PennyMac Financial Services, Inc. Reports Fourth Quarter and Full-Year 2018 Results

WESTLAKE VILLAGE, Calif.–(BUSINESS WIRE)–PennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income
of $53.0 million for the fourth quarter of 2018, on revenue of
$251.2 million. Net income attributable to PFSI common stockholders was
$38.7 million, or $0.63 per diluted share. Book value per share
increased to $21.34 from $20.67 on a pro forma basis at September 30,
20181.

Fourth Quarter 2018 Highlights

  • Pretax income was $58.3 million, down 5 percent from the prior quarter
    and 52 percent from the fourth quarter of 2017; diluted earnings per
    share of $0.63

    • Benefit from the remeasurement of tax-related items contributed
      $0.11 to diluted earnings per share; tax provision rate reduced to
      26.9 percent from 27.4 percent
  • Production segment pretax income was $25.4 million, down 1 percent
    from the prior quarter and 54 percent from the fourth quarter of 2017

    • Total loan acquisitions and originations were $19.4 billion in
      unpaid principal balance (UPB), up 8 percent from the prior
      quarter and 14 percent from the fourth quarter of 2017
    • Correspondent government, non-delegated and direct lending
      interest rate lock commitments (IRLCs) totaled $11.2 billion in
      UPB, down 1 percent from the prior quarter and 5 percent from the
      fourth quarter of 2017
    • Correspondent conventional and jumbo acquisition volume fulfilled
      for PennyMac Mortgage Investment Trust (NYSE: PMT) of $9.1 billion
      in UPB, up 21 percent from the prior quarter and 54 percent from
      the fourth quarter of 2017
  • Servicing segment pretax income was $29.3 million, down 13 percent
    from the prior quarter and 8 percent from the fourth quarter of 2017

    • Servicing segment pretax income excluding valuation-related
      changes was $44.5 million, up 49 percent from the prior quarter
      and 57 percent from the fourth quarter of 20172
    • The servicing portfolio grew to $299.3 billion in UPB, up 5
      percent from September 30, 2018
    • Completed $3.6 billion in UPB of previously announced bulk MSR
      portfolio acquisitions
  • Investment Management segment pretax income was $2.5 million,
    essentially unchanged from the prior quarter and up from $1.5 million
    in the fourth quarter of 2017

    • Net assets under management were $1.6 billion, essentially
      unchanged from September 30, 2018, and from December 31, 2017
  • As previously announced, the Company completed a corporate
    reorganization on November 1, 2018, that simplified its corporate
    structure and converted all equity ownership to a single class of
    publicly-traded common stock

Notable activity after quarter end

  • Completed the acquisition of additional bulk Ginnie Mae MSR portfolios
    totaling $798 million in UPB
  • Launched a Home Equity Line of Credit (HELOC) product offering to
    customers in our servicing portfolio, offering the opportunity to tap
    into the equity in their homes while keeping their existing
    first-mortgage interest rates
  • Launched a prime non-qualified mortgage (non-QM) loan product to our
    correspondent clients

Full-Year 2018 Highlights

  • Pretax income was $267.7 million; down 20 percent from the prior year

    • Diluted earnings per share of $2.59 includes a benefit of $0.20
      resulting from the remeasurement of tax-related items
  • Total net revenue of $984.6 million, up 3 percent from the prior year
  • Loan production totaled $67.6 billion in UPB, a decrease of 1 percent
    from the prior year
  • Servicing portfolio reached $299.3 billion in UPB, up 22 percent from
    December 31, 2017

1

 

$20.67 is the pro forma book value per share at September 30,
2018, adjusted for the impact of PennyMac Financial Services,
Inc.’s corporate reorganization completed on November 1, 2018.
Reported book value per share at September 30, 2018 was $21.47.

2

Excludes changes in the fair value of MSRs and the ESS liability,
(losses) gains on hedging which were $(67.3) million, $0.5
million, and $59.8 million, respectively, and a provision for
credit losses on active loans of $(8.3) million in the fourth
quarter of 2018.

“Our fourth quarter and full-year 2018 results demonstrate the strength
of the balanced mortgage banking platform we have built to deliver solid
performance across a variety of market conditions,” said President and
CEO David Spector. “We grew our servicing portfolio by over 20 percent
in 2018 to nearly $300 billion, driven primarily by our own production
activities, and continue to capture efficiencies and gain scale as the
portfolio grows. Our effective risk management and disciplined hedging
activities also contributed to our solid results. The unique execution
capabilities in our production business helped drive the increases in
our production volumes and market share during the quarter.”

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

       
Quarter ended December 31, 2018
Mortgage Banking

Investment

Production Servicing Total

Management

Total
(in thousands)
Revenue
Net gains on mortgage loans held for sale at fair value $ 36,848 $ 22,900 $ 59,748 $ $ 59,748
Loan origination fees 26,165 26,165 26,165
Fulfillment fees from PMT 28,591 28,591 28,591
Net servicing fees 105,212 105,212 105,212
Management fees 6,559 6,559
Carried Interest from Investment Funds
Net interest income (expense):
Interest income 18,273 39,460 57,733 57,733
Interest expense   2,970   33,483   36,453   8     36,461
15,303 5,977 21,280 (8 ) 21,272
Other   511   722   1,233   1,295     2,528
Total net revenue   107,418   134,811   242,229   7,846     250,075
Expenses   82,007   105,525   187,532   5,363     192,895
Income before provision for income taxes and

non-segment activities

25,411 29,286 54,697 2,483 57,180
Non-segment activities(1)   1,126
Pretax income $ 25,411 $ 29,286 $ 54,697 $ 2,483   $ 58,306
 

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
$19.4 billion in UPB, of which $10.4 billion in UPB was for its own
account, and $9.1 billion in UPB was fee-based fulfillment activity for
PMT. Correspondent government, non-delegated and direct lending IRLCs
totaled $11.2 billion in UPB.

Production segment pretax income was $25.4 million, a decrease of
1 percent from the prior quarter and a decrease of 54 percent from the
fourth quarter of 2017. Production revenue totaled $107.4 million, an
increase of 3 percent from the prior quarter and a decrease of 18
percent from the fourth quarter of 2017.

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

  Quarter ended
December 31,

2018

  September 30,

2018

  December 31,

2017

(in thousands)
Receipt of MSRs in loan sale transactions $ 141,100 $ 147,259 $ 143,904
Mortgage servicing rights recapture payable to

PennyMac Mortgage Investment Trust

(1,259 ) (1,157 ) (1,553 )
Provision for representations and warranties, net (229 ) (687 ) (381 )
Cash investment (1) (46,260 ) (90,199 ) (69,001 )
Fair value changes of pipeline, inventory and

hedges

  (33,604 )   1,698     25,652  
Net gains on mortgage loans held for sale $ 59,748   $ 56,914   $ 98,621  
 
Net gains on mortgage loans held for sale

by segment:

Production $ 36,848   $ 34,947   $ 68,716  
Servicing $ 22,900   $ 21,967   $ 29,905  
 
(1) Includes 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 $28.6 million in the fourth quarter, up 9 percent from the prior
quarter and 49 percent from the fourth quarter of 2017. The
quarter-over-quarter increase in fulfillment fee revenue was driven by a
21 percent increase in acquisition volumes by PMT, partially offset by a
lower weighted average fulfillment fee rate which was 32 basis points in
the fourth quarter, down from 35 basis points in the third quarter. The
weighted average fulfillment fee rate in the fourth quarter reflects
discretionary reductions to facilitate successful loan acquisitions by
PMT.

Net interest income totaled $15.3 million which included $12.6 million
in incentives which the Company is currently entitled to receive under
one of its master repurchase agreements to finance mortgage loans that
satisfy certain consumer relief characteristics, compared with $12.8
million in the third quarter. The Company expects that it will cease to
accrue the incentives under the repurchase agreement beginning 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 $82.0 million, a 5 percent increase
from the prior quarter and an 8 percent increase from the fourth quarter
of 2017. The quarter-over-quarter increase was primarily driven by
production volume growth.

Servicing Segment

Servicing includes income from owned MSRs, subservicing and special
servicing activities. Servicing segment pretax income was $29.3 million
compared with $33.6 million in the prior quarter and $32.0 million in
the fourth quarter of 2017. Servicing segment revenues totaled
$134.8 million, down 3 percent from the prior quarter and up 5 percent
from the fourth quarter of 2017. The quarter-over-quarter decrease
primarily reflects valuation-related losses, partially offset by
increased servicing fees driven by a larger portfolio.

Net loan servicing fees totaled $105.2 million and included
$194.4 million in servicing fees reduced by $82.3 million in realization
of MSR cash flows. Valuation-related losses totaled $6.9 million, which
included MSR fair value losses of $67.3 million, associated hedging
gains of $59.8 million and changes in fair value of the excess servicing
spread (ESS) liability resulting in a $0.5 million gain. The MSR fair
value losses primarily resulted from expectations for a modest increase
in prepayment activity driven by the decrease in mortgage rates near
quarter end. Before January 1, 2018, PennyMac Financial carried the
majority of its MSRs at the lower of amortized cost or fair value.
Beginning January 1, 2018, and prospectively, the Company accounts for
all MSRs at fair value.

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

  Quarter ended
December 31,

2018

  September 30,

2018

  December 31,

2017

(in thousands)
Servicing fees (1) $ 194,405 $ 174,262 $ 162,008
Effect of MSRs:
Amortization and realization of cash flows (82,250 ) (71,362 ) (66,891 )
Change in fair value and provision for/reversal of impairment of
MSRs carried at lower of amortized cost or fair value
(67,277 ) 60,883 28,029
Change in fair value of excess servicing spread

financing

526 (1,109 ) 4,593
Hedging gains (losses)   59,808     (52,971 )   (20,837 )
Total amortization, impairment and change in fair

value of MSRs

  (89,193 )   (64,559 )   (55,106 )
Net loan servicing fees $ 105,212   $ 109,703   $ 106,902  
 
(1) Includes contractually-specified servicing fees

Servicing segment revenue also included $22.9 million in net gains on
mortgage loans held for sale from the securitization of reperforming
government-insured and guaranteed loans, compared to $22.0 million in
the prior quarter and $29.9 million in the fourth quarter of 2017. 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 $6.0 million,
down from $6.4 million in the prior quarter and up from net interest
expense of $8.2 million in the fourth quarter of 2017. Interest income
decreased by $4.5 million from the prior quarter, primarily driven by
lower interest income from EBO activities as well as a seasonal decrease
in income from custodial deposits. Interest expense decreased by $4.0
million quarter-over-quarter; interest expense was elevated in the third
quarter due to an accelerated recognition of issuance costs related to
MSR-backed term notes that were refinanced in that period.

Servicing segment expenses totaled $105.5 million, essentially unchanged
from the prior quarter and up 9 percent from the fourth quarter of 2017.

The total servicing portfolio reached $299.3 billion in UPB at
December 31, 2018, an increase of 5 percent from September 30, 2018, and
22 percent from December 31, 2017. Servicing portfolio growth during the
quarter was driven by the Company’s loan production activities and the
completion of $3.6 billion in UPB of MSR acquisitions. Of the total
servicing portfolio, prime servicing was $298.7 billion in UPB, and
special servicing was $0.6 billion in UPB. PennyMac Financial
subservices and conducts special servicing for $94.7 billion in UPB, an
increase of 9 percent from September 30, 2018 and 26 percent from
December 31, 2017. PennyMac Financial’s owned MSR portfolio grew to
$201.1 billion in UPB, an increase of 4 percent from the prior quarter
end.

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

  December 31,

2018

  September 30,

2018

  December 31,

2017

(in thousands)
Loans serviced at period end:
Prime servicing:
Owned
Mortgage servicing rights
Originated $ 144,296,544 $ 138,311,827 $ 119,673,403
Acquisitions   56,757,600   55,347,551   46,575,834
201,054,144 193,659,378 166,249,237
Mortgage servicing liabilities 1,160,938 1,265,461 1,620,609
Mortgage loans held for sale   2,420,636   2,352,771   2,998,377
204,635,718 197,277,610 170,868,223
Subserviced for Advised Entities   94,074,625   86,389,458   73,651,608
Total prime servicing   298,710,343   283,667,068   244,519,831
Special servicing:
Subserviced for Advised Entities   583,529   837,003   1,328,660
Total special servicing   583,529   837,003   1,328,660
Total loans serviced $ 299,293,872 $ 284,504,071 $ 245,848,491
 
Mortgage loans serviced:
Owned
Mortgage servicing rights $ 201,054,144 $ 193,659,378 $ 166,249,237
Mortgage servicing liabilities 1,160,938 1,265,461 1,620,609
Mortgage loans held for sale   2,420,636   2,352,771   2,998,377
204,635,718 197,277,610 170,868,223
Subserviced   94,658,154   87,226,461   74,980,268
Total mortgage loans serviced $ 299,293,872 $ 284,504,071 $ 245,848,491
 

Investment Management Segment

PennyMac Financial manages PMT for which it earns base management fees
and may earn incentive compensation. Net assets under management were
$1.6 billion as of December 31, 2018, essentially unchanged from
September 30, 2018, and December 31, 2017.

Pretax income for the Investment Management segment was $2.5 million, in
line with the prior quarter and up from $1.5 million in the fourth
quarter of 2017. Management fees, which include base management fees
from PMT, increased 1 percent from the prior quarter and 10 percent from
the fourth quarter of 2017. Management fees also included incentive fees
of $0.7 million based on PMT’s performance.

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

  Quarter ended
December 31,

2018

  September 30,

2018

  December 31,

2017

(in thousands)
Management fees:
PennyMac Mortgage Investment Trust
Base $ 5,810 $ 5,799 $ 5,900
Performance incentive   749   683    
6,559 6,482 5,900
Investment Funds     (11 )   88
Total management fees   6,559   6,471     5,988
Carried Interest     (17 )   5
Total management fees and Carried Interest $ 6,559 $ 6,454   $ 5,993
 
Net assets of Advised Entities:
PennyMac Mortgage Investment Trust $ 1,566,132 $ 1,558,563 $ 1,544,585
Investment Funds         29,329
$ 1,566,132 $ 1,558,563   $ 1,573,914
 

Investment Management segment expenses totaled $5.4 million, down 2
percent from the prior quarter and up 21 percent from the fourth quarter
of 2017. The increase from the prior year was primarily due to a change
in accounting for expenses reimbursed by PMT under the Company’s
management agreement with PMT. As the result of adopting the new
accounting standard for revenue recognition, beginning January 1, 2018,
PennyMac Financial is required to include such expense reimbursements in
its net revenue and the expenses reimbursed in its expenses. Previously,
PennyMac Financial reduced its expenses by the amount of such
reimbursements.

Consolidated Expenses

Total expenses for the fourth quarter were $192.9 million, a 2 percent
increase from the prior quarter and a 9 percent increase from the fourth
quarter of 2017. The quarter-over-quarter change was primarily driven by
higher expenses in the Production segment due to higher volumes of
activity.

Executive Chairman Stanford L. Kurland concluded, “PennyMac Financial is
well positioned for growth in 2019 as we continue to pursue
opportunities we find attractive. We are proud of both a firm-wide
effort that resulted in the Company becoming the first non-bank lender
to directly offer its customers a HELOC product, and the launch of a
prime non-QM loan product in our correspondent channel. We continue to
realize operational efficiencies across our enterprise, such as in our
Servicing business as our investments in technology and portfolio growth
add to greater efficiency and scale driving improved operating profits.
We remain focused on further development of our direct lending channels
and building out our product menu to provide mortgage solutions that
meet our customers’ evolving financial needs. Our scale, platform and
ability to adapt to a changing market environment are the reasons why we
expect to be a beneficiary of market consolidation and to continue
delivering strong financial performance in the future.”

Management’s slide presentation will be available in the Investor
Relations section of the Company’s website at www.ir.pennymacfinancial.com
beginning at 1:30 p.m. (Pacific Standard Time) on Thursday, February 7,
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 www.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)

     
December 31,

2018

September 30,

2018

December 31,

2017

(in thousands, except share amounts)
ASSETS
Cash $ 155,289 $ 102,627 $ 37,725
Short-term investments at fair value 117,824 145,476 170,080
Mortgage loans held for sale at fair value 2,521,647 2,416,955 3,099,103
Assets purchased from PennyMac Mortgage Investment Trust under
agreements

to resell pledged to creditors

131,025 133,128 144,128
Derivative assets 96,347 73,618 78,179
Servicing advances, net 313,197 259,609 318,066
Investment in PennyMac Mortgage Investment Trust at fair value 1,397 1,518 1,205
Mortgage servicing rights 2,820,612 2,785,964 2,119,588
Real estate acquired in settlement of loans 2,250 2,493 2,447
Furniture, fixtures, equipment and building improvements, net 33,374 31,662 29,453
Capitalized software, net 39,748 36,484 25,729
Receivable from PennyMac Mortgage Investment Trust 33,464 27,467 27,119
Loans eligible for repurchase 1,102,840 889,335 1,208,195
Other   109,559   86,194   107,076
Total assets $ 7,478,573 $ 6,992,530 $ 7,368,093
 
LIABILITIES
Assets sold under agreements to repurchase $ 1,933,859 $ 1,739,638 $ 2,381,538
Mortgage loan participation and sale agreements 532,251 524,667 527,395
Notes payable 1,292,291 1,291,847 891,505
Obligations under capital lease 6,605 9,630 20,971
Excess servicing spread financing payable to PennyMac Mortgage
Investment

Trust at fair value

216,110 223,275 236,534
Derivative liabilities 3,064 12,693 5,796
Mortgage servicing liabilities at fair value 8,681 9,769 14,120
Accounts payable and accrued expenses 156,212 140,363 109,143
Payable to PennyMac Mortgage Investment Trust 104,631 91,818 136,998
Payable to exchanged Private National Mortgage Acceptance Company,
LLC

unitholders under tax receivable agreement

46,537 47,605 44,011
Income taxes payable 400,546 74,158 52,160
Liability for loans eligible for repurchase 1,102,840 889,335 1,208,195
Liability for losses under representations and warranties   21,155   21,022   20,053
Total liabilities   5,824,782   5,075,820   5,648,419
 
STOCKHOLDERS’ EQUITY
Common stock—authorized 200,000,000 shares of $0.0001 par value;

issued and outstanding, 77,480,172 , 25,195,436, and 23,529970
shares,

respectively

8 3 2
Class B common stock—authorized 1,000 shares of $0.0001 par value;

issued and outstanding, 0, 45 and 46 shares, respectively

Additional paid-in capital 1,310,648 236,457 204,103
Retained earnings   343,135   304,386   265,306
Total stockholders’ equity attributable to PennyMac Financial
Services, Inc.

common stockholders

  1,653,791   540,846   469,411
Noncontrolling interests in Private National Mortgage Acceptance

Company, LLC

    1,375,864   1,250,263
Total stockholders’ equity   1,653,791   1,916,710   1,719,674
Total liabilities and stockholders’ equity $ 7,478,573 $ 6,992,530 $ 7,368,093
 

Contacts

Media
Stephen Hagey
(805) 530-5817

Investors
Christopher Oltmann
(818) 264-4907

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