Direct lending fueled PennyMac Financial Services’ third quarter activity, leading to a quarterly gain in its bottom line.

The Westlake Village, California-based lender and servicer posted net income of $249.3 million for the three months ending Sept. 30, marking a 22% increase from the second quarter’s $204.2 million profit, but declining by 53.4% compared to income from the same three months one year ago, which was a record $535.2 million.

PennyMac’s revenue for the third quarter came in at $786.6 million, compared to $742.3 million three months earlier, a 5.6% uptick. Third-quarter revenue in the same time frame one year ago was $1.112 billion, 29.3% higher. The company reported diluted earnings per share of $3.80, beating analyst estimates of $3.50 per share, according to Yahoo Finance.

“The beat was on stronger mortgage banking income and lower expenses in both origination and servicing,” according to analyst Bose George, managing director at Keefe, Bruyette & Woods, in a research note. “This helped offset a miss in servicing driven by elevated prepayment rates.”

As it had in the second quarter, PennyMac’s leaders said diversified lines of business were behind the positive results, particularly growth in consumer-direct lending.

“The ongoing success we see in the channel can be attributed to the increased application of data analytics and the investments we have made in our loan fulfillment and sales process,” said Doug Jones, the company’s president and chief mortgage banking officer, in an earnings presentation on Thursday.

PennyMac’s share of the consumer-direct market increased to 1.4% at the end of the quarter compared to 0.9% at the close of 2020. Its third-quarter broker-direct market share inched up to 2.4% from 2.2% at last year’s end. The company estimated its current correspondent market share remained at 17.7%.

Consumer- and broker-direct lending channels accounted for 84% of pretax income in its production segment. Loan production brought in a total of $330.6 million pre-tax, up 35.3% from second quarter’s $244.4 million, but down 46% year-over-year from $613.3 million.

“Our direct-lending channels have an outsized impact on production segment earnings,” said Andy Chang, chief operating officer. “As we continue to grow our leadership positions in the direct origination channels, this growth will enhance profitability of our production segment.”

Consumer direct origination volumes for the quarter amounted to $11.1 billion, and for broker direct, $4 billion. Quarterly correspondent originations totaled $44 billion in unpaid balance.

PennyMac also reported servicing pretax income of $8 million, down 74.1% from $30.9 million in the previous quarter and 92.8% from $111.7 million in the third quarter last year. Its share of the loan-servicing market increased to 4.1% of the market, compared to 3.7% at the end of 2020.

Quarterly pretax income in its investment management segment was $1 million, 75.7% lower than the $4.1 million recorded at the end of the second quarter, as incentive fees were not earned in the third quarter, and down 69.7% year over year from $3.3 million.

Penny Mac’s servicing unit will play a larger role for the company in the next several months based on current trends, according to Chang.

“Our large and growing servicing portfolio will become an increasingly important component of our earnings as interest rates increase, and we believe this provides a competitive advantage to other mortgage banks as the industry’s origination volumes return to more normalized levels,” he said.

Investors greeted the company’s earnings by shooting PennyMac Financial Services, Inc. (PFSI) stock up 1.9% overnight. After closing the previous day at $64.60, shares of PFSI started trading Friday at $65.80 and had jumped up another 3.1% to $67.71 by 11am.

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