PennyMac Financial Services Inc. (NYSE:PFSI) reported its fourth-quarter 2024 earnings, revealing a diluted earnings per share (EPS) of $1.95, falling short of the forecasted $3.03. The company's revenue also missed expectations, coming in at $470.11 million against the anticipated $531.7 million. Despite these misses, the stock saw a premarket increase of 6.98%, trading at $112. According to InvestingPro data, analysts maintain a strong buy consensus with a potential 19% upside from current levels.
Key Takeaways
- EPS of $1.95 missed the forecast of $3.03.
- Revenue reached $470.11 million, below the expected $531.7 million.
- Stock price increased by 6.98% in premarket trading.
- Strong growth in loan originations and servicing portfolio.
- Continued focus on technology and operational efficiency.
Company Performance
PennyMac Financial Services demonstrated robust growth in its loan origination and servicing segments. The company reported a net income of $104 million and an annualized return on equity (ROE) of 11%, with an operating ROE of 16%. Total (EPA:TTEF) loan originations and acquisitions surged to $36 billion, marking a 13% increase from the previous quarter. The servicing portfolio expanded to an unpaid principal balance of $6.66 billion. InvestingPro analysis shows the company maintains an impressive 87.4% gross profit margin, though it's currently experiencing cash flow challenges. InvestingPro subscribers have access to 8 additional key insights about PFSI's financial health.
Financial Highlights
- Revenue: $470.11 million, below the $531.7 million forecast.
- EPS: $1.95, missing the $3.03 forecast.
- Loan originations: $36 billion, up 13% from the prior quarter.
- Servicing portfolio: $6.66 billion in unpaid principal balance.
Earnings vs. Forecast
PennyMac's actual EPS of $1.95 was significantly below the forecast of $3.03, representing a surprise of approximately -35.6%. This miss contrasts with previous quarters where the company had generally met or exceeded expectations. The revenue shortfall was similarly notable, falling short by about 11.6%.
Market Reaction
Despite the earnings miss, PennyMac's stock price rose by 6.98% in premarket trading, reaching $112. This movement suggests that investors may be focusing on the company's strategic initiatives and growth potential rather than the immediate earnings shortfall. The stock's performance remains within its 52-week range, with a high of $119.13 and a low of $83.03. InvestingPro indicates the stock is currently fairly valued based on its proprietary Fair Value model, with strong price momentum scores and a modest P/E ratio of 19.7x.
Outlook & Guidance
Looking forward, PennyMac projects an operating ROE in the mid to high teens for 2025. The company anticipates continued efficiency gains and portfolio growth, with plans to engage in unsecured debt market transactions. The guidance for future EPS and revenue remains optimistic, with expectations of $14.13 in EPS for FY2025 and $16.63 for FY2026. InvestingPro data reveals analysts expect 48% revenue growth in FY2025, though three analysts have recently revised their earnings expectations downward. For comprehensive analysis and detailed forecasts, investors can access the full PFSI Research Report on InvestingPro.
Executive Commentary
CEO David Spector emphasized the company's strong market position, stating, "We have a platform in the mortgage industry that I believe is unmatched." He highlighted the balanced and diversified business model, noting, "Our leadership positions in both production and servicing enable strong financial performance."
Risks and Challenges
- Market volatility and high mortgage rates could impact future performance.
- Potential changes in GSE conservatorship may affect operations.
- Economic conditions and interest rate fluctuations pose ongoing risks.
Q&A
During the earnings call, analysts inquired about the company's hedge performance and strategy, delinquency trends, and potential changes in the GSE market. The management detailed plans for brand expansion in the consumer direct channel, addressing concerns about market adaptation and growth strategies.
Full transcript - PennyMac Financial Services Inc (PFSI) Q4 2024:
Operator/Moderator, Panamax Financial Services: Good afternoon, and welcome to Panamax Financial Services Inc. Fourth Quarter twenty twenty four Earnings Call.
Additional earnings materials, including presentation slides that will be referred to in this call, are available on Pennamac Financial's website at pfsi.pennamac.com. Before we begin, let me remind you that this call may contain forward looking statements that are subject to certain risks identified on Slide 2 of the earnings presentation that could cause the company's actual results to differ materially as well as non GAAP measures that have been reconciled to their GAAP equivalent in the earnings materials. Now, I'd like to introduce David Spector, PennyMac Financial's Chairman and Chief Executive Officer and Dan Perotti, Pennymark Financial's Chief Financial Officer. You may begin.
David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: Thank you, operator. Good afternoon, and thank you to everyone for participating in our earnings call. For the reported net income of $104,000,000 or diluted earnings per share of $1,.95 for an annualized return on equity of 11%. Excluding the impact of fair value changes, PFSI produced an annualized operating ROE of 16%, driven by continued strength in our servicing business and a solid contribution from our production segment despite higher mortgage rates. In total, loan originations and acquisitions were $36,000,000,000 in unpaid principal balance, up 13% from the prior quarter and driving the continued growth of our servicing portfolio to $6.66,000,000,000 dollars in unpaid principal balance with 260,000,0.0 customers.
Before I continue on, I would like to talk about a change that we are reporting our financial results and reporting segments. We took the opportunity to address our financial reporting for the evolution of our businesses and the way we manage them. As a result, we have modified our segment definitions. The principal change we made was to remove the corporate overhead allocations from our business segments to better evaluate the performance of our operating businesses. We also determined that our investment management business was not an operational segment and as such, the related results are now consolidated into corporate and other items.
Our 2 operating segments are now production and servicing. And we have included non segment activities and activities related to our investment management business in corporate and other. Prior period amounts have been recast to conform these periods presentation to the current period presentation. And I encourage investors to view the Excel supplement posted on pssi.pennimac.com for more detailed information. Now, back to our results.
The marked the end of a very successful year for PFSI, as you can see on slide 4 of our earnings presentation. We highlighted some of our key achievements in 2024, which demonstrates the earnings power of our balanced business model and the significant gains in operating leverage we achieved. In the production segment, total acquisition and origination volumes were $116,000,000,000 in UPB, up 17% from 2023, driven by a nearly 70% increase in originations from the direct lending channels. Production segment revenues were up 47% from 2023 and despite the large mix shift, expenses remain contained, up only 13% from 2023. Production segment pretax income in 2024 was $3.11,000,000 dollars up from $116,000,000 in 2023, including a significantly higher contribution in the when rates decline, highlighting our ability to rapidly address recapture opportunities and increased demand for refinances when mortgage rates decline.
Our large servicing business provides ongoing revenue and cash flow contributions in this higher rate environment and continues to provide the foundation for our strong financial performance. The unpaid principal balance of our servicing portfolio increased 10% from the prior year end as production volumes more than offset runoff from prepayments. Servicing segment operating revenues were $150,000,000,0.0 a 19% increase from the prior year, driven primarily by increased servicing fees and earnings on custodial balances due to growth in the owned portfolio. Operating expenses increased by only 3%, demonstrating the ability of our servicing workflows and technology to scale efficiently with our growth, while also providing our servicing associates with the tools they need to best serve our customers. In 2024, operating pretax income was $6.43,000,000 dollars or 10.1 basis points of average servicing portfolio UPB, up from $5.35,000,000 dollars or 9.3 basis points in 2023.
In total, we delivered an operating return on equity of 17%. GAAP ROE was 9%. Growth in book value per share was 6% and we also increased our dividend to $0.3 per quarter, an increase of 50% from the previous dividend. These strong yearly results demonstrate our commitment to operational excellence and our focus on delivering sustainable earnings through varying interest rate cycles by leveraging our balanced business model. Turning to the origination market, current third party estimates for total originations in 2025 averaged $2,000,000,000,000 reflecting growth in overall volumes.
Though mortgage rates are back up into the 7% range, we believe ongoing volatility in rates will present opportunities in the origination market from time to time. As you can see on Slide 6, our balanced and diversified business model with leadership positions in both production and servicing enables strong financial performance and a foundation for continued growth as an industry leading mortgage company across different interest rate environments. We achieved the mid teens operating ROE in quarters characterized by higher mortgage rates and a 20% operating ROE in the when mortgage rates declined. Because we retained the servicing rights on our loan production and have been 1 of the largest producer of mortgage loans in recent periods, we are uniquely positioned with a large and growing portfolio of borrowers who recently entered into mortgages at higher rates and who stand to benefit from a refinance in the future when interest rates decline. On Slide 7 of our earnings presentation, you can see that as of year end, dollars $2.20,000,000,000 in unpaid principal balance or approximately one third of the loans in our portfolio at a note rate above 5%.
Approximately $100,000,000,000 were government loans and approximately $120,000,000,000 were conventional and other loans. The potential opportunity for earnings growth is highlighted on this slide as well as our historical refinance recapture rates, which have improved significantly from five years ago as a result of our ongoing technology enhancements and process improvements. We expect these recapture rates to continue improving given our multi year investments combined with the increased investment in our brand as use of targeted marketing strategies. As I briefly discussed, our large and growing servicing portfolio is a key asset, anchoring our core operational results in this higher interest rate environment and driving low cost leads to our consumer direct division. Throughout our history, we have been focused on deploying new and emerging technologies to drive efficiencies and lower costs, as evidenced by the chart on the right side of Slide 8, which highlights a decline in our per loan servicing expenses of more than 35% since 2019.
We have a platform in the mortgage industry that I believe is unmatched. And further, our best in class management team remains committed to unlocking additional efficiencies through continued investments in workflow and technologies. It is for all of these reasons that I am confident in our ability to continue driving strong financial performance in this higher rate environment bolstered by increases in the origination market in periods when mortgage rates decline. 2025 will be an exciting year for us. I will now turn it over to Dan, who will review the drivers of PFSI's fourth quarter financial performance.
Dan Perotti, Chief Financial Officer, PennyMac Financial Services: Thank you, David. PFSI reported net income of $104,000,000 in the or $1,.95 in earnings per share for an annualized ROE of 11%. These results included $68,000,000 of fair value declines on MSRs net of hedges and costs and the impact of these items on diluted earnings per share was negative $0,.93 PFSI's Board of Directors declared a common share dividend of $0.3 per share. Beginning with our production segment, pretax income was $78,000,000 down from $129,000,000 in the prior quarter. Total acquisition and origination volumes were $36,000,000,000 in unpaid principal balance, up 13% from the prior quarter as many loans originally locked in the were funded in the Total lock volumes were $36,000,000,000 in UPB, down 7% from the prior quarter due to higher mortgage rates.
Of total acquisition and origination volumes, dollars 32,000,000,000 was for PFSI's own account and $4,000,000,000 was fee based fulfillment activity for PMT. PennyMac maintained its dominant position in correspondent lending in the with total acquisitions of $28,000,000,000 up from $26,000,000,000 in the prior quarter. Correspondent channel margins in the were 27 basis points, down from 33 basis points in the prior quarter. However, the revenue contribution was essentially unchanged as increased volumes offset the lower margins. Increased volume in the quarter was primarily due to PMT retaining 19% of total conventional correspondent production in the a decline from 42% in the In the we expect PMT to retain approximately 15% to 25% of total conventional correspondent production consistent with the Of note, pursuant to a renewed mortgage banking agreement with PMT, beginning in the all correspondent loans will initially be acquired by PFSI.
However, PMT will retain the right to purchase up to 100% of non government correspondent loan production. In Broker Direct, we continue to see strong trends and continued growth in market share as we position PennyMac as a strong alternative to channel leaders. Originations in the channel were up 22% as many loans locked in the were funded in the while lock volume was down 17% given the reversal in mortgage rates. The number of brokers approved to do business with us at year end was over 4600, up 21% from the end year, and we expect this number to continue growing as top brokers increasingly look for strength and diversification in their business partners. Broker channel margins were up slightly from the prior quarter near normalized levels.
Consumer Direct was similar with originations up 40% from the and lot volumes down 30%. Margins in the channel were up given a higher mix of refinance loans in the at lower margins. Activity in Jan. 0 was down due to higher mortgage rates and typical seasonality. Production expenses, net of loan origination expense, increased 12% from the prior quarter due to a higher funded due to higher funded volumes and increased capacity in the direct lending channels.
It is our preference to hold a level of excess origination capacity in the current market environment given our belief that volatility in interest and mortgage rates will provide pockets of opportunity from time to time and that we will need to be quick to react. Turning to servicing, the servicing segment recorded pretax income of $87,000,000 Excluding valuation related changes, pretax income was $168,000,000 or 1,0.3 basis points of average servicing portfolio UPB. Loan servicing fees were up from the prior quarter, primarily due to growth in PFSI's owned portfolio, and earnings on custodial balances and deposits and other income decreased due to lower short term rates. Custodial funds managed for PFSI's own portfolio averaged 7300000000.0 in the up from $690,000,000,0.0 in the primarily due to increased prepayments. Realization of MSR cash flows decreased $10,000,000 from the prior quarter due to lower prepayment expectations as a result of higher mortgage rates.
Operating expenses were down $2,000,000 from the prior quarter at $81,000,000 or 5 basis points of average servicing portfolio UPB. The fair value of PFSI's MSR increased by $5.40,000,000 dollars driven by higher market interest rates. Pension losses and costs were $6.00 $8,000,000 more than offsetting MSR fair value gains. As David mentioned, results from our investment management business are now included within corporate and other. Corporate and other items contributed a pretax loss of $36,000,000 compared to $39,000,000 in the prior quarter.
PFSI recorded a provision for tax expense of $25,000,000 resulting in an effective tax rate of 19.2%. The reduction in the effective tax rate from the prior quarter was primarily due to a decline in the provision rate from 26.85% to 26.7% and the resulting repricing of expected taxes on deferred income. We ended the quarter with $330,000,000,0.0 of total liquidity, which includes cash and amounts available to draw on facilities where we have collateral pledged. We'll now open it up for questions. Operator?
Operator/Moderator, Panamax Financial Services: Thank you. I would like to remind everyone, we will only take questions related to Panamax Financial Services Inc. Or PFSI. PFSI. We also ask that you please keep your questions limited to 1 preliminary question and 1 follow-up question as we'd like to ensure we can answer as many questions as possible.
Your first question comes from the line of Doug Hunter with UPS. Please go ahead.
David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: Going to a little bit more about the hedge performance this quarter, kind of what drove the larger hedge loss. And I know in past quarters you had talked about changing the head strategy cost of it and just kind of give us an update on the strategy there?
Dan Perotti, Chief Financial Officer, PennyMac Financial Services: Sure. So and sorry you cut out a little bit, Doug. So I'm going to answer
David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: these are
Dan Perotti, Chief Financial Officer, PennyMac Financial Services: the questions that I heard and if there's some piece that I didn't answer, just let me know afterwards. In terms of the performance of the hedge in the actually the overall hedge performed more or less in line with how we expected in terms of our insulation from changes in market rates. 1 change that we did have during the quarter is that as interest rates increased significantly when rates were at lower levels, we had discussed we were attempting to hedge in sort of 80% to 90% area as we moved up to higher rates where again in sort of near term rallies there's not as much of an impact to production. We moved that hedge ratio back towards 90% to 100% as rates increased and that's where we started the quarter and how we are currently what we're currently targeting today. What we did see impact the net hedge results during the quarter that departed from that 90% to 100% hedge ratio.
We did say see hedge costs since we do utilize options and the curve was still flat to inverted for a lot of the or for part of the quarter. And then, we did see some excess prepayments. We mentioned the prepayment fees were a bit higher in the due to the impact of, of rates being lower in the although that was baked into our model, the speeds were a bit in excess of what we had projected. And for us, that flows through into our changes in fair value. And so that had a little bit of a negative impact in the quarter as well.
And so those components together, account for most of the negative contribution on the hedge during the quarter. As we're going into the we've seen the hedge perform fairly well thus far. As I mentioned, we're hedging more in the 90% to 100% range currently, given where we're sitting in the interest rate environment and the amount of production that we would see in just a near term rally or in a close rally where we're not rallying very significantly.
David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: Great. Appreciate that, Dan.
Operator/Moderator, Panamax Financial Services: Your next question comes from the line of Michael Kaye with Wells Fargo (NYSE:WFC). Please go ahead.
Michael Kaye, Analyst, Wells Fargo: A quick question on that 2025 guidance. It looks like you downgraded it from prior. What kind of rate environment do you contemplate in that revised ROE guidance? Is that current rates on the low end or is it some sort of improving if
Analyst: you just flush that out a little bit?
Dan Perotti, Chief Financial Officer, PennyMac Financial Services: Yes, that's really more or less assuming a rate environment that's pretty similar to where we are today. So we aren't really forecasting a significant decline in interest rates given with that mid teens to high teens operating ROE guidance. And so given what we're seeing and the production environment that we think is likely in that case and especially the refinance environment that's likely in that case, that as you mentioned sort of brings down our operating ROE expectations rallies from here that would allow those operating ROEs to get back up into the 20s like we saw in or higher if there's a more sustained rally. But that operating ROE projection was really more contemplating the rates at levels that we're currently at.
Analyst: Okay.
Michael Kaye, Analyst, Wells Fargo: A question on what's the impact to PennyMac if the GSEs exit conservatorship and just wondering how PennyMac is preparing for that potential and maybe you could talk about how the benefit of having PMT benefits, TFSI in that scenario?
David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: Well, you kind of answered the question, Michael. So, thank you. But let me kind of take it from the top here. How are you doing? Good, good, Tom.
Good, good. So, look, we from day 1 have managed this company through a range of outcomes. And I think in a period of time when the GSEs were 90 plus percent of the market, we are a leading mortgage residential mortgage lender and producer mortgages and servicer. And if the GSEs begin to retrace that which we're starting to see parts of it, we're going to continue to operate better than anyone in the industry. I think that we as you pointed out, we're uniquely positioned with PMT to have an investment vehicle to invest in credit related investments.
And I think in we had 2 securitizations of investor loan and second home loans that execute better in the private markets than they do delivering to the GSEs. We closed our first deal for 2025 today. We're on track to do a deal a month, which represents about 50% of that production with the remaining production going whole loan loan to whole loan buyers like insurance companies. What's important there is you can begin to see how we think about distribution as the GSE footprint gets reduced. And look, guarantee fees, if you listen to some people, they say they're going to go up with the new administration.
But if guarantee fees were to go up, the ability to access all outlets in the market is a trademark of my career in this company. And so, we'll continue to find whole loan investors, we'll continue to do securitizations in PMT and PMT is going to thrive in that opportunity. PMT is expanding the expanding the loans that they're looking to do securitizations. There's opportunities in jumbo. There's opportunities less so in close ten seconds.
But I will tell you that I think that PMT is going to PMT had a great quarter in the It's gone up to a really nice start in the and that's something that we're going to leverage if we see the GSE retracement take place. In addition, what's interesting about the results and we're seeing it in Jan. 0 it's strong is the amount of jumbo volume we're doing. In the we did almost $1,000,000,000 of jumbo production across all 3 channels. We are on pace to do more than that in the And there were as I mentioned, we're looking to do a securitization in P and T in the year.
But again, we're accessing the markets there as well the whole market there as well. And then on the consumer direct side, we had a really nice quarter in terms of close to end second production in the And that kind of again plays into our ability to distribute loans away from the agencies. And we're building a great operation to access pools of capital to be able to put on trades, to be able to settle trades. And so, as we see if we see in a marketplace where loans move away from the agencies, we're going to continue to be the leader in the industry in being able to maximize the economics. And that really when you look at when I look at our organization between PFSI and PMT, that's the differentiator is our expertise to be able to price and execute and find best execution for our customers, our correspondents and our brokers.
Analyst: Okay. Thank you.
Operator/Moderator, Panamax Financial Services: Your next question comes from the line of Terry Ma with Barclays (LON:BARC). Please go ahead.
Analyst: Hey, thank you. Good evening. I just had a follow-up on the operating ROE range for 2025 of mid to high teens. I guess your exit rate for this year is kind of already in the mid teens. I'm just curious, what do you need to see to get to the high teens?
Do you need to see many rate rallies? Or do you think you can continue to kind of grind higher on the ROE scale even if you kind of even if rates stay where they are right now?
Dan Perotti, Chief Financial Officer, PennyMac Financial Services: I think yes. Thanks, Terry. That's a great question. So as we see or if we see rates continue to stay at this high level, we do expect to continue to drift upwards in terms of operating ROE. I think the key aspect there is the, our efficiencies that we've gained over time in the servicing space and servicing portfolio.
So, we have a page in the deck that shows our decrease in operating expenses over time with respect to our servicing portfolio that's gone down by 30% over the past few years since 2019. We expect to be able to continue to drive that down on a per unit basis both as a function of scale as well as continuing to make our operations more efficient. And so on that basis, we would generally expect our, even if we stay in the current environment, our operating ROE to drift upwards. And so the mid to high ROE the mid to high teens, I think to your point depending on what you consider mid and high, we would generally expect to be drifting upwards toward the high teens over the year if we stay up in this rate level, if we stay up in this rate environment where we're gaining further efficiencies as we go through the year.
David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: Terry, a couple of things about 2024 that's really, I think, highlights the power of the company is that you look at the results and we had that brief rally and you can see how quickly the ROE can climb to 20% and even higher if a rally is protracted. And then similarly to speak about the operating scale historically when you've had rallies, you recognize the lock when it's you recognize the gain in the lock when you take it, but the expenses a lot of the expenses hit when you close the loan. And so in we were closing out loans from the pipeline and we still had a relatively very good ROE. And so I think that there's it speaks to the leverage that we have in our production channels. And I think as you continue to see growth in the non agency products combined with the continued efficiencies that our production teammates continue to isolate and perfect that it's a lot of it is in our control and then you take the piece that's not in control and that's the market.
And we know 1 thing for sure, rates go up and rates come down. And so, our ability to be able to seize on that opportunity is vitally important. And that's 1 of the reasons why we've brought in some excess capacity in our consumer direct channel. And so we have about additional 100 LOs at the moment that are really focused on at the moment working for our customers who want cash out refinances or close ten seconds or are looking to buy new homes. But likewise, as rates decline, we can pivot those LOs to focus on rate and term refis.
And historically when markets move, originators go out and they try to find additional capacity, but we're in a position because of the strength of the organization and be able to maintain that capacity and be able to do so of why having products that they can offer our customer base.
Analyst: Got it. That's very helpful color. And then just to follow-up, any color you can provide on what you're seeing with respect to just delinquencies in your portfolio? It's sixty plus day delinquency rate increased sequentially, but it also the year over year increase also accelerated in the quarter? Thank you.
David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: And and and and and and Hello?
Operator/Moderator, Panamax Financial Services: Your has reconnected. You may proceed.
David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: Thank you. Sorry about that folks. We got disconnected here. And I believe the question was about delinquencies.
Analyst: Yes. It
David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: was. Okay. Sorry about that. So, look, I think that delinquencies continue to stay at low levels. We're seeing as you can see on Slide 26 that they have gone up a little bit.
Much of that is seasonality and you saw that a little bit at the where we saw delinquency numbers go up so slightly and we expect those to return to more normalized levels in and as tax refunds come in and people get themselves current. I will tell you that we are very well positioned in the event that delinquency rates do show a spike. And a lot of that speaks to our expertise in servicing delinquent loans. There are a lot of forbearance programs out by FHA, VA, USDA, and the 2 GSEs. There are programs offered by there's a program offered by the VA to buy delinquent modified loans called the BAS program that we talked about in the past.
And last quarter, we sold $800,000,000 of unpaid principal balance of modified once delinquent VA loans back to the VA that had a negative servicing mark of a little over $11,000,000 and we were well over 50% of the participant in that program. And that just speaks to not only our expertise as a servicer but also our servicing technology and the ability to quickly adopt and adapt to any program that's out in the marketplace. And so, we I'm looking at this number on a monthly basis mindful of what's happened in the past. But generally speaking, I take comfort in the fact that we're in a marketplace right now where over 50% of the loans are still below 5%. You still have housing constraints in the marketplace.
Demand is still up. And I generally think that we're still in a good market for borrowers who want or need to sell their home. But having said that, in managing the balanced business model and managing through a range of outcomes, what we do on production, we also do on servicing. So, we're looking at all the possible outcomes and make sure that we're ready till we ask anything that we see take place in the market.
Operator/Moderator, Panamax Financial Services: And your next question comes from the line of Crispin Logue with Piper Sandler. Please go ahead.
Crispin Logue, Analyst, Piper Sandler: Thank you. Good afternoon. I appreciate you taking my questions. First, just on origination and channels. Most of your origination channels were down in the quarter, which makes sense.
But I saw that conventional correspondent locks were actually up nicely in the quarter. Can you discuss how you're able to do that in this type of environment and what drove that?
Dan Perotti, Chief Financial Officer, PennyMac Financial Services: Sure. So, I mean, 1 thing to note about correspondent generally is that it typically lags a bit, from the or correspondent loss will typically lag a bit from the environment that we see presently since the correspondent loss that we take are generally after the or a large portion of them is after the correspondence themselves has lost the loan and closed the loan. So it takes that sixty to ninety days from whatever the interest rate was. And so as we moved into the we saw additional, we saw additional or a lot of the volume from rates being lower in the sort of flow through into the in terms of locks in correspondent in our direct channels. Those have been locked really in the And so that drove some of that increased lock activity in the In addition to that, as David mentioned, we've also been pretty active in terms of our sourcing of investor loans, which fall into that conventional correspondent or a lot of that falls into that conventional correspondent camp.
And so that has also been a place where we have been increasingly active and helped drive some of that lock share in conventional correspondent in the
Crispin Logue, Analyst, Piper Sandler: Great. Thank you. Appreciate that. And then just 1 last 1. Can you just discuss your outlook for the level of mortgage rates?
And then what makes you think that you could see volatility in the near to intermediate term that could present opportunities for originations and refi as you discussed? Or is it more just a possibility of rates rallying and being ready like you've added capacity that we may see something similar to the
David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: Look, right now we're in kind of unprecedented territory in terms of volatility. I mean, just the movement just the daily movements that you see in rates is pretty extreme from what I've seen throughout my career. And so, it really kind of validates why it's vitally important to manage through a range of outcomes. And so, if rates if rates were to go higher, having our servicing portfolio is vitally important. Again, being a leading correspondent aggregator to continue to buy loans during periods of higher rates feeds the flywheel that we have in our consumer direct channel.
And likewise, regardless of where rates go, people are always going to be buying homes and there's always going to be a market for loan originations. And so, when in markets like that being a well capitalized enterprise with a great reputation only benefits us. And if rates were to go higher, you're going see consolidation take place in the industry. Likewise, in periods of time when rates do decline, the ability to offer refinances and be able to seize on the opportunity really is beneficial to us as a servicer, but also as an originator. And that's what you saw in the And so, as you see more consolidation taking place in the industry, that as an originator that benefits those who are left originating because that just takes that capacity which typically leads to higher margins in periods when rates do decline.
And so, by and large, I think to your point, it's just it's really having a view of how you're going to operate in different rate environments and being prepared to do so in a very nimble fashion, which is how this organization is set up to operate.
Operator/Moderator, Panamax Financial Services: And your next question comes from the line of Mark DeVries with Deutsche Bank (ETR:DBKGn). Please go ahead.
Mark DeVries, Analyst, Deutsche Bank: Yes, thanks. I wanted to drill down a little bit more on kind of what gives you confidence in continuing to drive down that average cost to service to get you to that higher teens ROE. The rate of change has obviously been flowing in recent years. Are you expecting or still generating new ways to drive efficiency through your proprietary servicing platform or just benefiting from getting a lot more scale off that without having to add costs? Just kind of, what gives you the confidence there?
Dan Perotti, Chief Financial Officer, PennyMac Financial Services: It's a little bit of both, right? So as we're continuing to grow the servicing portfolio, we're continuing to get economies of scale. If you look at the overall operating expenses in the servicing in our servicing segment have been roughly flat over the last few quarters. And so as we just continue to add servicing, we're getting the benefits of scale there. In addition to that, there are aspects of our servicing operation that we believe can continue, where we can continue to have process improvements in automation that can further drive down our unit costs, in particular, things related to delinquent loans, we believe that there's opportunity for a significant or for continued savings or additional savings with respect to, with respect to automation and process improvements where that haven't been fully addressed in our development plan thus far or our process enhancement plan thus far.
And so looking at both of those aspects, that gives us confidence that we can continue to drive down that per unit cost even as we go forward. And certainly, you can see that although we've had slower progress in more recent periods, there still is continued progress in terms of ratcheting down those costs. Yes, look, I think that there that group is hyper focused
David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: on really driving down the costs. And having our technology to do so just allows us to implement it faster, quicker and smarter. I think that I know that we are going to be introducing a chatbot in the call center and servicing as well as the call center for consumer direct for that matter in the not too distant future. We're looking to continue to enhance workflows and to move and to move initiatives offshore. And so, I think that you're going to continue to see that cost come down.
And look, yes, of course, some of it has to do with just the increased scoring portfolio and the scale that comes with it. But there's but we have not we wouldn't be where we are today if it weren't for the technology and the team that we have in place. And it's going to continue to decline. I know that.
Mark DeVries, Analyst, Deutsche Bank: Okay, great. That's really helpful. Dan, just 1 more question for you. Are there any accounting issues that we need to think about as you make that transition you mentioned in to at least initially retaining all of the conventional originations?
Dan Perotti, Chief Financial Officer, PennyMac Financial Services: No accounting issues per se. It would be, if you look at it, just slightly a slight increase in inventory compared to other points in time or the preceding quarters as we move forward if all else were being equal. Although those loans are only expected to stay. The loans that would be going to PMT, assuming PMT retains the same amount of conventional loans that it otherwise would have been, will really only sit on PFSI's books for one to two days on average. So really, the impact would probably be dominated by the fluctuations other fluctuations in the market and so forth.
So I don't we don't expect any significant accounting changes. We still, as the contract stipulates, will charge a fulfillment fee PSI will charge a fulfillment fee to PMT for the loans that it's for the loans that will be passed through to PMT or through PFSI to PMT, and their the correspondent loans that they will elect to receive. And their the gain on sale structure for a PMT should remain the same because the economic terms at which they'll be acquiring the loans will be substantially the same as to what they were receiving previously. So, yes, don't expect any meaningful accounting differences or changes versus what you see today.
Mark DeVries, Analyst, Deutsche Bank: Okay. Got it. Thank you.
Operator/Moderator, Panamax Financial Services: And your next question comes from the line of Ryan Shelley with Bank of America. Please go ahead.
Ryan Shelley, Analyst, Bank of America: Hey guys, thanks for taking the question. I have 2 quick ones. So first on revenue margin, was the decrease in the quarter just attributed to mix shift or were you guys seeing anything else? And then I'll just drop the second one and let you guys answer. Just how are you thinking about the unsecured maturity coming up this Oct.
0?
David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: Sure. So,
Dan Perotti, Chief Financial Officer, PennyMac Financial Services: yes, with respect to the revenue margin in the production channel, we did see a lot of the change in revenue margin is due, as you mentioned, to the mix shift. You can see that the overall correspondent locks remained pretty similar quarter over quarter if you include the PMT or especially if you're looking at just the production before PMT. There's a significant shift towards correspondent given the change in overall percentage that PMT retained during the quarter. And so that was the major driver. The other and while the locks in the direct channels with higher margins declined, the other driver is that there was also a reduction if you look at the correspondent line in terms of the margin on the correspondent loans.
So that was a combination both of competitiveness in the channel in the as well as really the mix within correspondent where a greater proportion of the locks that were going in were conventional, which tends to be a little bit lower margin than the government loans.
David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: The other thing about, I would say, is that we of course, Dec. 0 is usually typically a slower month, all the way around. The mix shift was a big component, obviously quarter over quarter. But as we look at Jan. 0, we're really seeing things back to a more normalized level in the 3 divisions.
And Jan. 0 has been a really exciting month for us. I like we as you can see in the earnings presentation, we had great share growth in Broker Direct and we're continuing to see some really good headwinds in Broker. In correspondent, we're seeing there was some irrational pricing earlier in much of the first six to nine months of 2024 that we began to see that kind of relieve itself a little bit and we're continuing to see that as we start the quarter here. My sense is we're getting some share benefit there.
And then on the consumer direct channel, obviously having the close end seconds, we're seeing more production there as well. And so, I think it's for the month of Jan. 0, it's been an active month here unlike Dec. 0 where we just felt it just felt to me much more as though we were in holiday mode for most of the month.
Dan Perotti, Chief Financial Officer, PennyMac Financial Services: With respect to the second question relating to the 2025 maturity, so we do have a unsecured debt maturity coming up later in the year. That is part of our capital planning that we're looking at as we go through the year in 2025 both to address that 2025 maturity later in the year as well as to sort of move forward on our objective that we've discussed previously to move our non funding debt mix more toward unsecured a bit away from the funding secured by MSR. We are looking to enter into transactions in the unsecured market through 2025, trying to find what the best opportunities for that would be in order to achieve both of those objectives. But we do expect to be in the market in 2025 in the unsecured market to both address the maturity as well as increase our overall proportion of unsecured debt.
Ryan Shelley, Analyst, Bank of America: Thank you very much guys. Very helpful.
Operator/Moderator, Panamax Financial Services: And your next question comes from the line of Derek Summers with Jefferies. Please go ahead.
Derek Summers, Analyst, Jefferies: Good afternoon, everyone. Based on your approved broker count in the presentation, what percentage of the total broker market do you think you've penetrated so far?
David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: I would say somewhere between 2530%.
Analyst: Great. Thank
David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: you. And the nice thing is that the velocity of growth is accelerating as we're seeing as we're getting share growth and more people are seeing our performance and our pricing, it's kind of building upon itself. So, I expect growth to continue at a very good pace in 2025. I think that we have good share growth for the year of 2024, but I believe we'll have even better share growth in 2025. As clearly brokers are understanding they need an alternative to the top 2 guys.
And so, we and given our performance to date in terms of our product mix and our ability to adapt to changing markets and build a reputation in the broker community, it's building upon itself and the momentum is really nice to see.
Derek Summers, Analyst, Jefferies: Got it. Thank you. And then just to pivot to escrow income, how should we think about kind of balancing portfolio growth as a tailwind versus the potential for declining short term rates looking through 2025?
Dan Perotti, Chief Financial Officer, PennyMac Financial Services: Sure. So, I mean, as you mentioned, a lot of it is dependent on what happens exactly with short term rates. So I
Derek Summers, Analyst, Jefferies: think we're
Dan Perotti, Chief Financial Officer, PennyMac Financial Services: still expecting or the forward curve or the futures market is implying limited cuts additional cuts here in 2025. I think still 1 to 2 cuts. So not necessarily expecting a lot of movement on the rate that would sort of the short term rates which would drive the placement fee levels on those balances that we receive. In terms of the portfolio, still expecting pretty significant growth in the portfolio as we move through 2020, as we move through 2025, very similar in terms of the amount that we're adding to the portfolio each quarter, especially at prepayment speeds, especially prepayment speeds remain contained. And so I think balancing those effects where we're not expecting a lot of short term reduction but are expecting continued growth to the portfolios, we'd expect that overall dollar number in total from the run rate, if you will, that we have in to continue to increase overall through the year.
Derek Summers, Analyst, Jefferies: Thanks for taking my question.
Operator/Moderator, Panamax Financial Services: And your next question comes from the line of Bruce George with KBW. Please go ahead.
David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: Hey guys, good afternoon. Actually, I'd like to ask on the direct to consumer side, your volume I assume is still largely recapture. Are there strategies you're thinking about to market to consumers outside of your servicing portfolio? Absolutely. There's it's a huge part of our strategic plan this year to focus on our brand.
And over the next quarter, you're going to see a series of announcements from us that reflect that commitment. It's a lot of it's a reflection of a lot of time and work that Doug and the team have put in place to really start focusing on the brand. Similarly, there's marketing direct strategies to our portfolio on purchase transactions. And then finally, I think I'm generally pleased with just the name what I'm seeing in terms of the name recognition of PennyMac and that's just going to grow as the brand strategy gets implemented. And so, I think that as we sit here at higher rates, it's imperative for us to really focusing on the new customer acquisition part of our consumer direct channel and Doug and the team are really hyper focused on continuing to drive leads in from that part of our consumer direct channel.
Operator/Moderator, Panamax Financial Services: Thank you. And your next question comes from the line of Eric Hagen with BTIG. Please go ahead.
Michael Kaye, Analyst, Wells Fargo: Hi, thanks. Good afternoon.
Analyst: And hope all you guys are okay following the fires in your area.
Mark DeVries, Analyst, Deutsche Bank: I
Analyst: know that you don't typically give guidance around origination volume, but do you feel like the lower bound for your originations on a go forward basis will be, call it, at least $30,000,000,000 per quarter? And from the perspective of the correspondent sellers, I mean, how competitive is the alternative for them, just being the opportunity to deliver loans into the cash window?
David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: Yes, I don't listen. I think as it pertains to correspondent, the cash window ebbs and flows. And look, Fannie and Freddie are important business partners of ours and I think they're going to be increasingly distracted, as the new administration begins to really look at alternatives for Fannie and Freddie. Do they come out of conservatorship? Nobody knows.
But at a minimum, there's going to be a lot of focus on making sure that they're that if they do come out that they're ready to go. And I think it's going to be pretty quiet from my perspective in terms of new programs coming out of the agencies. And similarly, I just don't see the window from time to time will be a competitor, but I see that as 1 alternative. The other thing, the window becomes less of an issue in periods of time of higher interest rates because sellers don't want to retain servicing because they don't hedge that servicing. And so when rates were 0, there was a much better economic thesis to holding on to servicing.
When mortgage rates are 7%, it's not so much the case. I think in terms of the competitive landscape and correspondent, look, we've got great competitors out there, they're good people, but at the end of the day, we are the leading correspondent aggregator. Abby and Alex and the team are going to continue to grow market share there. And that's something and they're going to do so profitably. And that's something that they're very much focused on.
And in markets like this, correspondent sellers want to make sure they're continuing to maintain a very strong relationship with us for when periods of time when rates do decline, they need to have an aggregator who can clear warehouse lines quickly and can buy loans quickly. So, that is something that is I think really going to be the case for correspondent.
Operator/Moderator, Panamax Financial Services: And that is all the time we have for questions. I'd like to turn it back to David Spector for closing remarks.
David Spector, Chairman and Chief Executive Officer, PennyMac Financial Services: Okay. Well, listen, I want to thank everyone for the call. I'm really sorry about the interruption. That's not on our end. We're great with technology.
But if you have any questions or any follow-up, please reach out to our Investor Relations team. They're always available. I'll always make myself available. And thank you all for the great questions and the robust discussion. Bye bye.
Operator/Moderator, Panamax Financial Services: Thank you all for joining us this afternoon. We encourage investors with additional questions to contact our Investor Relations team by email or by phone. Thank you.
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