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

October 31, 2019 4:30 PM

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

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. 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)

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

$

201,268

$

231,388

$

102,627

Short-term investments at fair value

90,663

75,542

145,476

Loans held for sale at fair value

4,522,971

3,506,406

2,416,955

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

107,678

118,716

133,128

Derivative assets

232,948

168,116

73,618

Servicing advances, net

271,501

271,534

259,609

Investment in PennyMac Mortgage Investment Trust at fair value

1,667

1,637

1,518

Mortgage servicing rights

2,556,253

2,720,335

2,785,964

Real estate acquired in settlement of loans

20,328

8,160

2,493

Operating lease right-of-use assets

53,384

53,977

-

Furniture, fixtures, equipment and building improvements, net

32,221

33,373

31,662

Capitalized software, net

57,975

55,642

36,484

Receivable from PennyMac Mortgage Investment Trust

39,744

34,695

27,467

Loans eligible for repurchase

892,631

1,007,435

889,335

Other

221,967

111,420

86,194

Total assets

$

9,303,199

$

8,398,376

$

6,992,530

LIABILITIES
Assets sold under agreements to repurchase

$

3,538,889

$

2,747,084

$

1,739,638

Mortgage loan participation and sale agreements

514,625

523,177

524,667

Notes payable

1,293,625

1,293,180

1,291,847

Obligations under capital lease

23,881

28,295

9,630

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

183,141

194,156

223,275

Derivative liabilities

14,035

15,952

12,693

Operating lease liabilities

72,160

73,461

-

Mortgage servicing liabilities at fair value

34,294

12,948

9,769

Accounts payable and accrued expenses

215,379

151,504

140,363

Payable to PennyMac Mortgage Investment Trust

61,862

65,605

91,818

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

46,537

46,537

47,605

Income taxes payable

480,559

441,336

74,158

Liability for loans eligible for repurchase

892,631

1,007,435

889,335

Liability for losses under representations and warranties

19,968

18,709

21,022

Total liabilities

7,391,586

6,619,379

5,075,820

STOCKHOLDERS' EQUITY
Common stock—authorized 200,000,000 shares of $0.0001 par value;
issued and outstanding 78,434,556, 78,304,899, and 25,195,436 shares,
respectively

8

8

3

Additional paid-in capital

1,328,166

1,317,023

236,457

Retained earnings

583,439

461,966

304,386

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

1,911,613

1,778,997

540,846

Noncontrolling interests in Private National Mortgage Acceptance
Company, LLC

-

-

1,375,864

Total stockholders' equity

1,911,613

1,778,997

1,916,710

Total liabilities and stockholders’ equity

$

9,303,199

$

8,398,376

$

6,992,530

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Quarter ended
September 30,
2019 		June 30,
2019 		September 30,
2018
(in thousands, except earnings per share)
Revenue
Net gains on loans held for sale at fair value

$

235,732

$

147,533

$

56,914

Loan origination fees

49,434

36,924

26,485

Fulfillment fees from PennyMac Mortgage Investment Trust

45,149

29,590

26,256

Net loan servicing fees:
Loan servicing fees
From non-affiliates

185,967

180,753

147,182

From PennyMac Mortgage Investment Trust

12,964

11,568

10,071

Other fees

26,018

26,008

17,009

224,949

218,329

174,262

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

(158,720

)

(159,195

)

(64,559

)

Net loan servicing fees

66,229

59,134

109,703

Net interest income:
Interest income

83,452

70,900

60,964

Interest expense

56,380

52,924

38,775

27,072

17,976

22,189

Management fees, net:
From PennyMac Mortgage Investment Trust

10,098

8,832

6,482

From Investment Funds

-

-

(11

)

10,098

8,832

6,471

Carried Interest from Investment Funds

-

-

(17

)

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

66

119

129

Results of real estate acquired in settlement of loans

188

743

194

Other

2,379

2,126

2,605

Total net revenue

436,347

302,977

250,929

Expenses
Compensation

141,132

114,717

103,364

Servicing

47,909

29,008

40,797

Technology

20,385

16,080

15,273

Loan origination

34,851

23,071

7,203

Occupancy and equipment

7,257

7,042

7,117

Professional services

9,682

6,313

7,117

Other

8,934

7,156

8,361

Total expenses

270,150

203,387

189,232

Income before provision for income taxes

166,197

99,590

61,697

Provision for income taxes

44,724

26,894

5,545

Net income

121,473

72,696

56,152

Less: Net income attributable to noncontrolling interest

-

-

41,663

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

$

121,473

$

72,696

$

14,489

Earnings per share
Basic

$

1.55

$

0.93

$

0.58

Diluted

$

1.51

$

0.92

$

0.57

Weighted-average common shares outstanding
Basic

78,361

78,335

25,125

Diluted

80,382

79,318

78,913

Media

Janis Allen

(805) 330-4899

Investors

Isaac Garden

(818) 264-4907

Source: PennyMac Financial Services, Inc.

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