 million in fair value declines, primarily driven by increases in market interest rates and $17 million in declines due to hedge costs.

Our investment management segment delivered pretax income of $1 million down from $4 1 million in the prior quarter as no incentive fees were earned for Pmt's performance this quarter.

Net assets under management totaled $2 $5 billion as of September 30th up 6% from June 30, and up 9% from September 32020, due to PMT sale of $250 million of preferred stock.

Segment revenue was $9 $8 million down 28% from the second quarter and unchanged from the third quarter of 2020.

Lastly, I would like to touch on the trends, we are seeing related to forbearance and loss mitigation the percentage of loans in forbearance decreased to three 2% at September 30th from four 9% at June 30th as borrowers on forbearance plans at June 30th who have since exited more than offset new forbearance plans.

Servicing advances outstanding increased modestly to approximately $430 million at September 30 from $424 million at June 30th advances are expected to increase over the next few months as many property tax payments become due towards the end of the calendar year.

No P&I advances are outstanding as prepayment activity continued to sufficiently cover remittance obligations.

And with that I would like to turn it back to David for some closing remarks.

Thank you Dan looking forward, we have plans in place to leverage investments in technology and marketing across the business and I am optimistic we will continue to increase our market share while successfully addressing the changing needs of the more than 2 million customers in our large and growing servicing portfolio.

It is for these reasons, we expect Pennymac financial to continue delivering attractive returns on equity, which we expect will trend towards our pre COVID-19 average over time.

We encourage investors with any questions to reach out to our investor relations team by email or phone. Thank.

Thank you.

This concludes Pennymac financial services, Inc. 's third quarter earnings discussion.

For any questions. Please visit our website at IR Dot Pennymac financial Dot com or call our Investor Relations Department at 8182644907. Thank you.