PennyMac Financial Services, Inc. Reports Third Quarter 2022 Results

WESTLAKE VILLAGE, Calif.–()–PennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income of $135.1 million for the third quarter of 2022, or $2.46 per share on a diluted basis, on revenue of $476.3 million. Book value per share increased to $68.26 from $65.38 at June 30, 2022.

PFSI’s Board of Directors declared a third quarter cash dividend of $0.20 per share, payable on November 23, 2022, to common stockholders of record as of November 14, 2022.

Third Quarter 2022 Highlights

  • Pretax income was $185.5 million, up 4 percent from the prior quarter and down 45 percent from the third quarter of 2021

    • Repurchased 1.9 million shares of PFSI’s common stock at an average price of $51.13 per share for a cost of $99.7 million; also repurchased an additional 882 thousand shares through October 26th at an average price of $45.73 per share for a cost of $40.3 million
  • Production segment pretax income of $38.6 million, up from $9.7 million in the prior quarter and down from $330.6 million in the third quarter of 2021

    • Total loan acquisitions and originations, including those fulfilled for PennyMac Mortgage Investment Trust (NYSE: PMT), were $26.0 billion in UPB, down 3 percent from the prior quarter and 56 percent from the third quarter of 2021
    • Consumer direct interest rate lock commitments (IRLCs) were $3.8 billion in unpaid principal balance (UPB), down 12 percent from the prior quarter and 77 percent from the third quarter of 2021
    • Broker direct IRLCs were $1.9 billion in UPB, down 16 percent from the prior quarter and 62 percent from the third quarter of 2021
    • Government correspondent IRLCs totaled $12.4 billion in UPB, up 9 percent from the prior quarter and down 24 percent from the third quarter of 2021
    • Correspondent acquisitions of conventional loans fulfilled for PMT were $10.2 billion in UPB, down 1 percent from the prior quarter and 64 percent from the third quarter of 2021
  • Servicing segment pretax income was $145.3 million, down from $167.6 million in the prior quarter and up from $8.0 million in the third quarter of 2021

    • Pretax income excluding valuation-related items was $69.6 million, down 21 percent from the prior quarter
    • Valuation items included:

      • $237.2 million in mortgage servicing rights (MSR) fair value gains partially offset by $164.7 million in fair value decreases from hedging results

        • Net impact on pretax income related to these items was $72.4 million, or $0.97 in earnings per share
      • $3.2 million of reversals related to provisions for losses on active loans
    • Servicing portfolio grew to $539.1 billion in UPB, up 2 percent from June 30, 2022 and 9 percent from September 30, 2021, driven by production volumes which more than offset prepayment activity
  • Investment Management segment pretax income was $1.6 million, up from $0.2 million in the prior quarter and $1.0 million in the third quarter of 2021

    • Net assets under management (AUM) were $2.0 billion, down 3 percent from June 30, 2022, and 19 percent from September 30, 2021

“In the third quarter, PennyMac Financial once again delivered strong financial performance,” said Chairman and CEO David Spector. “Meaningful income contributions from both of our production and servicing segments led to an annualized return on equity of 16 percent and growth in book value per share, despite mortgage rates climbing to their highest levels in more than a decade. Our management team’s long-standing commitment to disciplined liquidity and capital management provides us the opportunity to repurchase shares at attractive prices well-below book value while also introducing new technologies like the recently-released POWER+ platform to our broker partners.”

Mr. Spector continued, “We remain focused on the broader challenges facing our industry in the near-term. We will remain vigilant in our risk management disciplines and continue to actively pursue opportunities to further improve efficiency across our businesses. I continue to believe Pennymac Financial is strategically well-positioned in the mortgage market given our strong levels of capital, our large and growing servicing portfolio, and our efficient and low-cost operating platform run by a best-in-class management team.”

The following table presents the contributions of PennyMac Financial’s segments to pretax income:

Quarter ended September 30, 2022
Mortgage Banking Investment
Management
Production Servicing Total Total
(in thousands)
Revenue
Net gains on loans held for sale at fair value

$

140,683

$

28,011

 

$

168,694

$

$

168,694

Loan origination fees

 

34,037

 

 

 

34,037

 

 

34,037

Fulfillment fees from PMT

 

18,407

 

 

 

18,407

 

 

18,407

Net loan servicing fees

 

 

243,742

 

 

243,742

 

 

243,742

Management fees

 

 

 

 

 

7,731

 

7,731

Net interest income (expense):
Interest income

 

30,825

 

52,169

 

 

82,994

 

 

82,994

Interest expense

 

24,970

 

57,995

 

 

82,965

 

 

82,965

 

5,855

 

(5,826

)

 

29

 

 

29

Other

 

474

 

556

 

 

1,030

 

2,620

 

3,650

Total net revenue

 

199,456

 

266,483

 

 

465,939

 

10,351

 

476,290

Expenses

 

160,884

 

121,200

 

 

282,084

 

8,734

 

290,818

Income before provision for income taxes

$

38,572

$

145,283

 

$

183,855

$

1,617

$

185,472

Production Segment

The Production segment includes the correspondent acquisition of newly originated government-insured mortgage loans for PennyMac Financial’s own account, fulfillment services on behalf of PMT and direct lending through the consumer direct and broker direct channels, including the underwriting and acquisition of loans from correspondent sellers on a non-delegated basis.

PennyMac Financial’s loan production activity for the quarter totaled $26.0 billion in UPB, $15.8 billion of which was for its own account, and $10.2 billion of which was fee-based fulfillment activity for PMT. Correspondent government and direct lending IRLCs totaled $18.0 billion in UPB, up 1 percent from the prior quarter and down 52 percent from the third quarter of 2021 due to the significant reduction in the size of the overall origination market.

Production segment pretax income was $38.6 million, up from $9.7 million in the prior quarter and down from $330.6 million in the third quarter of 2021. Production segment revenue totaled $199.5 million, down 11 percent from the prior quarter and 69 percent from the third quarter of 2021. The quarter-over-quarter decrease was driven by a $12.2 million decrease in net gains on loans held for sale primarily driven by the smaller origination market.

The components of net gains on loans held for sale are detailed in the following table:

Quarter ended
September 30,
2022
June 30,
2022
September 30,
2021
(in thousands)
Receipt of MSRs and recognition of MSLs in loan sale transactions

$

345,077

 

$

398,253

 

$

398,665

 

Mortgage servicing rights recapture payable to PennyMac Mortgage Investment Trust

 

(1,648

)

 

(4,752

)

 

(12,976

)

Reversal of (provision for) liability for representations and warranties, net

 

118

 

 

45

 

 

(2,206

)

Cash (loss) gain (1)

 

(16,795

)

 

(368,554

)

 

126,053

 

Fair value changes of pipeline, inventory and hedges

 

(158,058

)

 

197,575

 

 

117,218

 

Net gains on mortgage loans held for sale

$

168,694

 

$

222,567

 

$

626,754

 

Net gains on mortgage loans held for sale by segment:
Production

$

140,683

 

$

152,895

 

$

496,568

 

Servicing

$

28,011

 

$

69,672

 

$

130,186

 

 
(1) Net of cash hedging results

PennyMac Financial performs fulfillment services for conventional conforming and jumbo loans acquired by PMT from non-affiliates in its correspondent production business. These services include, but are not limited to, marketing, relationship management, correspondent seller approval and monitoring, loan file review, underwriting, pricing, hedging and activities related to the subsequent sale and securitization of loans in the secondary mortgage markets for PMT.

Fees earned from the fulfillment of correspondent loans on behalf of PMT totaled $18.4 million in the third quarter, down 11 percent from the prior quarter and 58 percent from the third quarter of 2021. The decrease from the prior quarter was driven by a lower fulfillment fee rate due to the competitive mortgage market while the decrease from the third quarter of 2021 was primarily driven by the decrease in conventional acquisition volumes.

Net interest income totaled $5.9 million, down from $9.2 million in the prior quarter. Interest income in the third quarter totaled $30.8 million, up from $28.4 million in the prior quarter, and interest expense totaled $25.0 million, up from $19.2 million in the prior quarter, both due to increasing interest rates.

Production segment expenses were $160.9 million, down 25 percent from the prior quarter and 48 percent from the third quarter of 2021. The decline from the prior quarter was driven by lower volumes in the direct lending channels and the expense management initiatives announced in prior quarters.

Servicing Segment

The Servicing segment includes income from owned MSRs, subservicing and special servicing activities. Servicing segment pretax income was $145.3 million, down from $167.6 million in the prior quarter and up from $8.0 million in the third quarter of 2021. Servicing segment net revenues totaled $266.5 million, down from $278.6 million in the prior quarter and up from $136.8 million in the third quarter of 2021. The quarter-over-quarter decrease was primarily driven by a $41.7 million decrease in net gains on loans held for sale related to early buyout (EBO) activity and was partially offset by a $24.6 million decrease in net interest expense.

Revenue from net loan servicing fees totaled $243.7 million, up slightly from $238.4 million in the prior quarter as increased servicing fees from a larger servicing portfolio and higher net valuation-related gains were largely offset by increased realization of cash flows, due to higher average MSR balances during the quarter. Revenue from loan servicing fees included $313.1 million in servicing fees, reduced by $141.8 million from the realization of MSR cash flows. Net valuation-related gains totaled $72.4 million, and included MSR fair value gains of $237.2 million and hedging declines of $164.7 million primarily driven by increasing interest rates during the period.

The following table presents a breakdown of net loan servicing fees:

Quarter ended
September 30,
2022
June 30,
2022
September 30,
2021
(in thousands)
Loan servicing fees (1)

$

313,080

 

$

302,350

 

$

267,758

 

Changes in fair value of MSRs and MSLs resulting from:
Realization of cash flows

 

(141,781

)

 

(121,724

)

 

(82,217

)

Change in fair value inputs

 

237,192

 

 

233,826

 

 

(65,452

)

Hedging losses

 

(164,749

)

 

(176,005

)

 

(86,459

)

Net change in fair value of MSRs and MSLs

 

(69,338

)

 

(63,903

)

 

(234,128

)

Net loan servicing fees

$

243,742

 

$

238,447

 

$

33,630

 

 
(1) Includes contractually-specified servicing fees

Servicing segment revenue included $28.0 million in net gains on loans held for sale related to reperforming government-insured and guaranteed loans purchased out of Ginnie Mae securitizations, or EBOs. These gains were down from $69.7 million in the prior quarter and $130.2 million in the third quarter of 2021 as a result of lower volumes and redelivery gains due to higher interest rates.

Net interest expense totaled $5.8 million, versus net interest expense of $30.4 million in the prior quarter and $27.1 million in the third quarter of 2021. Interest income was $52.2 million, up from $21.5 million in the prior quarter as increased placement fees on custodial balances offset the decline in interest income on EBO loans held for sale. Interest expense was $58.0 million, up from $51.9 million in the prior quarter also due to higher interest rates.

Servicing segment expenses totaled $121.2 million, up from $111.0 million in the prior quarter. The third quarter included $3.2 million in reversals for credit losses on active loans versus $21.5 million in the prior quarter.

The total servicing portfolio grew to $539.1 billion in UPB at September 30, 2022, an increase of 2 percent from June 30, 2022 and 9 percent from September 30, 2021. PennyMac Financial subservices $231.0 billion in UPB, up 2 percent from June 30, 2022 and 6 percent from September 30, 2021. PennyMac Financial’s owned MSR portfolio grew to $308.1 billion in UPB, an increase of 2 percent from June 30, 2022 and 11 percent from September 30, 2021.

The table below details PennyMac Financial’s servicing portfolio UPB:

September 30,
2022
June 30,
2022
September 30,
2021
(in thousands)
Prime servicing:
Owned
Mortgage servicing rights and liabilities
Originated

$

283,653,037

$

276,627,961

$

241,193,600

Acquisitions

 

20,182,332

 

20,683,203

 

26,913,133

 

303,835,369

 

297,311,164

 

268,106,733

Loans held for sale

 

4,287,585

 

3,575,712

 

9,295,126

 

308,122,954

 

300,886,876

 

277,401,859

Subserviced for PMT

 

230,959,804

 

226,365,581

 

217,984,987

Total prime servicing

 

539,082,758

 

527,252,457

 

495,386,846

Special servicing – subserviced for PMT

 

19,015

 

23,001

 

28,801

Total loans serviced

$

539,101,773

$

527,275,458

$

495,415,647

Investment Management Segment

PennyMac Financial manages PMT for which it earns base management fees and may earn incentive compensation. Net AUM were $2.0 billion as of September 30, 2022, down 3 percent from June 30, 2022 and 19 percent from September 30, 2021 due to PMT’s financial performance.

Pretax income for the Investment Management segment was $1.6 million, up from $0.2 million in the prior quarter and $1.0 million in the third quarter of 2021. Base management fees from PMT were $7.7 million, down from $7.9 million in the prior quarter and $8.8 million in the third quarter of 2021 due to the decline in AUM. No performance incentive fees were earned in the third quarter.

The following table presents a breakdown of management fees:

Quarter ended
September 30,
2022
June 30,
2022
September 30,
2021
(in thousands)
Management fees:
Base

$

7,731

$

7,910

$

8,778

 

Performance incentive (adjustment)

 

 

 

(258

)

Total management fees

$

7,731

$

7,910

$

8,520

 

 
Net assets of PennyMac Mortgage Investment Trust

$

2,017,331

$

2,070,640

$

2,479,327

 

Investment Management segment expenses totaled $8.7 million, down 8 percent from the prior quarter and essentially unchanged from the third quarter of 2021.

Consolidated Expenses

Total expenses were $290.8 million, down 13 percent from the prior quarter and 35 percent from the third quarter of 2021. The quarter-over-quarter decrease was primarily driven by lower production volumes in the direct lending channels and the expense management initiatives announced in prior quarters.

Management’s slide presentation will be available in the Investor Relations section of the Company’s website at ir.pennymacfinancial.com after the market closes on Thursday, October 27, 2022.

About PennyMac Financial Services, Inc.

PennyMac Financial Services, Inc. is a specialty financial services firm focused on the production and servicing of U.S. mortgage loans and the management of investments related to the U.S. mortgage market. Founded in 2008, the company is recognized as a leader in the U.S. residential mortgage industry and employs over 4,600 people across the country. For the twelve months ended September 30, 2022, PennyMac Financial’s production of newly originated loans totaled $133 billion in unpaid principal balance, making it the fourth largest mortgage lender in the nation. As of September 30, 2022, PennyMac Financial serviced loans totaling $539 billion in unpaid principal balance, making it a top ten mortgage servicer in the nation. Additional information about PennyMac Financial Services, Inc. is available at ir.pennymacfinancial.com.

Forward-Looking Statements

This press release 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 results, future operations, business plans and investment strategies, as well as industry and market conditions, all of which are subject to change. Words like “believe,” “expect,” “anticipate,” “promise,” “project,” “plan,” and other expressions or words of similar meanings, as well as future or conditional verbs such as “will,” “would,” “should,” “could,” or “may” are generally intended to identify forward-looking statements. Actual results and operations for any future period may vary materially from those projected herein and from past results discussed herein. Factors which could cause actual results to differ materially from historical results or those anticipated include, but are not limited to: interest rate changes; our exposure to risks of loss and disruptions in operations resulting from adverse weather conditions, man-made or natural disasters, climate change and pandemics such as COVID-19; declines in real estate or significant changes in U.S. housing prices or activity in the U.S. housing market; the continually changing federal, state and local laws and regulations applicable to the highly regulated industry in which we operate; lawsuits or governmental actions that may result from any noncompliance with the laws and regulations applicable to our business; the mortgage lending and servicing-related regulations promulgated by the Consumer Financial Protection Bureau and its enforcement of these regulations; our dependence on U.S. government-sponsored entities and changes in their current roles or their guarantees or guidelines; changes to government mortgage modification programs; the licensing and operational requirements of states and other jurisdictions applicable to our business, to which our bank competitors are not subject; foreclosure delays and changes in foreclosure practices; changes in macroeconomic and U.S. real estate market conditions; difficulties inherent in adjusting the size of our operations to reflect changes in business levels; purchase opportunities for mortgage servicing rights and our success in winning bids; our substantial amount of indebtedness; the discontinuation of LIBOR; increases in loan delinquencies and defaults; failure to modify, resell or refinance early buyout loans; our reliance on PennyMac Mortgage Investment Trust (NYSE: PMT) as a significant contributor to our mortgage banking business; maintaining sufficient capital and liquidity and compliance with financial covenants; our obligation to indemnify third-party purchasers or repurchase loans if loans that we originate, acquire, service or assist in the fulfillment of, fail to meet certain criteria or characteristics or under other circumstances; our obligation to indemnify PMT if our services fail to meet certain criteria or characteristics or under other circumstances; decreases in the returns on the assets that we select and manage for our clients, and our resulting management and incentive fees; the extensive amount of regulation applicable to our investment management segment; conflicts of interest in allocating our services and investment opportunities among us and our advised entities; the effect of public opinion on our reputation; our ability to effectively identify, manage and hedge our credit, interest rate, prepayment, liquidity and climate risks; our initiation or expansion of new business activities or strategies; our ability to detect misconduct and fraud; our ability to mitigate cybersecurity risks and cyber incidents; our ability to pay dividends to our stockholders; and our organizational structure and certain requirements in our charter documents. You should not place undue reliance on any forward- looking statement and should consider all of the uncertainties and risks described above, as well as those more fully discussed in reports and other documents filed by the Company with the Securities and Exchange Commission from time to time. The Company undertakes no obligation to publicly update or revise any forward-looking statements or any other information contained herein, and the statements made in this press release are current as of the date of this release only.

The Company’s earnings materials contain financial information calculated other than in accordance with U.S. generally accepted accounting principles (“GAAP”), such as pretax income excluding valuation-related items that provide a meaningful perspective on the Company’s business results since the Company utilizes this information to evaluate and manage the business. Non-GAAP disclosure has limitations as an analytical tool and should not be viewed as a substitute for financial information determined in accordance with GAAP.

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 
September 30,
2022
June 30,
2022
September 30,
2021
(in thousands, except share amounts)
ASSETS
Cash

$ 1,558,679

$ 1,415,396

$ 476,497

Short-term investments at fair value

36,098

4,961

5,046

Loans held for sale at fair value

4,149,726

3,586,810

9,659,695

Derivative assets

164,160

103,901

429,984

Servicing advances, net

455,083

570,822

522,906

Mortgage servicing rights at fair value

5,661,672

5,217,167

3,611,120

Operating lease right-of-use assets

72,138

82,078

85,266

Investment in PennyMac Mortgage Investment Trust at fair value

884

1,037

1,477

Receivable from PennyMac Mortgage Investment Trust

32,306

43,234

49,993

Loans eligible for repurchase

3,757,538

2,778,768

4,335,378

Other

473,527

468,081

567,776

Total assets

$ 16,361,811

$ 14,272,255

$ 19,745,138

 
LIABILITIES
Assets sold under agreements to repurchase

$ 3,487,335

$ 2,441,816

$ 6,897,157

Mortgage loan participation purchase and sale agreements

367,473

502,116

519,784

Obligations under capital lease

5,583

Notes payable secured by mortgage servicing assets

1,793,972

1,793,260

1,297,176

Unsecured senior notes

1,778,988

1,778,055

1,783,230

Derivative liabilities

125,487

42,702

14,204

Mortgage servicing liabilities at fair value

2,214

2,337

47,567

Accounts payable and accrued expenses

358,187

317,998

358,944

Operating lease liabilities

92,380

102,756

105,452

Payable to PennyMac Mortgage Investment Trust

87,978

98,991

138,972

Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement

26,675

27,014

31,815

Income taxes payable

964,307

885,721

659,768

Liability for loans eligible for repurchase

3,757,538

2,778,768

4,335,378

Liability for losses under representations and warranties

37,187

39,336

45,806

Total liabilities

12,879,721

10,810,870

16,240,836

 
STOCKHOLDERS’ EQUITY
Common stock–authorized 200,000,000 shares of $0.0001 par value; issued and outstanding 51,011,021, 52,938,854, and 60,419,578 shares, respectively

5

5

6

Additional paid-in capital

372,198

Retained earnings

3,482,085

3,461,380

3,132,098

Total stockholders’ equity

3,482,090

3,461,385

3,504,302

Total liabilities and stockholders’ equity

$ 16,361,811

$14,272,255

$ 19,745,138

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 
Quarter ended
September 30,
2022
June 30,
2022
September 30,
2021
(in thousands, except per share amounts)
Revenue
Net gains on loans held for sale at fair value

$

168,694

 

$

222,567

 

$

626,754

 

Loan origination fees

 

34,037

 

 

39,945

 

 

94,581

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

18,407

 

 

20,646

 

 

43,922

 

Net loan servicing fees:
Loan servicing fees

 

313,080

 

 

302,350

 

 

267,758

 

Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing

 

95,411

 

 

112,102

 

 

(147,669

)

Mortgage servicing rights hedging results

 

(164,749

)

 

(176,005

)

 

(86,459

)

Net loan servicing fees

 

243,742

 

 

238,447

 

 

33,630

 

Net interest income (expense):
Interest income

 

82,994

 

 

49,864

 

 

68,312

 

Interest expense

 

82,965

 

 

71,127

 

 

90,711

 

 

29

 

 

(21,263

)

 

(22,399

)

Management fees from PennyMac Mortgage Investment Trust

 

7,731

 

 

7,910

 

 

8,520

 

Other

 

3,650

 

 

3,263

 

 

1,604

 

Total net revenue

 

476,290

 

 

511,515

 

 

786,612

 

Expenses
Compensation

 

157,793

 

 

198,192

 

 

249,183

 

Technology

 

35,647

 

 

34,621

 

 

32,406

 

Loan origination

 

28,356

 

 

44,931

 

 

80,932

 

Servicing

 

20,399

 

 

3,051

 

 

27,892

 

Professional services

 

16,230

 

 

20,793

 

 

24,429

 

Occupancy and equipment

 

11,299

 

 

9,371

 

 

9,389

 

Marketing and advertising

 

7,601

 

 

13,007

 

 

11,360

 

Other

 

13,493

 

 

10,023

 

 

11,472

 

Total expenses

 

290,818

 

 

333,989

 

 

447,063

 

Income before provision for income taxes

 

185,472

 

 

177,526

 

 

339,549

 

Provision for income taxes

 

50,338

 

 

48,363

 

 

90,239

 

Net income

$

135,134

 

$

129,163

 

$

249,310

 

Earnings per share
Basic

$

2.59

 

$

2.38

 

$

4.02

 

Diluted

$

2.46

 

$

2.28

 

$

3.80

 

Weighted-average common shares outstanding
Basic

 

52,170

 

 

54,167

 

 

62,085

 

Diluted

 

54,968

 

 

56,642

 

 

65,653

 

Dividends declared per share

$

0.20

 

$

0.20

 

$

0.20

 

 

Source