PennyMac Financial Services, Inc. Reports Third Quarter 2024 Results

PennyMac Financial Services, Inc. (NYSE:PFSI) today reported net income of $69.4 million for the third quarter of 2024, or $1.30 per share on a diluted basis, on revenue of $411.8 million. Book value per share increased to $72.95 from $71.76 at June 30, 2024.

PFSI's Board of Directors declared a third quarter cash dividend of $0.30 per share, payable on November 27, 2024, to common stockholders of record as of November 18, 2024.

Third Quarter 2024 Highlights

• Pretax income was $93.9 million, down from $133.9 million in the prior quarter and $126.8 million in the third quarter of 2023
• Production segment pretax income was $107.9 million, up from $41.3 million in the prior quarter and $25.2 million in the third quarter of 2023
  • Total loan acquisitions and originations, including those fulfilled for PennyMac Mortgage Investment Trust (NYSE:PMT), were $31.7 billion in unpaid principal balance (UPB), up 17 percent from the prior quarter and 26 percent from the third quarter of 2023
  • Broker direct interest rate lock commitments (IRLCs) were $5.3 billion in UPB, up 24 percent from the prior quarter and 78 percent from the third quarter of 2023
  • Consumer direct IRLCs were $5.2 billion in UPB, up 93 percent from the prior quarter and 206 percent from the third quarter of 2023
  • Government correspondent IRLCs totaled $12.4 billion in UPB, up 12 percent from the prior quarter and 24 percent from the third quarter of 2023
  • Conventional correspondent IRLCs for PFSI's account totaled $8.2 billion in UPB, down 17 percent from the prior quarter and 20 percent from the third quarter of 2023 as PMT retained a higher percentage of its conventional correspondent production volumes
  • Correspondent acquisitions of conventional conforming and jumbo loans fulfilled for PMT were $5.9 billion in UPB, up 167 percent from the prior quarter and 116 percent from the third quarter of 2023
• Servicing segment pretax loss was $14.6 million, compared to pretax income of $88.5 million in the prior quarter and $101.2 million in the third quarter of 2023
  • Pretax income excluding valuation-related items and non-recurring items was $151.4 million, up from $149.0 million in the prior quarter
  • Valuation-related items included:
    • $402.4 million in mortgage servicing rights (MSR) fair value declines, before recognition of realization of cash flows, partially offset by $242.1 million in hedging gains
      • Net impact on pretax income related to these items was $(160.4) million, or $(2.19) in diluted earnings per share
    • $5.7 million provision for losses on active loans
  • Servicing portfolio grew to $648.1 billion in UPB, up 2 percent from June 30, 2024, and 10 percent from September 30, 2023 driven by production volumes which more than offset prepayment activity
• Investment Management segment pretax income was $0.7 million, down from $4.0 million in the prior quarter and up from $0.4 million in the third quarter of 2023
  • Net assets under management (AUM) were $1.9 billion, essentially unchanged from June 30, 2024 and September 30, 2023

"PennyMac Financial reported outstanding results in the third quarter, with an annualized operating return on equity of 20 percent," said Chairman and CEO David Spector. "Our production segment pretax income nearly tripled from last quarter as lower mortgage rates provided us the opportunity to help many customers in our servicing portfolio lower their monthly mortgage payments through a refinance. At the same time, our servicing portfolio – now near $650 billion in unpaid principal balance and nearly 2.6 million customers – continues to grow, driving increased revenue and cash flow contributions, as well as low-cost leads for our consumer direct lending division."

Mr. Spector continued, "We have built an operating platform that we believe is unmatched in the mortgage industry, able to handle large, growing volumes of loans at the highest quality standards while also delivering strong performance across various market environments. Our ability to swiftly react to the increased opportunity in the loan production market reflects our significant and ongoing investments in technology, the operational enhancements we have made, and ultimately the scale we have achieved. In this period of interest rate volatility, we expect to continue delivering strong financial results with annualized operating returns on equity in the high-teens to low-twenties, anchored by the continued growth of our servicing portfolio and low-cost structure."

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 $31.7 billion in UPB, $25.7 billion of which was for its own account and $5.9 billion of which was fee-based fulfillment activity for PMT. Correspondent locks for PFSI and direct lending IRLCs totaled $31.2 billion in UPB, up 12 percent from the prior quarter and 24 percent from the third quarter of 2023.

Production segment pretax income was $107.9 million, up from $41.3 million in the prior quarter and $25.2 million in the third quarter of 2023. Production segment revenue totaled $295.6 million, up 46 percent from the prior quarter and 69 percent from the third quarter of 2023. The increase from the prior quarter and third quarter of 2023 was primarily due to higher volumes across all channels, with the largest increase in the consumer direct channel.

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 $11.5 million in the third quarter, up 160 percent from the prior quarter and 108 percent from the third quarter of 2023. The increase from the prior quarter was primarily due to higher volumes of conventional correspondent loans retained by PMT. In the fourth quarter, we expect PMT to retain approximately 15 to 25 percent of total conventional correspondent production, a decline from 42 percent in the third quarter.

Net interest expense in the third quarter was $2.1 million, compared to net interest income of $1.2 million in the prior quarter. Interest income totaled $79.4 million, down from $84.6 million in the prior quarter, and interest expense totaled $81.5 million, down from $83.4 million in the prior quarter, both primarily due to lower market interest rates.

Production segment expenses were $187.5 million, up 16 percent from the prior quarter and 26 percent from the third quarter of 2023, both primarily due to higher volumes in the direct lending channels.

Servicing Segment

The Servicing segment includes income from owned MSRs and subservicing. The total servicing portfolio grew to $648.1 billion in UPB at September 30, 2024, an increase of 2 percent from June 30, 2024 and 10 percent from September 30, 2023. PennyMac Financial's owned MSR portfolio grew to $416.4 billion in UPB, up 3 percent from June 30, 2024, and 17 percent from September 30, 2023. PennyMac Financial subservices $231.4 billion in UPB for PMT and subservices on an interim basis $258 million in UPB of previously owned loans that have been repurchased by the United States Veterans Affairs (VA) pursuant to the Veterans Affairs Servicing Purchase (VASP) program.

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

Servicing segment pretax loss was $14.6 million, down from pretax income of $88.5 million in the prior quarter and $101.2 million in the third quarter of 2023. Servicing segment net revenues totaled $107.1 million, down from $194.2 million in the prior quarter and $217.1 million in the third quarter of 2023.

Revenue from net loan servicing fees totaled $75.8 million, down from $167.6 million in the prior quarter and $185.4 million in the third quarter of 2023. Loan servicing fees were $462.0 million, up from $440.7 million in the prior quarter primarily due to growth in PFSI's owned portfolio, reduced by $225.8 million in realization of cash flows, which was up from last quarter due to higher prepayment expectations as a result of lower market interest rates. Net valuation related declines were $160.4 million, compared to $72.4 million of such losses in the prior quarter. MSR fair value losses, before realization of cash flows, were $402.4 million due to lower market interest rates and hedging gains were $242.1 million, also driven by declining interest rates.

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

Servicing segment revenue included $20.9 million in net gains on loans held for sale related to early buyout loans (EBOs), down slightly from $21.7 million in the prior quarter and $23.6 million in the third 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 income totaled $9.9 million, compared to net interest expense of $8.4 million in the prior quarter and net interest income of $7.2 million in the third quarter of 2023. Interest income was $146.0 million, up from $116.1 million in the prior quarter due to increased earnings from placement fees on custodial balances due to higher average balances outstanding. Interest expense was $136.1 million, up from $124.5 million in the prior quarter due to higher average balances of debt outstanding during the quarter.

Servicing segment expenses totaled $121.8 million, up from $105.7 million in the prior quarter primarily due to higher stock-based compensation, which had declined in the last quarter and increased in the current quarter related to the projected payout of certain share-based awards.

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 September 30, 2024, essentially unchanged from June 30, 2024 and September 30, 2023.

Pretax income for the Investment Management segment was $0.7 million, down from $4.0 million in the prior quarter and up from $0.4 million in the third quarter of 2023. Base management fees from PMT were $7.2 million, essentially unchanged from the prior quarter and third quarter of 2023. No performance incentive fees were earned in the third quarter.

The following table presents a breakdown of management fees:

Investment Management segment expenses totaled $8.7 million, up from $5.3 million in the prior quarter and $8.4 million in the third quarter of 2023.

Consolidated Expenses

Total expenses were $317.9 million, up from $272.3 million in the prior quarter primarily due to increased production segment expenses due to higher volumes and stock-based compensation expense as mentioned above.

Taxes

PFSI recorded a provision for tax expense of $24.6 million, resulting in an effective tax rate of 26.1 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, October 22, 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 4,000 people across the country. For the twelve months ended September 30, 2024, PennyMac Financial's production of newly originated loans totaled $107 billion in unpaid principal balance, making it a top lender in the nation. As of September 30, 2024, PennyMac Financial serviced loans totaling $648 billion in unpaid principal balance, making it a top 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, consumer and 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; 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 dependence on U.S. government-sponsored entities and changes in their current roles or their guarantees or guidelines; 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 entity; 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, including 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.

⁽¹⁾ Assumes a tax rate of 26.85%

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