PennyMac Financial Services, Inc. Reports Fourth Quarter and Full-Year 2022 Results

PennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income of $37.6 million for the fourth quarter of 2022, or $0.71 per share on a diluted basis, on revenue of $340.4 million. Book value per share increased to $69.44 from $68.26 at September 30, 2022.

PFSI's Board of Directors declared a fourth quarter cash dividend of $0.20 per share, payable on February 24, 2023, to common stockholders of record as of February 14, 2023.

Fourth Quarter 2022 Highlights

• Net income included non-recurring tax items of $(11.9) million primarily driven by a tax rate increase impacting PFSI's net deferred tax liability; impact on earnings per share was $(0.22)
• Pretax income was $67.7 million, down 63 percent from the prior quarter and 71 percent from the fourth quarter of 2021
  • Repurchased 1.1 million shares of PFSI's common stock at an average price of $46.99 per share for a cost of $51.3 million
• Production segment pretax loss of $9.0 million, down from pretax income of $38.6 million in the prior quarter and $106.5 million in the fourth quarter of 2021
  • Total loan acquisitions and originations, including those fulfilled for PennyMac Mortgage Investment Trust (NYSE: PMT) were $23.0 billion in unpaid principal balance (UPB), down 12 percent from the prior quarter and 51 percent from the fourth quarter of 2021
  • Consumer direct interest rate lock commitments (IRLCs) were $1.7 billion in UPB, down 56 percent from the prior quarter and 88 percent from the fourth quarter of 2021
  • Broker direct IRLCs were $2.0 billion in UPB, up 8 percent from the prior quarter and down 48 percent from the fourth quarter of 2021
  • Government correspondent IRLCs totaled $10.7 billion in UPB, down 14 percent from the prior quarter and 31 percent from the fourth quarter of 2021
  • Conventional correspondent IRLCs for PFSI's account totaled $4.7 billion in UPB
  • Correspondent acquisitions of conventional conforming loans fulfilled for PennyMac Mortgage Investment Trust (NYSE: PMT) were $6.8 billion in UPB, down 34 percent from the prior quarter and 61 percent from the fourth quarter of 2021
• Servicing segment pretax income was $75.6 million, down from $145.3 million in the prior quarter and $126.1 million in the fourth quarter of 2021
  • Pretax income excluding valuation-related items was $79.1 million, up 14 percent from the prior quarter driven by increased earnings on custodial balances and deposits and decreased operating expenses
  • Valuation items included:
    ?    $82.6 million in mortgage servicing rights (MSR) fair value gains largely offset by $72.9 million in hedging losses
    • Net impact on pretax income related to these items was $9.7 million, or $0.13 in earnings per share
    • $13.2 million provision for losses on active loans
  • Servicing portfolio grew to $551.7 billion in UPB, up 2 percent from September 30, 2022, driven by production volumes which more than offset prepayment activity
• Investment Management segment pretax income was $1.2 million, down from $1.6 million in the prior quarter and $1.5 million in the fourth quarter of 2021
  • Net assets under management (AUM) were $2.0 billion, down 3 percent from September 30, 2022, and 17 percent from December 31, 2021

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 February 2023 for two years

Full-Year 2022 Highlights

• Net income of $475.5 million, down from $1.0 billion in 2021; return on equity of 14 percent
• Pretax income of $665.2 million, down from $1.4 billion in 2021
• Total net revenue of $2.0 billion, down from $3.2 billion in 2021
• Repurchased approximately 7.8 million shares of PFSI's common stock, or 14 percent of the total outstanding shares at the beginning of the year, for an approximate cost of $406 million
• Loan production of $109.0 billion in UPB, a decrease of 54 percent from 2021
  • $22.3 billion in UPB of originations in the direct lending channels, down 63 percent from 2021
• Servicing portfolio UPB of $551.7 billion at year end, up 8 percent from December 31, 2021
• Issued $500 million of 5-year term notes secured by Ginnie Mae MSRs

"PennyMac Financial produced strong results in 2022, a year characterized by a rapid and significant increase in mortgage rates," said Chairman and CEO David Spector. "The 14 percent return on equity achieved in 2022 can be attributed to the resilience and scale of our balanced business model and the decisive actions taken throughout the year to right-size our business for the much smaller origination market. While production activity fell in 2022 our servicing earnings were strong. In fact, the majority of PennyMac Financial's income in 2022 was generated by our large and growing servicing portfolio, which totaled more than $550 billion in unpaid principal balance at year end, up 8 percent from the prior year. Strong financial performance not only enabled us to continue returning capital to stockholders and investing in innovative mortgage banking technology, but also resulted in solid growth in PFSI's book value per share, which ended the year up 16 percent from year end 2021."

Mr. Spector continued, "More than 15 years ago, we founded Pennymac with a vision to help revitalize the mortgage market and become a trusted partner in home ownership. Since then, we have grown responsibly and profitably into one of the largest residential mortgage producers and servicers in the country with an industry-leading correspondent production business and a growing presence in the direct lending channels. Though 2023 is expected to be another challenging year for the mortgage industry, I remain confident in PennyMac Financial's ability to continue executing given its balanced business model and long history of generating stockholder value through different mortgage market cycles and environments."

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 $23.0 billion in UPB, $16.2 billion of which was for its own account, and $6.8 billion of which was fee-based fulfillment activity for PMT. Correspondent locks for PFSI and direct lending IRLCs totaled $19.1 billion in UPB, up 6 percent from the prior quarter and down 43 percent from the fourth quarter of 2021.

Production segment pretax loss was $9.0 million, down from pretax income of $38.6 million in the prior quarter and $106.5 million in the fourth quarter of 2021. Production segment revenue totaled $131.6 million, down 34 percent from the prior quarter and 69 percent from the fourth quarter of 2021. The quarter-over-quarter decrease was driven by a $56.0 million decrease in net gains on loans held for sale primarily as a result of lower volume in the consumer direct lending channel and lower overall 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 $12.2 million in the fourth quarter, down 34 percent from the prior quarter and 40 percent from the fourth quarter of 2021. The quarter-over-quarter decrease in fulfillment fee revenue was driven by lower conventional acquisition volumes for PMT's account as PFSI began to acquire certain of the conventional loans sourced by PMT.

Net interest income totaled $6.0 million, up slightly from $5.9 million in the prior quarter. Interest income in the fourth quarter totaled $42.9 million, up from $30.8 million in the prior quarter, and interest expense totaled $36.8 million, up from $25.0 million in the prior quarter, both due to increasing interest rates.

Production segment expenses were $140.6 million, down 13 percent from the prior quarter and 56 percent from the fourth 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 $75.6 million, down from $145.3 million in the prior quarter and $126.1 million in the fourth quarter of 2021. Servicing segment net revenues totaled $199.0 million, down from $266.5 million in the prior quarter and $255.7 million in the fourth quarter of 2021. The quarter-over-quarter decrease was primarily driven by a $60.9 million decrease in net loan servicing fees and a $10.8 million decrease in net gains on loans held for sale related to early buyout (EBO) activity.

Revenue from net loan servicing fees totaled $182.8 million, down from $243.7 million in the prior quarter primarily driven by lower net valuation related gains and partially offset by increased loan servicing fees due to a larger servicing portfolio. Revenue from loan servicing fees included $321.9 million in servicing fees, reduced by $148.8 million from the realization of MSR cash flows. Net valuation-related gains totaled $9.7 million, and included MSR fair value gains of $82.6 million, and hedging losses of $72.9 million. The hedging losses were largely driven by hedge costs and higher interest rates during the quarter.

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

Servicing segment revenue included $17.2 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 $28.0 million in the prior quarter and $185.8 million in the fourth quarter of 2021. These EBOs are previously delinquent loans that were brought back to performing status through PennyMac Financial's successful servicing efforts.

Net interest expense totaled $2.7 million, versus $5.8 million in the prior quarter and $25.2 million in the fourth quarter of 2021. Interest income was $64.5 million, up from $52.2 million in the prior quarter as increased placement fees on custodial balances more than offset the decline in interest income on EBO loans held for sale. Interest expense was $67.2 million, up from $58.0 million in the prior quarter due to higher interest rates.

Servicing segment expenses totaled $123.4 million, up 2 percent from the prior quarter. Servicing segment expenses included $13.2 million in provisions for losses on active loans in the fourth quarter due to higher delinquency rates. The prior quarter included a reversal of the provision of $3.2 million.

The total servicing portfolio grew to $551.7 billion in UPB at December 31, 2022, an increase of 2 percent from September 30, 2022 and 8 percent from December 31, 2021. PennyMac Financial subservices and conducts special servicing for $233.6 billion in UPB, an increase of 1 percent from September 30, 2022 and 5 percent from December 31, 2021. PennyMac Financial's owned MSR portfolio grew to $318.1 billion in UPB, an increase of 3 percent from September 30, 2022 and 11 percent from December 31, 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 December 31, 2022, down 3 percent from September 30, 2022 and 17 percent from December 31, 2021.

Pretax income for the Investment Management segment was $1.2 million, down from $1.6 million in the prior quarter and $1.5 million in the fourth quarter of 2021. Base management fees from PMT were $7.3 million, down from $7.7 million in the prior quarter and $8.9 million in the fourth quarter of 2021 due to the decline in AUM. No performance incentive fees were earned in the fourth quarter.

The following table presents a breakdown of management fees:

Investment Management segment expenses totaled $8.7 million, unchanged from the prior quarter and down 2 percent from the fourth quarter of 2021.

Consolidated Expenses

Total expenses were $272.7 million, down 6 percent from the prior quarter and 41 percent from the fourth quarter of 2021. The quarter-over-quarter decrease was primarily driven by lower production volumes in the direct lending channels, expense management activities and a reduction of performance-based compensation accruals.

Taxes

PFSI recorded a provision for tax expense of $30.1 million, resulting in an effective tax rate of 44.4 percent versus 27.1 percent in the prior quarter. The increase in the effective tax rate in the fourth quarter was primarily driven by an increase in the provision tax rate, which increased from 26.5 percent to 26.85 percent for 2022. The increase in tax rate resulted in the repricing of PFSI's net deferred tax liability, which was the primary driver of a non-recurring tax expense of approximately $11.9 million in the quarter.

Management's slide presentation will be available in the Investor Relations section of the Company's website at pfsi.pennymac.com after the market closes on Thursday, February 2, 2023.

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 approximately 4,000 people across the country. In 2022, PennyMac Financial's production of newly originated loans totaled $109 billion in unpaid principal balance, making it the third largest mortgage lender in the nation. As of December 31, 2022, PennyMac Financial serviced loans totaling $552 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 pfsi.pennymac.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; 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, defaults and forbearances; 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 investment management and incentive fees; 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 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; 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.