Q1 2022 PennyMac Financial Services Inc Earnings Call

75% of our production was purchase loans and we achieved a 19% return on equity.

Similarly in an extremely difficult 2018, with a higher 10 year treasury yield and an origination market of $1 six trillion.

80% of our production was purchase loans and we achieved a return on equity of 13%.

PFS is strong record across various market environments is well documented and unique among mortgage banks.

Successfully navigating a challenging mortgage environment requires a strong balance sheet expertise in the capital markets and strong operational and capital planning disciplines things, we have been emphasizing for years.

Our balanced business model with leadership positions in both production and servicing along with our long term commitment to risk management drives profitability across different market environments.

This dynamic has led to the growth of <unk> equity base and book value per share, which has nearly tripled since the end of 2018.

We have achieved this tremendous growth, while simultaneously maintaining low levels of leverage and strong liquidity relative to our peers.

These values and commitments are ingrained within our company culture and they have been since our founding in 2008.

With our long term strategic goals in mind, our first course of action is ensuring that our future expense levels are aligned with the lower projected activity in the market.

While these are always tough decisions to make our expense management initiatives began in the summer of 2021 with certain hiring freezes and strategic plans to accommodate a changing market.

So mortgage rates increased faster than predicted we have already taken necessary steps to better align our expense base with expected lower levels of activity, while continuing to drive greater efficiencies.

These expense management initiatives are expected to take a few months to be fully reflected in our results.

We will be diligent in our operational and financial management disciplines in order to return our production channel expenses to more appropriate levels.

Due to these impacts PFS size ROE is projected to trend lower before returning to its pre COVID-19 range over time.

Before turning it over to Doug Jones, our president and Chief mortgage banking officer.

I'd like to briefly address the Fhfa's recent re proposal of eligibility standards for non Bank agency seller Servicers.

While the FHFA is currently considering comments on its proposal the proposed standards call for tightened liquidity net worth and leverage requirements for large non banks. Additional proposed standards include an added liquidity buffer capital and liquidity plans and third party ratings requirements as.

As I mentioned earlier <unk> has a long track record of strong financial performance robust liquidity and capital planning disciplines and has historically operated with low levels of leverage.

If the standards were implemented today pennymac financials, well positioned to meet each of these requirements given its long standing commitment to capital and enterprise risk management with these disciplines fully integrated throughout the organization.

Now I'll turn it over to Doug who will discuss the benefits of our large and growing servicing business and review <unk> first quarter mortgage banking results.

Thanks, David a large servicing business is essential for the success of our mortgage banking in a rising rate environment. Our de Novo servicing platform was built from scratch void of any legacy issues that arose from the great financial crisis, and we have invested significantly throughout our history to ensure that we were able to efficiently.

Effectively serve our customers at the highest standards.

Our leading production business has driven the strong organic growth of our servicing portfolio and today I am extremely proud of the more than a half trillion and <unk> of servicing that we manage and more than $2 2 million customers we serve.

As a key part of our balanced business model, our large servicing portfolio provides significant value to the company <unk>.

Servicing and sub servicing fees generate over $1 billion in revenue annually and PFS is expected to further benefit in the near term as higher short term interest rates are expected to drive increased interest income on our custodial deposit balances.

In 2019, we launched our own proprietary cloud based servicing system designed specifically for Panamax unique workflows SSE as we call. It not only provides us with the cost efficiencies by reducing third party vendor expenses, but increases our flexibility, enabling us to adapt.

Quickly to current market conditions or forthcoming regulation.

Additionally, SSE provides invaluable insight to our servicing team members dedicated to assisting customers with hardships and mitigating losses going even further SSC provides the data we use to better understand our customers' needs. So loan officers in our consumer direct channel can assist borrowers with products that can benefit them.

Finally, given our scale we have achieved we have begun to work with Hippo to offer homeowners insurance to our servicing portfolio customers and are currently evaluating other potential partnerships to explore ways to better serve our customers with additional product offerings.

All of these benefits demonstrate the strength of a large servicing business such as ours, especially once supported by an industry, leading production business delivering new loans and additional customers on a daily basis.

Now, let's turn to PFS is multichannel production business.

<unk> maintained its leadership position in the correspondent channel and we estimate that over the last 12 months. We have represented approximately 15, 8% of the channel overall.

Total correspondent loan acquisition volume was $22 $5 billion in the first quarter, 57% or $12 $7 billion were government loans, and 43% or $9 $8 billion or conventional loans for which <unk> earns a fulfillment fee from PMT.

Government acquisition volumes were down consistent with industry volumes, while conventional correspondent acquisitions were down significantly as increased competition for conventional loans, including from the Gse's was heightened during the quarter margin compression in the conventional correspondent space created a return profile lower than our threshold and so on.

<unk> declined as we maintained our discipline. So we have started to see summer term to more normalized margins in April .

Government correspondent lock volume was $12 5 billion down 20% from the prior quarter revenue per fallout adjusted government lock in the first quarter was 23 basis points down one basis point from the prior quarter. The scale, we've achieved in our correspondent business combined with our low cost structure and operational excellence in the channel allow us to offer.

Great efficiently through volatile market environments.

In this environment, some smaller market participants have pulled back significantly or exited the channel entirely potentially creating some opportunities as the market transitions.

In April correspondent acquisitions, or $6 $5 billion on locks were $7 $5 billion turning to the consumer direct channel our market share was approximately doubled since 2020, and we accounted for approximately one 7% of total originations in the channel over the last 12 months origination volumes in the first quarter.

Over $8 2 billion in interest.

Rate lock commitments were $9 $1 billion, while down from the previous quarter. The pace of decline is less than that of the over all market and we continue to build our capabilities in the channel.

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

I remain excited about the future potential for market share growth in this channel as we leverage our servicing portfolio, new technology and advanced data analytics.

We also continue to see success in our purchase and new customer acquisition channels. Despite the smaller origination market.

Purchase volume in the first quarter was $791 million up slightly from the prior quarter and new customer acquisition lock volume was $1 $3 billion down from $1 9 billion last quarter margins. In this channel continued to tighten with revenue per fallout adjusted lock of 297.

10 basis points in the quarter.

And April originations for our consumer direct channel totaled $1 $8 billion and locks totaled $1 $6 billion. The committed pipeline at April 30th was $1 9 billion.

Originations in our broker direct channel totaled $2 $5 billion in locks totaled $3 $5 billion pricing margins and the channel continued to reflect significant levels of competition and revenue per fallout. Adjusted lock was 62 basis points down from 68 basis points in the prior quarter, we estimated in the <unk>.

Last 12 months, we represented approximately two 2% of the origination volume in the channel with over 200 brokers approved to offer our products are approximately 15% of the total population of brokers.

Despite elevated levels of competition currently 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 new products and a superior mortgage experience, while we remain committed to the broker direct channel we remain disciplined in the current market environment broker originations in April .

Total $800 million in locks totaled $700 million the committed pipeline at April 30 was $900 million.

As we discussed earlier these acquisition and origination volumes continued to drive the organic growth of our servicing portfolio.

This quarter approximately $24 billion of portfolio runoff was more than offset by the addition of $33 billion in total production and we ended the quarter with a servicing portfolio of $519 billion or approximately four 1% of all residential mortgage debt in the U S. P.

Prepayment speeds have slowed meaningfully given the rapid increase in mortgage rates, David mentioned earlier Pennymac Financial's owned portfolio reported a prepayment speed of 17, 1% in the first quarter down from 23, 4% in the prior quarter, Similarly, prepayment speeds and Pennymac Financial's sub serviced portfolio, which includes.

Mostly Fannie Mae and Freddie Mac mortgage servicing rights owned by PMT was 13% down from 19, 8% in the prior quarter.

The size of our servicing portfolio, which consists primarily of Ginnie Mae MSR at a 60 day plus delinquency rate of three 9% down from 4.7% at the end of the prior quarter, while our sub servicing portfolio, consisting primarily of conventional loans reported a 60 day plus delinquency rate of <unk>, 7% down.

From <unk>, 9% at December 31.

The <unk> of completed modifications was $5 $1 billion in the <unk> loan volume totaled $2 $1 billion, both down from the prior quarter as opportunities have a decline due to lower delinquency levels and higher mortgage rates.

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 $174 million or diluted earnings per share of $2 94.

Production segment pretax income was $9 $3 million as you will see on slide 10, we provide a breakdown of the revenue contribution from each of PFS sized loan production channels net of loan origination expenses, including fulfillment fees received from PMT for conventional correspondent loans.

Production revenue margins in consumer direct continued to decline from the prior quarter broker direct margins also declined from the prior quarter and remained below their normalized levels.

Government correspondent margins were also down slightly revenue per fallout adjusted locks for PFS is one account was 102 basis points in the first quarter down from 113 basis points in the prior quarter.

This includes $19 $5 million in losses realized related to timing of revenue and loan origination expense recognition hedging pricing and execution changes and other items.

We recognize that expenses in our production segment remain elevated given the rapid decline in the size of the overall origination market and are actively working to adjust these expenses to better align with lower expected volumes the.

The servicing segment recorded pretax income of $225 2 million up from pre tax income of $126 1 million in the prior quarter and $141 $7 million in the first quarter of 2021.

Pretax income excluding valuation related items for the servicing segment was $86 million down from the prior quarter, primarily as a result of lower Epo related income.

Operating revenue was essentially unchanged from the prior quarter operating expenses as a percentage of average servicing portfolio <unk> increased primarily due to seasonal collection trends, but were down from the first quarter of last year.

Payoff related expenses, which include interest shortfall and recording and release fees related to prepayments decreased by $6 $2 million.

Realization of MSR cash flows increased $14 million driven by higher average MSR values during the quarter.

In order to protect the value of our MSR asset we utilize our 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 14, you can see the fair value of our MSR increased by $324 million in the first quarter driven by higher mortgage rates, which resulted in expectations for lower prepayment activity in the future.

Hedging losses totaled $218 million, primarily driven by higher interest rates.

Finally, our investment management segment delivered pretax income of $97000 down from $1 $5 million in the prior quarter.

Net assets under management totaled $2 $2 billion as of March 31 down 6% from December 31, and March 31, 2021 segment revenue was $10 $1 million down 3% from the prior quarter and up 6% from the first quarter of 2021 and with that I would like to turn it back to David for some closing remarks.

Thank you Dan.

And thank you to our current shareholders and potential investors listening to the call. While the current mortgage market is going through rapid changes in transitioning to a more purchase oriented focus.

We feel PFS size, well position due to the strength of our balanced business model our position as a leading producer of purchase mortgages in our risk management capabilities. We have successfully navigated many mortgage cycles throughout our history and I firmly believe there is not a better management team than panamax to navigate this one.

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

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

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