PennyMac Financial Services, Inc. Reports Third Quarter 2022 Results

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 26^th 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:

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:

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:

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:

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:

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.

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