Pennymac Financial Services, Inc. · NYSE:PFSI
Pennymac Financial Services — Investor Presentation (May 2020)
35 slides from Pennymac Financial Services's investor presentation, May 19, 2020
Slide 1: May 2020 Investor Presentation
May 2020 Investor Presentation
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: PFSI Is a Proven Leader in the Agency Mortgage Business
PFSI Is a Proven Leader in the Agency Mortgage Business 3 Loan Production Volume Loan Servicing Portfolio Net Assets Under Management ✓ Uniquely advantaged specialty finance firm; substantially all of the production and servicing business is for Fannie Mae, Freddie Mac and Ginnie Mae-eligible loans
Slide 4: PFSI Represents an Attractive Investment Opportunity
148 324 914 4/30/18 - 10/31/18 11/1/18 - 12/31/19 1/1/20 - 5/15/20 $7.27 $12.32 $21.34 $26.26 $29.85 6/30/13 12/31/15 12/31/18 12/31/19 3/31/20 PFSI Represents an Attractive Investment Opportunity 4 ▪ Track record of strong profitability; profitable every year since 2008(1) ▪ Record annual earnings
Slide 5: Earnings Driven by Organic Growth in PFSI's Mortgage Banking Businesses
Earnings Driven by Organic Growth in PFSI’s Mortgage Banking Businesses 5 5 Loan Servicing(1) Loan Production(1) ▪ Correspondent production has driven market share growth historically ▪ Consumer-direct and broker-direct lending channels are expected to drive market share growth going forward ▪ Organ
Slide 6: PFSI's Assets and Continued Investments in Technology Are Critical
▪ enables brokers to effectively originate loans while remaining connected to PennyMac throughout the process PFSI’s Assets and Continued Investments in Technology Are Critical 6 Production Systems Environment ▪ Migrating our correspondent platform to Ellie Mae’s next generation Encompass Digital Le
Slide 7: Strong Balance Sheet and Liquidity with Low Leverage
Strong Balance Sheet and Liquidity with Low Leverage 7 ▪ PFSI’s strong balance sheet, low leverage, and disciplined approach to liquidity management have proven critically important in the current market environment ▪ Strong balance sheet with low leverage versus competitors – Debt to equity of 2.7x
Slide 8: PennyMac's Enterprise Risk Management (ERM) Foundation
8 PennyMac’s Enterprise Risk Management (ERM) Foundation ▪ Effective governance, compliance and operating systems are critical ▪ PennyMac has utilized a “three-lines of defense” model to monitor the effectiveness of controls ▪ ERM is a fundamental part of our day-to-day operating activities and a co
Slide 9: Hedging Protects MSR Asset and Moderates the Volatility of PFSI's Results
$163.7 ($559.0) ($920.3) ($129.5) $404.8 $1,051.1 $87.3 $527.8 $240.1 2018 2019 1Q20 MSR fair value change before recognition of realization of cash flows Hedging and other gains (losses) Production pretax income 9 Hedging Protects MSR Asset and Moderates the Volatility of PFSI’s Results Note: Figur
Slide 10: PFSI Earnings Driven by Its Market-Leading Production Business
$2.1 $4.0 $5.0 $5.2 $3.8 1Q19 2Q19 3Q19 4Q19 1Q20 10 PFSI Earnings Driven by Its Market-Leading Production Business Production Pretax Income Servicing Pretax Income Investment Management Pretax Income ($ in millions) ($ in millions) ($ in millions) $11.2 -$2.7 -$18.1 -$5.1 $35.3 $47.1 $25.2 $39.1 $4
Slide 11: Faster Growth Direct Lending Has Outsized Impact on Production Earnings
11 Faster Growth Direct Lending Has Outsized Impact on Production Earnings Consumer Direct Lending Volume (UPB in billions) Broker Direct Lending Volume (UPB in billions) Correspondent Production Volume (UPB in billions) ▪ While the direct lending channels (consumer and broker direct) represented 16
Slide 12: Growing Opportunity for PennyMac In an Expanding Origination Market
3.72% 3.28% 2.68% 1.55% 1.88% 0.63% 0% 1% 2% 3% 4% 1/2/20 2/2/20 3/2/20 4/2/20 5/2/20 Average 30-year fixed rate mortgage Secondary Mortgage Rate 10-year Treasury Yield Growing Opportunity for PennyMac In an Expanding Origination Market 12 U.S. Mortgage Origination Market(2) (UPB in billions) (1) MB
Slide 13: Expected Impact of Current Environment on PFSI by Business Segment
13 Expected Impact of Current Environment on PFSI by Business Segment Loan Production Loan Servicing Investment Management ▪ Record levels of profitable production create “flywheel” by growing the servicing portfolio in a historically low interest rate environment ‒ In a rising rate environment, the
Slide 14: Servicing Trends – Delinquency and Forbearance for PFSI's Owned Portfolio
7.0% 6.0% 6.0% 7.6% 7.2% 13.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 12/31/18 3/31/19 6/30/19 9/30/19 12/31/19 3/31/20 Servicing Trends – Delinquency and Forbearance for PFSI’s Owned Portfolio 14 ▪ PFSI is in a strong position to successfully manage hardships related to COVID-19 giv
Slide 15: PFSI's Liquidity Profile and Projected Needs for Servicing Advances
15 PFSI’s Liquidity Profile and Projected Needs for Servicing Advances ▪ PFSI has substantial liquidity which has been increasing with cash generated from earnings ‒ $1.4 billion in available liquidity(1), less $223 million in minimum liquidity required by Ginnie Mae, as of April 30, 2020 ▪ PFSI has
Slide 16: Appendix
Appendix oo » PennyMac
Slide 17: ▪ 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 18: PFSI Has Developed in a Sustainable Manner for Long-Term Growth
▪ MSR financing structure to include servicer advances 18 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 19: Industry-leading platform built organically – not through acquisitions
19 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 20: First Quarter Highlights
First Quarter Highlights 20 ▪ Net income was $306.2 million; diluted earnings per share (EPS) were $3.73 – Record earnings driven by continued strong production results combined with substantial gains on our interest rate hedge investments which more than offset fair value losses on mortgage servici
Slide 21: ▪ Record servicing segment pretax income of $170.8 million, versus a pretax loss of
21 ▪ Record servicing segment pretax income of $170.8 million, versus a pretax loss of $5.1 million in 4Q19 and pretax income of $11.2 million in 1Q19 – Valuation-related items included $920.3 million in MSR fair value losses offset by $1.1 billion in hedging and other gains; net impact on pretax in
Slide 22: Developments That Have Affected the Mortgage Markets
Developments That Have Affected the Mortgage Markets 22 ▪ Substantial slowdown in the economy related to COVID-19 and public health measures ‒ Over the last six weeks 30.3 million workers have filed jobless claims, evidencing increased hardships for homeowners and borrowers leading to expectations f
Slide 23: Trends in PennyMac Financial's Businesses
Correspondent Production(1)(2) Market Share Market Share Consumer Direct Production(1) Loan Servicing(1) Market Share Broker Direct Production(1)(2) Market Share 23 Trends in PennyMac Financial’s Businesses (1) Source: Inside Mortgage Finance and company estimates for 1Q20 or as of 3/31/20. Inside M
Slide 24: Production Segment Highlights – Correspondent Channel
$6.8 $16.7 $13.6 $8.1 $20.5 $16.2 $16.4 $36.0 $34.0 1Q19 4Q19 1Q20 Government loans Conventional loans for PMT Total locks 24 (UPB in billions) Correspondent Volume and Mix(1) Production Segment Highlights – Correspondent Channel (3) (4) ▪ Correspondent acquisitions by PMT in 1Q20 totaled $29.8 bill
Slide 25: Production Segment Highlights – Consumer Direct Channel
$0.6 $1.2 $1.7 $0.7 $2.6 $2.4 $1.4 $3.8 $4.0 $1.0 $2.4 $3.4 1Q19 4Q19 1Q20 Conventional Government Committed pipeline (UPB in billions) Consumer Direct Production Volume 25 Production Segment Highlights – Consumer Direct Channel (1) (1) Commitments to originate mortgage loans at specified terms at p
Slide 26: Production Segment Highlights – Broker Direct Channel
$0.2 $0.9 $1.2 $0.1 $0.5 $0.4 $0.4 $1.4 $1.6 $0.3 $0.7 $1.3 1Q19 4Q19 1Q20 Conventional loans Government loans Committed pipeline 26 Production Segment Highlights – Broker Direct Channel Broker Direct Production Volume(1) (UPB in billions) (2) (1) As of 1Q20, historical and current period non-delega
Slide 27: Servicing Segment Highlights
$368.7 $384.2 $(22.2) $35.4 $2.4 At 12/31/19 Runoff Additions from loan production MSR acquisitions At 3/31/20 (1) 27 Servicing Segment Highlights (1) Owned portfolio in predominantly government-insured and guaranteed loans under the FHA (53%), VA (38%), and USDA (9%) programs; delinquency data base
Slide 28: Investment Management Segment Highlights
Investment Management Revenues (1) 28 Investment Management Segment Highlights Investment Management AUM ($ in billions) ▪ Net AUM as of March 31, 2020 were $1.8 billion, down 26% from December 31, 2019 primarily due to significant non-cash fair value losses on PMT’s investments in government-sponso
Slide 29: 1Q20 Servicing Profitability Excluding Valuation-Related Changes
29 (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 30: Why Are MSR Sales Occurring? How Do MSRs Come to Market?
30 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 31: Excess Servicing Spread and MSR Asset structure
31 Excess Servicing Spread (e.g., 12.5bp) MSR Asset (e.g., 25bp 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 cas
Slide 32: MSR Asset Valuation
32 MSR Asset Valuation Note: Figures may not sum exactly due to rounding (1) Represents weighted average (2) Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. The Company applies a pricing spread to the United Sta
Slide 33: Acquisitions and Originations by Product
33 Note: Figures may not sum exactly due to rounding (1) The UPB of historical period correspondent conventional conforming acquisitions has been reduced by $128 million, $308 million, $410 million, and $421 million, and the UPB of historical and current period correspondent government acquisitions
Slide 34: Interest Rate Locks by Product
34 Interest Rate Locks by Product First Lien Locks Unaudited ($ in millions) Correspondent Locks(1) Conventional Conforming 8,974 $ 12,628 $ 19,461 $ 19,736 $ 19,109 $ Government 7,385 12,028 15,933 16,225 14,871 Non-Agency(2) 13 14 1 - - Total 16,372 $ 24,671 $ 35,395 $ 35,961 $ 33,980 $ Consumer D
Slide 35: Credit Characteristics by Acquisition / Origination Period
35 Credit Characteristics by Acquisition / Origination Period Correspondent Consumer Direct Broker Direct 1Q19 2Q19 3Q19 4Q19 1Q20 1Q19 2Q19 3Q19 4Q19 1Q20 Government-insured 699 698 701 703 700 Government-insured 44 43 42 42 42 Conventional 750 755 760 762 763 Conventional 38 36 35 35 34 Weighted A
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