PennyMac Financial Services, Inc. Reports Fourth Quarter and Full-Year 2019 Results

WESTLAKE VILLAGE, Calif.–(BUSINESS WIRE)–PennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income of $152.7 million for the fourth quarter of 2019, or $1.88 per share on a diluted basis, on revenue of $490.4 million. Book value per share increased to $26.26 from $24.37 at September 30, 2019.

PFSI’s Board of Directors declared a fourth quarter cash dividend of $0.12 per share, payable on February 27, 2020, to common stockholders of record as of February 14, 2020.

Fourth Quarter 2019 Highlights

  • Pretax income was $203.4 million, up 22 percent from the prior quarter and 249 percent from the fourth quarter of 2018

    • Record pretax income and operating earnings1 driven by strong Production segment results and operating performance in the Servicing segment
  • Production segment pretax income was $203.3 million, up 13 percent from the prior quarter and 700 percent from the fourth quarter of 2018, driven by record loan production volumes across all channels

    • Total loan acquisitions and originations were $42.4 billion in unpaid principal balance (UPB), up 22 percent from the prior quarter and 118 percent from the fourth quarter of 2018
    • PFSI’s correspondent interest rate lock commitments (IRLCs) totaled $16.9 billion in UPB, up 1 percent from the prior quarter and 84 percent from the fourth quarter of 20182
    • Direct lending IRLCs were a record $6.5 billion in UPB, up 16 percent from the prior quarter and 235 percent from the fourth quarter of 2018

      • $5.4 billion in UPB of locks in the consumer direct channel; $1.1 billion in UPB of locks in the broker direct channel
    • Correspondent acquisitions of conventional loans fulfilled for PennyMac Mortgage Investment Trust (NYSE: PMT) were $20.5 billion in UPB, up 23 percent from the prior quarter and 126 percent from the fourth quarter of 2018
  • Servicing segment pretax loss was $5.1 million, versus a pretax loss of $18.1 million in the prior quarter and pretax income of $29.3 million in the fourth quarter of 2018

    • Valuation-related items included a $160.6 million gain in the fair value of mortgage servicing rights (MSRs) and $194.6 million in hedging and other losses; net impact on pretax income was $(34.0) million and on earnings per share was $(0.31)
    • Pretax income excluding valuation-related items was $39.1 million, up 55 percent from the prior quarter and down 12 percent from the fourth quarter of 2018

      • Operating expenses decreased by $6.5 million from the prior quarter primarily due to a reduction in vendor expenses following the completion of our Servicing Systems Environment (SSE)
    • The servicing portfolio grew to $368.7 billion in UPB, up 6 percent from September 30, 2019
  • Investment Management segment pretax income was $5.2 million, up from $5.0 million in the prior quarter and $2.5 million in the fourth quarter of 2018

    • Revenue was $11.8 million, essentially unchanged from the prior quarter and up 50 percent from the fourth quarter of 2018
    • Net assets under management (AUM) were $2.5 billion, up 10 percent from September 30, 2019, driven by $215 million in new common equity raised by PMT during the quarter, including $201 million in December

Notable activity after quarter end:

  • Completed the acquisition of a bulk Ginnie Mae MSR portfolio totaling $2.4 billion in UPB

Full-Year 2019 Highlights

  • Pretax income of $529.4 million, up 98 percent from the prior year and the highest level on record for PennyMac Financial

    • Diluted earnings per share of $4.89, up from $2.59 in 2018 and also a record
  • Total net revenue of $1.5 billion, up 50 percent from the prior year
  • Record loan production of $117.6 billion in UPB, an increase of 74 percent from the prior year, which included $9.8 billion in UPB of consumer direct production, an increase of 209 percent from the prior year
  • Servicing portfolio growth of 23 percent
  • Net AUM growth of 56 percent, driven by $830 million in new common equity raised by PMT

PennyMac Financial delivered outstanding performance across all of its businesses in the fourth quarter and throughout 2019,” said President and CEO David Spector. “Book value per share grew 22 percent for the year, driven by record profitability in our Production segment and our ability to successfully hedge the interest rate risk inherent in mortgage servicing rights in a year characterized by significant interest rate volatility. Each of our production channels grew market share this year and substantial growth in our consumer direct lending channel was a major contributor to the Company’s earnings. Further, our industry-leading correspondent channel became the largest aggregator of residential mortgage loans in the U.S., according to Inside Mortgage Finance. Our servicing portfolio also grew more than 20 percent for the year while our technology investments continue to drive greater operating efficiency and better service for our 1.8 million customers. With our maturing, balanced business model, the opportunity to continue capturing market share gains across our businesses and the strong foundation provided by our large and growing servicing portfolio, we expect PFSI to earn a mid-teens return on equity across different market environments; however, we expect PFSI to deliver a higher ROE in 2020.”

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

Quarter ended December 31, 2019
Mortgage Banking Investment
Management
Production Servicing Total Total
(in thousands)
Revenue
Net gains on loans held for sale at fair value

$

227,751

$

29,736

 

$

257,487

$

 

$

257,487

Loan origination fees

 

63,868

 

 

 

63,868

 

 

 

63,868

Fulfillment fees from PMT

 

58,297

 

 

 

58,297

 

 

 

58,297

Net servicing fees

 

 

87,731

 

 

87,731

 

 

 

87,731

Management fees

 

 

 

 

 

10,314

 

 

10,314

Net interest income (expense):
Interest income

 

26,624

 

49,391

 

 

76,015

 

 

 

76,015

Interest expense

 

23,737

 

41,378

 

 

65,115

 

17

 

 

65,132

 

2,887

 

8,013

 

 

10,900

 

(17

)

 

10,883

Other

 

360

 

(21

)

 

339

 

1,456

 

 

1,795

Total net revenue

 

353,163

 

125,459

 

 

478,622

 

11,753

 

 

490,375

Expenses

 

149,863

 

130,586

 

 

280,449

 

6,560

 

 

287,009

Pretax income (loss)

$

203,300

$

(5,127

)

$

198,173

$

5,193

 

$

203,366

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 $42.4 billion in UPB, $21.9 billion of which was for its own account, and $20.5 billion of which was fee-based fulfillment activity for PMT. Correspondent government, non-delegated and direct lending IRLCs totaled $23.4 billion in UPB, up 4 percent from the prior quarter and 110 percent from the fourth quarter of 2018.

Production segment pretax income was $203.3 million, up 13 percent from the prior quarter and 700 percent from the fourth quarter of 2018. Production revenue totaled $353.2 million, up 12 percent from the prior quarter and 229 percent from the fourth quarter of 2018. The quarter-over-quarter increase was driven by a $14.4 million increase in loan origination fees, a $13.1 million increase in fulfillment fees from PMT, and an $11.6 million increase in net gains on loans held for sale.

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

Quarter ended
December 31,
2019
September 30,
2019
December 31,
2018
(in thousands)
Receipt of MSRs in loan sale transactions

$

328,182

 

$

227,256

 

$

141,100

 

Mortgage servicing rights recapture payable to PennyMac Mortgage Investment Trust

 

(2,624

)

 

(1,896

)

 

(1,259

)

Provision for representations and warranties, net

 

(1,583

)

 

(1,333

)

 

(229

)

Cash investment (1)

 

4,694

 

 

(108,408

)

 

(46,260

)

Fair value changes of pipeline, inventory and hedges

 

(71,182

)

 

120,113

 

 

(33,604

)

Net gains on loans held for sale

$

257,487

 

$

235,732

 

$

59,748

 

Net gains on loans held for sale by segment:
Production

$

227,751

 

$

216,132

 

$

36,848

 

Servicing

$

29,736

 

$

19,600

 

$

22,900

 

(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 $58.3 million in the fourth quarter, up 29 percent from the prior quarter and 104 percent from the fourth quarter of 2018. The quarter-over-quarter increase in fulfillment fee revenue was driven primarily by a 23 percent increase in acquisition volumes by PMT and a slight increase in the weighted average fulfillment fee rate to 28 basis points from 27 basis points in the prior quarter.

Net interest income totaled $2.9 million, down from $4.0 million in the prior quarter and $15.3 million in the fourth quarter of 2018. Net interest income in the third quarter of 2019 and the fourth quarter of 2018 included incentives totaling $1.6 million and $12.6 million, respectively, which the Company was entitled to receive under one of its master repurchase agreements to finance mortgage loans that satisfied certain consumer relief characteristics. As expected and previously disclosed, the lender completed the orderly wind down of the incentive program during the quarter ended September 30, 2019 and accordingly, the related master repurchase agreement expired. As a result, there were no consumer relief incentives in the fourth quarter of 2019.

Production segment expenses were $149.9 million, up 10 percent from the prior quarter and 83 percent from the fourth quarter of 2018 as a result of the increase in volumes.

Servicing Segment

Servicing includes income from owned MSRs, subservicing and special servicing activities. Servicing segment pretax loss was $5.1 million, versus a pretax loss of $18.1 million in the prior quarter and pretax income of $29.3 million in the fourth quarter of 2018. Servicing segment revenues totaled $125.5 million, up 15 percent from the prior quarter and down 7 percent from the fourth quarter of 2018. The quarter-over-quarter increase was primarily driven by higher servicing fees related to a larger servicing portfolio and lower net valuation-related losses.

Net loan servicing fees totaled $87.7 million and included $234.9 million in servicing fees reduced by $113.1 million from the realization of MSR cash flows. Net valuation-related losses totaled $34.0 million, and included MSR fair value gains of $160.6 million more than offset by hedging losses of $192.4 million and a $2.3 million change in the fair value of the excess servicing spread liability. The MSR fair value gains primarily resulted from expectations for decreased prepayment activity in the future as a result of higher interest rates in the fourth quarter.

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

Quarter ended
December 31,
2019
September 30,
2019
December 31,
2018
(in thousands)
Loan servicing fees (1)

$

234,871

 

$

224,949

 

$

194,405

 

Effect of MSRs:
Realization of cash flows

 

(113,102

)

 

(117,220

)

 

(82,250

)

Change in fair value of MSRs

 

160,611

 

 

(295,510

)

 

(67,277

)

Change in fair value of excess servicing spread financing

 

(2,263

)

 

3,864

 

 

526

 

Hedging (losses) gains

 

(192,386

)

 

250,146

 

 

59,808

 

Total change in fair value of MSRs

 

(147,140

)

 

(158,720

)

 

(89,193

)

Net loan servicing fees

$

87,731

 

$

66,229

 

$

105,212

 

(1) Includes contractually-specified servicing fees

Servicing segment revenue also included $29.7 million in net gains on loans held for sale from the securitization of reperforming government-insured and guaranteed loans, compared to $19.6 million in the prior quarter and $22.9 million in the fourth 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 $8.0 million, down from $23.1 million in the prior quarter and up from $6.0 million in the fourth quarter of 2018. Interest income decreased by $11.6 million from the prior quarter, primarily driven by lower interest income related to custodial deposit balances, as seasonal tax disbursements reduced balances and earnings rates declined. Interest expense was up $3.4 million from the prior quarter, driven by elevated EBO activity.

Servicing segment expenses totaled $130.6 million, up 2 percent from the prior quarter driven by a larger servicing portfolio partially offset by lower vendor-related fees as a result of the completion of SSE, our proprietary servicing system.

The total servicing portfolio reached $368.7 billion in UPB at December 31, 2019, an increase of 6 percent from September 30, 2019 and 23 percent from December 31, 2018, driven by the Company’s loan production activities. PennyMac Financial subservices and conducts special servicing for $135.4 billion in UPB, an increase of 12 percent from September 30, 2019 and 43 percent from December 31, 2018. PennyMac Financial’s owned MSR portfolio grew to $233.3 billion in UPB, an increase of 2 percent from September 30, 2019 and 14 percent from December 31, 2018.

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

December 31,
2019
September 30,
2019
December 31,
2018
(in thousands)
Prime servicing:
Owned
Mortgage servicing rights
Originated

$

166,188,825

$

157,437,101

$

144,296,544

Acquisitions

 

59,598,279

 

63,778,892

 

56,757,600

 

225,787,104

 

221,215,993

 

201,054,144

Mortgage servicing liabilities

 

2,758,454

 

2,327,687

 

1,160,938

Mortgage loans held for sale

 

4,724,006

 

4,323,252

 

2,420,636

 

233,269,564

 

227,866,932

 

204,635,718

Subserviced for PMT

 

135,288,944

 

120,460,120

 

94,074,625

Total prime servicing

 

368,558,508

 

348,327,052

 

298,710,343

Special servicing:
Subserviced for PMT

 

125,724

 

147,956

 

583,529

Total loans serviced

$

368,684,232

$

348,475,008

$

299,293,872

 
Mortgage loans serviced:
Owned
Mortgage servicing rights

$

225,787,104

$

221,215,993

$

201,054,144

Mortgage servicing liabilities

 

2,758,454

 

2,327,687

 

1,160,938

Mortgage loans held for sale

 

4,724,006

 

4,323,252

 

2,420,636

 

233,269,564

 

227,866,932

 

204,635,718

Subserviced

 

135,414,668

 

120,608,076

 

94,658,154

Total mortgage loans serviced

$

368,684,232

$

348,475,008

$

299,293,872

Investment Management Segment

PennyMac Financial manages PMT for which it earns base management fees and may earn incentive compensation. Net AUM were $2.5 billion as of December 31, 2019, up 10 percent from September 30, 2019 and 56 percent from December 31, 2018. The quarter-over-quarter growth was driven by PMT’s issuance of approximately $215 million of common shares during the quarter.

Pretax income for the Investment Management segment was $5.2 million, up from $5.0 million in the prior quarter and $2.5 million in the fourth quarter of 2018. Management fees, which include base management and performance incentive fees from PMT, increased 2 percent from the prior quarter and 57 percent from the fourth quarter of 2018. Base management fees were $8.4 million, up from $7.9 million in the prior quarter and $5.8 million in the fourth quarter of 2018 as a result of PFSI’s increased AUM. Performance-based incentive fees were $1.9 million, down slightly from $2.2 million in the prior quarter and up from $0.7 million in the fourth quarter of 2018, driven by PMT’s continued strong financial performance.

The following table presents a breakdown of management fees:

Quarter ended
December 31,
2019
September 30,
2019
December 31,
2018
(in thousands)
Management fees:
PennyMac Mortgage Investment Trust
Base

$

8,441

$

7,914

$

5,810

Performance incentive

 

1,873

 

2,184

 

749

Total management fees

$

10,314

$

10,098

$

6,559

 
Net assets of PennyMac Mortgage Investment Trust

$

2,450,916

$

2,219,611

$

1,566,132

Investment Management segment expenses totaled $6.6 million, down 3 percent from the prior quarter and up 22 percent from the fourth quarter of 2018.

Consolidated Expenses

Total expenses were $287.0 million, up 6 percent from the prior quarter and 49 percent from the fourth quarter of 2018. The year-over-year change was primarily driven by higher volumes of activity in the Production segment.

Chairman Stanford L. Kurland concluded, “As I reflect on the past twelve years, I am incredibly proud of the organization we have built and I believe our dedicated employees and the depth of our management team are unmatched in the industry. PennyMac Financial has unique capabilities, including its synergistic partnership with PennyMac Mortgage Investment Trust, the REIT that we manage, as well as our best-in-class operating platform, which have established this Company as a leading mortgage banking enterprise. Our people, platform and governance infrastructure, which includes our focus on risk management, position us well to sustain our competitive advantage in the residential mortgage market across a variety of economic environments. As I relinquish my day-to-day responsibilities but continue my involvement as Chairman of the Board, I am confident that the management team will continue to build on the established foundation in place for future growth, while providing superior, long-term returns to our stockholders.”

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, February 6, 2020.

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; expected discontinuation of LIBOR; 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; our ability to pay dividends to our stockholders; 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.

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

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 
December 31,
2019
September 30,
2019
December 31,
2018
(in thousands, except share amounts)
ASSETS
Cash

$

188,291

$

201,268

$

155,289

Short-term investments at fair value

 

74,611

 

90,663

 

117,824

Loans held for sale at fair value

 

4,912,953

 

4,522,971

 

2,521,647

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

 

107,512

 

107,678

 

131,025

Derivative assets

 

159,686

 

232,948

 

96,347

Servicing advances, net

 

344,379

 

271,501

 

313,197

Investment in PennyMac Mortgage Investment Trust at fair value

 

1,672

 

1,667

 

1,397

Mortgage servicing rights

 

2,926,790

 

2,556,253

 

2,820,612

Real estate acquired in settlement of loans

 

20,326

 

20,328

 

2,250

Operating lease right-of-use assets

 

73,090

 

53,384

 

Furniture, fixtures, equipment and building improvements, net

 

30,480

 

32,221

 

33,374

Capitalized software, net

 

63,130

 

57,975

 

39,748

Receivable from PennyMac Mortgage Investment Trust

 

48,159

 

39,744

 

33,464

Loans eligible for repurchase

 

1,046,527

 

892,631

 

1,102,840

Other

 

206,411

 

221,967

 

109,559

Total assets

$

10,204,017

$

9,303,199

$

7,478,573

 
LIABILITIES
Assets sold under agreements to repurchase

$

4,141,053

$

3,538,889

$

1,933,859

Mortgage loan participation and sale agreements

 

497,948

 

514,625

 

532,251

Notes payable secured by mortgage servicing rights

 

1,294,070

 

1,293,625

 

1,292,291

Obligations under capital lease

 

20,810

 

23,881

 

6,605

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

 

178,586

 

183,141

 

216,110

Derivative liabilities

 

22,330

 

14,035

 

3,064

Operating lease liabilities

 

91,320

 

72,160

 

Mortgage servicing liabilities at fair value

 

29,140

 

34,294

 

8,681

Accounts payable and accrued expenses

 

175,273

 

215,379

 

156,212

Payable to PennyMac Mortgage Investment Trust

 

73,280

 

61,862

 

104,631

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

 

46,158

 

46,537

 

46,537

Income taxes payable

 

504,569

 

480,559

 

400,546

Liability for loans eligible for repurchase

 

1,046,527

 

892,631

 

1,102,840

Liability for losses under representations and warranties

 

21,446

 

19,968

 

21,155

Total liabilities

 

8,142,510

 

7,391,586

 

5,824,782

 
STOCKHOLDERS’ EQUITY
Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding 78,515,047, 78,434,556, and 77,480,172 shares, respectively

 

8

 

8

 

8

Additional paid-in capital

 

1,335,107

 

1,328,166

 

1,310,648

Retained earnings

 

726,392

 

583,439

 

343,135

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

 

2,061,507

 

1,911,613

 

1,653,791

Total liabilities and stockholders’ equity

$

10,204,017

$

9,303,199

$

7,478,573

 

Contacts

Media

Janis Allen
(805) 330-4899

Investors
Isaac Garden

(818) 264-4907

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