PFSI - Earnings call transcript Q1 2024 | PennyMac Financial Services, Inc.

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Operator

Good afternoon, and welcome to PennyMac Financial Services Inc.'s First Quarter 2024 Earnings Call.

Additional earnings materials, including presentation slides that will be referred to in this call are available on PennyMac Financial website at pfsi.pennymac.com.

Before we begin, let me remind you that this call may contain forward-looking statements that are subject to certain risks identified on Slide 2 of the earnings presentation that could cause the company's actual results to differ materially as well as non-GAAP measures that have been reconciled to their GAAP equivalents in the earnings materials.

Now I'd like to introduce David Spector, PennyMac Financial Chairman and Chief Executive Officer; and Dan Perotti, PennyMac Financial Chief Financial Officer. Please go ahead.

David Spector

ahead. go Please operator. Thank you, and our thank for afternoon, to you quarter earnings in first participating call. Good everyone PFSI reported quarter. net return income of $XX million of in on and X% the first equity an annualized value These $XXX net hedges accrual. $X results and legal mortgage of nonrecurring million fair of a include million servicing declines of rights on

business was items, and continue we to the resilience of Excluding were strong. as the these impact PFSI's XX% very of model. our balanced strength results our annualized operating ROE demonstrate

quarter $XX and million continued pretax volumes anchor value principal nonrecurring excluding impact contributing were X.X pretax portfolio Our income in acquisitions lending higher growth items. Production profitable, performance income segment billion and and to customers. in with servicing $XXX balance, by to in billion million, channels. loan nearly driven unpaid portfolio the remained million with continues $XXX financial to our driving market-driven And growing direct of Total $XX the our our large first servicing originations in

to $X.X Turning trillion, an Current from total for growth reflecting averaged estimates estimated in third-party XXXX in originations $X.X XXXX. origination trillion the market.

Federal mortgage the It we the is decline, will the of in rates, supported to longer many estimates look were of believe X% these will it optimistic to the expectation decline interest of estimates reset. higher origination In higher. third-party is remains or In further their we home strong a demand be rate dependent the that growing, multiple up into of lower undoubtedly higher for expect expected longer current by estimate years, rates note for last $X total to market volumes higher we up group demographics. their our with levels. and range, when to back However, Though remain borrowers a purchase interest X% current we from with normalized cuts the originated second pent-up this to upon constrained half beginning these is from X market believe continue from market expectations With originations the key rate rates year. and for these trillion borrowers Reserve interest mortgage levels. mortgages to and driving buying a approximately of refinance rates do more environment, of currently,

As I increased loans well on when to volumes do will we discuss, decline. are very of refinanced capitalize rates positioned

SSE portfolios. potentially service of and new servicing the our the potential larger a other large implement we able business many we will our already with industry system to actively by growing our -- does ] per channels. of and in portfolio, with However, one current servicing regulatory changes, a unlock have we of our remain proprietary originations our built [ surveys of maintain loan to cost are our were is industry smaller work provides borrowers its since versus has stakeholders. base we to was beyond for excellent quickly servicing associates beginning system for forbearance to expanding prudent lowest market flexibility more Not correspondent to SSE. system due position of to borrowers to servicing when it's also cost at during our include and some only the and servicers we the with our many automated focused leverage -- for utilization program but confirmed in seamlessly increased helped and systems adding of additional customer value friendly multiple opportunities than system. in XX% large exit One to as drive accommodate our related are user of result opportunity These servicing launch and our down the our service in XXXX, servicing environment, have many itself of to what continuum pandemic, a and growing are allowed us our we changes opportunities subservicing part on to which exploring interface, P&C, the enter intuitive sellers looking highlighted allow

mortgage by Additionally, technology. comprehensive alongside with create technologists we mortgage banking leveraging of have looking been us, approached a in numerous the SSE marketplace industry innovative to next-generation partner to other technology

required, advantages While a by software other potentially the far. we marketplace in the we SSE's servicing that opportunities meaningful, upfront multi-tenant We line in SSE commercialize into believe technology to versus meaningful industry. could the we a and look servicing are systems and time longer servicers have to thus also industry-leading competitive encouraged platform, be other investment would a our are licensing explored

be other we right we will further monetizing thoughtful the for SSE, customers and stakeholders. committed remain However, our doing in and thing to

ability first this our mentioned of highlighting I generate last and was increase quarter origination cycle. rate we is quarter the expect As interest results earlier, and operating our significant one year first quarterly smallest in what markets from annualized XX%, strong to of the a ROE

XXXX, persists a borrowers interest to As The earnings supporting provide to a time servicing that comprised driving rates, expected base continues where remain rates of profitability. extended of an particularly in on have low to majority continue of which income we very to we interest look period locked the for that our level of build of majority expect scenario our earnings, continued portfolio elevated. in these servicing results in operating is our be

due in of low overall the recent home delinquencies well substantial years Additionally, due remain appreciation. of the as home strength consumer to price as to continued equity the accumulation

and largest In us current newly with in production the position assets acquire unique to Our mortgages of mortgage to the as multifaceted consumer decline. needs higher in originate producers division meaningful a portfolio. our provide of country recent one our have direct And or the volume rates with originated expect of X% for we rate ] do and del provides periods, population approach of to mortgages this added borrowers we when [ to strong market.

remain rates for this borrowers larger driving is longer, future. in expected population grow, of to higher the an even opportunity As

UPB XX% improves. more servicing $XXX upside segment than review will loans of financial drivers at roughly higher our in billion our As performance. I of to of rates, potential when PFSI's these additional the origination in for now will or market in XX, who expectations Dan, portfolio were it production March our driving mortgage turn quarter over first the

Daniel Perotti

$X.XX of per net Thank you, of $XX earnings the quarter in income for David. first an share or annualized PFSI X%. ROE in million reported

dividend these to on results items included impact mentioned, Directors was $X.XX. million negative Black additional hedges arbitration declines and to cash net share. was down retained value compensation program, common and fair result. per per The per slightly declared related of $X.XX growth the final PFSI's $XX.XX, awards a annual these David Book diluted MSRs the stock As more earnings prior Knight of from issuance also to share $X earnings. million due $XXX on first of value interest our related of the of primarily of share in quarter Board accrued quarter which end, offset equity than

down first maintained quarter. was of quarter principal to quarter. was one billion in volumes lending from profitability decline production $XX down in our in in the $XX billion, of dominant prior origination quarter prior balance, quarter with slightly XXXX. The focus $XX the correspondent PMT. unpaid position XX% for PennyMac fee-based down its from driven overall. acquisitions by acquisition prior total $XX Total for the million, Turning income and fulfilment was account PFSI $XX were from segment. the and billion from the fourth $X activity $XX was billion million our on Pretax in billion

channel correspondent second providing us driven expect us at loan payments end quarter Higher expense same in X% the the who fallout as from of of an in alternative Production the growth refinances was in increased quarter, mortgage XX billion, lower We strong last up XX% with from margin quarter were the first and of quarter. approximately streamlined billion. channels. number this by quarter approved Our April XX% Consumer Despite as was primarily higher rates from in and $X.X margins overall was do quarter, as locks the fundings strong The Broker number direct up from to In lock broker total quarter X,XXX, of declined lending position during were the which top from points slightly prior that Direct, XX higher in points and strong their locks locked origination up highs, we market expected a growing government included were in channel of option. than for to essentially are the an levels we loans brokers to primarily XX% volumes recent basis and over the look are of XXX prior expected XX%. $X.X trends share In prior to higher up PennyMac and net Direct, from channel originations a the volumes to and basis business channel last for in continue points, due as year, continue basis we in quarter. were expenses brokers up basis increasingly see reported mortgage XX last volume impact unchanged. to opportunity points, borrowers total up to leaders. smaller in market, previously time rates. a continued were to Acquisitions increase with

Servicing recorded pretax income The $X segment servicing. of to Turning million.

pretax PFSI slightly portfolio Earnings end valuation-related other smaller correspondent at of of portion in year changes X.X Operating average XXXX. due a quarter, items, seasonal been recent in tax fees to servicing nonrecurring deposits but quarter and P&C periods. to income the a decreased income production has result primarily up fiscal basis smaller acquiring payments from due balances the slightly. was prior as ] due UPB.Loan Excluding during million owned [ the a portfolio, growth balances Servicing larger average the and points on to PFSI's of -- from increased or conventional $XXX and of were expenses

the $X.X PFSI's own the EBO managed few the losses million which from Hedging was lower of custodial increased for However, value quarter lower billion income funds quarter. slightly, balances low March average MSR the due fair higher yields during $XXX of The up expectations in prior by at activity to quarter, custodial this MSR portfolio rates drove for million. million, earnings mortgage contribution $X.X from on at year-end. driven higher cash of at by end flows were the the we remain next $XXX XX, billion totaled expect $XX prepayment for and quarters. Realization PFSI's and to down future. increased

quarter elevated quarter. million $X contributed assets hedge quarter, to Our net pretax interest the increased Provision to hedges rate the was during $X.X PFSI's were prior the rate Management an and liability. of certain due costs. in of XX.X% exposure to resulting for income effective segment end tax positively management awards, volatility income impacted of Investment with the positioned limit tax stock-based the were compensation from during expense under million, to The tax unchanged which vesting

note In open it servicing and capital. of MSRs Mae notes for up $XXX February, questions. August Operator? X-year advances on term $XXX required and Finally, issued million mature secured of secured ] XXXX. by million Ginnie a in due [ we now new to term subsequently We'll

Operator

you. everyone related KBW. only question to [Operator Services, George first we Bill questions Thank would Financial I PennyMac PFSI. like with to remind is Instructions] from Inc. The take or will

Bose George

the about just what I of quarter. the could hedging wanted ineffectiveness kind first you just walk bit of this I to guess, a through this drove quarter? some ask little hedge about

David Spector

Dan. This is

mentioned, way. were that increased loss given quarter during the as that first I of more cost either So than due were pretty the the interest that MSR with exposure a shape options, that inverted remarks, exposure rate The curve would we the the in we a greater and bit the the most volatile to had the volatility of hedging the as were quarter of that we the levels hedge of I move. way significantly implied seeing whichever yield lead quarter, The elevated we inverted reason a to interest -- elevated the positioned during volatility positioned to of significant our position. during meaning the direction really reason quarter, was, as if rates maintaining rates mentioned were typical at potential and well cost overall for and as the in onset shape an

which insured or if need be so we to that exposures. sort we identify hedge to we lost needed costs, hedge certain wanted accept to to insured it, be And money open take of up be if on those would the would

certain we And so exposures. to elected open up

the in that loss volatile hedging led first rates significantly the to As were you quarter, know, and that interest you see.

we've moving into the our we're repositioned second As quarter, hedge.

One shape -- X levels overall the that the changed. hedge have volatility volatility changed of service in the factors also We changed, implied of have the yield market. really have is options that

also improved cost in has a would hedge that gains expect losses I hedging. outlook more of so we and the repositioned call what And sort in traditional profile would And our to of we've rally. a where sell-off

And so of we same same expect, type forward, don't the go of we results. of as recurrence -- the type

Bose George

And VAFP you of could the turn, improve the from program announced for That's think to valuations, and I otherwise VA the ask MSRs? in foreclosure. remove then want helpful. purchased guys have you going especially to lot Okay. a exposure then the where the VA risk tail servicing Do they that in that this VA an

David Spector

Yes.

to customers I there place remove [indiscernible] around bit us. program, it. program, risk strategic controls it's advances recognize I taking I'm some of concerning that some existing continue a VA a more So look, foreclosure in good tail for think around down a will the is stop the little this and it's It's to and I cat level fallen some program those because it value put are the really but to confirmable hazard because of think that loans

two in this many phenomena to really rates. interest a being also of that. There's see at the over in polar where rates great higher tale think quickly. portfolio kind have really really rates already go position.And strategically as the really in done that a I be the of discloses there's today, increased the think that I'm cities the so VA sits more. the kind have them low marketplace But of fact And I a where the devil engaging pertains loans of it don't borrowers the as because is on about. concerned going a I lot to Dan of because the work VA can ones we've details meaningfully

Daniel Perotti

Sure.

loans $X.X in they billion at for alternative that in we've UPB might an would that that today about portfolio be servicing VA the help delinquency have what fat outstanding the loans where and elsewhere would look their serve As don't it's or loss mitigation our VA that position think guidelines needs. We we under loans be eligible seen. of X,XXX of waterfall

our And versus today. a so overall, portfolio, total small portion

and looking the mentioned, as the of that. in sort go-forward go-forward VA could potential terms downside But our implications and the be portfolio, helps David servicing, in more is and VA play mentioned, to some today of risk at if loans of cases. In hazard comfortable around we eventually VA certainly for with of beneficial the terms the others have servicing And of valuation I remove delinquencies could somewhat current that the we out. concern as and would how where around extreme moral get delinquency

a little would So benefit I have value. terms bit of net it the say think negative a it's whether or impact in to servicing early

Operator

of Harter line from comes with Doug question the next Your UBS.

Douglas Harter

market and originating view you that Mac's quarter new how second lien, about Can the announcement? would was in you how the talk Freddie for

David Spector

we of in fact is where think the out Look, for which I The see that low supportive came by already in they that's as out kind issues that program. and on to the we refinances, as -- market. they cash lien being anyone refinance see we not are into the I done I GSEs out the rate look, place great cash with second mortgages, getting marketplace lien second think in why of offer very are we a be sheer that And think origination.

their that follow Freddie's on suit that would just I will I portfolio. expect Fannie think announcement,

for million be our customers. key perspective, -- second. of that's some equity. it's we $XXX a originating From to It's very need borrowers think to would their want creates month borrowers product or in really close-end addressed that a our we're think meaningful. an It tap think important of north going component paying who that I tool private And product think our are I of a offerings to standardization -- industry. I that I the it's I it's But excited liens. And on around low capital important issue But think fact some mortgages and the wage a is it. it by second get the issues out. crowded refinances cash I know about it's some the offering off concerns getting use very people taking of there's around I'm that something

Operator

comes Your from next question Piper with Love Sandler. Crispin

line now Your open. is

Unknown Analyst

questions. my taking you appreciate I

be rate comments, on pushed servicing out. current rate key seems that Just will driver based operating it of some being environment, your results, of given cuts just the the

as And on Given appetite you have mind XXXX? move what's servicing growth MSRs? target this for your - in portfolio acquiring you do just a also through

David Spector

this Well, of direct grow, And growing probably of as our the don't, goals is a continue to I'm we out really as really What we organic great flywheel we to really we little the this built see faster continue that of buy side that, our - great so, continue byproduct to portfolio. build of strategy. fast. done consumer lead think company.We I and as balanced the to such challenge.And I place, I expect will strong a that a refinances would big going servicing that offer rates ice be see correspondent on I channel broker focused and in direct have the model model presence have continue to and in that space, a meet melting and growth can expect to a go our we I the of that cube growth when And servicing don't not, we servicing even clip. in a size organic grow. at I'm XX the do we've I servicing grow business that portfolio to scenario could really built decline, don't have port the we And a in anytime right to in that a future. get terms on years space, borrowers, the blob growth growth the job to we're big, that company, the think with in takes to continue our

Daniel Perotti

Yes.

that, more of of look $XX and our billion We've billion give our at $XX overall per through a - lending platform to direct adding origination/acquisition bit if correspondent quarter. channels. been to to definition pace what typically servicing little Just to you the

runoff have that. We against some

review quarter portfolio sort And of portfolio.We $XX look characteristics generally as as well a the a return hurdle, portfolio terms loans that, that pace we are mentioned, although for loans, - And do any math not investment, as we if of may to as a out come have that the to we look meet acquisitions. that that, note our I year. the the our shape PMT, in speaking, the our of the the be loans to PFSI. significant of have of which, rest control of would of portfolios to billion add mortgage type onto a billion portfolios, the on rate in buying But able lower but limit quarter the $XX are come sort we're to do that the or of are as able less at bringing this less few the you focused characteristics channels. the correspondent seen you're want over generally do downside. And portfolio think to but bulk that, we market. recently, you of that to also attractive servicing preponderance David portfolios so can types do, a have add we've more control servicing. the we the of of we that portfolios, specifically expect servicing characteristics we're overall.Â Adding of those so billion PMT to return, around servicing, through blocks still at to note be on of sort $XX adding at rates.Â There is, those production more there And we'd the our higher see We likely PFSI's most through out around portfolios there

Unknown Analyst

broker by channel? one last broadly increase player then drove margins Can just the margins be sale me, you broker from in being there, discuss and driven the just a And looks just again direct three direct. with to higher? the some what And one on you, of the dynamics top competition mostly in quarter, in

David Spector

And Look, the that, strong top irrational incredibly we've was broker to it I of broker QX, share a see was sale really QX, beyond.But And very alternative tech direct. participants. just more seeing something continue it's, everyone a it's broker amount proud brokers pricing. kind byproduct taking PennyMac in got gain really is increased is think lot activity and it's there's to the say, direct. this as direct, second top brokers meaningful And shift margins, jumbo brokers return a time, foresee think, I feedback of and of continuing We're in to are good a out pricing two the a it's of. strong look part And at continuing in in two I a of And a a as think in it's story think organization I gain rational to that, good. broker year a things would market. direct margins need when from there of great We've our seen or and remain, just back broker option.I I that, something quarter-over-quarter. coming just, that there we're period supporting of of pertains place the to a on

Daniel Perotti

broker barring as terms in forward so, more current the I'd fourth did specifically. that the our have of of some line note were And we one back quarter.And experienced sharp excess the as some the other on fallout significant had broker quarter the expectations, going rally. in look you broker normalized if in recur a first that bit margins interest our fourth for rate that view quarter model too, to by The margins we impacted in the the and is margins that as we're quarter, that environment change not with we the first in

Operator

from of next the with question. Kyle Please line ask question comes Joseph Jefferies. your The

Kyle Joseph

for wanted just in of my have X, them questions. on to post-unlock. taking Thanks technology I A regarding Slide been and hone lot asked.

it you approach? for You on going anticipate, be of one others, us timeframe Do to the four-pronged Is focusing a of a more for laid this? layout the out four these give than strategies. sense the and

David Spector

Look, as really Yes. I I system not we're mean, the to exploring the the marketplace. down taking. to done with pertains later options, just have clearly encouraged And - We're it approach system most that have. in linear costs all earlier that, it's that's themselves. think the a they've to I'm presented SSE. as you And that to, advanced we we've what done see testament And on is remarkable. really or servicing a we can slides, we've slides what drive opportunities

and We plentiful. at, continue I opportunities to you know, identify the look they're efficiencies.And

real the And PMT. opportunities there's some who to smaller But portfolios. to SSE, we maintain as subservicing. think beyond logical the continue sellers optimize need I we will in vitally competitive pertains increase and down step focus to correspondent costs. production there important. investment allow on in with that And capabilities they'll be Furthermore, a think in to need to advantage I and drive to that, Dan, our we have first the think our continuing soliciting And we next foremost, I organization.And us is to, it need expand servicing servicing.

having for to out are selling I for SSE, large innovative to think that's that, in using noticed.And of also, servicing, parties know on we point in the system technologists there's and and technology.And in get working technology to lot want the perhaps the AI the to marketplace. I'm but And on I - success that with self-serve is AI. is our I just banks I XX%, XX% on technology, a We're that's think other think that that's clearly think conversations get final to servicers, the of industry, step, commercialization great very, other who compared a in many I platform. marketplace. And the talk we've the done We're our AI away, I the some a investment AI But think industry, require said, lot look and at what us. really of being self-serve think the I about that us really I discussions really system. at are a as other to out that, multi-tenancy offerings hearing allow on marketplace XX% next want really our yesterday's the taking and which I we've had built good are interesting option place here that's, into furthest would - robust to in a marketplace in probably get of And discussions.And to allow lot And be on I building that and to the the automation be system with in organization. served. the development borrowers think we this great the of there

we in. classification that is data.On clients to address area all to we've helps read route needs of production the we documents in affected, documents On from servicing of documents coming side, the can side, or have, the documents brokers, and AI which extraction to deployed and the

customer meaningful, The We using. drive business but of that, we to be tools a lot all have able the most complaints, better that one see AI exciting all is complaints, great which us. reduce and to that really one allows be and to think foremost continue to that, so, outshine, going costs.Â And one I reduce we're can to and outcomes, us customer for the is voice also to this is record conversations is system first going to continue

about and industry, it's benefits seeing for We the well. others, I'm important also think excited reap as the

Operator

Ma with the question. from of Terry line comes your question next The Please Barclays. ask

Terry Ma

that think on the about to decline seasonal this guys a first ROE this operating I spoke build printed continue kind you obviously you last to guys of quarter, So, ROE but throughout quarter And should expect XX% year. in you in quarter.

outlook? you higher I So forward, going you the on XX% level top continue can that, maybe just speak that to your guess, rate for despite of to new, can longer build confidence

David Spector

Yes.

the of move be to for mortgage expect at overall level we say, ROEs ROEs, in the as of be, moving longer our the higher through year, generally to I to that ROE looking sort think market. of potentially we operating should teen rate I high generally would up outlook, our size the the size on depending mid-teen

exist David fact remarks, of, volatility that there so, any despite we bit and in refinance longer, that higher his refinance are of more are our larger these more leads market, in opportunities As the to rates.Â And higher the channels. business noted that and interest for and mortgages rate become incrementally to other and for greater our greater, sort terms boost the opportunities feed flywheel or at of

do expect for remaining to this but the a ROE, mid from increase probably And we these year. in teens general levels so, of high

Terry Ma

follow-up the And wanted not hedging. you I correctly, were more positioned guys on just I rate your materialize. initially comments vol for first That the in If then interpreted to quarter. did

to was hedging that there on therefore Is give of some you have quarter-to-date? guys inaccuracies performed those possible have since kind So mark-to-market it hedges adjusted. a how

David Spector

saw ratio are little XX% this updates everything changes quarter sort typically don't to for on adjusted a of to XXX% costs, quarter, closer a day-to-day hedge we basis, give tracking, bit than we and what our we So, last inter quarter. the than, but much

Operator

final from take question We from Eric line BTIG. Hagen the of the will

Your line open. is

Eric Hagen

correspondent, business margins the expand to or Ginnie win those maybe rates Looking rates lower? more And cut you rate rates are How do how sustainable either, at would think or your return your How to levels do if you're at levels? option doing? you change how at versus the when weigh credit lower? mean, risk, in I margin fact these these being you are hurdles are box maybe

David Spector

kind we still first saw to market focused expect to, I tell of that, away XX% activity the participant that's and the the from holding tell overly I And We're they return think player be always will share. state listen, we're pertains, steady some credit raised going you pertains quarter, Yes. who I finish on whole-own we're increased organization we're on had share had you - the will aggressive.Â I We government side. profitability. will quarter. down just box correspondent don't, saw get GSEs. to to there's kind that had from good tell of it run activity. weird going kind gained. we margins, We be that continue a as being still over more on to to over, going a a dominant bunch quarter are the of We good We're was correspondent.Â We're you I gain production. margins, getting, it market capital not I that the today. here. to executions Look, where we're sale in as of getting the

that think don't, But start April, that's we've nice gone to off well. I through expect think, as And to continue I in I I the important quarter. as so, that a would and

Eric Hagen

you at, to at and range and see how a cost leverage, at different mean, does net the ROE. are levels? XX, of worth do you tangible I'm that your for your target Slide at these changing XX% looking pre-tax rate how mean, looking maybe compare of assets. capital mean, levels guys there is to I leverage? I doing I that a

David Spector

overall around So, lower, targeted we rate as on noted our given debt page, X.X recently. We've to of on the X.X been terms typically we've environment got the, the lower been equity, total the in below

really we to up would servicing than we're more to will but terms volumes has, ratio, market, in through portfolio, in production expect be anything. ratio equity we to non-funding as terms function of that overall, in a We be driven a the the in the our add range, total one we ratio, primarily, X.X.So, roughly of bit debt in to target and continue our of could range that's driven has overall non-funding between the which think now, the we're equity - to time to higher, I equity that by move debt of which sort debt

we And think we're in don't to a I the operating to change that a, so, current we're we or moving as meaningful in our forward.We to before, think our high-teen way change environment, and leverage mid mid-teen, really have prudent profile a in a expect there as in discussed that profile leverage results dramatically to ROE. managing level

Operator

time. to questions this for remarks. it no closing Mr. have will We now further the at I Spector turn back

David Spector

on everyone joining call thank like to I'd the for us today.

all over team, Investor I myself, coming so months. feel to you questions, to and any have to to our the please out free speaking much. forward reach you look If next Relations Thanks

PennyMac Financial Services (PFSI) 24 Apr 242024 Q1 Earnings call transcript