PennyMac Financial Services, Inc. (NYSE: PFSI) today reported a net loss of $36.8 million for the fourth quarter of 2023, or $(0.74) per share on a diluted basis, on revenue of $361.9 million. Book value per share decreased to $70.52 from $71.56 at September 30, 2023.

PFSI’s Board of Directors declared a fourth quarter cash dividend of $0.20 per share, payable on February 23, 2024, to common stockholders of record as of February 13, 2024.

Fourth Quarter 2023 Highlights

• Pretax loss was $54.2 million, compared to pretax income of $126.8 million in the prior quarter and $67.7 million in the fourth quarter of 2022
  • Includes a non-recurring expense accrual of $158.4 million in the servicing segment as a result of the long-standing arbitration related to the development of our proprietary servicing software
• Issued 5-year $125 million term loan secured by Ginnie Mae MSR and servicing advances
• Issued $750 million of 6-year unsecured senior notes due in December 2029
• Redeemed $875 million in secured term notes due in 2025
• Production segment pretax income of $39.4 million, up from $25.2 million in the prior quarter and a pretax loss of $9.0 million in the fourth quarter of 2022
  • Total loan acquisitions and originations, including those fulfilled for PennyMac Mortgage Investment Trust (NYSE: PMT), were $26.7 billion in unpaid principal balance (UPB), up 6 percent from the prior quarter and 16 percent from the fourth quarter of 2022
  • Consumer direct interest rate lock commitments (IRLCs) were $1.6 billion in UPB, down 6 percent from the prior quarter and 5 percent from the fourth quarter of 2022
  • Broker direct IRLCs were $2.8 billion in UPB, down 7 percent from the prior quarter and up 38 percent from the fourth quarter of 2022
  • Government correspondent IRLCs totaled $11.2 billion in UPB, up 11 percent from the prior quarter and 5 percent from the fourth quarter of 2022
  • Conventional correspondent IRLCs for PFSI’s account totaled $10.0 billion in UPB, down 3 percent from the prior quarter and up 110 percent from the fourth quarter of 2022
  • Correspondent acquisitions of conventional conforming loans fulfilled for PennyMac Mortgage Investment Trust (NYSE: PMT) were $2.5 billion in UPB, down 10 percent from the prior quarter and 63 percent from the fourth quarter of 2022
• Servicing segment pretax loss was $95.5 million, compared to pretax income of $101.2 million in the prior quarter and $75.6 million in the fourth quarter of 2022
  • Pretax income excluding valuation-related and non-recurring items was $144.4 million, up 20 percent from the prior quarter due to lower operating expenses, higher servicing fee revenue and decreased realization of MSR cash flows, partially offset by higher net interest expense
  • Valuation-related and non-recurring items included:
    • $370.7 million in mortgage servicing rights (MSR) fair value losses largely offset by $294.8 million in hedging gains
    • $158.4 million arbitration accrual
      • Net impact on pretax income related to these items was $(234.3) million, or $(3.25) in earnings per share
    • $5.7 million provision for losses on active loans
  • Servicing portfolio grew to $607.2 billion in UPB, up 3 percent from September 30, 2023 driven by production volumes which more than offset prepayment activity
• Investment Management segment pretax income was $1.9 million, up from $0.4 million in the prior quarter and $1.2 million in the fourth quarter of 2022
  • Net assets under management (AUM) were $2.0 billion, essentially unchanged from September 30, 2023

Full-Year 2023 Highlights

• Net income of $144.7 million, down from $475.5 million in 2022
• Pretax income of $183.6 million, down from $665.2 million in 2022
• Total net revenue of $1.4 billion, down from $2.0 billion in 2022
• Repurchased 1.2 million shares of PFSI’s common stock for an approximate cost of $71 million
• Loan production of $99.4 billion in UPB, a decrease of 9 percent from 2022
• Servicing portfolio UPB of $607.2 billion at year end, up 10 percent from December 31, 2022

“PennyMac Financial produced an annualized operating return on equity of 15%¹ in the fourth quarter, marking the culmination of another outstanding year for the company and highlighting the strength of our balanced business model,” said Chairman and CEO David Spector. “The net loss in the fourth quarter was primarily driven by a one-time accrual related to the award in our long-running arbitration with Black Knight. While we disagree with the final ruling, we are very pleased to retain ownership of our industry-leading servicing system, as well as the ability to utilize it as we see fit to benefit our customers and stakeholders.”

Mr. Spector continued, “2023 was one of the more challenging origination markets in recent history, with industry volumes down approximately 40 percent from 2022 and unit originations at their lowest levels since 1990. However, Pennymac, through its multi-channel production platform, produced nearly $100 billion in UPB of mortgage loans, down only 9 percent from 2022, demonstrating both our strong access to the purchase market and our ability to profitably support our customers and business partners. These production volumes continued to drive the organic growth of our servicing portfolio, which ended the year at more than $600 billion in UPB, up 10 percent from the end of last year. Our scaled and growing servicing business is key to the success we have achieved, driving earnings in higher interest rate environments and future opportunities as our customer base continues to expand.”

Mr. Spector concluded, “I am extraordinarily proud of what we accomplished in 2023 and I am even more excited about PennyMac Financial’s future. Our long track record of strong operational and financial performance is unique in the mortgage industry and has been driven by the resilience of our balanced business model with industry-leading positions in both production and servicing, as well as our strong capital and risk management disciplines. I believe we are the most well-positioned company in the industry with proprietary, industry-leading technology, a strong balance sheet, and a growing population of servicing customers that stand to benefit from the products and services we offer to best fit their home ownership needs.”

¹ See page 15 for a reconciliation of non-GAAP items

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 $26.7 billion in UPB, $24.2 billion of which was for its own account, and $2.5 billion of which was fee-based fulfillment activity for PMT. Correspondent locks for PFSI and direct lending IRLCs totaled $25.6 billion in UPB, up 2 percent from the prior quarter and 34 percent from the fourth quarter of 2022.

Production segment pretax income was $39.4 million, up from pretax income of $25.2 million in the prior quarter and a pretax loss of $9.0 million in the fourth quarter of 2022. Production segment revenue totaled $176.5 million, essentially unchanged from the prior quarter and up 34 percent from the fourth quarter of 2022. The increase from the fourth quarter of 2022 was driven primarily by higher net gains on loans held for sale due to higher volumes and margins.

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 $4.9 million in the fourth quarter, down 11 percent from the prior quarter and 60 percent from the fourth quarter of 2022. The quarter-over-quarter decrease was driven by lower conventional acquisition volumes for PMT’s account.

Net interest income in the fourth quarter totaled $8.2 million, up from $2.5 million in the prior quarter. Interest income totaled $73.4 million, up from $62.2 million in the prior quarter, and interest expense totaled $65.2 million, up from $59.6 million in the prior quarter, both due to higher volumes and higher average note rates on newly originated loans.

Production segment expenses were $137.1 million, down 8 percent from the prior quarter and 2 percent from the fourth quarter of 2022. Production expenses, net of loan origination expense, were lower than the prior quarter primarily due to lower compensation accruals related to financial performance.

Servicing Segment

The Servicing segment includes income from owned MSRs, subservicing and special servicing activities. The total servicing portfolio grew to $607.2 billion in UPB at December 31, 2023, an increase of 3 percent from September 30, 2023 and 10 percent from December 31, 2022. PennyMac Financial subservices and conducts special servicing for $232.7 billion in UPB. PennyMac Financial’s owned MSR portfolio grew to $374.6 billion in UPB, an increase of 5 percent from September 30, 2023 and 18 percent from December 31, 2022.

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

Servicing segment pretax loss was $95.5 million compared to pretax income of $101.2 million in the prior quarter and $75.6 million in the fourth quarter of 2022. Servicing segment pretax loss in the fourth quarter included a non-recurring arbitration accrual of $158.4 million. Servicing segment net revenues totaled $175.8 million, down from $217.1 million in the prior quarter and $199.0 million in the fourth quarter of 2022. The quarter-over-quarter decrease was driven primarily by lower net loan servicing fees and net interest expense in the fourth quarter versus net interest income in the prior quarter.

Revenue from net loan servicing fees totaled $162.3 million, down from $185.4 million in the prior quarter primarily driven by increased net valuation related losses and partially offset by increased loan servicing fees due to a larger servicing portfolio and lower realization of cash flows. Net loan servicing fee revenues included $402.5 million in loan servicing fees, reduced by $164.3 million from the realization of MSR cash flows. Net valuation-related losses totaled $75.9 million, and included MSR fair value losses of $370.7 million driven by the decline in mortgage interest rates, and hedging gains of $294.8 million.

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

Servicing segment revenue included $24.5 million in net gains on loans held for sale related to reperforming government-insured and guaranteed loans purchased out of Ginnie Mae securitizations, or EBOs. These gains were up from $23.6 million in the prior quarter and $17.2 million in the fourth quarter of 2022. These EBOs are previously delinquent loans that were brought back to performing status through PennyMac Financial’s successful servicing efforts.

Net interest expense totaled $13.7 million, versus net interest income of $7.2 million in the prior quarter and net interest expense of $2.7 million in the fourth quarter of 2022. Interest income was $91.6 million, down from $104.4 million in the prior quarter due to decreased placement fees on custodial balances from seasonally lower average balances. Interest expense was $105.3 million, up from $97.2 million in the prior quarter due to higher average balances of debt outstanding during the quarter.

Servicing segment expenses totaled $271.3 million and included a non-recurring arbitration accrual of $158.4 million. Excluding this accrual, servicing segment expenses were $112.9 million, down slightly from the prior quarter.

Investment Management Segment

PennyMac Financial manages PMT for which it earns base management fees and may earn incentive compensation. Net AUM was $2.0 billion as of December 31, 2023, essentially unchanged from September 30, 2023 and December 31, 2022.

Pretax income for the Investment Management segment was $1.9 million, up from $0.4 million in the prior quarter and $1.2 million in the fourth quarter of 2022. Base management fees from PMT were $7.3 million, essentially unchanged from the prior quarter and the fourth quarter of 2022. No performance incentive fees were earned in the fourth quarter.

The following table presents a breakdown of management fees:

Investment Management segment expenses totaled $7.7 million, down 8 percent from the prior quarter and 11 percent from the fourth quarter of 2022.

Consolidated Expenses

Total expenses were $416.2 million. Excluding the non-recurring arbitration accrual of $158.4 million, total expenses were $257.8 million, down from $273.5 million in the prior quarter and $272.7 million in the fourth quarter of 2022.

Taxes

PFSI recorded a benefit from income tax of $17.4 million in the fourth quarter, due to the pretax loss.

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 Thursday, February 1, 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. In 2023, PennyMac Financial’s production of newly originated loans totaled $99 billion in unpaid principal balance, making it the second largest mortgage lender in the nation. As of December 31, 2023, PennyMac Financial serviced loans totaling $607 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, the Company’s 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; declines in real estate or significant changes in U.S. housing prices or activity in the U.S. housing market; 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; changes in macroeconomic and U.S. real estate market conditions; difficulties inherent in adjusting the size of our operations to reflect changes in business levels; purchase opportunities for mortgage servicing rights and our success in winning bids; 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 or characteristics or under other circumstances; our obligation to indemnify PMT if our services fail to meet certain criteria or characteristics or under other circumstances; decreases in 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 adverse weather conditions, man-made or natural disasters, 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 Company’s earnings materials contain financial information calculated other than in accordance with U.S. generally accepted accounting principles (“GAAP”), such as pretax income and operating return on equity excluding valuation-related changes and a non-recurring legal accrual that provides a meaningful perspective on the Company’s business results since the Company utilizes this information to evaluate and manage the business. Non-GAAP disclosure has 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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