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PFSI PennyMac Financial Services

Participants
Isaac Garden Vice President 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 third-quarter 2020 earnings discussion for PennyMac Financial Services, Inc. The slides that accompany this discussion are available on PennyMac Financial's website at ir.pennymacfinancial.com.

Before we begin, let me remind you that our discussion contains forward-looking statements that are subject to risks identified on Slide 2 that could cause our actual results to differ materially as well as certain non-GAAP measures. Thank you.

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

David Spector

Isaac. you, Thank an quarter reported and earnings a from PennyMac by increase higher second driven production income record Financial in in servicing. both share was diluted income million of per $X.XX. Net $XXX.X earnings or

issued $XXX an will by million explain During the later $XXX quarter, million X.XXX% my Notes additional which Senior end, quarter in of after upon followed Unsecured I we presentation.

quarter and fulfilled $X.X prior while from third increased the by $XX.X XXX,XXX and UPB, the correspondent in stock from lock acquisitions prior quarter up of and quarter. XXXX. finally, up for XXXX, the Of for were UPB, balance, channels. quarter conventional XXXX. XXX% XX% XX% consumer XXXX. XXXX. from the $XX.X declared quarter quarter from at pre-tax cost of the from growth up quarter Board quarter dividend billion loans across the strong production were were of third from of up per continued cash was quarter We the $XX.X XXX% was third billion broker volume XX% XX% unpaid up end Production up segment from common an was share of Total XX% XX% from billion for up of billion of quarter quarter these, per quarter billion prior third XX% $XX.XX income the PFSI's also in the the driven totaled share. direct million. up direct up of $XX.X shares million, repurchased lending the locks $XX.X And third value and from of direct from of all I'm $XX.XX performance channel. the note and correspondent principal approximately $XXX.X in PMT of the lending volume pleased Directors billion channel, in to Book $X.X in in Government that UPB, the Direct in prior $X.XX third XX% and approximate quarter prior a XX% to from PFSI's prior up the

third on loss excluding quarter from million Servicing prior pre-tax the The $XX.X valuation-related pre-tax in million, for in pre-tax was quarter of Moving million share. and per income, to a by the XXX% included were was hedging COVID-XX. from value million, million related $XXX.X X. in a decrease XXX% quarter segment gains. $XX $XX.X loss prior impact income of of a in other million These loss items earnings of offset up and pre-tax in the these losses, $XXX.X from by $XX.X Slide and to XXXX. items items the third the quarter loss driven of XXXX. $X.X of $X.XX mitigation of primarily segment, diluted and Valuation-related Servicing net activities million Pre-tax up increases MSR a recorded The fair partially

from As of of totaled September prior quarter by high in XX, offsetting from Servicing production X% of XX, prepayment almost XX% billion September This the activities. end driven $XXX increase and UPB, our was the elevated increase XXXX. portfolio volumes an

income million, the X% to in by PMT $XX.X under up June million management from down was million prior Segment million quarter gains assets Our Net as billion $X.X in of from the $X.X $X.X shares PFSI. million, down quarter, XXXX. related and from which of Management included $X.X delivered from of segment quarter XX. $X Investment the down pre-tax prior owned totaled third revenue September XX, in

scalable was XX-year specialists. disciplined built is with not processes Financial sustainable growth than approach long-term development its built PFSI's platform to and discuss turn and let's unique systems a over industry-leading to includes through Slide growth. more X mortgage Now and PennyMac organically for why among history. acquisitions This

have We eight distinguished includes directors. a by Board governance qualified and led strong and that culture independent highly compliance maintained a

committees governance Our oversee risks nine includes structure key that and controls.

Additionally, business external parties. we and oversight partners have other third from regulators,

deep REIT be with the tax-efficient PMT, a banking expertise range over manage, we with for relationship growth long-term The tell experienced proven team. now across management to PFSI and we achieved. core X,XXX and by proud mortgage today and advantage dedicated we have am to with that to competitive investment has access PennyMac-ers capital. capabilities success have permanent synergistic of that a management the is you have we led full I Our distinctive a to highly

have, that XXX relevant fact, of industry In PennyMac executives experience. the on years XX average, senior-most

to platform $XXX According the to in the were third over value. has Now PFSI's Inside Slide franchise long-term producer built. have mortgage last about let's of approximately billion turn Finance, we we the months, loans substantial XX with the X industry-leading Mortgage UPB largest and mortgage production. country banking talk in

Freddie Mae, securitizations, We Ginnie three broker diversified with of delivered Mae-guaranteed source loans and largest a of have we correspondent, Mac are production from one all the and direct. channels: into model direct and Fannie consumer producers

later our direct our us position well business As growing correspondent leadership for growth rapidly purchase market. on in sustainable in the growing the broker I presentation, detail and in position will lending more and

production, rights creates servicing flywheel a its PFSI turn, portfolio Importantly, of retains and in all servicing loan mortgage which, on growth effect. the high-quality

and driven MSR primarily growth Our our been by time has time. in opportunistic from been acquisitions production volumes has with servicing growth supplemented to portfolio bulk the

Mortgage portfolio to we in our XX, $XXX UPB. the earlier, States, at largest As Finance. residential And I now servicer mentioned June over in the billion eighth of mortgages were according is Inside servicing United

recurring provides a of the would life natural would which event rates, These interest Our of the loan loans a the in dynamics asset. valuable revenue production increase, higher in the more And the hedge create servicing we of service. expected life income. result MSR captured over to business fee

success, and drives platform presence servicing we continued leads for consumer banking have in industry-leading scale a our nationwide. our new built and channel. originations Mortgage an Importantly, portfolio for efficiency direct, both requires with higher-margin

X.X and leading beyond technology consumer the banking ongoing portfolio industry and proprietary mortgage vendors. valuable relationships, servicing have well has world-class, million we across capabilities built Our with our is platform almost systems

to track record turn discuss creation. Now profitability of Slide let's and value X PFSI's and consistent

you our see seven businesses more servicing. PFSI's an to slide, delivered business. $X.X of The by strong As low the common through years reported and disciplined base the return common our And a tailwinds and current management value on we've mortgage and equity our PFSI's to record first return growth since COVID-related annual than return on have income founding, over drive of IPO through from people, through in increased has or varying excellence $XXX of combined made average rates over our have on on This as our contrast the to in results investments to PFSI is shareholders years diversified market operational over evidenced advances and with public Net the since stockholders' we including model, attributed this technology in million not is income scale book also environment. a to XX%. with XXXX, infrastructure returns significant grown PFSI maintained The net can net charts historic stockholders' XXXX of and XX%. our to results the our In rate to COVID This financial XX% is rate year, in company, an average earnings $X a nine compounded in of equity. cycles now and year lenders billion the only have income became mortgage our or billion. average loan share equity unprofitable, business perform per due in industry-leading consistent performance earnings increase in months this well XXXX, production many substantial crisis equity retained when annualized of driven XX%. us we but have the positioned at

The X let's Financial's discuss broker growth our lending to Now to earnings significant and increased a consumer growth. power. is contributor Slide direct turn channels of faster PennyMac and PFSI's earnings

As channels. production driven capturing mortgage PFSI as has this page, growth in to of chart pre-tax result scale made growth is profitable we've of growth fulfillment the our upper process. this the significant left the on you in investments see lending direct the income can been by a the end-to-end

of a full-year XXXX was we our addition, pre-tax growth refinance channels. at in as billion, months Production for pace these a $X.X to demand of as the planned segment from current well significantly hire nine as million result In nearly continue first income meaningful up XXXX. the for $XXX

growth In our of segment been activities. addition and the increased portfolio contribution, loss to servicing the earnings providing driven mitigation PFSI with scale, with increasingly by along earnings Servicing recurring have

finally, Investment in on income, years, changes, XXXX upper on As has chart thus more along in results valuation-related grown you than results the equity. the in pre-tax have growth can million. far operational of PMT's $XXX And our right, with excluding see doubled full-year from XXXX with recent Management the

to financial remains the macroeconomic while So performance persist exceptional uncertain, through expect outlook XXXX. we PFSI's

to channel, turn X correspondent large banks, their let's orientation production PFSI's had purchase toward channel, discuss we money Now Slide most time reduced entered PFSI's when dominated which our at is developed which business mortgages. a into historically to this participation.

the this correspondents sustainable focused market. business, grew customer we we strong those orientation purchase a As more with towards our on growth

has last mix to the lender Mortgage second in Finance. consistently XX purchase were country industry according over our purchase result, months, a and largest the the we As the money exceeded Inside average,

toward loans broker this to our purchase orientation expanded we As expect direct continue. we channel, strong money

grown continued the enabled PFSI has grow gain smaller the which share talk is I mortgage despite of XXXX origination origination to volumes expected for evidenced has since XXXX, slide, from market. unchanged in strong positioning and XXXX, further during purchase every declining about rates XXXX The in purchased XXXX in year by lending U.S. as to for market performance. Our orientation essentially loans production PFSI next single markets our money market origination years as higher and, on will remains

for now opportunity to origination channels, from able turn originations Federal Purchase $X.X mortgage is Slide expectations PennyMac's PennyMac technology trillion, robust been as near environment in continuation X to XXXX. on to positioned $X.X its range to These increase successfully forecast investments. overall total result to three rates in originations mortgage risk to trillion originations Economic structure, We've an discuss increase significant the supported position. Now the through let's are to XXXX Reserve all grow infrastructure have to refinance expected hold the for this forecasted will XXXX market capital disciplines levels. originations and increased a over all-time a and X% return market XXXX low year-over-year, well current total rates of XXXX and indicate forecast forecasts XX interest to by trillion. market management driving capitalize our of in $X.X are that and while market.

to Slide across businesses. market discuss to XX turn share PennyMac let's Now

its share across year, As production a mortgage years. estimate servicing XX.X% strong growth slide, several has record $XXX production of for can PennyMac UPB be market seen of XXXX. on over nine in we last months our XX.X%, the correspondent the market up With is billion this from channels channel track the in this in and of share first over

up share channel. in in X%, that nearly year. estimate grow growing in also to direct our from year-to-date, we servicing consumer We increase of the non-portfolio in nearly And X.X% billion initiatives is reflects a growth success last are consumer this with the $XXX direct UPB of PennyMac's and continued market confident place XX% portfolio originations, channel. over The

broker direct has as position grown well. substantially Our market channel

channel nearly have market XXXX. our X%, Currently, expertise in to we apply relationships. As our the we a broker able X.X% correspondent business-to-business in channel from PennyMac estimate share double of been represents to

we now up in from X.X% Finally, of service that all to our the approximately mortgage continue at And this estimate portfolios December X.X% outstanding United year. grow debt servicing XXXX. States, XX, we

we performs and the processing centralized in and channels. infrastructure to the organization, turn underwriting all rapid Crucial which PFSI's fulfillment growth scalable XX architecture built Slide to mortgage banking. is production for Next, have to let's we've discuss enable built mortgage our loan

than fulfillment We and process for an greater underwriting fulfillment enables when processing market have change to which allows our scalability traditional model. a developed direct end-to-end channels, for conditions lending and division our mortgage remain flexible

and assigned across and drive specific that XX markets. locations functions, focus talent and growing expertise process a labor to Our are allowing platform cost operations down with we have with a us on then significant operate process. is down loan offshore, for more efficiently, more which Furthermore, broken over task country the origination specific to attract distributed specialists into in

the at right. on Looking chart the

September mortgage XX, increased have PennyMac-ers servicing for base address our employee production the increased ended the over X,XXX by for requirements. and to We months nine demand primarily

In XX% year employee fact, this mortgage our servicing in has of production growth been roles. and

we continue we've infrastructure, up are is a made and per ago year employer workflows. Additionally, the realize investments production cost of to per and loan the significantly loans technology down, in as from benefits

talk about turn let's to investments. focus for technology and XX our current Slide Now

enhance upgrades the In lending to direct continue growth consumer to initiatives throughout broker digital and businesses, origination our we addition expected direct focused to to of non-portfolio technology our use investment in reducing our are continued in process. portal, is self-service direct the cycle MAC improving POWER. our originations. our lending origination ability broker portal, workflow of generation consumer Within capabilities via With entire borrowers channel, data our enhancing marketing analytics, ongoing for lead our our channel, the drive to the to use length of thus enhancements and loan And the on success. critical further increasing include we

our further brokers We best-in-class their are capabilities. also extending to and solutions self-service to enhance our tools

is production division further loan of making to documents. distribution fulfillment mortgage improve our and enhancements automate the and Finally,

use fulfillment automation. also closings online are We and increasing the of

of broker, a and proprietary specifically the our investments operations, robust will drive scale PX, sales will technology and Combined technology, for to portal, originate. higher new will our servicing reduced and systems consumer productivity, SSE, these improve enable platform which at experience provide with improve a cost future workflow correspondent and to the All these growth. in support and volumes operational

over was turn was strengthened the update liquidity credit and PFSI its senior capital. unsecured an well and of billion PFSI's to of $XXX initiative as and PFSI's add million September to short-term view use liquidity collateral. XX liability our institutional important pledged as among on secured $XXX excess Net diversify and corporate that pay consisting facility. issuance inaugural $XXX for strategic a billion approximately competitive leverage. structure, proceeds Now in let's available liquidity million of and ratings balance debt milestone further revolving debt with increased no advantage. of corporate October. in October in to on drawn may down XX, liquidity $X.X million has received $XXX cash increase investors unsecured issuance the sheet investments after overall The with raise to position near-term and new debt, and X-year in of This resulting be a immediately $X.X in issuer represents long-term time. short-term million capital retiring our facilities improve to term Slide secured an We is our now approximately

significant ongoing in specifically As I across to and long-term mentioned success, our earlier, our operations we platform have fulfillment lending investments direct ensure mortgage divisions.

we volumes significant believe current production have activity. given also low We of liquidity, capital requirements to to support on uncertainty, and by we viewed And with work common other favorably will is also it prudent increased basis. and evaluate uses the continue excess of basis. which a ongoing regulators liquidity economic Furthermore, repurchases is EBO excess share on maintain counterparties we finally, an daily including to

in to over to and Chief update trends businesses. I'd production an our Doug Financial's for it volumes Jones, Officer on turn servicing Banking Mortgage like Now PennyMac and

Doug Jones

Thank you, David.

$XX.X in Slide in quarter, to from from quarter loans, the PMT, acquisitions UPB, third acquisitions acquisitions XX% totaled loans. XX% up billion. XX% totaled and and XX% and correspondent from the the XX% and third acquisition correspondent October, our of $XX.X the from volumes billion the from in totaled up a of in up third billion up quarter prior prior locks $XX.X were the XXXX. quarter prior XX% quarter locks from UPB, XXXX. correspondent turn billion fee in UPB, $XX.X for XX. Government from which correspondent totaled conventional the and $XX.X acquisitions, up prior billion UPB were Government Correspondent earns the PFSI the $XX XX% fulfillment In quarter. billion quarter totaled were XXXX. government quarter in third-quarter Conventional XX% from of loan XX% Let's

Interest third channel totaled in Looking we up from center from prior in at in of XXX% quarter consumer quarter originated direct UPB quarter the loans, $XX.X $X.X totaled XX% and quarter October, XXXX. billion. the commitments UPB and the at in locks pipeline the billion in direct XX% third column, billion In lock the rate XXX% XX $X.X billion. $X.X quarter originations October our the totaled prior The third committed XXXX. consumer was $X.X from UPB, up from and the of billion

direct given third totaled up to from third at broker prior the Finally, our direct totaled was the the third $X.X The billion committed in billion from the up in Interest XXX% XXX% quarter UPB, shift October, quarter originations in in UPB and In of quarter lock remained margins PFSI's quarter, billion UPB broker broker and direct. rate the second $X.X pipe and originations from XX% quarter XX and from especially XXXX. $X.X XXXX. was volume elevated, locks of $X production the October billion. totaled $X.X consumer billion. mix XX%

all lock up on second I quarter the billion second high in discuss quarter correspondent portal. were historical lending correspondent increased correspondent in to $XX.X from the the margins U.S. of from Margins turn proud channel correspondent efforts in remained $XX.X which report quarter in Slide am PennyMac's second let's have higher-margin, correspondent in remain down to segment new to and in Production channel highlights benefit quarter aggregator levels additional the from commitments, as PX, low the in and the continue PennyMac of volume largest XX and volume clients of $X.X volumes Now overall channels. XXXX. trends billion the a or that now record third basis. to but of the third from return our to the migrated levels billion Government quarter. in in best XX% UPB, increased the

and volumes capacity. recent as and quarterly growth a fulfillment sales combined direct, on Moving consumer advanced record result modeling the in to with achieved analytics, we of

and low-cost about. that end-to-end to David process talked Additionally, benefits had see we from fulfillment continue infrastructure our

initiatives the the historical rate lock and million the interest at of up in $XX totaled in $XXX $XXX in third also prior million the commitments beginning the relative elevated of quarter launched to XXXX. remained result a but decreased year, quarter of modestly quarter, million levels. Margins third As non-portfolio from the

and Lastly, in our presence by and channel. record channel we brokers approved volumes lock in our larger in funded saw broker the direct increase driven the

have XX, X,XXX market. in the XX, we the June peak up Our XX,XXX the estimated historical believe totaled remain September brokers sellers to approved from at but on a continue second and Margins active non-delegated basis. from and can brokers XX% high garner seen levels share quarter from decreased in we the

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

XX.X% includes up from the PennyMac quarter, the prior Our the servicing servicing PennyMac in portfolio Freddie grew XX% to quarter, of XXXX, third Financial's Similarly, which quarter. prepayment prepayment of mostly up sub-serviced from June reported rights September portfolio driven by elevated XX XX.X% prepayment $XXX.X owned growth Mae of billion in speed XX.X% volumes from end that activity. prior Financial's the the UPB XX, third at by Fannie in portfolio, increased record XX.X% production PMT, mortgage in portfolio despite Mac and a drove and own speeds X% quarter. the to from

significantly last now PennyMac quarter quarter, volume in and concludes it and EBO Our modifications of of billion, presentation, X.X% owned portfolio was as mitigation portfolio a Andy quarter, had also of over a rate sub-serviced Officer. XX.X% to while borrowers down UPB XX-plus from forbearance end loan as Financial turn of Financial's from the X.X%, from at activities. day significantly million XX $X.X UPB down like XX-plus Chang, result day my June $X from from delinquency prior substantial begin $XXX up increase to delinquency reported Chief rate to I'd last The completed up emerge That loss a of the billion, of at plans. slightly XX.X%, totaled the our

Andy Chang

from will of you, Investment assets and X% at information. factors discuss highlight read Management detailed PFSI's some $X.X due management On financial Thank XX, Doug. to Slide which up million, June from shares the release billion included $X.X under press we our the results. In Investment expect recognize Net segment, encourage XX, value. then September of owned the totaled gains to the for to some million you XX, which I resume on trends did increase our in PFSI down more primarily third in key We not XX by for revenues PFSI's were in to hedging earnings. do $XX.X the related summarizes Management not book prior PMT's our incentive Slide results impact PMT quarter, time. quarter, fees, PFSI.

impacted MSR The Our to income. the offset production than considers fair comprehensive moderate partially rate foreclosure value increased quarter gains asset COVID-XX. third hedging PFSI's on in our hedging and The other $X.X costs designed driven by decrease is in of impact by more by changes also strategy interest the our record the the of modestly value decreased by was of million estimates MSR fair offset in was and quarter. and of production-related income

turn mix profitability conventional volume net down XXX accounted from from especially shift broker broker elevated, PFSI's Slide PFSI's earlier. channels but XX% up look fallout-adjusted points revenue revenue production PFSI's fees for to of PFSI's of the margins the an with breaks slide XXX to the quarter lending direct. XX the The Production expenses, third of loans. direct and income. received to This for fallout-adjusted own of in PMT lock and Revenue production direct impact at fulfillment for in was loan quarter, consumer account pre-tax on basis and segment PFSI's Consumer XX% represented loan third of year a origination Let's over each outsized segment. the correspondent basis remain earnings. drivers from have Production lock channels, per contribution including points

channel, Our points XX from ranging correspondent basis points in vary in XXX to approximately direct. by basis consumer costs

production of expenses trend expected locks are a to higher. lending, As fallout-adjusted toward our to as production continues shift mix direct percentage

to let's modest Valuation-related profitability loss for from interest increased from forbearance, was EBO segment. related mitigation and Pretax quarter-over-quarter fees shortfall prior expense, million $XXX.X a in up million, the our million excluding third of as to valuation-related Servicing changes, the fees quarter revenue Slide Operating quarter million Servicing XX income higher loan-related increased $XXX.X discuss portfolio. result growing to of significantly million $XX.X $X.X the by revenue driven the turn record a XXXX. servicing our $XX.X segment, Now in of and Payoff-related as activity bought status performing to and of related loans in $XX.X release quarter delinquencies were recording while to active to the most in on quarter-over-quarter. increased losses third elevated which million loans COVID-XX. out the prepayments, included million includes expenses returned for loans emerging changes from remains and higher provision by immediately. related by $X.X credit on driven

turn trends to and mitigation Slide forbearance let's portfolio. MSR and Now XX PFSI's discuss for in loss delinquencies,

at sufficiently over activity as advances made modifications. related XX XX% approximately XX, to current up completed those, were June since plans by became or advances more at $XXX claims reperformance. our from requirement. June to at the in have at Of were expected As delinquency XX borrowers XX% XX outstanding P&I X% are you as continue prepayment Ginnie were of XX forbearance six in to Of from of September June borrowers at the June continues offset forbearance can September in XX-plus at XX who XX.X% slide, XX months. was percentage MSR decreased partial forbearance next at from Mae's XX. have new or exited PFSI's plans see loans XXXX XX.X% than million and down in on since the to were and XX.X% X% September The $XXX day million Servicing XX, the FHA at rate to increasing June XX.X%, No forbearance exited. were cover XX of portfolio June who been

be mentioned, claims, the Doug XX% bought six remain resecuritized was for PFSI's were conjunction for delinquent predominantly billion of loss resecuritization. X% At out forbearance. loan months in and government loans were in FHA of current third be which portfolio quarter. related UPB As a immediately. the efforts to $X.X September modifications, of eligible to with in was in partial in loans may mitigation XX% must which minimum XX,

to it I David expect levels closing that, XXXX. some resecuritization We like to would continue back And remarks. turn and to with reperformance elevated over into for of

David Spector

by third and across and Thank PennyMac from channels. performance broker and increases earnings Production income Record Production direct both channels outstanding Financial resulted all income you, again our record Andy. higher-margin in lending the delivered segments. driven Servicing in quarter consumer our growth continued from in

further country. We growth now capacity employees our throughout continue to X,XXX for add PennyMac and operations more the have than across

in record history, production servicing speeds, record than a profitability to including Financial significant grew public has Our by as the earnings activities. and over our and mitigation track $XXX elevated more seven volumes, offset contribution COVID-related creation its long than value throughout prepayment servicing of portfolio consistent PennyMac billion which thanks loss UPB, made to a more company's driven company. years a

continued to business Our positive nearly driving growth environments. trends million in success. leading company across our position and PFSI's lending loss are Production our customers purchase succeed oriented servicing market, to activities business, the different of and the Loan historically mitigation servicing portfolio X.X market The expected in direct

uncertain, exceptional macroeconomic expect we So to persist outlook financial the Financial's while performance XXXX. PennyMac through remains

answers we questions post any team investors email our with by Investor website. Relations to such to questions any our reach to our you. received, Thank will and encourage questions are If we Lastly, these out phone. or

Isaac Garden

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

For relations our department investor call XXX-XXX-XXXX. please at ir.pennymacfinancial.com or any visit questions, our website Thank at you