Q1 2023 PennyMac Financial Services Inc Earnings Call

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 is 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 maintains strong ties with borrowers in their local communities.

<unk> has also developed many strong relationships with purchase focused builder own mortgage companies, which combined with the exit of other corresponded 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.

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 maintained strong relationships with real estate 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 where 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.

Our consumer direct division serves to protect the value of our servicing portfolio in a declining interest rate environment.

Loan officers and 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 being 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 first quarter when interest rates declined to distress on the regional banks, which drove the increase in lock volumes in this channel from the prior quarter.

Penny Mac 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. 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 our multiyear technology initiative, which has resulted in an industry, leading and flexible loan delivery platform that we call <unk> three <unk>.

<unk> III 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 and our broker direct lending Division and then beginning very positive feedback from the brokers who utilize the system.

Making sure brokers can provide flawless closing execution and the best price possible for their customers has been the focus of our improvements and we believe these features are critical for the success of brokers in the prevailing competitive origination market.

Notably this quarter, we also expanded 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 increase 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 it's still early in its development, we are excited and supportive of the potential contributions from artificial intelligence and the low 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.

I believe Pennymac financial is extraordinarily well positioned given its large imbalanced business model combined with strong capital and liquidity management disciplines.

Though the environment remains challenging it is currently our expectation that PFS is return on equity will trend towards pre COVID-19 range from 2023.

I will now turn the call over to Dan who will review details of our financial performance.

Thanks, David.

<unk> reported net income of $30 million in the first quarter or <unk> 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 Msr's and hedges, primarily due to elevated hedge costs.

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

As David mentioned, we continued repurchasing stock in the first quarter, we bought back nearly 800000 shares for $45 million at an average price of $59.01 per share through April 25th we bought back nearly 200000 shares for $11 million 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.

<unk> reports financial results through three segments production servicing and investment management.

In the first quarter. The production segment reported a pretax loss of $20 million. The servicing segment recorded a pretax income of $57 million in the investment management segment reported pretax income of $300000.

Overall production, including volumes acquired by PMT was solid in the first quarter down only 1% from the prior quarter, while industry volumes are estimated to be down approximately 17%.

Pennymac widened its leadership position in correspondent lending is 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 approximately 17% of the channel overall and we believe our market share has been meaningfully higher than more recent periods as correspondent sellers seek high quality partners like Pennymac.

In April we estimate total correspondent acquisitions will be $6 3 billion.

And lots will be $6 8 billion.

As David mentioned, we see strong trends in our broker direct lending division as volumes margins market share and the number of brokers approved to do business with us all increased from the prior quarter.

Over the last 12 months, we believe we represented approximately two 2% of the total originations in the channel in April volumes continued to be strong with estimated originations of $600 million in <unk> of $900 million.

We estimate the committed pipeline at April 30th will be $1 billion.

And 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 our market share in the channel remains low, but we believe <unk> consumer direct originations are positioned for future growth given the amount of higher note rate servicing we continue adding.

To our servicing portfolio through our correspondent production channel.

In April we estimate total originations in the channel will be $500 million in locks will be $800 million.

We estimate the committed pipeline at April 30th will be $1 billion.

As you can see on slide 11 of our earnings presentation. We saw increased revenue contributions from all three channels and slightly lower expenses.

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.

Pre tax income in our servicing segment was down from the prior quarter due to net fair value declines on Msr's and hedges while the prior quarter included net gains on MSR and hedges, excluding valuation related changes servicing pretax income was $94 million up from $79 million in the prior quarter.

Loan servicing fees increased primarily as a result of continued portfolio growth and the earnings we recognize from placement fees on custodial balances and deposits increased due to higher short term interest rates, despite seasonally lower custodial balance levels.

Income from <unk> related activities increased $13 million from the prior quarter, Although we expect a lower contribution in coming quarters due to the higher interest rate environment.

Partially offsetting these revenue increases were higher operating expenses up from a seasonal low in the fourth quarter and increased interest expense driven primarily by higher short term rates and the issuance of $680 million term loan secured by Ginnie Mae MSR 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 fee.

Fair value of <unk> MSR before recognition of realization of cash flows decreased by $90 million during the quarter driven by lower market interest rates.

Hedge gains totaled $47 million and were impacted by $32 million in hedge costs, which were elevated due to significant interest rate volatility the net impact on MSR and hedge fair value changes on <unk> pre tax income was $43 million and the impact on earnings per share was <unk> 59.

As expected delinquencies declined from seasonal highs at yearend and servicing advances outstanding for <unk> MSR portfolio decreased to approximately $427 million from $520 million.

No principal and interest advances are outstanding as prepayment activity continues to sufficiently cover remittance obligations at this time.

And <unk> investment management segment net assets under management were $2 billion at quarter end up slightly from the prior quarter due to Pmt's strong financial results.

Now I would like to briefly talk about PFS, a strong capital and liquidity position, which you can see on slide 24 of our earnings presentation.

Our leverage increased from December 31, primarily due to higher balances of loans held for sale. However, non funding debt to equity remained low at one two times at March 31.

During the quarter, we further strengthened our balance sheet opportunistically raising $680 million in the form of a five year term loan secured by Ginnie Mae MSR and servicing advances at an attractive price of sofa, plus 300 basis points.

Looking ahead to upcoming maturities the secured term notes due in August of this year can be extended for two years at <unk> discretion. Finally, given our demonstrated access to liquidity and financing we feel PFS 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.

Thank you Dan.

As you can see I'm very excited for Pennymac financial's future, our servicing portfolio continues to grow and our competitive position within the correspondent and broker direct lending channels has never been better.

We are increasingly seeing new correspondents and brokers turned their attention a penny Mac and its best in class mortgage platform is a trusted and innovative business partner for.

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 team by email or phone.

Thank you.

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

For any questions. Please visit our website at <unk> Dot Pennymac dot com or call our Investor Relations Department at 8182644907. Thank you.