PennyMac Financial Services, Inc. Reports Third Quarter 2019 Results and Initiates Quarterly Dividend

WESTLAKE VILLAGE, Calif.–(BUSINESS WIRE)–PennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income of $121.5 million for the third quarter of 2019, or $1.51 per share on a diluted basis, on revenue of $436.3 million. Book value per share increased to $24.37 from $22.72 at June 30, 2019.

PFSI also announced today that it has initiated a quarterly dividend for common stockholders, and the Board of Directors has declared a cash dividend of $0.12 per share of common stock for the third quarter of 2019. This dividend will be paid on November 29, 2019, to common stockholders of record as of November 15, 2019. The dividend level will be reviewed each quarter and determined based on a number of factors, including, among other things, PennyMac Financial’s earnings, liquidity, growth outlook, the capital required to support ongoing growth opportunities, the forward-looking economic environment, and compliance with other internal and external requirements.

Third Quarter 2019 Highlights

  • Pretax income was $166.2 million, up 67 percent from the prior quarter and 169 percent from the third quarter of 2018

    • Record pretax income and operating earnings1 driven by strong Production segment results and disciplined hedging of mortgage servicing rights (MSRs)
  • Production segment pretax income was $179.3 million, up 82 percent from the prior quarter and 599 percent from the third quarter of 2018, driven by record production volumes and higher margins

    • Total loan acquisitions and originations were $34.9 billion in unpaid principal balance (UPB), up 44 percent from the prior quarter and 94 percent from the third quarter of 2018
    • PFSI’s correspondent interest rate lock commitments (IRLCs) totaled $16.8 billion in UPB, up 33 percent from the prior quarter and 80 percent from the third quarter of 20182
    • Direct lending IRLCs were a record $5.6 billion in UPB, up 39 percent from the prior quarter and 184 percent from the third quarter of 2018
    • Correspondent acquisitions of conventional loans fulfilled for PennyMac Mortgage Investment Trust (NYSE: PMT) were $16.6 billion in UPB, up 55 percent from the prior quarter and 122 percent from the third quarter of 2018
  • Servicing segment pretax loss was $18.1 million, versus a pretax loss of $2.7 million in the prior quarter and pretax income of $33.6 million in the third quarter of 2018

    • Valuation-related items included a $295.5 million loss in the fair value of MSRs, partially offset by $254.0 million in hedging and other gains; net impact on pretax income was $(43.3) million and on earnings per share was $(0.39)
    • Pretax income excluding valuation-related items was $25.2 million, down 46 percent from the prior quarter and 16 percent from the third quarter of 2018

      • Additional technology-related expenses of $7 million over the prior quarter related to the development and completion of our servicing system modules; servicing technology expenses are expected to be $15-20 million lower in 2020 versus 2019
      • $9.3 million increase in early buyout (EBO) loan-related expenses over the prior quarter; EBO loan volume more than doubled from the prior quarter and is expected to benefit future period income from loan redeliveries
      • Higher realization of MSR cash flows due to higher prepayment expectations from lower interest rates
    • The servicing portfolio grew to $348.5 billion in UPB, up 4 percent from June 30, 2019 and 22 percent from September 30, 2018
  • Investment Management segment pretax income was $5.0 million, up from $4.0 million in the prior quarter and $2.5 million in the third quarter of 2018

    • Revenue was $11.8 million, an increase of 14 percent from the prior quarter and 49 percent from the third quarter of 2018
    • Net assets under management (AUM) were $2.2 billion, up 14 percent from June 30, 2019, and 42 percent from September 30, 2018, driven by $253 million in new common equity raised by PMT during the quarter

1 In the fourth quarter of 2017, diluted earnings per share were $2.44, which included a $1.79 contribution from the remeasurement of deferred tax items due to enactment of the Tax Cuts and Jobs Act of 2017

2 Consists of correspondent government and non-delegated IRLCs

“PFSI delivered exceptional results this quarter, driven by record mortgage loan volumes and market share gains across all of our production channels combined with continued focus and discipline on hedging our mortgage servicing rights during this rapidly changing interest rate environment,” said President and CEO David Spector. “Our ability to quickly scale our operational capabilities and respond to the larger market environment reflects multi-year investments in our technology and infrastructure. As a result, I am pleased to note that PennyMac was the largest correspondent aggregator in the U.S. during the third quarter, as reported by Inside Mortgage Finance. Continued growth in our servicing portfolio and our customer base to more than 1.7 million consumers provides us with a strong foundation for future growth opportunities, while our hedging performance largely offset fair value losses on our MSR asset. And finally, our investment management segment continues to perform well, driven by PMT’s capital raising activities in support of its strong organic investment growth opportunities. Given the current market environment, we expect exceptional performance for PennyMac Financial to continue through the fourth quarter, while the continued growth of our production, servicing and investment management businesses is expected to drive long-term earnings performance.”

Executive Chairman Stanford L. Kurland added, “Now in our twelfth year of operations, PennyMac Financial has established itself as a leading independent mortgage banking enterprise with the demonstrated ability to profitably navigate and grow through varying market environments. We are positioned for continued growth as we evolve our loan production and servicing platforms to provide sustainable long-term competitive advantages. Notably, I am pleased to announce the successful completion of our servicing system environment, which we believe is a substantial technological advancement for PennyMac Financial. It will allow us to fully leverage cloud-based infrastructure and real-time processing, and enable us to reduce costs, increase scalability and decrease response times to changes in regulations and the market environment. I am immensely proud of PFSI’s success and also pleased to announce that our Board of Directors has approved the initiation of a quarterly cash dividend. At the forefront of our strategic mission is to deliver superior returns and value to our stockholders, and we believe the establishment of a quarterly cash dividend is an important component in the structure of providing long-term, sustainable stockholder returns.”

The following table presents the contributions of PennyMac Financial’s segments to pretax income:

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

$

216,132

$

19,600

 

$

235,732

$

 

$

235,732

Loan origination fees

 

49,434

 

 

 

49,434

 

 

 

49,434

Fulfillment fees from PMT

 

45,149

 

 

 

45,149

 

 

 

45,149

Net servicing fees

 

 

66,229

 

 

66,229

 

 

 

66,229

Management fees

 

 

 

 

 

10,098

 

 

10,098

Net interest income (expense):
Interest income

 

22,445

 

61,007

 

 

83,452

 

 

 

83,452

Interest expense

 

18,423

 

37,936

 

 

56,359

 

21

 

 

56,380

 

4,022

 

23,071

 

 

27,093

 

(21

)

 

27,072

Other

 

324

 

567

 

 

891

 

1,742

 

 

2,633

Total net revenue

 

315,061

 

109,467

 

 

424,528

 

11,819

 

 

436,347

Expenses

 

135,777

 

127,581

 

 

263,358

 

6,792

 

 

270,150

Pretax income (loss)

$

179,284

$

(18,114

)

$

161,170

$

5,027

 

$

166,197

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 $34.9 billion in UPB, $18.3 billion of which was for its own account, and $16.6 billion of which was fee-based fulfillment activity for PMT. Correspondent government, non-delegated and direct lending IRLCs totaled $22.4 billion in UPB, up 34 percent from the prior quarter and 99 percent from the third quarter of 2018.

Production segment pretax income was $179.3 million, up 82 percent from the prior quarter and 599 percent from the third quarter of 2018. Production revenue totaled $315.1 million, up 60 percent from the prior quarter and 203 percent from the third quarter of 2018. The quarter-over-quarter increase was driven by a $91.3 million increase in net gains on loans held for sale, due to higher production volumes and margins across all production channels.

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

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

$

227,256

 

$

176,493

 

$

147,259

 

Mortgage servicing rights recapture payable to
PennyMac Mortgage Investment Trust

 

(1,896

)

 

(1,408

)

 

(1,157

)

Provision for representations and warranties, net

 

(1,333

)

 

(727

)

 

(687

)

Cash investment( 1)

 

(108,408

)

 

(49,005

)

 

(90,199

)

Fair value changes of pipeline, inventory and
hedges

 

120,113

 

 

22,180

 

 

1,698

 

Net gains on mortgage loans held for sale

$

235,732

 

$

147,533

 

$

56,914

 

Net gains on mortgage loans held for sale
by segment:
Production

$

216,132

 

$

124,860

 

$

34,947

 

Servicing

$

19,600

 

$

22,673

 

$

21,967

 

(1) Net of cash hedging results

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; 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 $45.1 million in the third quarter, up 53 percent from the prior quarter and 72 percent from the third quarter of 2018. The quarter-over-quarter increase in fulfillment fee revenue was driven by a 55 percent increase in acquisition volumes by PMT, partially offset by a slight decrease in the weighted average fulfillment fee rate to 27 basis points from 28 basis points in the prior quarter, reflecting discretionary reductions to facilitate successful loan acquisitions by PMT.

Net interest income totaled $4.0 million, down from $5.0 million in the prior quarter and $15.7 million in the third quarter of 2018. Net interest income in the third quarter included $1.6 million in incentives which the Company was entitled to receive under one of its master repurchase agreements to finance mortgage loans that satisfied certain consumer relief characteristics, down from $3.9 million and $12.8 million in the second quarter of 2019 and the third quarter of 2018, respectively. As expected, the lender completed the orderly wind down of the incentive program during the quarter ended September 30, 2019. The related master repurchase agreement expired on August 31, 2019.

Production segment expenses were $135.8 million, up 38 percent from the prior quarter and 73 percent from the third 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 $18.1 million, versus a pretax loss of $2.7 million in the prior quarter and pretax income of $33.6 million in the third quarter of 2018. Servicing segment revenues totaled $109.5 million, up 14 percent from the prior quarter and down 21 percent from the third quarter of 2018. The quarter-over-quarter increase was primarily driven by lower net valuation-related losses resulting from the decline in mortgage rates and increased interest income related to custodial deposits, partially offset by higher realization of MSR cash flows.

Net loan servicing fees totaled $66.2 million and included $224.9 million in servicing fees reduced by $117.2 million from the realization of MSR cash flows. Net valuation-related losses totaled $41.5 million, which included MSR fair value losses of $295.5 million, partially offset by hedging gains of $250.1 million and a $3.9 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 continued decline in mortgage rates in the quarter.

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

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

$

224,949

 

$

218,329

 

$

174,262

 

Effect of MSRs:
Realization of cash flows

 

(117,220

)

 

(106,774

)

 

(71,362

)

Change in fair value of MSRs

 

(295,510

)

 

(259,205

)

 

60,883

 

Change in fair value of excess servicing spread financing

 

3,864

 

 

3,604

 

 

(1,109

)

Hedging gains (losses)

 

250,146

 

 

203,180

 

 

(52,971

)

Total change in fair value of MSRs

 

(158,720

)

 

(159,195

)

 

(64,559

)

Net loan servicing fees

$

66,229

 

$

59,134

 

$

109,703

 

(1) Includes contractually-specified servicing fees

Servicing segment revenue also included $19.6 million in net gains on loans held for sale from the securitization of reperforming government-insured and guaranteed loans, compared to $22.7 million in the prior quarter and $22.0 million in the third quarter of 2018. These loans were previously purchased out of Ginnie Mae securitizations as EBO 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 $23.1 million, up from $13.0 million in the prior quarter and $6.4 million in the third quarter of 2018. Interest income increased by $9.0 million from the prior quarter, primarily driven by higher interest income related to custodial deposit balances, while interest expense decreased by $1.1 million.

Servicing segment expenses totaled $127.6 million, up 29 percent from the prior quarter driven by additional technology-related expenses of approximately $7 million related to the development and completion of our servicing system modules, and $9.3 million of increased expenses related to EBO loan volume, which more than doubled from the prior quarter.

The total servicing portfolio reached $348.5 billion in UPB at September 30, 2019, an increase of 4 percent from June 30, 2019 and 22 percent from September 30, 2018, with the quarter-over-quarter growth driven by the Company’s loan production activities. PennyMac Financial subservices and conducts special servicing for $120.6 billion in UPB, an increase of 11 percent from June 30, 2019 and 38 percent from September 30, 2018. PennyMac Financial’s owned MSR portfolio grew to $227.9 billion in UPB, an increase of 1 percent from the prior quarter end and 16 percent from September 30, 2018.

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

September 30,
2019
June 30,
2019
September 30,
2018
(in thousands)
Prime servicing:
Owned
Mortgage servicing rights
Originated

$

157,437,101

$

152,546,247

$

138,311,827

Acquisitions

 

63,778,892

 

68,153,929

 

55,347,551

 

221,215,993

 

220,700,176

 

193,659,378

Mortgage servicing liabilities

 

2,327,687

 

1,297,421

 

1,265,461

Mortgage loans held for sale

 

4,323,252

 

3,342,187

 

2,352,771

 

227,866,932

 

225,339,784

 

197,277,610

Subserviced for PMT

 

120,460,120

 

108,856,599

 

86,389,458

Total prime servicing

 

348,327,052

 

334,196,383

 

283,667,068

Special servicing:
Subserviced for PMT

 

147,956

 

274,626

 

837,003

Total loans serviced

$

348,475,008

$

334,471,009

$

284,504,071

 
Mortgage loans serviced:
Owned
Mortgage servicing rights

$

221,215,993

$

220,700,176

$

193,659,378

Mortgage servicing liabilities

 

2,327,687

 

1,297,421

 

1,265,461

Mortgage loans held for sale

 

4,323,252

 

3,342,187

 

2,352,771

 

227,866,932

 

225,339,784

 

197,277,610

Subserviced

 

120,608,076

 

109,131,225

 

87,226,461

Total mortgage loans serviced

$

348,475,008

$

334,471,009

$

284,504,071

Investment Management Segment

PennyMac Financial manages PMT for which it earns base management fees and may earn incentive compensation. Net AUM were $2.2 billion as of September 30, 2019, up 14 percent from June 30, 2019 and 42 percent from September 30, 2018. The quarter-over-quarter growth was driven by PMT’s issuance of approximately $253 million of common shares during the third quarter.

Pretax income for the Investment Management segment was $5.0 million, up from $4.0 million in the prior quarter and $2.5 million in the third quarter of 2018. Management fees, which include base management and performance incentive fees from PMT, increased 14 percent from the prior quarter and 56 percent from the third quarter of 2018. Base management fees were $7.9 million in the quarter, up from $6.8 million in the prior quarter and $5.8 million in the third quarter of 2018 as a result of PFSI’s increased AUM. Performance-based incentive fees were $2.2 million, up from $2.0 million in the prior quarter and $0.7 million in the third quarter of 2018, driven by PMT’s continued strong performance.

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

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

$

7,914

$

6,839

$

5,799

 

Performance incentive

 

2,184

 

1,993

 

683

 

 

10,098

 

8,832

 

6,482

 

Investment Funds

 

 

 

(11

)

Total management fees

 

10,098

 

8,832

 

6,471

 

Carried Interest

 

 

 

(17

)

Total management fees and Carried Interest

$

10,098

$

8,832

$

6,454

 

 
Net assets of Advised Entities:
PennyMac Mortgage Investment Trust

$

2,219,611

$

1,943,934

$

1,558,563

 

Investment Management segment expenses totaled $6.8 million, up 7 percent from the prior quarter and 24 percent from the third quarter of 2018.

Consolidated Expenses

Total expenses for the third quarter were $270.2 million, up 33 percent from the prior quarter and 43 percent from the third quarter of 2018. The year-over-year change was primarily driven by higher volumes of activity in the Production segment and increased expenses in the Servicing segment as noted earlier.

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, October 31, 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.

Contacts

Media

Janis Allen

(805) 330-4899

Investors
Isaac Garden

(818) 264-4907

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