PennyMac Monetary's earnings decline displays a slowdown in lending

Net income at PennyMac Financial Services was lower on a quarterly and yearly basis, reflecting industry headwinds in the current market, while pretax service revenue exceeded the amount generated from production channels.

The nationwide lender and service provider, a subsidiary of Pennymac, reported net income of $173.1 million for the final three months of 2021, but earnings declined 31% from $249.3 million in the third quarter . Earnings were also down 62% from the same quarter a year ago, when net for the Westlake Village, Calif.-based company was $452.8 million. Diluted earnings per share were $2.79.

Total net income for full year 2021 was reported at $1 billion, down 60% from 2020 earnings of $1.6 billion.

The decline reflected trends across the mortgage lending industry as lending slowed from record levels of the previous 12 months. Production volume within PennyMac's three channels in this segment — correspondent, direct-to-consumer, and direct-to-broker — all declined on a quarterly basis, but this was offset by an increase in the company's service portfolio. The company had $126 million in pretax revenue from the services segment in the fourth quarter compared to $8 million in the third quarter. Meanwhile, the manufacturing business brought in $106.5 million in pretax income, down from $330.6 million in the quarter. Unpaid maintenance balances increased to $509.7 billion as of December 31, up from $426.8 billion at the end of 2020.

Pennymac officials adopted a cautious tone when discussing the outlook for the coming months. "We believe that the decline in overall allocations will continue to create significant competition and pressure on profit margins until current industry overcapacity is addressed," CEO David Spector said in the company's earnings presentation.

With its large services segment standing alongside originations, companies like PennyMac should be able to weather the expected slowdown after three years of growth, Henry Coffey, managing director, equity research at Wedbush Securities, said in a recent interview with National Mortgage Messages.

"If you're a servicer, that's pretty good because your service business will be so much more profitable," he said. "And successful companies — their profits may decline on the origination front, but they will still be profitable."

Companywide net revenue for the fourth quarter was $693.8 million, due in part to gains on $500.1 million of loans held for sale. However, revenue was 11.8% below the third-quarter figure of $786.6 million and 30% below the $1 billion mark a year earlier. Annual sales were $3.2 billion compared to $3.7 billion in 2020

Despite industry projections for less lending in 2022, PennyMac's direct lending is gaining momentum in the business if recent initiatives indicate it.

In January, the company began renaming its PennyMac Broker Direct unit, now known as PennyMac TPO, to strengthen its partnerships with third-party partners. The move was part of a larger marketing initiative by the parent company, whose subsidiaries include PennyMac Financial Services and PennyMac Mortgage Investment Trust. The parent company also introduced a new logo and renamed itself Pennymac.

"Our newly developed branding and marketing focus, as well as the use of transformational technologies in our direct lending channels, are key components of multi-year investments to achieve our mid-term goals," said Spector. He also noted that upcoming marketing campaigns could include Pennymac TV commercials and more social platform content.

Pennymac also announced plans last month to open a new origination center to serve direct customers. Direct consumer lending made up an overwhelming percentage of manufacturing revenue for the company's past quarters.

The growth strategy is not as unexpected as it might seem in the current credit climate and is tied to the company's reputation as a service provider. "That wasn't a decision they made yesterday," Coffey said.

“When you have so many service customers, it's just a natural consequence of this business. They reap their own service,” he said.

Originations generated through the consumer direct channel were $10.6 billion in the fourth quarter, while broker direct production was $3.7 billion, according to company officials. Its correspondent channel produced $30.3 billion.

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