While proposed capital rules for banks with assets of $100 billion or more have raised concerns for some nondepositories in terms of their potential impact on funding sources, they appear to have at least one upside for a large loan aggregator like Pennymac.
Correspondent gains contributed to $93 million in earnings during the third quarter, up from $58.3 million in the second but down from $135.1 million a year earlier, executives said. The company added 29 sellers during the period, according to Chief Financial Officer Dan Perotti.
"We had a really strong quarter in correspondent and I think it's really for a couple of reasons. One, clearly, we're seeing the banks stepping back," David Spector, chairman and CEO, said during a call with analysts about earnings reported by the company's lender/servicer arm.
During the quarter, pretax income broke down by business line as follows: servicing, $101 million; production, $25.1 million; and investment management, $400,000. The first category included a negative $25 million net valuation change on mortgage servicing rights and hedging.
Overall, those results at PennyMac Financial Services were "solid" and suggest there'll be a longer-term uptrend in the company's return on equity, according to some analysts.
"We expect the company to continue to increase market share in the correspondent and broker channels, and grow its ROE higher over time," Jay McCanless, Henry Coffey and Brian Violino of Wedbush said in a report Friday. Net servicing profits also will likely drive future results.
While Pennymac's strength as a large aggregator is considerable and it's a differentiator, it doesn't necessarily guarantee a leadership position as a nonbank mortgage stock, according to Eric Hagen and Jake Katsikis, analysts at BTIG.
"We don't expect it to necessarily produce the highest return versus other originator/servicers, but we appreciate the quality of the earnings, including the risk management applied as the market leader in the correspondent channel, where the value includes conservatively hedging for the risk of weaker MSR valuations caused by a downward shock to interest rates," they said.
PennyMac Financial's correspondent market share increased to 21% for the last 12 months prior to quarter end, according to an Pennymac investor presentation citing Inside Mortgage Finance numbers. That number was up from 15% for calendar year 2022.
While that share is high, on a consecutive-quarter basis the correspondent margin was flat at 33 basis points, analysts at Keefe, Bruyette & Woods noted. The margin for the mortgage broker or wholesale channel rose to 97 from 84, and retail increased to 474 from 366.
Second-lien volumes fueled some of the retail gains, executives noted.
"The product I'm really enthusiastic about is closed-end seconds…. The margins are very nice, it's a profitable product for us. We sell them all into the secondary market," Spector said.
PennyMac Financial shares were trading near $69 at the time of this writing Friday compared to close to $64 the day before. The shares of its real estate investment trust affiliate, which earned $51 million in the third quarter, also were trading higher at above $12 as compared to $11.
