PennyMac Financial Services, Inc. Reports Second Quarter 2019 Results

WESTLAKE VILLAGE, Calif.–(BUSINESS WIRE)–PennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income of $72.7 million for the second quarter of 2019, or $0.92 per share on a diluted basis, on revenue of $303.0 million. Book value per share increased to $22.72 from $21.72 at March 31, 2019.

Second Quarter 2019 Highlights

  • Pretax income was $99.6 million, up 65 percent from the prior quarter and 33 percent from the second quarter of 2018

    • Driven by strong Production segment performance and disciplined hedging of mortgage servicing rights (MSRs)
  • Production segment pretax income was $98.2 million, up 109 percent from the prior quarter and 417 percent from the second quarter of 2018

    • Total loan acquisitions and originations were $24.1 billion in unpaid principal balance (UPB), up 45 percent from the prior quarter and 51 percent from the second quarter of 2018
    • PFSI’s correspondent interest rate lock commitments (IRLCs) 1 totaled $12.7 billion in UPB, up 64 percent from the prior quarter and 24 percent from the second quarter of 2018
    • Direct lending IRLCs were $4.1 billion in UPB, up 53 percent from the prior quarter and 129 percent from the second quarter of 2018
    • Correspondent acquisitions of conventional loans fulfilled for PennyMac Mortgage Investment Trust (NYSE: PMT) were $10.7 billion in UPB, up 32 percent from the prior quarter and 99 percent from the second quarter of 2018
  • Servicing segment pretax loss was $2.7 million, down from pretax income of $11.2 million in the prior quarter and $54.6 million in the second quarter of 2018

    • Valuation-related items included a $259.2 million loss in the fair value of MSRs, partially offset by $209.4 million in hedging and other gains; net impact on pretax income was $(49.8) million and on earnings per share was $(0.46)
    • Pretax income excluding valuation-related items was $47.1 million, up 33 percent from the prior quarter and 32 percent from the second quarter of 2018

      • Record quarterly operating profitability driven by a growing servicing portfolio coupled with the ongoing realization of greater scale and cost efficiencies
    • The servicing portfolio grew to $334.5 billion in UPB, up 3 percent from March 31, 2019, and 27 percent from June 30, 2018
  • Investment Management segment pretax income was $4.0 million, up from $2.1 million in the prior quarter and $1.1 million in the second quarter of 2018

    • Revenue of $10.4 million, an increase of 18 percent from the prior quarter and 50 percent from the second quarter of 2018
    • Net assets under management (AUM) were $1.9 billion, up 13 percent from March 31, 2019 and 26 percent from June 30, 2018, driven by $214 million in new common equity raised by PMT during the quarter in light of its significant investment opportunities

1 Consists of correspondent government and non-delegated IRLCs

“PFSI delivered strong results across all of its business segments in the second quarter with profits driven by record loan production and improved margins, which we continue to see in the current market environment,” said President and CEO David Spector. “Key to our performance this quarter has been the disciplined focus on and execution of our sophisticated interest-rate risk management strategy, which substantially mitigated the impact of fair value losses on our MSRs resulting from the significant decline in mortgage rates this quarter. In addition, our servicing portfolio delivered strong operating earnings as we continue to focus on key cost metrics and scale efficiencies. I am also pleased with the results in our investment management business as PMT’s compelling organic investment strategies provided strong returns and PMT successfully raised new capital for these opportunities.”

The following table presents the contribution of PennyMac Financial’s Production, Servicing and Investment Management segments to pretax income:

Quarter ended June 30, 2019
Mortgage Banking Investment
Management
Production Servicing Total Total
(in thousands)
Revenue
Net gains on loans held for sale at fair value

$

124,860

$

22,673

 

$

147,533

$

 

$

147,533

Loan origination fees

 

36,924

 

 

 

36,924

 

 

 

36,924

Fulfillment fees from PMT

 

29,590

 

 

 

29,590

 

 

 

29,590

Net servicing fees

 

 

59,134

 

 

59,134

 

 

 

59,134

Management fees

 

 

 

 

 

8,832

 

 

8,832

Net interest income (expense):
Interest income

 

18,900

 

52,000

 

 

70,900

 

 

 

70,900

Interest expense

 

13,898

 

39,015

 

 

52,913

 

11

 

 

52,924

 

5,002

 

12,985

 

 

17,987

 

(11

)

 

17,976

Other

 

117

 

1,332

 

 

1,449

 

1,539

 

 

2,988

Total net revenue

 

196,493

 

96,124

 

 

292,617

 

10,360

 

 

302,977

Expenses

 

98,249

 

98,797

 

 

197,046

 

6,341

 

 

203,387

Pretax income

 

98,244

 

(2,673

)

 

95,571

 

4,019

 

 

99,590

Production Segment

Production includes the correspondent acquisition of newly originated government-insured mortgage loans for PennyMac Financial’s own account, the underwriting and acquisition of loans from correspondent sellers on a non-delegated basis, fulfillment services on behalf of PMT and direct lending through the consumer direct and broker direct channels.

PennyMac Financial’s loan production activity for the quarter totaled $24.1 billion in UPB, $13.4 billion of which was for its own account, and $10.7 billion of which was fee-based fulfillment activity for PMT. Correspondent government, non-delegated and direct lending IRLCs totaled $16.7 billion in UPB, up from $10.4 billion in the prior quarter.

Production segment pretax income was $98.2 million, an increase of 109 percent from the prior quarter and 417 percent from the second quarter of 2018. Production revenue totaled $196.5 million, up 52 percent from the prior quarter and 120 percent from the second quarter of 2018. The quarter-over-quarter increase resulted from a $58.1 million increase in net gains on loans held for sale, driven primarily by higher production volumes and margins in our consumer direct production channel, leveraging the Company’s scalable mortgage fulfillment platform to address the opportunity provided by lower mortgage rates.

The components of net gains on loans held for sale are detailed in the following table:

Quarter ended
June 30,
2019
March 31,
2019
June 30,
2018
(in thousands)
Receipt of MSRs in loan sale transactions

$

176,493

 

$

114,957

 

$

153,924

 

Mortgage servicing rights recapture payable to PennyMac Mortgage Investment Trust

 

(1,408

)

 

(1,123

)

 

(936

)

Provision (reversal of liability) for representations and warranties, net

 

(727

)

 

3,143

 

 

143

 

Cash investment (1)

 

(49,005

)

 

(23,023

)

 

(106,946

)

Fair value changes of pipeline, inventory and hedges

 

22,180

 

 

(9,178

)

 

14,761

 

Net gains on loans held for sale

$

147,533

 

$

84,776

 

$

60,946

 

Net gains on loans held for sale by segment:
Production

$

124,860

 

$

66,721

 

$

33,966

 

Servicing

$

22,673

 

$

18,055

 

$

26,980

 

 
(1) Net of cash hedge expense

PennyMac Financial performs fulfillment services for 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; the approval of correspondent sellers and the ongoing monitoring of their performance; reviewing loan data, documentation and appraisals to assess loan quality and risk; 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 $29.6 million in the second quarter, up 7 percent from the prior quarter and 103 percent from the second quarter of 2018. The quarter-over-quarter increase in fulfillment fee revenue was driven by a 32 percent increase in acquisition volumes by PMT, partially offset by the decrease in the weighted average fulfillment fee rate to 28 basis points from 34 basis points in the prior quarter, reflecting discretionary reductions to facilitate successful loan acquisitions by PMT.

Net interest income totaled $5.0 million, a decrease from $10.5 million in the prior quarter and $15.8 million in the second quarter of 2018. Net interest income included $3.9 million in incentives which the Company received under one of its master repurchase agreements to finance mortgage loans that satisfied certain consumer relief characteristics, down from $9.3 million in the prior quarter and $12.5 million in the second quarter of 2018. As the Company expected, the lender substantially curtailed the incentives provided under the master repurchase agreement through an orderly wind down of the incentive program during the quarter ended June 30, 2019.

Production segment expenses were $98.2 million, up 20 percent from the prior quarter and 40 percent from the second quarter of 2018 as a result of production volume growth.

Servicing Segment

Servicing includes income from owned MSRs, subservicing and special servicing activities. Servicing segment pretax loss was $2.7 million, down from pretax income of $11.2 million in the prior quarter and $54.6 million in the second quarter of 2018. Servicing segment revenues totaled $96.1 million, down 12 percent from the prior quarter and 35 percent from the second quarter of 2018. The quarter-over-quarter decrease primarily reflects net valuation-related losses resulting from the decline in mortgage rates during the quarter, which were partially offset by increased servicing revenue and economies of scale from a larger servicing portfolio.

Net loan servicing fees totaled $59.1 million and included $218.3 million in servicing fees reduced by $106.8 million from the realization of MSR cash flows. Net valuation-related losses totaled $52.4 million, which included MSR fair value losses of $259.2 million, partially offset by hedging gains of $203.2 million and a $3.6 million gain due to the change in fair value of the excess servicing spread liability. The MSR fair value losses primarily resulted from expectations for increased prepayment activity driven by the decrease in mortgage rates in the quarter.

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

Quarter ended
June 30,
2019
March 31,
2019
June 30,
2018
(in thousands)
Servicing fees (1)

$

218,329

 

$

199,377

 

$

161,942

 

Effect of MSRs:
Realization of cash flows

 

(106,774

)

 

(92,475

)

 

(65,227

)

Change in fair value of MSRs

 

(259,205

)

 

(164,939

)

 

42,259

 

Change in fair value of excess servicing spread financing

 

3,604

 

 

4,051

 

 

(996

)

Hedging gains (losses)

 

203,180

 

 

134,557

 

 

(24,289

)

Total change in fair value of MSRs

 

(159,195

)

 

(118,806

)

 

(48,253

)

Net loan servicing fees

$

59,134

 

$

80,571

 

$

113,689

 

 
(1) Includes contractually-specified servicing fees

Servicing segment revenue also included $22.7 million in net gains on loans held for sale from the securitization of reperforming government-insured and guaranteed loans, compared to $18.1 million in the prior quarter and $27.0 million in the second quarter of 2018. These loans were previously purchased out of Ginnie Mae securitizations as early buyout loans and brought back to performing status through PennyMac Financial’s successful servicing efforts, primarily with the use of loan modifications. Net interest income totaled $13.0 million, up from $10.3 million in the prior quarter and $6.7 million in the second quarter of 2018. Interest income increased by $8.0 million from the prior quarter, primarily driven by higher interest income from custodial deposit balances, while interest expense increased by $5.4 million, driven by higher interest shortfall expense from elevated prepayment activity.

Servicing segment expenses totaled $98.8 million, essentially unchanged from the prior quarter and up 6 percent from the second quarter of 2018.

The total servicing portfolio reached $334.5 billion in UPB at June 30, 2019, an increase of 3 percent from March 31, 2019 and 27 percent from June 30, 2018, with the quarter-over-quarter growth driven by the Company’s loan production activities. PennyMac Financial subservices and conducts special servicing for $109.1 billion in UPB, an increase of 8 percent from March 31, 2019 and 34 percent from June 30, 2018. PennyMac Financial’s owned MSR portfolio grew to $225.3 billion in UPB, an increase of 1 percent from the prior quarter end and 24 percent from June 30, 2018.

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

June 30,
2019
March 31,
2019
June 30,
2018
(in thousands)
Loans serviced at period end:
Prime servicing:
Owned
Mortgage servicing rights
Originated

$

152,546,247

$

147,987,738

$

132,307,067

Acquisitions

 

68,153,929

 

71,846,623

 

45,957,173

 

220,700,176

 

219,834,361

 

178,264,240

Mortgage servicing liabilities

 

1,297,421

 

1,000,403

 

1,569,602

Loans held for sale

 

3,342,187

 

2,573,121

 

2,448,908

 

225,339,784

 

223,407,885

 

182,282,750

Subserviced for Advised Entities

 

108,856,599

 

100,939,297

 

80,359,635

Total prime servicing

 

334,196,383

 

324,347,182

 

262,642,385

Special servicing:
Subserviced for Advised Entities

 

274,626

 

348,131

 

854,994

Total special servicing

 

274,626

 

348,131

 

854,994

Total loans serviced

$

334,471,009

$

324,695,313

$

263,497,379

 
Loans serviced:
Owned
Mortgage servicing rights

$

220,700,176

$

219,834,361

$

178,264,240

Mortgage servicing liabilities

 

1,297,421

 

1,000,403

 

1,569,602

Loans held for sale

 

3,342,187

 

2,573,121

 

2,448,908

 

225,339,784

 

223,407,885

 

182,282,750

Subserviced

 

109,131,225

 

101,287,428

 

81,214,629

Total loans serviced

$

334,471,009

$

324,695,313

$

263,497,379

Investment Management Segment

PennyMac Financial manages PMT for which it earns base management fees and may earn incentive compensation. Net assets under management were $1.9 billion as of June 30, 2019, up 13 percent from March 31, 2019 and 26 percent from June 30, 2018. The quarter-over-quarter growth was driven by PMT’s issuance of approximately $214 million of common shares during the second quarter.

Pretax income for the Investment Management segment was $4.0 million, up from $2.1 million in the prior quarter and $1.1 million in the second quarter of 2018. Management fees, which include base management and performance incentive fees from PMT, increased 22 percent from the prior quarter and 56 percent from the second quarter of 2018. Base management fees were $6.8 million in the quarter, up from $6.1 million in the prior quarter as a result of PFSI’s increased assets under management. Performance-based incentive fees were $2.0 million, up from $1.1 million in the prior quarter, driven by PMT’s strong performance. No incentive fees were earned in the second quarter of 2018.

The following table presents a breakdown of management fees and carried interest:

Quarter ended
June 30,
2019
March 31,
2019
June 30,
2018
(in thousands)
Management fees:
PennyMac Mortgage Investment Trust
Base

$

6,839

$

6,109

$

5,728

 

Performance incentive

 

1,993

 

1,139

 

 

 

8,832

 

7,248

 

5,728

 

Investment Funds

 

 

 

(64

)

Total management fees

 

8,832

 

7,248

 

5,664

 

Carried Interest

 

 

 

(168

)

Total management fees and Carried Interest

$

8,832

$

7,248

$

5,496

 

 
Net assets of Advised Entities:
PennyMac Mortgage Investment Trust

$

1,943,934

$

1,727,589

$

1,545,487

 

Investment Funds

 

 

 

765

 

$

1,943,934

$

1,727,589

$

1,546,252

 

Investment Management segment expenses totaled $6.3 million, down 5 percent from the prior quarter and up 9 percent from the second quarter of 2018. The quarter-over-quarter decrease was related to seasonally higher accruals in the beginning of the year.

Consolidated Expenses

Total expenses for the second quarter were $203.4 million, up 9 percent from the prior quarter and 20 percent from the second quarter of 2018. The year-over-year change was primarily driven by higher volumes of activity in the Production segment.

Executive Chairman Stanford L. Kurland concluded, “PennyMac Financial has built an operating platform that we believe is unmatched in the mortgage industry to handle large, growing volumes of loans at the highest standards of quality and to deliver strong performance across different market environments. Our ability to react swiftly to the increased opportunity in the loan production market reflects the significant and ongoing investments in technology and operational enhancements, such as in our mortgage fulfillment division, over the past several years. Given the present market environment, we anticipate exceptional performance for PennyMac Financial to persist throughout the second half of this year, while the continued growth of our servicing portfolio is expected to drive long-term earnings performance.”

Management’s slide presentation will be available in the Investor Relations section of the Company’s website at ir.pennymacfinancial.com beginning at 1:30 p.m. (Pacific Time) on Thursday, August 1, 2019.

About PennyMac Financial Services, Inc.

PennyMac Financial Services, Inc. is a specialty financial services firm with a comprehensive mortgage platform and integrated business focused on the production and servicing of U.S. mortgage loans and the management of investments related to the U.S. mortgage market. Additional information about PennyMac Financial Services, Inc. is available at ir.pennymacfinancial.com.

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, the recently completed corporate reorganization, the expected benefits and market and financial impact of the reorganization 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,” “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: 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 businesses; 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; changes to government mortgage modification programs; the licensing and operational requirements of states and other jurisdictions applicable to the Company’s businesses, to which our bank competitors are not subject; foreclosure delays and changes in foreclosure practices; certain banking regulations that may limit our business activities; changes in macroeconomic and U.S. real estate market conditions; difficulties inherent in growing loan production volume; 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; changes in prevailing interest rates; increases in loan delinquencies and defaults; our reliance on PennyMac Mortgage Investment Trust (NYSE: PMT) as a significant source of financing for, and revenue related to, our mortgage banking business; any required additional capital and liquidity to support business growth that may not be available on acceptable terms, if at all; 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 its services fail to meet certain criteria or characteristics or under other circumstances; decreases in the returns on the assets that we select and manage for our clients, and our resulting management and incentive fees; the extensive amount of regulation applicable to our investment management segment; conflicts of interest in allocating our services and investment opportunities among us and our advised entities; the effect of public opinion on our reputation; our recent growth; our ability to effectively identify, manage, monitor and mitigate financial risks; our initiation of new business activities or investment strategies or expansion of existing business activities or investment strategies; our ability to detect misconduct and fraud; our ability to mitigate cybersecurity risks and cyber incidents; our exposure to risks of loss with real estate investments resulting from adverse weather conditions and man-made or natural disasters; 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.

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 
June 30,
2019
March 31,
2019
June 30,
2018
(in thousands, except share amounts)
ASSETS
Cash

$

231,388

$

144,266

$

189,663

Short-term investments at fair value

 

75,542

 

149,372

 

98,571

Loans held for sale at fair value

 

3,506,406

 

2,668,929

 

2,527,231

Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors

 

118,716

 

125,929

 

138,582

Derivative assets

 

168,116

 

121,153

 

92,471

Servicing advances, net

 

271,534

 

284,230

 

258,900

Investment in PennyMac Mortgage Investment Trust at fair value

 

1,637

 

1,553

 

1,424

Mortgage servicing rights

 

2,720,335

 

2,905,090

 

2,486,157

Real estate acquired in settlement of loans

 

8,160

 

1,690

 

2,300

Operating lease right-of-use assets

 

53,977

 

56,239

 

Furniture, fixtures, equipment and building improvements, net

 

33,373

 

33,423

 

29,607

Capitalized software, net

 

55,642

 

45,416

 

31,913

Receivable from PennyMac Mortgage Investment Trust

 

34,695

 

29,951

 

19,661

Loans eligible for repurchase

 

1,007,435

 

1,094,702

 

879,621

Other

 

111,420

 

157,057

 

85,605

Total assets

$

8,398,376

$

7,819,000

$

6,841,706

 
LIABILITIES
Assets sold under agreements to repurchase

$

2,747,084

$

2,151,938

$

1,825,813

Mortgage loan participation and sale agreements

 

523,177

 

547,879

 

528,368

Notes payable

 

1,293,180

 

1,292,736

 

1,140,546

Obligations under capital lease

 

28,295

 

5,091

 

13,032

Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value

 

194,156

 

205,081

 

229,470

Derivative liabilities

 

15,952

 

17,838

 

4,094

Operating lease liabilities

 

73,461

 

76,373

 

Mortgage servicing liabilities at fair value

 

12,948

 

7,844

 

10,253

Accounts payable and accrued expenses

 

151,504

 

162,677

 

114,409

Payable to PennyMac Mortgage Investment Trust

 

65,605

 

76,494

 

99,309

Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement

 

46,537

 

46,537

 

46,903

Income taxes payable

 

441,336

 

414,636

 

67,357

Liability for loans eligible for repurchase

 

1,007,435

 

1,094,702

 

879,621

Liability for losses under representations and warranties

 

18,709

 

17,982

 

20,587

Total liabilities

 

6,619,379

 

6,117,808

 

4,979,762

 
STOCKHOLDERS’ EQUITY

Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding 78,304,899, 78,317,843, and 25,008,655 shares, respectively

8

8

3

Additional paid-in capital

 

1,317,023

 

1,311,914

 

229,941

Retained earnings

 

461,966

 

389,270

 

299,951

Total stockholders’ equity attributable to PennyMac Financial Services, Inc. common stockholders

 

1,778,997

 

1,701,192

 

529,895

Noncontrolling interests in Private National Mortgage Acceptance Company, LLC

 

 

 

1,332,049

Total stockholders’ equity

 

1,778,997

 

1,701,192

 

1,861,944

Total liabilities and stockholders’ equity

$

8,398,376

$

7,819,000

$

6,841,706

 

Contacts

Media

Janis Allen

(805) 330-4899

Investors

Christopher Oltmann

(818) 264-4907

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