PennyMac Financial Services, Inc. Reports Second Quarter 2019 Results

August 1, 2019 4:30 PM

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

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

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Quarter ended
June 30,
2019
March 31,
2019
June 30,
2018
(in thousands, except earnings per share)
Revenue
Net loan servicing fees:
Loan servicing fees
From non-affiliates

$

180,753

$

166,790

$

138,871

From PennyMac Mortgage Investment Trust

11,568

10,570

9,431

From Investment Funds

-

-

3

Other fees

26,008

22,017

13,637

218,329

199,377

161,942

Change in estimated fair value of mortgage servicing rights and excess servicing spread financing

(159,195

)

(118,806

)

(48,253

)

Net loan servicing fees

59,134

80,571

113,689

Net gains on loans held for sale at fair value

147,533

84,776

60,946

Loan origination fees

36,924

23,930

24,428

Fulfillment fees from PennyMac Mortgage Investment Trust

29,590

27,574

14,559

Net interest income:
Interest income

70,900

58,333

55,104

Interest expense

52,924

37,543

32,616

17,976

20,790

22,488

Management fees, net:
From PennyMac Mortgage Investment Trust

8,832

7,248

5,728

From Investment Funds

-

-

(64

)

8,832

7,248

5,664

Carried Interest from Investment Funds

-

-

(168

)

Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust

119

192

108

Results of real estate acquired in settlement of loans

743

274

13

Other

2,126

2,350

2,571

Total net revenue

302,977

247,705

244,298

Expenses
Compensation

114,717

106,600

98,540

Servicing

29,008

30,293

28,490

Technology

16,080

15,966

15,154

Loan origination

23,071

14,497

5,144

Occupancy and equipment

7,042

6,776

6,507

Professional services

6,313

5,881

5,587

Other

7,156

7,401

10,178

Total expenses

203,387

187,414

169,600

Income before provision for income taxes

99,590

60,291

74,698

Provision for income taxes

26,894

14,156

6,293

Net income

72,696

46,135

68,405

Less: Net income attributable to noncontrolling interest

-

-

50,568

Net income attributable to PennyMac Financial Services, Inc. common stockholders

$

72,696

$

46,135

$

17,837

Earnings per share
Basic

$

0.93

$

0.59

$

0.71

Diluted

$

0.92

$

0.58

$

0.70

Weighted-average common shares outstanding
Basic

78,335

77,653

24,959

Diluted

79,318

79,286

78,825

Media

Janis Allen

(805) 330-4899

Investors

Christopher Oltmann


(818) 264-4907

Source: PennyMac Financial Services, Inc.

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