California-based nonbank mortgage lender Pennymac Financial Services’ net income dropped more than 50% in the first quarter from the same period in 2021, driven by lower profits from its production segment due to surging mortgage rates and a shrinking origination market. However, the company still reported a pretax net income of $234.5 million in the first quarter, essentially unchanged from the prior quarter.

The firm’s earnings were driven by its servicing portfolio and about $520 billion in unpaid principal balance, said David Spector, chairman and chief executive officer of PennyMac in an earnings call. 

Pennymac’s servicing portfolio grew to $518 billion in unpaid balance, up 2% from Dec. 31, 2021, and 16% from March 31, 2021, led by production volumes which more than offset prepayment activity, according to Spector.

“The unprecedented increase in mortgage rates resulted in lower overall industry origination volumes and left originators and aggregators who still hold excess operational capacity competing for a much smaller population of loans,” Spector said.

The production segment pretax income was $9.3 million, down from $106.5 million in the last quarter of 2021 and $362.9 million in the first quarter that year. 

The consumer direct interest rate lock commitments (IRLCs) were $9.1 billion in unpaid principal balance, down 36% from the previous quarter and 32% from the first quarter of 2021. Broker direct IRLCs declined (38%) at a steeper rate than government sponsored IRLCs (27%) from the same period last year. 

Total loan acquisitions and originations were $33.3 billion in unpaid balance, down 29% from the previous quarter and 50% from the first quarter of 2021. 

Among its multi-channel production business, Pennymac’s consumer direct market rose from 1.6% of total originations in 2021 to 1.7% this year, according to Spector. He expects the company to grow market share in that channel as it leverages “servicing portfolio, new technology and advanced data analytics capabilities,” without mentioning further details. 

The correspondent channel had the largest market share across Pennymac’s business at 15.8% in the first quarter. Loan servicing followed at 4.1% and broker direct channel trailed at 2.2%. 

Pennymac’s servicing segment pretax income was $225.2 million in the first quarter, up from $126.1 million in the previous quarter and $141.7 million in the same period in 2021. 

The firm’s servicing and subservicing fees rake in more than $1 billion in revenue annually, according to Doug Jones, the firm’s president and chief mortgage banking officer. Jones added Pennymac began to work with home protection insurance firm Hippo Holdings to offer homeowners insurance and the firm is evaluating other potential partnerships to offer additional products without mentioning details. 

In January 2021, the firm launched a new technology platform in its wholesale channel and rebranded its broker division from PennyMac Broker Direct to Pennymac TPO. 

While Spector said the company’s first-quarter earnings was “solid,” he noted mortgage rates rose faster than predicted and Pennymac has taken steps to better align its expenses. 

Pennymac announced layoffs of 236 employees in six different California offices in March. Most of the positions that were affected by the announcement were home loan specialists, including those with expertise in refinancing. 

The firm’s return on equity was 20% in the first quarter of this year and is projected to trend lower before returning to its pre-pandemic range, according to Spector. Pennymac’s ROE was 61% in 2020 and 29% in 2021. 

The company continued to buy back shares of its stock. It repurchased about $141 million dollars worth of stock in the first quarter, down from $257.3 million in stock buybacks from the previous quarter. 

“The pace of share repurchases was down from last quarter as we believe it is prudent to retain capital during periods of greater volatility,” Spector said. 

PFSI’s stock closed Thursday at $48.38 following the earnings publication, down 4.6% from market opening. The stocks fell 1.1% on Friday to $47.84 at around 2:40 pm.