PennyMac Financial Services, Inc. Reports Second Quarter 2024 Results and Increases Quarterly Dividend

PennyMac Financial Services, Inc. (NYSE:PFSI) today reported net income of $98.3 million for the second quarter of 2024, or $1.85 per share on a diluted basis, on revenue of $406.1 million. Book value per share increased to $71.76 from $70.13 at March 31, 2024.

PFSI's Board of Directors declared a second quarter cash dividend of $0.30 per share, a 50 percent increase from the prior quarter, payable on August 23, 2024, to common stockholders of record as of August 13, 2024.

Second Quarter 2024 Highlights

• Pretax income was $133.9 million, up from $43.9 million in the prior quarter and $72.9 million in the second quarter of 2023
• Production segment pretax income was $41.3 million, up from $35.9 million in the prior quarter and $24.4 million in the second quarter of 2023
  • Total loan acquisitions and originations, including those fulfilled for PennyMac Mortgage Investment Trust (NYSE:PMT), were $27.2 billion in unpaid principal balance (UPB), up 25 percent from the prior quarter and 9 percent from the second quarter of 2023
  • Broker direct interest rate lock commitments (IRLCs) were $4.3 billion in UPB, up 28 percent from the prior quarter and 52 percent from the second quarter of 2023
  • Consumer direct IRLCs were $2.7 billion in UPB, up 25 percent from the prior quarter and second quarter of 2023
  • Government correspondent IRLCs totaled $11.1 billion in UPB, up 31 percent from the prior quarter and 3 percent from the second quarter of 2023
  • Conventional correspondent IRLCs for PFSI's account totaled $9.9 billion in UPB, up 15 percent from the prior quarter and 32 percent from the second quarter of 2023
  • Correspondent acquisitions of conventional conforming and jumbo loans fulfilled for PMT were $2.2 billion in UPB, up 26 percent from the prior quarter and down 26 percent from the second quarter of 2023
• Servicing segment pretax income was $88.5 million, compared to $4.9 million in the prior quarter and $46.5 million in the second quarter of 2023
  • Pretax income excluding valuation-related items and non-recurring items was $149.0 million, up 20 percent from the prior quarter due to higher net loan servicing fees, higher earnings from placement fees on custodial balances, and lower operating expenses
  • Valuation-related and non-recurring items included:
    • $99.4 million in mortgage servicing rights (MSR) fair value gains, before recognition of realization of cash flows, more than offset by $171.8 million in hedging losses
    • Non-recurring, non-cash gain of $12.5 million related to a transaction within our closing services joint venture in our servicing segment
      • Net impact on pretax income related to these items was $(59.9) million, or $(0.82) in diluted earnings per share
    • $0.6 million provision for losses on active loans
  • Servicing portfolio grew to $632.7 billion in UPB, up 2 percent from March 31, 2024, and 10 percent from June 30, 2023 driven by production volumes which more than offset prepayment activity
• Investment Management segment pretax income was $4.0 million, up from $3.1 million in the prior quarter and $2.0 million in the second quarter of 2023
  • Net assets under management (AUM) were $1.9 billion, essentially unchanged from March 31, 2024, and June 30, 2023
• Issued $650 million of senior unsecured notes due in November 2030 at attractive terms and subsequently paid down short-term secured borrowings

"PennyMac Financial generated strong earnings in the second quarter with an annualized operating return on equity of 16 percent," said Chairman and CEO David Spector. "Given our continued strong financial results, I am pleased to note that PFSI's Board of Directors approved a quarterly common cash dividend of $0.30 per share from $0.20 per share, an increase of 50 percent. Our large and growing servicing business continues to drive revenue and cash flow in this higher interest rate environment and notably, our per loan servicing expenses were at record low levels as we continue to leverage our proprietary technology and operational scale. In the second quarter, total acquisition and origination volumes were $27 billion, up 25 percent from the prior quarter, driving continued growth of our servicing portfolio to more than $630 billion in unpaid principal balance at quarter-end."

Mr. Spector continued, "While our financial performance in recent periods has been strong, I continue to believe Pennymac's best days are yet ahead. This quarter we successfully raised $650 million in unsecured senior notes at attractive terms, further strengthening our balance sheet and demonstrating our strong access to capital and liquidity. In this higher interest rate environment, we have gained considerable market share in our purchase-focused correspondent and broker-direct lending channels, and with nearly $115 billion in UPB of the loans in our servicing portfolio carrying a note rate greater than 6 percent, our consumer direct lending channel will have a tremendous opportunity to provide our customers with lower mortgage rates when interest rates decline. Our multi-channel approach to loan production drives strong competitive advantages for us and with our balanced business model, we remain one of the best-positioned in the industry to drive continued growth and financial returns."

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 $27.2 billion in UPB, $25.0 billion of which was for its own account and $2.2 billion of which was fee-based fulfillment activity for PMT. Correspondent locks for PFSI and direct lending IRLCs totaled $28.0 billion in UPB, up 24 percent from the prior quarter and 20 percent from the second quarter of 2023.

Production segment pretax income was $41.3 million, up from $35.9 million in the prior quarter and $24.4 million in the second quarter of 2023. Production segment revenue totaled $202.6 million, up 10 percent from the prior quarter and 19 percent from the second quarter of 2023. The increase from the prior quarter was primarily due to higher volumes across all channels, and the increase from the second quarter of 2023 was primarily due to higher overall volumes and higher margins in the direct lending channels.

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 $4.4 million in the second quarter, up 10 percent from the prior quarter and down 19 percent from the second quarter of 2023. The increase from the prior quarter was primarily due to higher volumes acquired for PMT's account. In the third quarter, PMT expects to retain approximately 30 to 50 percent of total conventional correspondent production, an increase from 18 percent in the second quarter.

Net interest income in the second quarter totaled $1.2 million, down from $2.0 million in the prior quarter. Interest income totaled $84.6 million, up from $63.9 million in the prior quarter, and interest expense totaled $83.4 million, up from $61.9 million in the prior quarter, both primarily due to higher average balance of loans held for sale and the associated financing during the quarter.

Production segment expenses were $161.3 million, up 8 percent from the prior quarter and 10 percent from the second quarter of 2023, both primarily due to higher overall volumes.

Servicing Segment

The Servicing segment includes income from owned MSRs and subservicing. The total servicing portfolio grew to $632.7 billion in UPB at June 30, 2024, an increase of 2 percent from March 31, 2024, and 10 percent from June 30, 2023. PennyMac Financial's owned MSR portfolio grew to $402.6 billion in UPB, up 4 percent from March 31, 2024, and 18 percent from June 30, 2023. PennyMac Financial subservices $230.2 billion in UPB for PMT.

The table below details PennyMac Financial's servicing portfolio UPB:

Servicing segment pretax income was $88.5 million, up from $4.9 million in the prior quarter and $46.5 million in the second quarter of 2023. Servicing segment net revenues totaled $194.2 million, up from $111.6 million in the prior quarter and $156.4 million in the second quarter of 2023.

Revenue from net loan servicing fees totaled $167.6 million, up from $101.0 million in the prior quarter and $146.1 million in the second quarter of 2023. Loan servicing fees were $440.7 million, up from $424.2 million in the prior quarter primarily due to growth in PFSI's owned portfolio, reduced by $200.7 million in realization of cash flows. Net valuation related declines were $72.4 million, down from $124.7 million in the prior quarter. MSR fair value gains, before realization of cash flows, were $99.4 million and hedging losses were $171.8 million driven by high hedge costs and significant interest rate volatility during the quarter.

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

Servicing segment revenue included $21.7 million in net gains on loans held for sale related to early buyout loans (EBOs), up slightly from the prior quarter and up from $15.2 million in the second quarter of 2023. These EBOs are previously delinquent loans that were brought back to performing status through PennyMac Financial's successful servicing efforts.

Net interest expense totaled $8.4 million, compared to $11.5 million in the prior quarter and $5.1 million in the second quarter of 2023. Interest income was $116.1 million, up from $92.4 million in the prior quarter due to increased earnings from placement fees on custodial balances. Interest expense was $124.5 million, up from $103.9 million in the prior quarter due to higher average balances of debt outstanding during the quarter.

Servicing segment expenses totaled $105.7 million, down slightly from $106.7 million in the prior quarter.

Investment Management Segment

PennyMac Financial manages PMT for which it earns base management fees and may earn incentive compensation. Net AUM were $1.9 billion as of June 30, 2024, essentially unchanged from March 31, 2024 and June 30, 2023.

Pretax income for the Investment Management segment was $4.0 million, up from $3.1 million in the prior quarter and $2.0 million in the second quarter of 2023. Base management fees from PMT were $7.1 million, essentially unchanged from the prior quarter and second quarter of 2023. No performance incentive fees were earned in the first quarter.

The following table presents a breakdown of management fees:

Investment Management segment expenses totaled $5.3 million, down from $6.3 million in the prior quarter and $7.5 million in the second quarter of 2023.

Consolidated Expenses

Total expenses were $272.3 million, up from $261.8 million in the prior quarter primarily due to increased production segment expenses due to higher volumes.

Taxes

PFSI recorded a provision for tax expense of $35.6 million, resulting in an effective tax rate of 26.6 percent.

Management's slide presentation and accompanying material will be available in the Investor Relations section of the Company's website at pfsi.pennymac.com after the market closes on Tuesday, July 23, 2024. Management will also host a conference call and live audio webcast at 5:00 p.m. Eastern Time to review the Company's financial results. The webcast can be accessed at pfsi.pennymac.com, and a replay will be available shortly after its conclusion.

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 3,900 people across the country. For the twelve months ended June 30, 2024, PennyMac Financial's production of newly originated loans totaled $101 billion in unpaid principal balance, making it a top lender in the nation. As of June 30, 2024, PennyMac Financial serviced loans totaling $633 billion in unpaid principal balance, making it a top five 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, our 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; changes in real estate values, housing prices and housing sales; changes in macroeconomic and U.S. real estate market conditions; 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; 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; difficulties inherent in adjusting the size of our operations to reflect changes in business levels; purchase opportunities for mortgage servicing rights; our substantial amount of indebtedness; increases in loan delinquencies, defaults and forbearances; 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; our obligation to indemnify PMT if our services fail to meet certain criteria or characteristics or under other circumstances; investment management and incentive fees; conflicts of interest in allocating our services and investment opportunities among us and our advised entities; our ability to mitigate cybersecurity risks, cyber incidents and technology disruptions; the effect of public opinion on our reputation; our exposure to risks of loss and disruptions in operations resulting from severe weather events, man-made or other natural conditions, climate change and pandemics; 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 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 press release contains financial information calculated other than in accordance with U.S. generally accepted accounting principles ("GAAP"), such as pretax income excluding valuation-related items and operating net income 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 disclosures have limitations as an analytical tool and should not be viewed as a substitute for financial information determined in accordance with GAAP.

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