PennyMac Financial Services, Inc. Reports Second Quarter 2023 Results

PennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income of $58.3 million for the second quarter of 2023, or $1.11 per share on a diluted basis, on revenue of $336.5 million. Book value per share increased to $69.77 from $68.91 at March 31, 2023.

PFSI’s Board of Directors declared a second quarter cash dividend of $0.20 per share, payable on August 25, 2023, to common stockholders of record as of August 15, 2023.

Second Quarter 2023 Highlights

• Pretax income was $72.9 million, up 91 percent from the prior quarter and down 59 percent from the second quarter of 2022
  • Repurchased 0.4 million shares of PFSI’s common stock at an average price of $60.31 per share for a cost of $26.1 million
• Production segment pretax income of $24.4 million, compared to pretax loss of $19.6 million in the prior quarter and pretax income of $9.7 million in the second quarter of 2022
  • Total loan acquisitions and originations, including those fulfilled for PennyMac Mortgage Investment Trust (NYSE: PMT) were $24.9 billion in unpaid principal balance (UPB), up 9 percent from the prior quarter and down 7 percent from the second quarter of 2022
  • Broker direct interest rate lock commitments (IRLCs) were $2.8 billion in UPB, up 11 percent from the prior quarter and 27 percent from the second quarter of 2022
  • Consumer direct IRLCs were $2.2 billion in UPB, down 2 percent from the prior quarter and 50 percent from the second quarter of 2022
  • Government correspondent IRLCs totaled $10.7 billion in UPB, up 4 percent from the prior quarter and down 5 percent from the second quarter of 2022
  • Conventional correspondent IRLCs for PFSI’s account totaled $7.5 billion in UPB, up 99 percent from the prior quarter
  • Correspondent acquisitions of conventional conforming loans fulfilled for PMT were $3.0 billion in UPB, down 54 percent from the prior quarter and 71 percent from the second quarter of 2022
• Servicing segment pretax income was $46.5 million, down from $57.4 million in the prior quarter and $167.6 million in the second quarter of 2022
  • Pretax income excluding valuation-related items was $75.3 million, down 20 percent from the prior quarter driven by lower early buyout (EBO) income, higher realization of mortgage servicing rights (MSR) cash flows, and higher interest expense partially offset by higher servicing fee revenue and placement fee income
  • Valuation items included:
    • $118.9 million in MSR fair value gains, before recognition of realization of cash flows, more than offset by $155.1 million in hedging losses
      • Net impact on pretax income related to these items was $(36.2) million, or $(0.51) in earnings per share
      • $7.5 million of reversals related to provisions for losses on active loans
  • Servicing portfolio grew to $576.5 billion in UPB, up 2 percent from March 31, 2023, driven by production volumes which more than offset prepayment activity
• Investment Management segment pretax income was $2.0 million, up from $0.3 million in the prior quarter and $0.2 million in the second quarter of 2022
  • Net assets under management (AUM) were $1.9 billion, down 2 percent from March 31, 2023 and 7 percent from June 30, 2022

Notable activity after quarter end

• PFSI exercised its option to extend the maturity for $650 million in term notes secured by Ginnie Mae MSRs originally due in August 2023 for two years

“PennyMac Financial reported solid results in the second quarter, reflecting increased production volumes and profitability from the prior quarter as well as a continued strong contribution from our large and growing servicing business,” said Chairman and CEO David Spector. “Strong operating performance was partially offset by net valuation-related losses that resulted from the inverted yield curve and elevated hedge costs driven by multi-year highs in interest rate volatility. Book value per share was up to $69.77 at quarter end. We continue to operate at high levels of efficiency while also focusing on investing in technology to support our balanced, multi-channel production and servicing platform.”

Mr. Spector continued, “Though the mortgage origination market remains constrained, I have never felt better about our competitive position. Our leading correspondent lending activities continue to drive the organic growth of our servicing portfolio by adding loans at prevailing mortgage rates, which we expect will provide meaningful opportunities for our consumer direct division in future periods when rates decline. I am also extraordinarily proud of the growth we have achieved in broker direct since our entrance into the wholesale channel only five years ago. Our scale, platform and this management team’s ability to adapt to changing market environments are the reasons I expect PennyMac Financial to continue leading the industry with strong financial performance.”

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 and certain conventional conforming 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 $24.9 billion in UPB, $21.9 billion of which was for its own account, and $3.0 billion of which was fee-based fulfillment activity for PMT. Correspondent locks for PFSI and direct lending IRLCs totaled $23.2 billion in UPB, up 23 percent from the prior quarter and 30 percent from the second quarter of 2022.

Production segment pretax income was $24.4 million, compared to a pretax loss of $19.6 million in the prior quarter and pretax income of $9.7 million in the second quarter of 2022. Production segment revenue totaled $170.6 million, up 40 percent from the prior quarter and down 24 percent from the second quarter of 2022. The quarter-over-quarter increase was driven primarily by higher volumes and margins.

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

PennyMac Financial performs fulfillment services for certain 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 $5.4 million in the second quarter, down 54 percent from the prior quarter and 74 percent from the second quarter of 2022. The year-over-year decrease in fulfillment fee revenue was driven by lower conventional acquisition volumes for PMT’s account as PFSI acquired a higher proportion of the conventional loans sourced by PMT in the second quarter of 2023.

Net interest expense totaled $0.6 million, compared to net interest income of $2.9 million in the prior quarter. Interest income in the second quarter totaled $75.4 million, up from $57.0 million in the prior quarter, and interest expense totaled $76.0 million, up from $54.1 million in the prior quarter, both due to higher volumes and short-term interest rates.

Production segment expenses were $146.2 million, up 4 percent from the prior quarter and down 32 percent from the second quarter of 2022. The increase from the prior quarter was due to increased loan origination expenses due to higher volumes. The year-over-year decrease was driven primarily by decreased production in the direct lending channels and the expense management activities noted in prior quarters.

Servicing Segment

The Servicing segment includes income from owned MSRs, subservicing and special servicing activities. Servicing segment pretax income was $46.5 million, compared to $57.4 million in the prior quarter and $167.6 million in the second quarter of 2022. Servicing segment net revenues totaled $156.4 million, down from $172.1 million in the prior quarter and $278.6 million in the second quarter of 2022. The quarter-over-quarter decrease was primarily driven by a $14.5 million decrease in net gains on loans held for sale related to EBO activity for government-insured and guaranteed loans purchased out of Ginnie Mae securitizations.

Revenue from net loan servicing fees totaled $146.1 million, down from $148.8 million in the prior quarter. Revenue from net loan servicing fees included $36.2 million in net valuation related declines, compared to $43.0 million of such declines in the prior quarter. MSR fair value gains, before realization of cash flows, were $118.9 million in the quarter, and hedging losses were $155.1 million. Revenue from loan servicing fees included $356.5 million in servicing fees, which were up from the prior quarter due to continued portfolio growth, reduced by $174.2 million from the realization of MSR cash flows, which were up from $146.2 million in the prior quarter due to increased cash flow generated by the MSR asset during the quarter from servicing and placement fees.

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

Servicing segment revenue included $15.2 million in net gains on loans held for sale related to EBOs. These gains were down from $29.7 million in the prior quarter and $69.7 million in the second quarter of 2022. These EBOs are previously delinquent loans that were brought back to performing status through PennyMac Financial’s successful servicing efforts.

Net interest expense totaled $5.1 million, versus $6.2 million in the prior quarter and $30.4 million in the second quarter of 2022. Interest income was $97.5 million, up from $71.5 million in the prior quarter driven primarily by increased placement fees on custodial balances. Interest expense was $102.6 million, up from $77.7 million in the prior quarter due to higher short-term interest rates and greater outstanding secured debt during the quarter.

Servicing segment expenses totaled $109.9 million, down 4 percent from the prior quarter. Servicing segment expenses in the second quarter included $7.5 million in reversals for credit losses on active loans. The prior quarter included $6.1 million in such reversals.

The total servicing portfolio grew to $576.5 billion in UPB at June 30, 2023, an increase of 2 percent from March 31, 2023 and 9 percent from June 30, 2022. PennyMac Financial subservices and conducts special servicing for PMT, whose servicing portfolio totaled $234.5 billion in UPB at quarter end, down 1 percent from March 31, 2023 and up 4 percent from June 30, 2022. PennyMac Financial’s owned MSR portfolio grew to $342.0 billion in UPB, up 4 percent from March 31, 2023 and 14 percent from June 30, 2022.

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