- Net Income: $98 million.
- Annualized Return on Equity (ROE): 11%.
- Annualized Operating ROE (excluding fair value changes and nonrecurring items): 16%.
- Quarterly Common Stock Dividend: $0.30 per share, up from $0.20 in the prior quarter (50% increase).
- Book Value per Share: $71.76, up from $70.13 in the prior quarter.
- Pretax Income (Production Segment): $41 million, up from $36 million in the prior quarter.
- Total Acquisition and Origination Volumes: $27 billion in unpaid principal balance, up 25% from the prior quarter.
- Correspondent Lending Acquisitions: $23 billion, up from $18 billion in the first quarter.
- Correspondent Channel Margins: 30 basis points, down from 35 basis points in the prior quarter.
- Broker Direct Locks: Up 28% from last quarter.
- Broker Direct Originations: Up 45% from last quarter.
- Number of Approved Brokers: Over 4,200, up more than 30% from the same time last year.
- Consumer Direct Lock Volumes: Up 25% from the prior quarter.
- Consumer Direct Originations: Up 3% from the prior quarter.
- Pretax Income (Servicing Segment): $89 million.
- Pretax Income (excluding valuation-related changes and nonrecurring items): $149 million or 9.5 basis points of average servicing portfolio UPB.
- Custodial Funds Managed: $5.7 billion in the second quarter, up from $4.6 billion in the first quarter.
- Operating Expenses (Servicing Portfolio UPB): 5.9 basis points, the lowest in company history.
- Fair Value of MSR: Increased by $99 million.
- Total Hedge Declines: $172 million.
- Investment Management Segment Pretax Income: $4 million.
- Provision for Income Tax Expense: $35.6 million, effective tax rate of 26.6%.
- Total Liquidity: $3.4 billion.
Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- PennyMac Financial Services Inc (PFSI, Financial) reported net income of $98 million, translating to an annualized return on equity (ROE) of 11%.
- The company's Board of Directors approved a quarterly common stock dividend of $0.30 per share, up from $0.20 in the prior quarter, representing a 50% increase.
- PFSI's production segment saw a pretax income increase to $41 million, up from $36 million in the prior quarter, with total acquisition and origination volumes rising by 25%.
- The servicing segment recorded a pretax income of $89 million, with operating expenses at their lowest levels in history at under 6 basis points.
- PFSI's proprietary servicing system has been enhanced to incorporate new technologies, including artificial intelligence, driving operating efficiencies and reducing costs.
Negative Points
- The company experienced $72 million of net fair value declines on MSRs and hedges, impacting overall earnings.
- Correspondent channel margins decreased to 30 basis points from 35 basis points in the prior quarter due to competitive pricing pressures.
- Hedge costs were at the higher end of the expected range, around 2%, due to significant interest rate volatility.
- The servicing segment's fair value declines on hedges exceeded MSR fair value increases, resulting in total hedge declines of $172 million.
- There was a slight uptick in delinquencies in the second quarter, attributed to seasonal factors and fewer business days in June.
Q & A Highlights
Q: Any more color you can provide on what you're seeing in correspondent quarter-to-date? July looked pretty strong, but you mentioned in your prepared remarks that there was some competitive pricing from participants last quarter. So has that kind of continued into this quarter?
A: Yes, it has continued, particularly on the government side due to aggressive market participants. Despite this, we had a great quarter in correspondent, with July locks projected at $9.5 billion, estimating $28.5 billion to $29 billion of production for the quarter. While margins are under pressure, we believe our long-term strategy remains strong. (David Spector, CEO)
Q: Any more color you can give on what happened intra-quarter with the hedge?
A: The differential between last quarter and this quarter is substantial. We brought the hedge performance closer to our target of around 100%. The quarter was volatile for interest rates, which led to some repositioning of our hedges. Hedge costs were at the higher end of our expected range due to volatility. Moving into the third quarter, we have seen volatility come off a bit, which may reduce hedge costs. (David Spector, CEO)
Q: Could you provide some color on the JV transaction? You said it's nonrecurring, but just curious what it was and if this is something we could see periodically?
A: The transaction involved selling an appraisal management company subsidiary to a larger company for a small ownership share. This is a one-time transaction, but there could be future upside from the ownership share. It highlights the potential economic benefits from our large servicing portfolio. (Daniel Perotti, CFO)
Q: How will the increase in the conventional loan percentage retained by PMT in 3Q versus the current run rate impact earnings?
A: There could be a small earnings impact as the margin on loans retained by PFSI is typically higher than the fulfillment fee charged to PMT. This activity is capital light and allows PMT to deploy capital for higher returns, benefiting PFSI over time. (David Spector, CEO)
Q: Are you going to have to hire back at the same pace as you did in prior cycles when the origination market finally comes back, especially in light of some of the advancements in technology?
A: We have worked to become more efficient and maintain excess capacity. We are already increasing LO capacity and have the ability to add or reduce capacity quickly and efficiently. We are confident we won't need to hire aggressively as in prior cycles. (David Spector, CEO)
Q: Can you give an update on the subservicing opportunity you talked about last quarter?
A: We expect to onboard 1 or 2 smaller customers by the end of the year, with potential for larger clients over time. We are using our correspondent sales force to propose the subservicing opportunity and expect to add scale to our platform, benefiting current investments in servicing. (David Spector, CEO)
Q: Where do you think the mortgage rate level is where we could see a significant pickup in refi activity?
A: A decline to around 6.5% would be meaningful, with significant acceleration at 6%. This would impact hundreds of billions of recently originated loans and those with second liens, driving refinance volumes higher. (David Spector, CEO)
Q: What are your initial thoughts on the CFPB proposed rule on services needing to work more closely with homeowners prior to foreclosing?
A: We have always prioritized doing what's right by the customer, and our audit results validate this. We do not see any concern regarding our servicing practices, cost structure, or profitability due to these proposed rules. (David Spector, CEO)
Q: How do you think about what PFSI is going to be doing with the incremental liquidity and what type of investments are you looking to make?
A: We have significant liquidity and do not expect to go on a spending spree. We will continue to invest in mortgage servicing rights, primarily through our correspondent business, and maintain our leverage ratios. (Daniel Perotti, CFO)
Q: Can you share more color on the decline in servicing expenses and if this trend will continue?
A: The decline in servicing expenses is due to our technology implementation and increased scale. We expect this trend to continue, barring any significant increase in delinquencies. (David Spector, CEO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
