Pennymac posts first-quarter profit of $39M

Pennymac Financial Services earned a profit of $39.3 million in the first quarter of 2024, the California-based multichannel lender and servicer announced Wednesday.

The company’s pretax gain in the first quarter was $43.9 million. That was less than the $38.1 million figure it posted during the same period last year but a significant improvement from the pretax loss of $54.2 million it incurred in fourth-quarter 2023.

“PennyMac Financial reported strong operating earnings in the first quarter, with an annualized operating return on equity of 15 percent in what is expected to be the one of the smallest quarterly origination markets of this cycle,” chairman and CEO David Spector said in a news release. “Strong volume increases in our consumer and broker direct channels drove continued profitability in our production segment.”

The company’s loan production pretax income was $35.9 million during the first quarter, down from $39.4 million in Q4 2023 but up from a pretax loss of $19.6 million in Q1 2023. Production revenue totaled $184.7 million, up 5% from the prior quarter and up 52% year over year.

Pennymac reported that the quarterly increase in production revenue was primarily tied to higher net gains on loans held for sale at fair value due to higher volumes in its direct-to-consumer channel. Meanwhile, the revenue growth compared to Q1 2023 was largely due to higher overall origination volumes and margins.

The total value of its loan acquisitions and originations dropped to $21.7 billion in unpaid principal balance (UPB), down 19% on a quarterly basis and 5% below year-ago levels.

During an earnings call on Wednesday, chief financial officer Daniel Perotti said that “Pennymac maintained its dominant position in correspondent lending in the first quarter” as it acquired $18 billion in volume. That was down from $24 billion in the prior quarter and was “driven by our focus on profitability over volatility,” he said.

In the wholesale channel, Perotti noted that locked loans were up 20% and funded loans were “essentially unchanged” from the prior quarter. But broker-channel margins grew from 79 basis points to 103 basis points during that period.

“The number of brokers approved to do business with us at quarter end was over 4,000 — up 36% from the same time last year,” Perotti said. “And we expect this number to continue growing as top brokers increasingly look for a strong second option.”

Pennymac’s servicing portfolio continues to grow. Its owned mortgage servicing rights (MSR) portfolio had a UPB of $386.6 billion on March 31, up 3% from the end of Q4 2023 and up 18% from the end of Q1 2023.

In response to an analyst’s question during the earnings call, Spector said he expects the company’s servicing channel to lead to more refinance opportunities when mortgage rates eventually decline.

“We have built a really great model in terms of growing the servicing portfolio as a byproduct of our organic growth strategy,” Spector said. “And as we continue to lead in the correspondent space and continue to grow our presence in the broker-direct space, I expect that our servicing will continue to grow at probably even a little faster clip. … I don’t see a melting ice cube scenario anytime in the future.”

Last year, Pennymac earned net income of $144.7 million, a decline of nearly 70% from the $475.5 million profit it posted in 2022. And in fourth-quarter 2023 alone, the company lost $36.8 million.

Its net revenues shrank from $2 billion in 2022 to $1.4 billion in 2023. Its overall profit was largely due to the strong performance of its servicing portfolio.

Legal troubles with Black Knight contributed to the loss in Q4 2023. Late in the year, an arbitrator awarded Black Knight $155.2 million in damages tied to a breach of contract claim in a four-year dispute involving the companies. Black Knight accused Pennymac of copying its mortgage servicing platform.

At the close of the market on Wednesday, Pennymac’s stock price was $92.07, up 4.86% since the start of the year.