WESTLAKE VILLAGE, Calif.--(BUSINESS WIRE)--Aug 2, 2018--PennyMac 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

Pretax income was $74.7 million, up from $73.0 million in the prior quarter Second quarter results reflect continued strong Servicing segment results and a quarterly increase in earnings contribution from the Production segment driven by higher volume Production segment pretax income was $19.0 million, up 11 percent from the prior quarter and down 71 percent from the second quarter of 2017 Total loan acquisitions and originations were $15.9 billion in unpaid principal balance (UPB), up 11 percent from the prior quarter and down 9 percent from the second quarter of 2017Correspondent government and direct lending interest rate lock commitments (IRLCs) totaled $11.9 billion in UPB, up 9 percent from the prior quarter and down 12 percent from the second quarter of 2017 Servicing segment pretax income was $54.6 million, modestly down from $54.9 million in the prior quarter and up from a loss of $11.2 million from the second quarter of 2017 Servicing segment pretax income excluding valuation-related changes was $35.8 million, down 1 percent from the prior quarter and up 134 percent from the second quarter of 2017 3The servicing portfolio grew to $263.5 billion in UPB, up 3 percent from March 31, 2018, and 15 percent from June 30, 2017 Investment Management segment pretax income was $1.1 million, up from $1.0 million in the prior quarter, and down from $2.5 million in the second quarter of 2017 Net assets under management were $1.5 billion, essentially unchanged from March 31, 2018, and down 3 percent from June 30, 2017 Repurchased approximately 236,000 shares of PFSI’s Class A common stock at a cost of $4.8 million and a weighted average cost of $20.41 per share

Notable activity after quarter end

Completed or entered into agreements to acquire bulk Ginnie Mae Mortgage Servicing Right (MSR) portfolios with UPB totaling approximately $13.9 billion Completed acquisitions from three sellers totaling $6.5 billion in UPBAlso entered into agreements for acquisitions from another three sellers totaling $7.4 billion in UPB that are expected to close in the third quarter 4

“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:

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