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PennyMac Financial Services, Inc. Reports Second Quarter 2018 Results and Declares Special, One-Time DividendPennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income of $68.4 million for the second quarter of 2018, on revenue of $244.3 million. Net income attributable to PFSI common stockholders was $17.8 million, or $0.70 per diluted share. Book value per share increased to $21.19, from $20.74 at March 31, 2018. Additionally, the PFSI Board of Directors declared a special, one-time cash dividend of $0.40 per share of PFSI Class A common stock. The dividend represents cash that resulted from previous tax-related distributions from Private National Mortgage Acceptance Company, LLC (PNMAC) in excess of PFSI's tax obligations. This dividend will be paid on August 30, 2018 to Class A common stockholders of record as of August 13, 2018. The Company anticipates that this distribution will be reported as a return of capital for tax purposes, based on the Company's current expectations regarding its projected taxable earnings and profits for the year 2018.1 Also today, a registration statement is being filed by New PennyMac Financial Services, Inc.2 for a corporate reorganization that, if completed, would simplify the Company's corporate structure and convert all equity ownership in PFSI and PNMAC into a single class of publicly traded common stock. Second Quarter 2018 Highlights
Notable activity after quarter end
"We reported solid financial results for the second quarter in a mortgage origination market that is transitioning and remains competitive, with lenders managing capacity and production margins for the higher rate environment," said President and CEO David Spector. "Our results reflect the strength of our balanced mortgage banking model with production volume and profits up from the prior quarter and the Servicing segment's continued strong earnings contribution, which benefited from an increase in mortgage rates during the quarter. In the third quarter, we have deployed capital into bulk MSR acquisitions totaling $6.5 billion in UPB and entered into agreements to acquire three additional portfolios totaling $7.4 billion in UPB. We also continue to invest in growth initiatives, such as broker direct lending, non-delegated correspondent, non-portfolio consumer direct origination and jumbo mortgages, which have the potential to meaningfully contribute to our profitability as they gain traction." The following table presents the contribution of PennyMac Financial's Production, Servicing and Investment Management segments to pretax income:
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 PennyMac Mortgage Investment Trust (NYSE: PMT) and direct lending through the consumer direct and broker direct channels. PennyMac Financial's loan production activity for the quarter totaled $15.9 billion in UPB, of which $10.5 billion in UPB was for its own account, and $5.4 billion in UPB was fee-based fulfillment activity for PMT. Correspondent government and direct lending IRLCs totaled $11.9 billion in UPB. Production segment pretax income was $19.0 million, an increase of 11 percent from the prior quarter and a decrease of 71 percent from the second quarter of 2017. Production revenue totaled $89.3 million, an increase of 5 percent from the prior quarter and a decrease of 32 percent from the second quarter of 2017. The quarter-over-quarter change resulted from a $3.7 million increase in net interest income and a $2.6 million increase in fulfillment fees from PMT, partially offset by a $2.2 million decrease in net gains on mortgage loans held for sale. Net interest income in the second quarter includes $12.5 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, up from $10.2 million in the prior quarter. The components of net gains on mortgage loans held for sale are detailed in the following table:
PennyMac Financial performs fulfillment services for conventional conforming loans acquired by PMT 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 $14.6 million in the second quarter, up 22 percent from the prior quarter and down 31 percent from the second quarter of 2017. The quarter-over-quarter increase in fulfillment fee revenue was driven by higher acquisition volumes by PMT. For the second quarter, the weighted average fulfillment fee rate was 27 basis points, down from 28 basis points in the prior quarter. Production segment expenses were $70.3 million, a 3 percent increase from the prior quarter and a 10 percent increase from the second quarter of 2017. The quarter-over-quarter increase was primarily driven by higher production volumes. Servicing Segment Servicing includes income from owned MSRs, subservicing and special servicing activities. Servicing segment pretax income was $54.6 million compared with $54.9 million in the prior quarter and an $11.2 million loss in the second quarter of 2017. Servicing segment revenues totaled $148.1 million, an increase of 1 percent from the prior quarter and 128 percent from the second quarter of 2017. The quarter-over-quarter increase reflects a larger servicing portfolio and higher interest income from custodial deposits, partially offset by increased realization of MSR cash flows and a decrease in revenue related to the reperformance of government-insured and guaranteed loans bought out of Ginnie Mae pools in prior periods. Net loan servicing fees totaled $113.7 million and included $161.9 million in servicing fees reduced by $65.2 million in realization of MSR cash flows. Valuation-related gains totaled $17.0 million, which includes MSR fair value gains of $42.3 million, associated hedging losses of $24.3 million and changes in fair value of the excess servicing spread (ESS) liability resulting in a $1.0 million loss. The MSR fair value gains primarily resulted from expectations for lower prepayment activity in the future due to higher mortgage rates. The following table presents a breakdown of net loan servicing fees:
Servicing segment revenue also included $27.0 million in net gains on mortgage loans held for sale from the securitization of reperforming government-insured and guaranteed loans, compared with $35.2 million in the prior quarter and $23.4 million in the second 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 $6.7 million, up from net interest expense of $6.3 million in the prior quarter and $5.8 million in the second quarter of 2017. Interest income increased by $9.9 million from the prior quarter, driven by income from custodial deposits and capitalized interest resulting from an increase in modification of EBO loans during the quarter. Interest expense decreased by $3.1 million from the first quarter; interest expense was elevated in the first quarter due to the accelerated recognition of costs related to the refinancing of MSR-backed term notes. Servicing segment expenses totaled $93.5 million, a 2 percent increase from the prior quarter and a 23 percent increase from the second quarter of 2017. The quarter-over-quarter increase was driven by servicing portfolio growth and an increase in EBO-related expenses resulting from higher volume of buyouts from Ginnie Mae securitizations. The total servicing portfolio reached $263.5 billion in UPB at June 30, 2018, an increase of 3 percent from the prior quarter end and 15 percent from a year earlier. Servicing portfolio growth during the quarter was driven by the Company's loan production activities. Of the total servicing portfolio, prime servicing was $262.6 billion in UPB and special servicing was $0.9 billion in UPB. PennyMac Financial subservices and conducts special servicing for $81.2 billion in UPB, an increase of 5 percent from March 31, 2018 and 21 percent from a year earlier. PennyMac Financial's owned MSR portfolio grew to $178.3 billion in UPB, an increase of 3 percent from the prior quarter end. The table below details PennyMac Financial's servicing portfolio UPB:
Investment Management Segment PennyMac Financial manages PMT for which it earns base management fees and may earn incentive compensation. PennyMac Financial has also managed two private Investment Funds that sold or liquidated all of their remaining assets in 2017 and the six months ended June 30, 2018. Net assets under management were $1.5 billion as of June 30, 2018, essentially unchanged from March 31, 2018, and down 3 percent from June 30, 2017. Pretax income for the Investment Management segment was $1.1 million, compared with $1.0 million in the prior quarter and $2.5 million in the second quarter of 2017. Management fees, which include base management fees from PMT and the private Investment Funds, decreased 2 percent from the prior quarter and 6 percent from the second quarter of 2017. No incentive fee was paid by PMT during the quarter as in the prior quarter; incentive fees of $0.3 million were paid for the second quarter of 2017. The following table presents a breakdown of management fees and carried interest:
Investment Management segment expenses totaled $5.8 million, down 2 percent from the prior quarter and up 50 percent from the second 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. 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 accounted for such reimbursements as reductions to its expenses. Consolidated Expenses Total expenses for the second quarter were $169.6 million, a 3 percent increase from the prior quarter and an 18 percent increase from the second quarter of 2017. The quarter-over-quarter change was driven by higher expenses in both the Servicing and Production segments due to higher volumes of activity. Executive Chairman Stanford L. Kurland concluded, "We continue to invest and pursue the buildout of our business model into new market segments, products and channels. We believe we are well-positioned to expand our growth and earnings opportunities with the investments we are making in our Production and Servicing businesses. In consumer direct lending, we are seeing success in non-portfolio and purchase-money originations, both of which are important to growing volumes. Further, our investments in the broker direct channel are beginning to deliver results and demonstrate our ability to access this previously untapped market segment. We are making technology investments across our business, such as in loan servicing where system enhancements will allow us to capture greater scale efficiencies. We also remain mindful of prudent expense management and are monitoring the deployment of our human resources and capital to ensure we continue to operate at high levels of efficiency and continue delivering attractive returns to stockholders." Management's slide presentation will be available in the Investor Relations section of the Company's website at www.ir.pennymacfinancial.com beginning at 1:10 p.m. (Pacific Daylight Time) on Thursday, August 2, 2018. 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. PennyMac Financial Services, Inc. trades on the New York Stock Exchange under the symbol "PFSI." 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 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; our dependence on the multifamily and commercial real estate sectors for future originations of commercial mortgage loans and other commercial real estate related loans; 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 and the Investment Funds 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. Non-solicitation In connection with a proposed reorganization of the Company, the Company's wholly-owned subsidiary, New PennyMac Financial Services, Inc., will be filing a registration statement on Form S-4 with the SEC, but this registration statement has not yet become effective. The securities registered under this registration statement may not be sold nor may offers to buy these securities be accepted before the time the registration statement becomes effective. This press release shall not constitute an offer to sell or a solicitation of an offer to buy these securities, and shall not constitute an offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of that jurisdiction. Additional Information and Where to Find It In connection with the proposed reorganization, New PennyMac Financial Services, Inc. (CIK# 0001745916) will be filing a registration statement on Form S-4 (the "New PennyMac Registration Statement") that includes a proxy statement of the Company that also constitutes a prospectus of New PennyMac Financial Services, Inc. (which New PennyMac Registration Statement has not yet been declared effective). INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE PROXY STATEMENT/PROSPECTUS, AND ANY OTHER RELEVANT DOCUMENTS WHEN THEY BECOME AVAILABLE, BECAUSE THEY CONTAIN, OR WILL CONTAIN, IMPORTANT INFORMATION ABOUT THE COMPANY, NEW PENNYMAC FINANCIAL SERVICES, INC. AND THE REORGANIZATION. A definitive proxy statement will be sent to stockholders of the Company seeking approval of the reorganization after the New PennyMac Registration Statement is declared effective. The proxy statement/prospectus and other documents relating to the reorganization can be obtained free of charge from the SEC website at www.sec.gov. Participants in Solicitation This communication is not a solicitation of a proxy from any investor or stockholder. However, the Company, New PennyMac Financial Services, Inc. and certain of their directors and executive officers may be deemed to be participants in the solicitation of proxies in connection with the proposed reorganization under the rules of the SEC. Information regarding the Company's directors and executive officers may be found in its definitive proxy statement relating to its 2018 Annual Meeting of Stockholders filed with the SEC on April 17, 2018 and in the proxy statement/prospectus included in the New PennyMac Registration Statement. Information regarding New PennyMac Financial Services, Inc.'s directors and executive officers may be found in the proxy statement/prospectus included in the New PennyMac Registration Statement. These documents can be obtained free of charge from the SEC.
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