PFSI PennyMac Financial Services

Isaac Garden Vice President of Investor Relations
David Spector President and Chief Executive Officer
Doug Jones Chief Mortgage Banking Officer
Andy Chang Chief Financial Officer
Call transcript
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Isaac Garden

Good afternoon, and welcome to the First Quarter 2020 Earnings Discussion for PennyMac Financial Services, Inc. The slides that accompany this discussion are available on PennyMac Financial's website at

Before we begin, please take a few moments to read the disclaimer on Slide 2 of the presentation. Thank you.

Now I would like to begin by introducing David Spector, PennyMac Financial's President and Chief Executive Officer, who will review the company's first-quarter 2020 results.

David Spector

Isaac. you, Thank fair record continued reported on the quarter, than first interest rights. mortgage PennyMac production earnings results, by offset more which strong hedge gains losses combined driven on rate servicing Financial investments, in value with our substantial $XXX.X income $X.XX. was per of or million Net earnings diluted share prior to Book increased from at $XX.XX, value per the quarter. $XX.XX up share end of the

price first at volumes of prior from XXX,XXX by $X.XX a repurchased the billion and record first per cash March, approximately the first shares a XXXX, million, income prior in of pre-tax channels. weighted common quarter lending of a and channels we a Production a principal quarter. XXX% Board average of quarter cost in XX% up margins per direct lending PFSI's balance, up quarter XXXX. record stock record the across $XX.XX all $X.X XXX% share. the Direct $X.X of from declared quarter unpaid of elevated and our $XXX.X million In from from PFSI's XX% segment driven was the share Directors were of for of locks dividend and the up

correspondent from $XX.X quarter from UPB, conventional fulfilled quarter prior the the XX% XXXX. and $XX.X And in first quarter were was quarter these, and XXXX. first $X.X quarter from channel, of volume up first channel. billion while of billion quarter and $X.X the in up the XXX% loans consumer Of prior finally, billion up the production from totaled from quarter of down the government billion of volume prior the XX% UPB, for XX% PMT was X% in down direct lock were down XXX% Correspondent from direct the broker XXXX. Total for in the $XX.X in UPB, billion acquisitions

$XXX.X of other by $XXX.X of first on value net pre-tax million billion income and The segment in was $XX.X million results to the the these impact segment prior quarter of MSR included and million The income primarily earnings were $X.X pre-tax record recorded loss more quarter versus quarter valuation-related $X.X servicing Continuing XXXX. million a was The diluted in of items, share. a offset of pre-tax in this driven income Slide than in million which gains. per hedging by pre-tax increase $X.XX $XXX.X which loss, a and in fair items X.

the quarter segment for pre-tax up XX% items, servicing from of valuation-related XXXX. up and income $XX.X first Excluding the million, from was quarter prior the X%

our prior of servicing XX, XXXX. of and billion in As end March XX, UPB, portfolio quarter of the from the XX% of from increase increase totaled an $XXX.X March X% an

and the investment the million quarter of down $X.X in XXXX. of of XX% the million, down from segment quarter quarter Our from $X.X prior $X.X from management million Segment prior in XXXX. up first XX% $X.X first quarter pre-tax and million, from delivered income up was the revenue

MSRs PMT profile. available shareholders' to totaled Ginnie trust its capacity for Ginnie XX, committed currently XX, and PennyMac in private expand to in financing April, a of advances. provide PennyMac year advances million and GMSR In Mae an by as equity. XX% servicing servicing $XXX down Net further to its March $X.X market has liquidity finance from assets a than issuer December management Mae Financial under announced early driven more enhancement billion after reduction Financial of development,

the to mortgage let's that developments markets. have and Now affected Slide recent turn X discuss

economy. substantial measures, in which XXXX, triggered slowdown of States quarter was public the first effects the by significantly the pandemic the and related United impacted of COVID-XX a During the health

response for higher as if to million for these homeowners is the COVID-XX leading the fiscal future. Over In The CARES homeowners indirectly and $X borrowers, of trillion claims, economic directly to coming in to in as designed well by six XX.X impact, have increased months providing evidencing and consumer hardships federal curtail granting workers hardships forbearance last losses. an impacted expectations effort weeks, the jobless the filed of program enacted with crisis. Act, or up to forbearance federally government credit the the stimulus, reduce to backed XX mortgages delinquencies

significantly of obligations and sellers financial has many COVID-XX supported of as liquidity value credit severely many assets. enterprise securities. uncertain financial has in increased, among returns volatility an purchases In securities on due expectations government-sponsored on servicers substantial including credit to the economic delinquencies market well increased required transfer as and participants. of Reserve volatility for market asset advanced near the has risk the The also rates to the elevated strain and in impacted However, assets, reduced Fed mortgage for Fund increase and and the liquidity The zero mortgage-backed through reduced actual been undercapitalized impact markets, for agency putting including losses, the servicers. the with market many outlook response, Federal market liquidity

to PFSI's strong critically has have environment. management strong leverage risk low this disciplined important management discipline and resulted an since in in total balance in market liquidity sheet, our February. approach increase been liquidity our And

the on from of origination healthy the market origination Now to the pandemic, turn rates. to X onset demand mortgage discuss let's interest market. Slide mortgage low to COVID-XX the experiencing update historically was an Prior

currently $X.X April the further forecasts recent and XX-year the sustain demand economy. developments declined for to of slowdown market an points to quarter average interest the stimulus into decreased markets mortgage These from this acted trillion trillion fixed-rate estimate end mortgage additional to increase acted X.X% The rates. new the XXXX, XX end month. financial The liquidity of XXXX. and the by March loans the at the heightened economic at have overall basis to for further economic lower And Reserve total X.X% has mortgage of despite in infusion of in $X.X originations in Federal

for support continued volumes are to to has environment purchase rate reduce orders robust stay-at-home while low mortgages. refinance The demand expected

to on expected for wide will strong see competitors we broker April. an As mortgage in crisis. of primary have the originate, throughout extended channels or in been organizations refinance correspondent later, introduced strong limit period have spread by risk remain certain expand continuously management, loans The crisis. and the to between to to PennyMac's primarily allowed COVID-XX these continue rate time the and Doug on as participation market their and settle secondary volumes capital of strains lending is due scale the us reduce many to forced advantages fund and mortgage expertise,

slide, competition had environment we loan will segments. next driven see margins The elevated across by industry of market business of current PFSI the PFSI's continue limited business impact across our the segment, constraints. on On already we all current by segment. the and discuss production capacity In environment has channels reduced an impact to all market

and We particularly expect our consumer a in growing the further market position direct in to to be to strong share loans, channels. settle continue and broker fund

we due our servicing MSR a to in In to hedge combination values the related changes of see in segment, factors. expect results profitability and from aside changes

delinquent portfolio reduced borrower for revenue fees expect subservicing we First, and related by servicing PMT increased from increased fee growth loans. to due delinquencies, potential the to offset

on Second, declined. short-term to deposits have custodial income we earn as expect reduced rates

expenses hardships expected increased to as servicing increased address hire for the costs and staff financing we borrower in Third, advances. we the increase expect additional required

borrowers expected from of And reduction from increases finally, early we gains by as forbearance. redelivery expect loans, the followed gains in emerge redelivery a buyout in near-term

Turning pandemic substantial under PMT's a assets to PMT's And our significantly, in on PFSI's shareholders impact segment. CRT in investment management as management. decreased The a decline resulting result, investments. equity had a

performance-based fees incentive management time. be do expect base to quarters, we As for a fees result, some we and in to future expect earn lower not

While performance throughout given prospects present to headwinds remain PFSI's elevated U.S. and XXXX. for PFSI's market for financial uncertain the we economy environment, present overall expect the are some businesses,

would to Doug Mortgage over PennyMac like Banking PFSI's to Officer, share I Now discuss Financial's turn Jones, Chief market trend. to it

Doug Jones

you, Thank David.

mortgage quarter. the share the XX.X% volumes And from our market acquisition correspondent was channel finance, inside XX.X%, up Our year ago. and decreased quarter estimates XX% a from down from on the in in based prior during

quarter positive to largest estimate we up trends the aggregator longer-term have quarterly the it us a to we in and opportunity. last direct review we continue the made allow year ago large share the to capture important remain as this share X.X%, While investments from quarter, market X.X% U.S. reached is PennyMac's channel in X.X% the this We correspondent market refinance quarter. consumer consecutive a trends from on note third are and that basis, for in the

XX broker Our over X.X% approved an to channel points brokers grew a basis quarter, we fulfillment quarter XX estimated direct and up continue market reaching year capacity. as X.X%, December ago at add and position from also

slightly up March X.X% the December David the we mentioned, first XXXX. continued mortgage now X% debt in U.S., outstanding at our and grow to from servicing quarter, and that XX estimate we over in As all of service portfolio up XX, from

turn billion billion of Government in from of to correspondent XX% first loans. prior the down the in and acquisitions the X $XX.X production totaled and conventional UPB XXXX. highlights. the Slide quarter from the loans totaled Correspondent the first from and down loan XXX% XX% UPB, up acquisitions up government in were discuss from quarter in quarter prior first XX% by quarter, PMT's XXX% quarter were XXXX. quarter $XX.X XX% and of let's Now PMT acquisitions

billion current from the XXXX. and PFSI impact leadership market are competition correspondent $XX.X and a UPB, Conventional Government in from XXX% first-quarter prior the UPB, down COVID-XX. channel. in first in correspondent the of quarter $XX.X quarter, correspondent up current as down amid locks Beginning prior XXXX. channel in PFSI with subsided earns XX% historical acquisitions reported quarter stemming able for acquisition fulfillment billion to X% quarter the now correspondent lock totaled from the fee the volatility XX% direct nondelegated maintain from were which volumes the from up the its lending of broker position was period and and

loan loan quarter. a in was fees up fallout-adjusted points, lock reduction quarter PMT by result its in XX the acquisition the and rate. a as from volumes first Revenue basis lower per slightly points of fourth government basis production Fulfillment paid decreased conventional fulfillment PMT's for XX in significantly fee

was UPB, acquisition average XX fee fulfillment percentage of basis loans Purchase points down volume. a our correspondent As channel in money the of for quarter. points, conventional in weighted XX% from basis total accounted XX prior correspondent the

end our XXX the of quarter. in continued sellers was the at of delegated up prior nearly end, XXX quarter from at rise network number also to correspondent The to

UPB. XXXX, loan and in volumes Looking $XX.X billion interest in April commitments correspondent $XX.X were and lock acquisitions were remain rate elevated. month margins for at the billion UPB Total

Now review let's turn to direct consumer XX Slide to channel highlights.

We channel, X% platform we investments and billion was have UPB from and from consumer up the driven our production loans XXXX. of of to opportunity. interest the first made in in prior rates address XXX% This $X quarter the quarter lower direct our originated by market to scale

our driving further quarter. improve improved the generation continues further analytics data prior channel of the levels lead abilities already use Margins enriched in Additionally, from recapture elevated rates. and in

points fallout-adjusted $X.X $X.X a per locks basis consumer from of in basis billion quarter. our direct in Revenue April up performance pipeline $X.X XXX lock and in Strong month prior the end. consumer billion points, at with direct was UPB of channel continued of committed in billion originations, XXX

Now Broker in let's production first quarter. from Direct discuss the correspondent now originations, billion which up the quarter, Slide $X.X acquisitions, highlights. Direct prior to XX% turn XX non-delegated and Broker UPB in our totaled include

from Interest brokers fulfillment results process. while investments increased rate brokers growth we of operations driven lock from were the over to The $X.X sellers XX% have number to combination up made our to billion UPB, approved declined strong XXX approved slightly a X,XXX, correspondent quarter The of quarter, up XXX. and and fourth was non-delegated further XX% our quarter. in by volume in scale

and locks $XXX growth at We XX. continue committed pipeline capacity encourage position. demand UPB originations direct totaled totaled $X.X In $X.X And our market in finally, billion April, to was increase and address billion. of broker elevated to the April million

turn I to the servicing will XX, and Slide results segment. highlight in let's Now our

prepayment the remain to speed portfolio, our March XX% Our production from XX.X% the Mac and servicing owned prepayment quarter. support as end which the strong elevated portfolio portfolio of subserviced PennyMac at first December from March The PMT, from XX, decreased grew quarter, despite to XXst Fannie Financial's of modestly up UPB XX% reported quarter. mostly a in continued growth portfolios Similarly, XX-day volumes to portfolio in quarter, from speeds. billion Freddie slightly prior the the $XXX.X first delinquency Financial's XXXX, and owned prior Mae rates of and by down on speeds the as in prepayment servicing our X% includes rights mortgage XX.X% XXst. XX% subserviced owned of PennyMac low in

while X.X%, our delinquency Our a portfolio portfolio rate from subserviced December owned reported X.X%, delinquency XXst. XX-day-plus XX-day of had rate of a unchanged

first significantly of COVID-XX The discussed as pandemic. arising volume delinquency Mae early totaled rates the expect from interest buyouts continued UPB impact loan the of The increase rate $X.X earlier, to to from result a low As of hardships volumes elevated Ginnie environment quarter we of billion. David the in support Securities. EBO

Now to investment Financial's over I management the segment. Officer, to Andy it would like Chang, to Chief turn PennyMac Financial results of our discuss

Andy Chang

Thank down March from which significant PMT's shareholders' primarily noted totaled investments XXst, billion as you, value $X.X in at XXst in equity on Doug. Net assets significant management reduction losses fair December due under a CRT, PMT's to noncash resulted in XX% earlier.

expects outsized the to PMT's on over CRT We compared these losses PMT of fair incur value losses life are credit that believe the to additional investments.

correspondent attractive base its production will lower, expect incurred be to the and quarter. PMT competitors affected fees recent and investment we for and fees opportunities management receive incentive we result time dislocations While some for as PMT do of a PFSI's during not performance losses business, the have expect market created first

you XX, read on will summarizes This Starting more hedging our factors the for Slide press of highlight We financial earnings on detailed encourage key quarter. to the our slide trends impact of for in information. first and results the some PFSI's results. release I

on to rate our Our MSR production-related value the into comprehensive the also of of changes asset designed moderate interest is taking income. hedging strategy impact account while fair

of other driven due prepayment We activity than combined $XXX.X and a lower movements with recorded in first fair in by value MSR fair fair expectations the first losses returns of value quarter. The represented The rates, in of more as fair were approximately the first quarter billion losses the These participants. $X.X hedging XX% asset offset MSR costs on delinquencies future higher significant to increased primarily loss our MSR by was our rates due in totaling value value benefit significant quarter by market December servicing expected interest million. option increased provided the in utilization gains and to our at coverage XX. fair decrease of value for substantial demanded

decline was million to our first driven the changes, Let's prior quarter proprietary expenses portfolio of decreased income, decreased Operating excluding payroll resulting the by and decreased first in in discuss XX segment. over valuation-related benefits. profitability higher $XX.X to offset Operating to Pretax cost percentage savings $XX.X custodial revenue deposits $XX.X servicing seasonally in of interest expenses up servicing average was the quarter a the rates. in lower rates turn related the short-term the taxes quarter as earnings income quarter quarter by of in million our XXXX. million, Slide systems to environment, driven servicing and cloud-based to which quarter a from of from due full by related

a and from finally, gains million due out initiatives related $X.X Credit of to bought combination income quarter for quarter loss but driven And the losses quarter prior million shortfall from decreased EBO-related in provisions and the elevated. the mitigation. increased Interest loans periods. to expense $X.X of by million over fourth defaulted loans by from decreased reperformance $X.X remained prior quarter seasonality

and Now to let's trends MSR Slide turn PFSI's servicing discuss for portfolio. XX

XX-plus delinquency historically X% day in MSR portfolio X%. on The predominantly rates PFSI's of been the government range to have

COVID-XX to XX% hardships XX-plus the XX, April of delinquency was related and by borrower driven requests. day rate As forbearance

PFSI's As platform. This portfolio ability reflects approximately were the forbearance our rapidly in and efficiently of XX, to XX% with access to loans our plans. April of provide in forbearance technology

COVID-XX hardships began guidance, the to XX, a PFSI April to our important given payments also for in platform expertise. is current and note through their March offering on in strong X. are and X% servicing evaluated position XX% related to approximately technology forbearance successfully customers be those PFSI through of It forbearance, following is manage the due on plans GSE's specialty request, initial automated its allowing forbearance systems. to receive that

been a our PFSI's enrolled a of in to ability the plan of environment. of market automated forbearance rapidly our one flexibility changing to technology channels, and fact, customers PennyMac XX% have reflecting In through respond

plans, including Ginnie responsibility fund PFSI delinquent those own again, MSRs. advances has servicing for a to our predominantly borrowers, Mae forbearance portfolio, in For

subserviced portfolio, as receive servicing And loan subservicing are current or the responsibility the owner advances I a for versus increased per of PMT. any a mentioned may earlier, loan. For MSR delinquent PFSI the revenue loan

advancing Let's crisis. securities, mortgage-backed it a requires to Ginnie turn to advances high Slide loans Similarly, principal Mae activity continue slide requires Fannie where for continue such for and to Mac in requires XXX interest advancing loans the interest needs by XX projected advances. a days. principal COVID-XX details interest combine. of delinquency continue to which advancing as extended These loans covered scheduled servicer servicer discuss for for of the for PFSI's periods This and to for out prepayment delinquent principal expectation servicing result adverse of typically and delinquent Freddie are advances delinquency until the unlike servicer and payments buys a XXX scheduled interest days. payments Mae rates a except servicing scenarios

advances and the loans. are average that at in start reaches to delinquent our months loans rates be the PFSI's insurance we majority for property expected of forbearance XX% in the to In securing expected expenses to MSR property protect delinquency interest delinquent to scenario, are plans stress of PFSI's premiums four the and recovery. XX% servicing months the moderate moderate the borrowers peak portfolio before cases. related both and other that of in assume advances The investors' the related taxes, assume

assumes case for the of reaches before months stress loans average recovery. the eight While start delinquent delinquent months the the

quarter total advances. in stress projections the higher or or of accounts due the PFSI XXXX, prepayment borrower to could corporate reinstatement of and after significantly billion from borrowers has no second a any $XXX the with than principal interest cash. XXXX reach advances collections with amount delayed fourth that balance principal Historically, increase and with In activity. less Advance advances million elevated or and total modification. if advances case, agencies In advances and quarter from advances peak insuring the required of loan prolonged principal reached a are interest moderate in half $X.X of case, recoveries funded of interest peak in servicing

liquidity, servicing liquidity able in MSRs $XXX And in currently As is PFSI less against to XXXX, advances had Suisse. $X.X Mae. million required million, previously Credit and outstanding XX, April up available from Mae by advances mentioned, $XXX were of Ginnie borrow PFSI as $XXX billion Ginnie million as and servicing to

advance loan, rates underlying While and financed vary at can guarantor by or type driven Ginnie of advances insurer average the advance Mae of servicing the of XX%. servicing be an

for financing PFSI's other of addition servicing the of structure or if lenders issuance term via for notes Importantly, expansion advances needed. the allows

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

David Spector

Thank for Interest spread very the our origination. forced given you, historic reduce participation, record three to or I PennyMac have rates resulting channels. Financial volumes limit success is from period. Andy. to lows, With significant am margins environment of fallen production providing of and performance a competitors and all their during certain quarterly COVID-XX new dislocations this favorable elevated mortgage proud financial capturing across production the

nearly like to adapted would employees everyone of dedicated I to working And from home. X,XXX enthusiastically thank who our

market interest which credit risks, maintained in proven environment. our and the its disciplined team to experienced Over XX management approach operational has rate, the has last highly current years, essential

Financial rights. PennyMac value outstanding offset strategies, which from record the on fair driven record interest a first than and performance more rate book reported servicing hedging and earnings significant value our mortgage segment growth by profitability losses XX% As result, production quarter in

to Additionally, our recognize environment that customers. causing is the hardship we increased

immediately the in the independent are available. the country well-positioned capabilities PennyMac borrowers mortgage incorporate capitalized made forbearance the Act producers to requirements best self-service into fulfill and quick platform ability and largest and offer and was using servicers the of the programs to CARES technology offer needed. Financial request its to forbearance as We one

founding improve stay driven Our seek refinance to expertise navigated will periods their volatility Since successfully in them modifications well-being. their to the company's external financial our in mitigation customers XXXX, assist we opportunities market for with loss of strategies help influences. or and have homes in disruptions operational to by

and by the confident And our to we the address in presented challenges ability impact current opportunities of COVID-XX. are

are to investors Web our or phone. post such to encourage received, to site. we Thank Q&A you. out our will email questions we Investor If with a Lastly, by Relations any reach team any questions

Isaac Garden

Financial Services, Inc.'s concludes discussion. first-quarter PennyMac This earnings

at For any XXX-XXX-XXXX. call questions, visit you. our department our at website or please Investor Relations Thank