Pennymac Financial Services, Inc. · NYSE:PFSI
Pennymac Financial Services — Q2 2020 Earnings Presentation
30 slides from Pennymac Financial Services's earnings presentation, Aug 6, 2020
Slide 1: Second Quarter 2020 Earnings Report
Second Quarter 2020 Earnings Report
Slide 2: Forward-Looking Statements
Forward-Looking Statements 2 This presentation contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding management’s beliefs, estimates, projections and assumptions with respect to, among other things, the Company’s financial
Slide 3: Second Quarter Highlights
Second Quarter Highlights 3 ▪ Net income was $352.7 million; diluted earnings per share (EPS) were $4.39 – Record earnings driven by core production and servicing results partially offset by fair value losses on mortgage servicing rights (MSRs) and associated hedging and other losses – Book value pe
Slide 4: Second Quarter Highlights (continued)
4 ▪ Servicing segment pretax loss was $62.4 million, versus pretax income of $170.8 million in 1Q20 and a pretax loss of $2.7 million in 2Q19 – $108.4 million in MSR fair value losses and $15.1 million in hedging and other losses driven by elevated hedge costs and fair value losses on options due to
Slide 5: PFSI's Success Built Upon Unique Business Model and Risk Management
$7.27 $12.32 $21.34 $26.26 $34.26 6/30/13 12/31/15 12/31/18 12/31/19 6/30/20 5 PFSI’s Success Built Upon Unique Business Model and Risk Management Book Value per Share Since IPO(1) ▪ Balanced business model, with established scale in loan production and servicing ‒ Drives profitability across differ
Slide 6: PFSI's Earnings Growth Driven by Direct Lending and Servicing Scale
$5.8 $7.0 $16.4 $8.5 2017 2018 2019 1H20 6 PFSI’s Earnings Growth Driven by Direct Lending and Servicing Scale Servicing Pretax Income Production Pretax Income Investment Management Pretax Income ($ in millions) ($ in millions) ($ in millions) Note: Does not include pretax income from non-segment ac
Slide 7: Economic Developments Affecting Our Businesses
Economic Developments Affecting Our Businesses 7 ▪ Challenges in the U.S. economy reflect the impact of COVID-19 as a recent resurgence of the virus weighs on states’ plans to re-open ‒ Re-opening plans, including a return to physical work locations, are now on pause in over 80% of the country and r
Slide 8: Opportunity in the Mortgage Origination Market
2.5% 3.0% 3.5% 4.0% 4.5% 5.0% Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 8 Opportunity in the Mortgage Origination Market (1) Actual originations: Inside Mortgage Finance. Total originations forec
Slide 9: Consumer Direct, Broker Direct and Correspondent Production Portals
Consumer Direct ▪ MAC, our consumer direct portal, allows potential borrowers to interact with their loan application online from end to end ▪ Creates improved productivity for loan officers; critical in managing capacity to consumer demand Broker Direct ▪ POWER, our broker direct portal, provides b
Slide 10: Market Share Trends in PennyMac Financial's Businesses
Correspondent Production(1) Consumer Direct Production(1) Broker Direct Production(1) Loan Servicing(1) 10 Market Share Trends in PennyMac Financial’s Businesses (1) Source: Inside Mortgage Finance and company estimates for 2Q20 or as of 6/30/20. Inside Mortgage Finance estimates total 2Q20 originat
Slide 11: Production Segment Highlights – Correspondent Channel
$10.6 $13.6 $11.0 $10.7 $16.2 $18.9 $21.3 $29.8 $29.9 $24.7 $34.0 $37.7 2Q19 1Q20 2Q20 Government loans Conventional loans for PMT Total locks 11 (UPB in billions) Correspondent Volume and Mix Production Segment Highlights – Correspondent Channel (2) (3) ▪ Correspondent acquisitions by PMT in 2Q20 t
Slide 12: Production Segment Highlights – Consumer Direct Channel
$0.8 $1.7 $2.5 $1.1 $2.4 $2.6 $2.0 $4.0 $5.1 $3.4 $7.2 $8.9 2Q19 1Q20 2Q20 Conventional Government Total Locks (UPB in billions) Consumer Direct Production Volume 12 Production Segment Highlights – Consumer Direct Channel (1) Commitments to originate mortgage loans at specified terms at period end (
Slide 13: Production Segment Highlights – Broker Direct Channel
$0.6 $1.2 $2.1 $0.2 $0.4 $0.5 $0.8 $1.6 $2.6 $1.3 $2.8 $4.1 2Q19 1Q20 2Q20 Conventional loans Government loans Total Locks 13 Production Segment Highlights – Broker Direct Channel Broker Direct Production Volume (UPB in billions) (1) Commitments to originate mortgage loans at specified terms at peri
Slide 14: Servicing Segment Highlights
$384.2 $388.3 ($33.5) $37.6 At 3/31/20 Runoff Additions from loan production At 6/30/20 (1) 14 Servicing Segment Highlights (1) Owned portfolio in predominantly government-insured and guaranteed loans under the FHA (54%), VA (29%), and USDA (12%) programs, in addition to conventional loans (5%) orig
Slide 15: Owned Portfolio Servicing Trends – COVID Forbearances & EBO Opportunity
15 Owned Portfolio Servicing Trends – COVID Forbearances & EBO Opportunity ▪ 69% of forbearance plans in effect as of April 30th have been extended ▪ The percentage of loans in PFSI’s MSR portfolio under forbearance plans declined from April 30th to July 31st as a 21% increase in new forbearance pla
Slide 16: Investment Management Segment Highlights
Investment Management Revenues (1) 16 Investment Management Segment Highlights Investment Management AUM ($ in billions) ▪ Net AUM as of June 30, 2020 were $2.2 billion, up 23% from March 31, 2020 due to the increase in PMT’s book value – primarily driven by record Correspondent Production segment r
Slide 17: MSR Valuation Changes and Offsets
17 MSR Valuation Changes and Offsets ($ in millions) Hedging Approach Continues to Moderate the Volatility of PFSI’s Results Note: Figures may not sum exactly due to rounding ▪ PFSI seeks to moderate the impact of interest rate changes on the fair value of its MSR asset through a comprehensive hedge
Slide 18: Drivers of PFSI Production Segment Profitability 2Q20
18 Drivers of PFSI Production Segment Profitability 2Q20 (1) Expected revenue net of direct origination costs at time of lock (2) Reflects hedging, pricing and execution changes, timing of revenue recognition, and other items ▪ Direct lending channels (consumer and broker direct) have outsized impac
Slide 19: 2Q20 Servicing Profitability Excluding Valuation-Related Changes
19 (1) Of average portfolio UPB, annualized (2) Comprised of net gains on mortgage loans held for sale at fair value and net interest income related to EBO loans (3) Changes in fair value do not include realization of MSR cash flows, which are included in amortization and realization of MSR cash flo
Slide 20: Trends in Delinquencies and Advances for PFSI's Owned Portfolio
6.8% 7.4% 7.6% 7.2% 13.0% 15.1% 14.6% Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 20 Trends in Delinquencies and Advances for PFSI’s Owned Portfolio 30+ Day Delinquency Rate(1) ▪ Servicing advances outstanding were approximately $285 million at July 31, versus $260 million at April 30, 2020 – Ginnie Mae requ
Slide 21: Appendix
Appendix oo » PennyMac
Slide 22: ▪ Complex and highly regulated mortgage industry requires effective governance, compliance and operating systems
▪ Complex and highly regulated mortgage industry requires effective governance, compliance and operating systems ▪ Operating platform has been developed organically and is highly scalable ▪ Commitment to strong corporate governance, compliance and risk management since inception ▪ PFSI is well posit
Slide 23: PFSI Has Developed in a Sustainable Manner for Long-Term Growth
▪ MSR financing structure to include servicer advances 23 PFSI Has Developed in a Sustainable Manner for Long-Term Growth ▪ Disciplined growth to address the demands of the GSEs, Agencies, regulators and our financing partners - Since inception, PennyMac has focused on building and testing processes
Slide 24: Industry-leading platform built organically – not through acquisitions
24 Industry-leading platform built organically – not through acquisitions ▪ Disciplined, sustainable growth for more than 12 years ▪ Focused on building and testing processes and systems before large transaction volumes Distinctive expertise and full range of capabilities across mortgage banking and
Slide 25: Why Are MSR Sales Occurring? How Do MSRs Come to Market?
25 Why Are MSR Sales Occurring? How Do MSRs Come to Market? ▪ Large servicers may sell MSRs due to operational pressures, regulatory capital constraints for banks and a re-focus on core customers/businesses ▪ Independent mortgage banks sell MSRs from time to time due to a need for capital ▪ Opportun
Slide 26: Excess Servicing Spread and MSR Asset Structure
26 Excess Servicing Spread (e.g., 17bp) MSR Asset (e.g., 34bp servicing fee) Acquired by PFSI from Third-Party Seller(1) ▪ PMT has co-invested in Agency MSRs acquired from third-party sellers by PFSI; presently only related to certain Ginnie Mae MSRs ▪ PMT acquires the right to receive the ESS cash
Slide 27: MSR Asset Valuation
27 MSR Asset Valuation Note: Figures may not sum exactly due to rounding Pool UPB $215,949 $17,859 $233,808 Weighted average coupon 3.83% 4.19% 3.86% Weighted average servicing fee rate 0.35% 0.34% 0.35% Weighted average prepayment speed assumption (CPR) 17.2% 12.1% 16.8% Fair value $2,037.0 $176.5
Slide 28: Acquisitions and Originations by Product
28 Note: Figures may not sum exactly due to rounding (1) Consists of prime jumbo and non-Qualified Mortgage (QM) loans Acquisitions and Originations by Product First Lien Acquisitions/Originations Second Lien Originations Unaudited ($ in millions) Correspondent Acquisitions Conventional Conforming 1
Slide 29: Interest Rate Locks by Product
29 Interest Rate Locks by Product First Lien Locks Note: Figures may not sum exactly due to rounding (1) Consists of prime jumbo and non-Qualified Mortgage (QM) loans Unaudited ($ in millions) Correspondent Locks Conventional Conforming 12,628 $ 19,461 $ 19,736 $ 19,109 $ 24,804 $ Government 12,028
Slide 30: Credit Characteristics by Acquisition / Origination Period
30 Credit Characteristics by Acquisition / Origination Period Correspondent Consumer Direct Broker Direct 2Q19 3Q19 4Q19 1Q20 2Q20 2Q19 3Q19 4Q19 1Q20 2Q20 Government-insured 698 701 703 700 719 Government-insured 43 42 42 42 37 Conventional 755 760 762 763 769 Conventional 36 35 35 34 32 Weighted A
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