PennyMac Financial Services, Inc. Reports First Quarter 2019 Results

WESTLAKE VILLAGE, Calif.–(BUSINESS WIRE)–PennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income
of $46.1 million for the first quarter of 2019, or $0.58 per share on a
diluted basis, on revenue of $247.7 million. Book value per share
increased to $21.72 from $21.34 at December 31, 2018.

First Quarter 2019 Highlights

  • Pretax income was $60.3 million, up 3 percent from the prior quarter
    and down 17 percent from the first quarter of 2018

    • Significant interest rate volatility highlighted the importance of
      our hedging approach and is also driving improving production
      trends
  • Production segment pretax income was $47.0 million, up 85 percent from
    the prior quarter and 174 percent from the first quarter of 2018

    • Total loan acquisitions and originations were $16.6 billion in
      unpaid principal balance (UPB), down 15 percent from the prior
      quarter and up 16 percent from the first quarter of 2018
    • Correspondent government and non-delegated interest rate lock
      commitments (IRLCs) totaled $7.7 billion in UPB, down 16 percent
      from the prior quarter and the first quarter of 2018
    • Direct lending IRLCs were $2.7 billion in UPB, up 36 percent from
      the prior quarter and 57 percent from the first quarter of 2018
    • Correspondent conventional and jumbo acquisition volume fulfilled
      for PennyMac Mortgage Investment Trust (NYSE: PMT) totaled $8.1
      billion in UPB, down 10 percent from the prior quarter and up 92
      percent from the first quarter of 2018
  • Servicing segment pretax income was $11.2 million, down 62 percent
    from the prior quarter and 80 percent from the first quarter of 2018

    • Servicing segment pretax income excluding valuation-related losses
      was $35.3 million, down 21 percent from the prior quarter and 3
      percent from the first quarter of 20181
    • Valuation-related items included a $164.9 million decrease in
      mortgage servicing rights (MSR) fair value, partially offset by
      $134.6 million in hedging gains and $4.1 million due to the change
      in fair value of the excess servicing spread (ESS) liability; net
      impact on pretax income was $(26.3) million and on EPS was $(0.24)
    • Completed two bulk acquisitions of Ginnie Mae MSR portfolios
      totaling $16.3 billion in UPB
    • The servicing portfolio grew to $324.7 billion in UPB, up 8
      percent from December 31, 2018, and 27 percent from March 31, 2018
  • Investment Management segment pretax income was $2.1 million, down
    from $2.5 million in the prior quarter and up from $1.0 million in the
    first quarter of 2018

    • Revenue of $8.8 million, up 12 percent from the prior quarter and
      28 percent from the first quarter of 2018
    • PMT raised approximately $147 million in net proceeds from the
      issuance of common shares during the quarter
    • Net assets under management (AUM) were $1.7 billion, up 10 percent
      from December 31, 2018, and 12 percent from March 31, 2018
1   Excludes changes in the fair value of MSRs and the ESS liability,
and (losses) gains on hedging which were $(164.9) million, $4.1
million, and $134.6 million, respectively, and a $2.2 million
reversal of provision for credit losses on active loans in the first
quarter of 2019.
 

“PFSI’s strong first quarter financial results demonstrate the earnings
power of PennyMac Financial’s balanced business model in a declining
mortgage rate environment,” said President and CEO David Spector. “Our
servicing portfolio grew to $325 billion at the end of the quarter,
driven by our industry-leading production activities and $16 billion of
bulk acquisitions. In our Production segment, the investments we have
made in our consumer direct lending channel generated strong results as
we helped a number of our 1.6 million servicing customers take advantage
of lower rates and refinance their homes. We remain confident that our
comprehensive operating platform and sophisticated interest rate risk
management capabilities position PennyMac Financial to execute across
different market environments and maintain our leadership position in
the mortgage industry.”

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

  Quarter ended March 31, 2019
Mortgage Banking  

Investment

 
Production   Servicing   Total

Management

Total
(in thousands)
Revenue
Net gains on mortgage loans held for sale at fair value $ 66,721 $ 18,055 $ 84,776 $ $ 84,776
Loan origination fees 23,930 23,930 23,930
Fulfillment fees from PMT 27,574 27,574 27,574
Net servicing fees 80,571 80,571 80,571
Management fees 7,248 7,248
Net interest income (expense):
Interest income 14,369 43,964 58,333 58,333
Interest expense   3,915   33,621   37,536   7     37,543
10,454 10,343 20,797 (7 ) 20,790
Other   488   765   1,253   1,563     2,816
Total net revenue   129,167   109,734   238,901   8,804     247,705
Expenses   82,161   98,571   180,732   6,682     187,414
Pretax income $ 47,006 $ 11,163 $ 58,169 $ 2,122   $ 60,291

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
$16.6 billion in UPB, $8.5 billion of which was for its own account, and
$8.1 billion was fee-based fulfillment activity for PMT. Correspondent
government, non-delegated and direct lending IRLCs totaled $10.4 billion
in UPB.

Production segment pretax income was $47.0 million, an increase of
85 percent from the prior quarter and 174 percent from the first quarter
of 2018. Production revenue totaled $129.2 million, an increase of
20 percent from the prior quarter and 52 percent from the first quarter
of 2018. The quarter-over-quarter increase resulted from a $29.9 million
increase in net gains on mortgage loans held for sale, driven by higher
production volumes and margins in our consumer direct production
channel. Net gains on mortgage loans held for sale also includes a $4.2
million benefit from a reduction in the liability for losses under
representations and warranties due to a change in estimate.

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

  Quarter ended

March 31,

2019

 

December 31,

2018

 

March 31,

2018

(in thousands)
Receipt of MSRs in loan sale transactions $ 114,957 $ 141,100 $ 141,873

Mortgage servicing rights recapture payable to PennyMac Mortgage
Investment Trust

(1,123 ) (1,259 ) (1,425 )

Reversal of liability (provision) for representations and
warranties, net

3,143 (229 ) (379 )

Cash investment (1)

(23,023 ) (46,260 ) (63,594 )

Fair value changes of pipeline, inventory and hedges

  (9,178 )   (33,604 )   (5,061 )
Net gains on mortgage loans held for sale $ 84,776   $ 59,748   $ 71,414  

Net gains on mortgage loans held for sale by segment:

Production $ 66,721   $ 36,848   $ 36,198  
Servicing $ 18,055   $ 22,900   $ 35,216  
 
(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 $27.6 million in the first quarter, down 4 percent from the
prior quarter and up 131 percent from the first quarter of 2018. The
quarter-over-quarter decrease in fulfillment fee revenue was driven by
lower acquisition volumes by PMT, partially offset by an increase in the
weighted average fulfillment fee rate to 34 basis points from 32 basis
points in the prior quarter.

Net interest income totaled $10.5 million, a decrease from $15.3 million
in the prior quarter and $12.1 million in the first quarter of 2018. Net
interest income included $9.3 million in incentives which the Company is
currently entitled to receive under one of its master repurchase
agreements to finance mortgage loans that satisfied certain consumer
relief characteristics, down from $12.6 million in the prior quarter and
$10.2 million in the first quarter of 2018. The Company expects that it
will cease to accrue incentives under the repurchase agreement in the
second quarter of 2019. While there can be no assurance, the Company
expects that the loss of such incentives will be partially offset by an
improvement in pricing margins.

Production segment expenses were $82.2 million, essentially unchanged
from the prior quarter and up 21 percent from the first quarter of 2018.

Servicing Segment

Servicing includes income from owned MSRs, subservicing and special
servicing activities. Servicing segment pretax income was $11.2 million,
down from $29.3 million in the prior quarter and $54.9 million in the
first quarter of 2018. Servicing segment revenues totaled
$109.7 million, down 19 percent from the prior quarter and 25 percent
from the first quarter of 2018. The quarter-over-quarter decrease
primarily reflects net valuation-related losses driven by the decline in
mortgage rates during the quarter, partially offset by increased
servicing fees from a larger portfolio.

Net loan servicing fees totaled $80.6 million and included
$199.4 million in servicing fees reduced by $92.5 million from the
realization of MSR cash flows. Net valuation-related losses totaled
$26.3 million, which included MSR fair value losses of $164.9 million,
associated hedging gains of $134.6 million and a $4.1 million gain
resulting from changes in fair value of the ESS 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

March 31,

2019

 

December 31,

2018

 

March 31,

2018

(in thousands)
Servicing fees (1) $ 199,377 $ 194,405 $ 160,673
Effect of MSRs:
Realization of cash flows (92,475 ) (82,250 ) (61,176 )
Change in fair value of MSRs (164,939 ) (67,277 ) 127,806

Change in fair value of excess servicing spread financing

4,051 526 (6,921 )
Hedging gains (losses)   134,557     59,808     (103,593 )
Total change in fair value of MSRs   (118,806 )   (89,193 )   (43,884 )
Net loan servicing fees $ 80,571   $ 105,212   $ 116,789  
 
(1) Includes contractually-specified servicing fees

Servicing segment revenue also included $18.1 million in net gains on
mortgage loans held for sale from the securitization of reperforming
government-insured and guaranteed loans, compared to $22.9 million in
the prior quarter and $35.2 million in the first quarter of 2018. These
loans were previously purchased out of Ginnie Mae securitizations as
early buyout (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 $10.3 million, up
from $6.0 million in the prior quarter and a net interest expense of
$6.3 million in the first quarter of 2018. Interest income increased by
$4.5 million from the prior quarter, primarily driven by higher interest
income from an increase in custodial deposit balances and elevated EBO
activity, while interest expense was essentially unchanged
quarter-over-quarter.

Servicing segment expenses totaled $98.6 million, down 7 percent from
the prior quarter and up 8 percent from the first quarter of 2018.

The total servicing portfolio reached $324.7 billion in UPB at March 31,
2019, an increase of 8 percent from December 31, 2018, and 27 percent
from March 31, 2018. Servicing portfolio growth during the quarter was
driven by the Company’s loan production activities and the completion of
$16.3 billion in UPB of bulk MSR acquisitions. PennyMac Financial
subservices and conducts special servicing for $101.3 billion in UPB, an
increase of 7 percent from December 31, 2018 and 31 percent from March
31, 2018. PennyMac Financial’s owned MSR portfolio grew to
$219.8 billion in UPB, an increase of 9 percent from the prior quarter
end.

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

 

March 31,

2019

 

December 31,

2018

 

March 31,

2018

(in thousands)
Loans serviced at period end:
Prime servicing:
Owned
Mortgage servicing rights
Originated $ 147,987,738 $ 144,296,544 $ 125,643,312
Acquisitions   71,846,623   56,757,600   47,843,853
219,834,361 201,054,144 173,487,165
Mortgage servicing liabilities 1,000,403 1,160,938 1,766,722
Mortgage loans held for sale   2,573,121   2,420,636   2,512,546
223,407,885 204,635,718 177,766,433
Subserviced for Advised Entities   100,939,297   94,276,938   76,636,300
Total prime servicing   324,347,182   298,912,656   254,402,733
Special servicing:
Subserviced for Advised Entities   348,131   381,216   903,138
Total special servicing   348,131   381,216   903,138
Total loans serviced $ 324,695,313 $ 299,293,872 $ 255,305,871
 
Mortgage loans serviced:
Owned
Mortgage servicing rights $ 219,834,361 $ 201,054,144 $ 173,487,165
Mortgage servicing liabilities 1,000,403 1,160,938 1,766,722
Mortgage loans held for sale   2,573,121   2,420,636   2,512,546
223,407,885 204,635,718 177,766,433
Subserviced   101,287,428   94,658,154   77,539,438
Total mortgage loans serviced $ 324,695,313 $ 299,293,872 $ 255,305,871

Investment Management Segment

PennyMac Financial manages PMT for which it earns base management fees
and may earn incentive compensation. Net assets under management were
$1.7 billion as of March 31, 2019, up 10 percent from December 31, 2018,
and 12 percent from March 31, 2018. The quarter-over-quarter change was
driven by PMT’s issuance of approximately $147 million of common shares
this quarter.

Pretax income for the Investment Management segment was $2.1 million,
down from $2.5 million in the prior quarter and up from $1.0 million in
the first quarter of 2018. Management fees, which include base
management fees from PMT, increased 11 percent from the prior quarter
and 26 percent from the first quarter of 2018 as a result of PMT’s
increased assets under management. Management fees also included
incentive fees of $1.1 million, up from $0.7 million in the prior
quarter, based on PMT’s strong financial performance. No incentive fees
were earned in the first quarter of 2018.

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

  Quarter ended

March 31,

2019

 

December 31,

2018

 

March 31,

2018

(in thousands)
Management fees:
PennyMac Mortgage Investment Trust
Base $ 6,109 $ 5,810 $ 5,696
Performance incentive   1,139   749    
7,248 6,559 5,696
Investment Funds       79  
Total management fees   7,248   6,559   5,775  
Carried Interest       (180 )
Total management fees and Carried Interest $ 7,248 $ 6,559 $ 5,595  
 
Net assets of Advised Entities:
PennyMac Mortgage Investment Trust $ 1,727,589 $ 1,566,132 $ 1,542,258
Investment Funds       2,668  
$ 1,727,589 $ 1,566,132 $ 1,544,926  

Investment Management segment expenses totaled $6.7 million, up 25
percent from the prior quarter and 12 percent from the first quarter of
2018. The quarter-over-quarter increase was driven by increased
compensation expenses related to seasonally higher accruals in the
beginning of the year.

Consolidated Expenses

Total expenses for the first quarter were $187.4 million, down 3 percent
from the prior quarter and up 13 percent from the first quarter of 2018.
The year-over-year change was primarily driven by higher volumes in the
Production segment and increased EBO-related activity in the Servicing
segment.

Executive Chairman Stanford L. Kurland concluded, “This quarter’s
results highlight both the ability of our balanced mortgage banking
platform to adapt to a changing market environment, and our core culture
of continuous improvement. We are focused on expense management and
greater efficiency across the organization, capturing the benefits of
scale and utilizing proprietary and third-party technology solutions to
realize competitive advantages through lower costs, while maintaining
the high quality and effectiveness of our operations. We believe these
initiatives will further differentiate PennyMac Financial from our
competition and further solidify our leadership position in the U.S.
mortgage market.”

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, May 2, 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)
 
 

March 31,

2019

 

December 31,

2018

 

March 31,

2018

(in thousands, except share amounts)
ASSETS
Cash $ 144,266 $ 155,289 $ 137,863
Short-term investments at fair value 149,372 117,824 105,890
Mortgage loans held for sale at fair value 2,668,929 2,521,647 2,584,236

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

125,929 131,025 142,938
Derivative assets 121,153 96,347 89,469
Servicing advances, net 284,230 313,197 284,145
Investment in PennyMac Mortgage Investment Trust at fair value 1,553 1,397 1,352
Mortgage servicing rights 2,905,090 2,820,612 2,354,489
Real estate acquired in settlement of loans 1,690 2,250 2,338
Operating lease right-of-use assets 56,239
Furniture, fixtures, equipment and building improvements, net 33,423 33,374 30,172
Capitalized software, net 45,416 39,748 28,919
Receivable from PennyMac Mortgage Investment Trust 29,951 33,464 27,356
Loans eligible for repurchase 1,094,702 1,102,840 1,018,488
Other   157,057   109,559   95,236
Total assets $ 7,819,000 $ 7,478,573 $ 6,902,891
 
LIABILITIES
Assets sold under agreements to repurchase $ 2,151,938 $ 1,933,859 $ 1,814,282
Mortgage loan participation and sale agreements 547,879 532,251 510,443
Notes payable 1,292,736 1,292,291 1,140,022
Obligations under capital lease 5,091 6,605 16,435

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

205,081 216,110 236,002
Derivative liabilities 17,838 3,064 4,476
Operating lease liabilities 76,373
Mortgage servicing liabilities at fair value 7,844 8,681 12,063
Accounts payable and accrued expenses 162,677 156,212 113,072
Payable to PennyMac Mortgage Investment Trust 76,494 104,631 117,987

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

46,537 46,537 46,037
Income taxes payable 414,636 400,546 58,956
Liability for loans eligible for repurchase 1,094,702 1,102,840 1,018,488
Liability for losses under representations and warranties   17,982   21,155   20,429
Total liabilities   6,117,808   5,824,782   5,108,692
 
STOCKHOLDERS’ EQUITY

Common stock—authorized 200,000,000 shares of $0.0001 par value;
issued and outstanding, 78,317,843, 77,480,172, and 25,195,436
shares, respectively

8 8 2
Additional paid-in capital 1,311,914 1,310,648 221,495
Retained earnings   389,270   343,135   282,114

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

  1,701,192   1,653,791   503,611

Noncontrolling interests in Private National Mortgage Acceptance
Company, LLC

      1,290,588
Total stockholders’ equity   1,701,192   1,653,791   1,794,199
Total liabilities and stockholders’ equity $ 7,819,000 $ 7,478,573 $ 6,902,891

Contacts

Media
Janis Allen
(805) 330-4899

Investors
Christopher Oltmann
(818) 264-4907

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