PennyMac Financial Services
However, its results were negatively impacted by a 51-cent-per-share reduction to its profits related to mortgage servicing rights as fair value gains were more than wiped out by hedging losses.
The company reported $58.3 million of net income for the second quarter,
"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 in a press release. "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."
Total margins for loans originated (including correspondent loans produced for related company PennyMac Mortgage Investment Trust) were higher across both the third party and consumer direct channels. The businesses are branded as Pennymac.
Its production segment pretax income of $24.4 million, compared with a pretax loss of $19.6 million in the prior quarter and
"Revenue per fallout adjusted lock for PFSI's own account was 63 basis points in the second quarter, up from 49 basis points in the first quarter, driven primarily by higher overall volumes and margins," said Dan Perotti, chief financial officer on a prerecorded call. "Additionally, segment profitability was negatively impacted by $2.9 million, caused by changes in [government-sponsored enterprise] pricing that did not come with pipeline protection as they historically have.
The correspondent channel (not including the PMT loans) had the highest margins, at 366 basis points for the most recent quarter, versus 323 basis points in the first quarter and 355 basis points a year ago.
PennyMac Financial was previously cited by industry observers
In the quarter, it originated $21.2 billion of correspondent loans, compared with $20.2 billion in the first quarter and $21 billion one year prior. Fundings for PennyMac Mortgage Trust are included in that total; those fell to $3 billion from $6.6 billion and $10.3 billion respectively.
"First off, we moved a lot of the bulk business that we have been purchasing in PMT," Spector said during a separate analysts call on Thursday afternoon. "PMT sold those loans to PFSI as a way for PMT to further diversify its investments between MSRs and credit-related investments."
For the same time frame, the broker channel did $2.1 billion in volume versus $$1.5 billion and $2.0 billion.
"We are anticipating that the company will continue to take market share in the correspondent and broker direct channels, and grow its return on equity over time," a Wedbush Securities report from Jay McCanless said.
Consumer direct volume of $1.6 billion for the second quarter was less than half of the $3.7 billion originated for the same period in 2022. In the first quarter, PennyMac Financial Services did just $1 billion.
Because of the MSR hit, servicing profitability was down to $46.5 billion from $57.4 million in the prior quarter and $167.6 million a year ago.
While PennyMac Financial realized $118.9 million in MSR fair value gains, it posted $155.1 million in hedging losses.
"Hedge losses…included $42 million in hedge costs, which were elevated due to the inverted yield curve and significant interest rate volatility," Perotti said. "However, hedge costs were meaningfully lower in June and remain at lower levels in July."
On the analysts call, Spector added that the company has adjusted its hedging strategy, opening up a little more exposure in a rising rate environment, and that has reduced those costs.
"We see both earnings and valuation upside connected to the evolving market landscape, where banks appear likely to continue ceding market share to non-banks in origination and servicing," said a report from BTIG analyst Eric Hagen.
Keefe, Bruyette & Woods is modeling PennyMac Financial to have a 5.7% market share in both this year and next, up from 4.9%.
"We believe [gain on sale] margins have likely troughed, and the improved mortgage banking visibility gives us more confidence in the company's earnings power in 2024," said the report from Bose George, a KBW analyst.
PMT also released results after the market closed on Thursday.
The real estate investment trust earned $14.2 million in the second quarter, down from $50.3 million in the first quarter but an improvement versus the year ago loss of $81.2 million.
"While continued credit spread tightening led to fair value increases for PMT's credit sensitive investments, the interest rate sensitive strategies were impacted by the inverted yield curve and elevated hedge costs driven by multi-year highs in interest rate volatility," Spector, who is also chairman and CEO of this company, said in a separate release. "We continue to deploy capital towards opportunistic investments in both credit sensitive and interest rate sensitive strategies; and this quarter, we invested nearly $100 million in such investments, which we believe can generate strong, long-term risk-adjusted returns."
