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Section 1: 8-K (8-K)

PFSI Form 8-K (3Q18 Earnings)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): November 1, 2018

 

PennyMac Financial Services, Inc.

(formerly known as New PennyMac Financial Services, Inc.)

(Exact name of registrant as specified in its charter)

 

Delaware

001-38727

83-1098934

(State or other jurisdiction

(Commission

(IRS Employer

of incorporation)

File Number)

Identification No.)

 

3043 Townsgate Road, Westlake Village, California

91361

(Address of principal executive offices)

(Zip Code)

 

(818) 224‑7442

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name or former address, if changed since last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

☐  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

☐  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

☐  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

☐  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

 

 

 


 

Item 2.02    Results of Operations and Financial Condition.

 

On November 1, 2018,  PennyMac Financial Services, Inc. (the “Company”) issued a press release announcing its financial results for the fiscal quarter ended September 30, 2018.  A copy of the press release and the slide presentation used in connection with the Company’s recorded presentation of financial results were made available on November 1, 2018 and are furnished as Exhibit 99.1 and Exhibit 99.2, respectively.

 

The information in Item 2.02 of this report, including the exhibits hereto, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of Section 18, nor shall it be deemed incorporated by reference into any disclosure document relating to the Company, except to the extent, if any, expressly set forth by specific reference in such filing.

 

Item 9.01    Financial Statements and Exhibits.

 

(d)  Exhibits.

 

Exhibit
No.

    

Description

 

 

 

99.1

 

Press Release, dated November 1, 2018, issued by PennyMac Financial Services, Inc. pertaining to its financial results for the fiscal quarter ended September 30, 2018.

99.2

 

Slide Presentation for use beginning on November 1, 2018 in connection with a recorded presentation of financial results for the fiscal quarter ended September 30, 2018.

 


 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

PENNYMAC FINANCIAL SERVICES, INC.

 

 

 

 

 

 

Dated:  November 2, 2018

/s/ Andrew S. Chang

 

Andrew S. Chang
Senior Managing Director and Chief Financial Officer

 

 


(Back To Top)

Section 2: EX-99.1 (EX-99.1)

Ex 99.1 PFSI 3Q18 Earnings Release

Exhibit 99.1

 

C:\Users\jpilkington\Downloads\Pennymac_Roof_FS_RGB.jpg

 

 

 

 

 

Media

Investors

 

Stephen Hagey

Christopher Oltmann

 

(805) 530-5817

(818) 264-4907

 

PennyMac Financial Services, Inc. Reports Third Quarter 2018 Results

and Completes Corporate Reorganization

Westlake Village, CA, November 1, 2018 – PennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income of $56.2 million for the third quarter of 2018, on revenue of $250.9 million.  Net income attributable to PFSI common stockholders was $14.5 million, or $0.57 per diluted share.  Book value per share increased to $21.47 from $21.19 at June 30, 2018.  Also today, the Company completed a corporate reorganization that simplified its corporate structure and converted all equity ownership to a single class of publicly-traded common stock.  Pro forma, giving effect to the reorganization, book value per share would have been $20.671.

Third Quarter 2018 Highlights

·

Pretax income was $61.7 million, down from $74.7 million in the prior quarter

o

Third quarter results reflect improved Production segment earnings and strong contributions from all three operating segments

·

Production segment pretax income was $25.7 million, up 35 percent from the prior quarter and down 63 percent from the third quarter of 2017

o

Total loan acquisitions and originations were $17.9 billion in unpaid principal balance (UPB), up 12 percent from the prior quarter and down 6 percent from the third quarter of 2017

o

Correspondent government and direct lending interest rate lock commitments (IRLCs) totaled $11.1 billion in UPB, down 6 percent from the prior quarter and 16 percent from the third quarter of 2017


1

Please refer to the reconciliation of reported to pro forma book value per share at September 30, 2018 at the end of this press release

 

 


 

o

Correspondent conventional acquisition volume fulfilled for PennyMac Mortgage Investment Trust (PMT) of $7.5 billion in UPB, up 39 percent from the prior quarter and drove an increase in fulfillment fee revenue

·

Servicing segment pretax income was $33.6 million, down 38 percent from $54.6 million in the prior quarter and up 37 percent from $24.5 million in the third quarter of 2017

o

Servicing segment pretax income excluding valuation-related changes was $29.9 million, down 17 percent from the prior quarter and 19 percent from the third quarter of 20172

o

The servicing portfolio grew to $284.5 billion in UPB, up 8 percent from June 30, 2018 and 19 percent from September 30, 2017

o

Redeemed $500 million of MSR-secured term notes and issued $650 million of 5-year secured term notes; refinancing expected to reduce annual interest expense by $7 million after recognizing $4.6 million of debt redemption costs this quarter

o

Completed $11.6 billion in UPB of the previously announced bulk MSR portfolio acquisitions

·

Investment Management segment pretax income was $2.5 million, up from $1.1 million in the prior quarter and $0.7 million in the third quarter of 2017

o

Net assets under management were $1.6 billion, up 1 percent from June 30, 2018, and down 5 percent from September 30, 2017

Notable activity after quarter end

·

Completed the corporate reorganization with the conversion of all equity ownership into a single class of publicly-traded common stock effective November 1, 2018.  The transaction simplifies our corporate structure and financial reporting

·

Completed the acquisition of additional bulk Ginnie Mae MSR portfolios totaling $3.2 billion in UPB.  An additional $1.2 billion in UPB of bulk MSR acquisitions are pending settlement3

 


2

Excludes changes in the fair value of MSRs and the ESS liability, and gains (losses) on hedging which were $60.9 million, $(1.1) million, and $(53.0) million, respectively, and a provision for credit losses on active loans of $(3.1) million in the third quarter of 2018.

3

These transactions are subject to continuing due diligence and customary closing conditions.  There can be no assurance regarding the size of the transactions or that the transactions will be completed at all.

 

2


 

“Our results this quarter reflect volume growth from last quarter in each of our production channels and continued growth of our servicing portfolio,” said President and CEO David Spector.  “Initiatives and investments targeted toward growing our consumer and broker direct channel volumes are showing encouraging results.  While the transition to a higher rate environment has resulted in a smaller origination market and intensified competition, PennyMac, with its unique operational capabilities, stands to benefit from market consolidation and the shift to a purchase-money focused market.  Finally, we are pleased to have completed our corporate reorganization which we believe offers many benefits including the simplification of our corporate structure, financial reporting, and improved comparability to other publicly traded companies.”

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 2018

 

 

Mortgage Banking

 

 

 

 

Investment

 

 

 

 

    

Production

    

Servicing

    

Total

    

Management

    

Total

 

 

 

(in thousands)

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains on mortgage loans held for sale at fair value

 

$

34,947 

 

$

21,967 

 

$

56,914 

 

$

— 

 

$

56,914 

Loan origination fees

 

 

26,485 

 

 

— 

 

 

26,485 

 

 

— 

 

 

26,485 

Fulfillment fees from PMT

 

 

26,256 

 

 

— 

 

 

26,256 

 

 

— 

 

 

26,256 

Net servicing fees

 

 

— 

 

 

109,703 

 

 

109,703 

 

 

— 

 

 

109,703 

Management fees

 

 

— 

 

 

— 

 

 

— 

 

 

6,471 

 

 

6,471 

Carried Interest from Investment Funds

 

 

— 

 

 

— 

 

 

— 

 

 

(17)

 

 

(17)

Net interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

17,013 

 

 

43,935 

 

 

60,948 

 

 

16 

 

 

60,964 

Interest expense

 

 

1,274 

 

 

37,491 

 

 

38,765 

 

 

10 

 

 

38,775 

 

 

 

15,739 

 

 

6,444 

 

 

22,183 

 

 

 

 

22,189 

Other

 

 

645 

 

 

805 

 

 

1,450 

 

 

1,478 

 

 

2,928 

Total net revenue

 

 

104,072 

 

 

138,919 

 

 

242,991 

 

 

7,938 

 

 

250,929 

Direct expenses

 

 

53,859 

 

 

80,085 

 

 

133,944 

 

 

906 

 

 

134,850 

Shared services

 

 

14,124 

 

 

16,466 

 

 

30,590 

 

 

3,097 

 

 

33,687 

Corporate overhead

 

 

10,422 

 

 

8,795 

 

 

19,217 

 

 

1,478 

 

 

20,695 

Expenses

 

 

78,405 

 

 

105,346 

 

 

183,751 

 

 

5,481 

 

 

189,232 

Pretax income

 

$

25,667 

 

$

33,573 

 

$

59,240 

 

$

2,457 

 

$

61,697 

 

 

 

 

 

3


 

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 $17.9 billion in UPB, of which $10.4 billion in UPB was for its own account, and $7.5 billion in UPB was fee-based fulfillment activity for PMT.  Correspondent government and direct lending IRLCs totaled $11.1 billion in UPB.

Production segment pretax income was $25.7 million, an increase of 35 percent from the prior quarter and a decrease of 63 percent from the third quarter of 2017.  Production revenue totaled $104.1 million, an increase of 16 percent from the prior quarter and a decrease of 27 percent from the third quarter of 2017.

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

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended

 

    

September 30, 
2018

    

June 30,
2018

    

September 30,
2017

 

 

(in thousands)

Receipt of MSRs in loan sale transactions

 

$

147,259 

 

$

153,924 

 

$

154,763 

Mortgage servicing rights recapture payable to PennyMac Mortgage Investment Trust

 

 

(1,157)

 

 

(936)

 

 

(1,495)

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

 

 

(687)

 

 

143 

 

 

(402)

Cash investment (1)

 

 

(90,199)

 

 

(106,946)

 

 

(43,943)

Fair value changes of pipeline, inventory and hedges

 

 

1,698 

 

 

14,761 

 

 

(787)

Net gains on mortgage loans held for sale

 

$

56,914 

 

$

60,946 

 

$

108,136 

 

 

 

 

 

 

 

 

 

 

Net gains on mortgage loans held for sale by segment:

 

 

 

 

 

 

 

 

 

Production

 

$

34,947 

 

$

33,966 

 

$

79,983 

Servicing

 

$

21,967 

 

$

26,980 

 

$

28,153 


(1)

Net of cash hedge expense

4


 

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 $26.3 million in the third quarter, up 80 percent from the prior quarter and 12 percent from the third quarter of 2017.  The quarter-over-quarter increase in fulfillment fee revenue was driven by a 39 percent increase in acquisition volumes by PMT and a higher weighted average fulfillment fee rate, which was 35 basis points in the third quarter, up from 27 basis points in the second quarter, reflecting lower discretionary reductions to facilitate successful loan acquisitions by PMT.

Production segment expenses were $78.4 million, an 11 percent increase from the prior quarter and a 7 percent increase from the third quarter of 2017.  The quarter-over-quarter increase was primarily driven by increased production activity.  Net interest income this quarter includes $12.8 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 $12.5 million in the second quarter.  The master repurchase agreement is subject to a rolling six-month term through August 2019, unless terminated earlier at the option of the lender.

Servicing Segment

Servicing includes income from owned MSRs, subservicing and special servicing activities.  Servicing segment pretax income was $33.6 million compared with $54.6 million in the prior quarter and $24.5 million in the third quarter of 2017.  Servicing segment revenues totaled $138.9 million, down 6 percent from the prior quarter and up 34 percent from the third quarter of 2017.  The quarter-over-quarter decrease primarily reflects a reduction in valuation-related gains and decreased revenue from the reperformance of government-insured guaranteed loans bought out of Ginnie Mae pools.

5


 

Net loan servicing fees totaled $109.7 million and included $174.3 million in servicing fees reduced by $71.4 million in realization of MSR cash flows.  Valuation-related gains totaled $6.8 million, which includes MSR fair value gains of $60.9 million, associated hedging losses of $53.0 million and changes in fair value of the excess servicing spread (ESS) liability resulting in a $1.1 million loss.  The MSR fair value gains primarily resulted from expectations for lower prepayment activity in the future due to higher mortgage rates.  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

 

    

September 30,
2018

    

June 30,
2018

    

September 30,
2017

 

 

(in thousands)

Servicing fees (1)

 

$

174,262 

 

$

161,942 

 

$

153,782 

Effect of MSRs:

 

 

 

 

 

 

 

 

 

Amortization and realization of cash flows

 

 

(71,362)

 

 

(65,227)

 

 

(65,751)

Change in fair value and provision for/reversal of impairment of MSRs carried at lower of amortized cost or fair value

 

 

60,883 

 

 

42,259 

 

 

(21,952)

Change in fair value of excess servicing spread financing

 

 

(1,109)

 

 

(996)

 

 

4,828 

Hedging losses

 

 

(52,971)

 

 

(24,289)

 

 

7,174 

Total amortization, impairment and change in fair value of MSRs

 

 

(64,559)

 

 

(48,253)

 

 

(75,701)

Net loan servicing fees

 

$

109,703 

 

$

113,689 

 

$

78,081 


(1)

Includes contractually-specified servicing fees

Servicing segment revenue also included $22.0 million in net gains on mortgage loans held for sale from the securitization of reperforming government-insured and guaranteed loans, compared to $27.0 million in the prior quarter and $28.2 million in the third 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 $6.4 million, down from $6.7 million in the prior quarter and up from net interest expense of $3.3 million in the third quarter of 2017.  Interest income increased by $5.7 million from the prior quarter, primarily driven by increased income from custodial deposits.  Interest expense increased by $5.9 million from the second quarter driven by the redemption of the $500 million Series 2017-GT2 term

6


 

notes, completed upon issuance of the $650 million Series 2018-GT2 term notes in August.  The refinancing resulted in the recognition of $4.6 million of debt issuance costs during the third quarter but is expected to reduce annual interest expense by approximately $7 million.

Servicing segment expenses totaled $105.3 million, a 13 percent increase from the prior quarter and a 33 percent increase from the third quarter of 2017, driven by servicing portfolio growth and transfers of recent bulk servicing acquisitions, in addition to EBO-related expenses resulting from a higher volume of buyouts from Ginnie Mae securitizations.

The total servicing portfolio reached $284.5 billion in UPB at September 30, 2018, an increase of 8 percent from the prior quarter end and 19 percent from September 30, 2017.  Servicing portfolio growth during the quarter was driven by the Company’s loan production activities and $11.6 billion in UPB of MSR acquisitions.  Of the total servicing portfolio, prime servicing was $283.7 billion in UPB and special servicing was $0.8 billion in UPB.  PennyMac Financial subservices and conducts special servicing for $87.2 billion in UPB, an increase of 7 percent from June 30, 2018 and 23 percent from September 30, 2017.  PennyMac Financial’s owned MSR portfolio grew to $193.7 billion in UPB, an increase of 9 percent from the prior quarter’s end.

7


 

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

 

    

September 30,
2018

    

June 30,
2018

    

September 30,
2017

 

 

(in thousands)

Loans serviced at period end:

 

 

 

 

 

 

 

 

 

Prime servicing:

 

 

 

 

 

 

 

 

 

Owned

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

 

 

 

 

 

 

 

 

Originated

 

$

138,311,827 

 

$

132,307,067 

 

$

113,590,527 

Acquisitions

 

 

55,347,551 

 

 

45,957,173 

 

 

49,209,050 

 

 

 

193,659,378 

 

 

178,264,240 

 

 

162,799,577 

Mortgage servicing liabilities

 

 

1,265,461 

 

 

1,569,602 

 

 

1,512,632 

Mortgage loans held for sale

 

 

2,352,771 

 

 

2,448,908 

 

 

2,858,642 

 

 

 

197,277,610 

 

 

182,282,750 

 

 

167,170,851 

Subserviced for Advised Entities

 

 

86,389,458 

 

 

80,359,635 

 

 

69,498,140 

Total prime servicing

 

 

283,667,068 

 

 

262,642,385 

 

 

236,668,991 

Special servicing:

 

 

 

 

 

 

 

 

 

Subserviced for Advised Entities

 

 

837,003 

 

 

854,994 

 

 

1,703,817 

Total special servicing

 

 

837,003 

 

 

854,994 

 

 

1,703,817 

Total loans serviced

 

$

284,504,071 

 

$

263,497,379 

 

$

238,372,808 

 

 

 

 

 

 

 

 

 

 

Mortgage loans serviced:

 

 

 

 

 

 

 

 

 

Owned

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

193,659,378 

 

$

178,264,240 

 

$

162,799,577 

Mortgage servicing liabilities

 

 

1,265,461 

 

 

1,569,602 

 

 

1,512,632 

Mortgage loans held for sale

 

 

2,352,771 

 

 

2,448,908 

 

 

2,858,642 

 

 

 

197,277,610 

 

 

182,282,750 

 

 

167,170,851 

Subserviced

 

 

87,226,461 

 

 

81,214,629 

 

 

71,201,957 

Total mortgage loans serviced

 

$

284,504,071 

 

$

263,497,379 

 

$

238,372,808 

 

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 September 30, 2018, up 1 percent from June 30, 2018, and down 5 percent from September 30, 2017.

Pretax income for the Investment Management segment was $2.5 million, compared to $1.1 million in the prior quarter and $0.7 million in the third quarter of 2017.  Management fees, which include base management fees from PMT, increased 14 percent from the prior quarter and 4 percent from the third quarter of 2017.  Management fees also included incentive fees of $0.7 million based on PMT’s performance.

8


 

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

 

 

 

 

 

 

 

 

 

 

 

Quarter ended

 

    

September 30, 
2018

    

June 30, 
2018

    

September 30, 
2017

 

 

(in thousands)

Management fees:

 

 

 

 

 

 

 

 

 

PennyMac Mortgage Investment Trust

 

 

 

 

 

 

 

 

 

Base

 

$

5,799 

 

$

5,728 

 

$

6,038 

Performance incentive

 

 

683 

 

 

— 

 

 

— 

 

 

 

6,482 

 

 

5,728 

 

 

6,038 

Investment Funds

 

 

(11)

 

 

(64)

 

 

178 

Total management fees

 

 

6,471 

 

 

5,664 

 

 

6,216 

Carried Interest

 

 

(17)

 

 

(168)

 

 

(1,158)

Total management fees and Carried Interest

 

$

6,454 

 

$

5,496 

 

$

5,058 

 

 

 

 

 

 

 

 

 

 

Net assets of Advised Entities:

 

 

 

 

 

 

 

 

 

PennyMac Mortgage Investment Trust

 

$

1,558,563 

 

$

1,545,487 

 

$

1,610,565 

Investment Funds

 

 

— 

 

 

765 

 

 

29,955 

 

 

$

1,558,563 

 

$

1,544,926 

 

$

1,640,520 

 

Investment Management segment expenses totaled $5.5 million, down 5 percent from the prior quarter and up 27 percent from the third 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 reduced its expenses by the amount of such reimbursements.

Consolidated Expenses

Total expenses for the third quarter were $189.2 million, a 12 percent increase from the prior quarter and a 21 percent increase from the third quarter of 2017.  The quarter-over-quarter change was driven by higher expenses in the Production and Servicing segments due to higher volumes of activity and higher interest expense due to the redemption of term notes in August.

***

9


 

Executive Chairman Stanford L. Kurland concluded, “As the mortgage market continues to adjust to higher rates, PennyMac Financial stands out from the competition by continuing to deliver strong production results and servicing portfolio growth.  The earnings contribution from our growth initiatives focused on product and channel development will become increasingly meaningful over time.  Underlying our success has been the strength of our management team and the development of new technologies across our business to drive greater operational capacity and efficiency.  We expect to see consolidation in the mortgage market, and successful firms will be the ones that have the size, scale and technological capabilities to compete.  We continue to make investments in technologies to further solidify our position as a leading, cost-efficient producer of residential mortgages, and are confident that we are well-positioned to benefit from the changes taking place in the mortgage market.”

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 Daylight Time) on Thursday, November 1, 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.  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. governmentsponsored entities and changes in their current roles or their guarantees or guidelines;

10


 

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 thirdparty 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.

 

11


 

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

    

September 30,
2018

    

June 30,
2018

    

September 30,
2017

 

 

(in thousands, except share amounts)

ASSETS

 

 

 

 

 

 

 

 

 

Cash

 

$

102,627 

 

$

189,663 

 

$

67,708 

Short-term investments at fair value

 

 

145,476 

 

 

98,571 

 

 

136,217 

Mortgage loans held for sale at fair value

 

 

2,416,955 

 

 

2,527,231 

 

 

2,935,593 

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

 

 

133,128 

 

 

138,582 

 

 

148,072 

Derivative assets

 

 

73,618 

 

 

92,471 

 

 

76,709 

Servicing advances, net

 

 

259,609 

 

 

258,900 

 

 

262,650 

Investment in PennyMac Mortgage Investment Trust at fair value

 

 

1,518 

 

 

1,424 

 

 

1,304 

Mortgage servicing rights

 

 

2,785,964 

 

 

2,486,157 

 

 

2,016,485 

Real estate acquired in settlement of loans

 

 

2,493 

 

 

2,300 

 

 

986 

Furniture, fixtures, equipment and building improvements, net

 

 

31,662 

 

 

29,607 

 

 

30,037 

Capitalized software, net

 

 

36,484 

 

 

31,913 

 

 

21,625 

Receivable from PennyMac Mortgage Investment Trust

 

 

27,467 

 

 

19,661 

 

 

16,008 

Loans eligible for repurchase

 

 

889,335 

 

 

879,621 

 

 

584,394 

Other

 

 

86,194 

 

 

85,605 

 

 

90,581 

Total assets

 

$

6,992,530 

 

$

6,841,706 

 

$

6,388,369 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

Assets sold under agreements to repurchase

 

$

1,739,638 

 

$

1,825,813 

 

$

2,096,492 

Mortgage loan participation and sale agreements

 

 

524,667 

 

 

528,368 

 

 

531,776 

Notes payable

 

 

1,291,847 

 

 

1,140,546 

 

 

890,884 

Obligations under capital lease

 

 

9,630 

 

 

13,032 

 

 

24,373 

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

 

 

223,275 

 

 

229,470 

 

 

248,763 

Derivative liabilities

 

 

12,693 

 

 

4,094 

 

 

11,474 

Mortgage servicing liabilities at fair value

 

 

9,769 

 

 

10,253 

 

 

16,076 

Accounts payable and accrued expenses

 

 

140,363 

 

 

114,409 

 

 

124,888 

Payable to PennyMac Mortgage Investment Trust

 

 

91,818 

 

 

99,309 

 

 

124,589 

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

 

 

47,605 

 

 

46,903 

 

 

75,076 

Income taxes payable

 

 

74,158 

 

 

67,357 

 

 

49,620 

Liability for loans eligible for repurchase

 

 

889,335 

 

 

879,621 

 

 

584,394 

Liability for losses under representations and warranties

 

 

21,022 

 

 

20,587 

 

 

19,673 

Total liabilities

 

 

5,075,820 

 

 

4,979,762 

 

 

4,798,078 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

Class A common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 25,195,436, 25,008,655 and 23,219,088 shares, respectively

 

 

 

 

 

 

Class B common stock—authorized 1,000 shares of $0.0001 par value; issued and outstanding, 45, 45 and 49 shares, respectively

 

 

— 

 

 

— 

 

 

— 

Additional paid-in capital

 

 

236,457 

 

 

229,941 

 

 

196,346 

Retained earnings

 

 

304,386 

 

 

299,951 

 

 

202,988 

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

 

 

540,846 

 

 

529,895 

 

 

399,336 

Noncontrolling interests in Private National Mortgage Acceptance Company, LLC

 

 

1,375,864 

 

 

1,332,049 

 

 

1,190,955 

Total stockholders' equity

 

 

1,916,710 

 

 

1,861,944 

 

 

1,590,291 

Total liabilities and stockholders’ equity

 

$

6,992,530 

 

$

6,841,706 

 

$

6,388,369 

12


 

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

Quarter ended

 

    

September 30,
2018

    

June 30,
2018

    

September 30,
2017

 

 

(in thousands, except earnings per share)

Revenue

 

 

 

 

 

 

 

 

 

Net mortgage loan servicing fees:

 

 

 

 

 

 

 

 

 

Mortgage loan servicing fees

 

 

 

 

 

 

 

 

 

From non-affiliates

 

$

147,182 

 

$

138,871 

 

$

126,416 

From PennyMac Mortgage Investment Trust

 

 

10,071 

 

 

9,431 

 

 

11,402 

From Investment Funds

 

 

— 

 

 

 

 

416 

Ancillary and other fees

 

 

17,009 

 

 

13,637 

 

 

15,548 

 

 

 

174,262 

 

 

161,942 

 

 

153,782 

Amortization, impairment and change in estimated fair value of mortgage servicing rights and excess servicing spread

 

 

(64,559)

 

 

(48,253)

 

 

(75,701)

Net mortgage loan servicing fees

 

 

109,703 

 

 

113,689 

 

 

78,081 

Net gains on mortgage loans held for sale at fair value

 

 

56,914 

 

 

60,946 

 

 

108,136 

Mortgage loan origination fees

 

 

26,485 

 

 

24,428 

 

 

33,168 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

26,256 

 

 

14,559 

 

 

23,507 

Net interest income:

 

 

 

 

 

 

 

 

 

Interest income

 

 

60,964 

 

 

55,104 

 

 

44,442 

Interest expense

 

 

38,775 

 

 

32,616 

 

 

42,492 

 

 

 

22,189 

 

 

22,488 

 

 

1,950 

Management fees, net:

 

 

 

 

 

 

 

 

 

From PennyMac Mortgage Investment Trust

 

 

6,482 

 

 

5,728 

 

 

6,038 

From Investment Funds

 

 

(11)

 

 

(64)

 

 

178 

 

 

 

6,471 

 

 

5,664 

 

 

6,216 

Carried Interest from Investment Funds

 

 

(17)

 

 

(168)

 

 

(1,158)

Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust

 

 

129 

 

 

108 

 

 

(33)

Results of real estate acquired in settlement of loans

 

 

194 

 

 

13 

 

 

281 

Other

 

 

2,605 

 

 

2,571 

 

 

487 

Total net revenue

 

 

250,929 

 

 

244,298 

 

 

250,635 

Expenses

 

 

 

 

 

 

 

 

 

Compensation

 

 

103,364 

 

 

98,540 

 

 

93,417 

Servicing

 

 

40,797 

 

 

28,490 

 

 

24,968 

Technology

 

 

15,273 

 

 

15,154 

 

 

13,926 

Occupancy and equipment

 

 

7,117 

 

 

6,507 

 

 

5,933 

Professional services

 

 

7,117 

 

 

5,587 

 

 

4,636 

Loan origination

 

 

7,203 

 

 

5,144 

 

 

5,581 

Marketing

 

 

2,275 

 

 

2,218 

 

 

2,375 

Other

 

 

6,086 

 

 

7,960 

 

 

5,655 

Total expenses

 

 

189,232 

 

 

169,600 

 

 

156,491 

Income before provision for income taxes

 

 

61,697 

 

 

74,698 

 

 

94,144 

Provision for (benefit from) income taxes

 

 

5,545 

 

 

6,293 

 

 

11,652 

Net income

 

 

56,152 

 

 

68,405 

 

 

82,492 

Less: Net income attributable to noncontrolling interest

 

 

41,663 

 

 

50,568 

 

 

65,411 

Net income attributable to PennyMac Financial Services, Inc. common stockholders

 

$

14,489 

 

$

17,837 

 

$

17,081 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

Basic

 

$

0.58 

 

$

0.71 

 

$

0.73 

Diluted

 

$

0.57 

 

$

0.70 

 

$

0.71 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

 

25,125 

 

 

24,959 

 

 

23,426 

Diluted

 

 

78,913 

 

 

78,825 

 

 

78,416 

13


 

PENNYMAC FINANCIAL SERVICES, INC.

RECONCILIATION OF REPORTED TO PRO FORMA BOOK VALUE PER SHARE

AT SEPTEMBER 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

    

As presented

    

Pro forma
adjustments

    

Pro forma

 

 

(in thousands except book value per share)

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

Class A common stock

 

$

 

$

 

$

Class B common stock

 

 

— 

 

 

— 

 

 

— 

Additional paid-in-capital(1)

 

 

236,457 

 

 

1,059,238 

 

 

1,295,695 

Retained earnings

 

 

304,386 

 

 

— 

 

 

304,386 

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

 

 

540,846 

 

 

1,059,243 

 

 

1,600,089 

Noncontrolling interest in Private National Mortgage Acceptance Company, LLC

 

 

1,375,864 

 

 

(1,375,864)

 

 

— 

Total stockholders' equity

 

$

1,916,710 

 

$

(316,621)

 

$

1,600,089 

 

 

 

 

 

 

 

 

 

 

Class A common shares outstanding

 

 

25,195 

 

 

52,222 

 

 

77,417 

Book value per share

 

$

21.47 

 

 

($0.80)

 

$

20.67 

 


(1)

Adjustments to additional paid-in capital are comprised of the following:

 

Transfer of non-controlling interest

    

 

 

    

$

1,375,864 

    

 

 

Par value of shares issued pursuant to conversion of PNMAC Class A Units

 

 

 

 

 

(5)

 

 

 

Deferred taxes attributable to converted Class A PNMAC units

 

 

 

 

 

(316,621)

 

 

 

 

 

 

 

 

$

1,059,238 

 

 

 

 

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Section 3: EX-99.2 (EX-99.2)

Exhibit 99.2

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Third Quarter 2018 Earnings Report


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Forward-Looking Statements 2 This presentation 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. These forward-looking statements include statements regarding the Company’s corporate reorganization, the expected benefits of such reorganization and the related impact on existing stakeholders, estimates regarding future market capitalization and the anticipated financial impact of the corporate reorganization. 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 and the Investment Funds if our 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 expansion of existing business activities; our ability to detect misconduct and fraud; and our ability to mitigate cybersecurity risks and cyber incidents. Our exposure to risks of loss resulting from adverse weather conditions and man- made or natural disasters; and or 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 presentation are current as of the date of this presentation only.


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Third Quarter Highlights 3 .. Pretax income was $61.7 million; diluted earnings per share were $0.57 – Third quarter results reflect improved Production segment income and strong contributions from all three operating segments – Book value per share increased to $21.47 from $21.19 at June 30, 2018; pro forma for PFSI’s corporate reorganization, book value per share was $20.67(1) .. Production segment pretax income was $25.7 million, up 35% from 2Q18 and down 63% from 3Q17 – Total acquisition and origination volume was $17.9 billion in unpaid principal balance (UPB), up 12% from 2Q18 and down 6% from 3Q17 – Total correspondent government and direct lending locks were $11.1 billion in UPB, down 6% from 2Q18 and down 16% from 3Q17 – Correspondent conventional acquisition volume fulfilled for PMT was $7.5 billion in UPB, up 39% from 2Q18; drove an increase in fulfillment fee revenue .. Servicing segment pretax income was $33.6 million, down 38% from 2Q18 and up 37% from 3Q17 – Servicing portfolio grew to $284.5 billion in UPB, up 8% from June 30, 2018 and 19% from September 30, 2017 – Pretax income excluding valuation-related items was $29.9 million, down 17% from 2Q18 and 19% from 3Q17 – Redeemed $500 million of MSR-secured term notes and issued $650 million of 5-year secured term notes; refinancing expected to reduce annual interest expense by $7 million after recognizing $4.6 million of debt redemption costs this quarter – Completed $11.6 billion in UPB of previously announced bulk MSR portfolio acquisitions (1) Please refer to page 29 for a reconciliation of reported to pro forma book value per share at September 30, 2018


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4 .. Investment Management segment pretax income was $2.5 million, up from $1.1 million in 2Q18 and $0.7 million in 3Q17 – Results included incentive fees of $0.7 million based on PMT’s performance – Net assets under management (AUM) were $1.6 billion, up 1% from June 30, 2018 and down 5% from September 30, 2017 Notable activity after quarter-end: .. Completed the acquisition of additional bulk Ginnie Mae MSR portfolios totaling $3.2 billion in UPB. An additional $1.2 billion in UPB of bulk MSR acquisitions are pending settlement(1) .. Completed PFSI’s corporate reorganization effective November 1st – Converted all equity ownership into a single class of publicly-traded common stock – Simplified corporate structure and financial reporting (1) These transactions are subject to continuing due diligence and customary closing conditions. There can be no assurance regarding the size of the transactions or that the transactions will be completed at all. Third Quarter Highlights (continued)


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Completed Corporate Reorganization to Simplify PFSI’s Structure 5 (1) As of October 31, 2018 (2) BlackRock refers to BlackRock Mortgage Ventures, LLC and HC Partners refers to HC Partners, LLC, formerly known as Highfields Capital Investments, LLC (3) After completion of the reorganization transaction. .. All equity ownership converted into a single class of publicly-traded common stock Key Implications for Existing Stockholders: .. Simplified Corporate Structure where all equity holders are represented by a single class of common stock .. Simplified Financial Reporting eliminates allocation of income and equity between PFSI common stockholders and PNMAC unitholders to more closely align interests .. Expands Potential Investor Universe and Demand for the Stock – Increased market capitalization from approximately $500 million to approximately $1.5 billion(1) and makes PennyMac Financial eligible for inclusion in certain stock indices .. No change in voting percentages as a result of the transaction .. Significant percentages owned by management PFSI Ownership(3) BlackRock 21% HC Partners 26% Other Public Shareholders 31% Management & Directors 22% (2) (2)


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$0.88 $0.99 $1.14 $1.19 $1.24 $1.27 $1.31 $0.75 $0.90 $0.62 $0.45 $0.40 $0.41 $0.43 $1.63 $1.89 $1.76 $1.64 $1.63 $1.68 $1.74 2015 2016 2017 2018E 2019E 2020E 2021E Purchase Refinance Mortgage Market Is Large with a Vibrant Purchase-Money Opportunity 6 U.S. Consumer Debt Outstanding(1) ($ in trillions) (1) Source: Federal Reserve Consumer Credit Report as of September 20, 2018. Data are as of June 30, 2018 (2) Source: Mortgage Bankers Association Purchase Originations are Growing(2) $10.8 $1.1 $1.0 Mortgage debt Auto loan debt Credit card debt .. The U.S. mortgage market is by far the largest consumer finance market, nearly ten times larger than the markets for auto loans and credit cards .. While refinance originations have decreased, there is a considerable growing opportunity in purchase-money originations – Forecasts predict a stable to modestly increasing total mortgage origination market over the next few years(2) – Purchase-money originations are expected to grow from $1.19 trillion in 2018 to $1.31 trillion in 2021 – Demand driven by a strong economy including low unemployment and rising household incomes in key home buying demographics – However, near-term new and existing home sales have underperformed versus expectations due to low inventory and consumers adjusting to higher rates


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…and the Industry Is Expected to Experience Consolidation 7 .. The industry today is highly fragmented with many smaller independent operators enabled by low rates, robust refinance volumes and high margins over the last several years – In 2013, the top 5 producers represented 48% of the market versus 28% today .. Transition to a higher interest rate, purchase- focused market is expected to drive consolidation among fewer, stronger participants .. Successful companies will be those with the size and scale to efficiently compete and will require: – Operational expertise – Deep mortgage expertise and ability to develop new products – Strong access to capital – Significant investment in technology 30% 25% 17% 15% 25% 27% 28% 34% Production Servicing Top 5 #6 - 20 #21 - 50 All others (1) Inside Mortgage Finance; 1H2018 annualized (2) Inside Mortgage Finance; as of 6/30/18 Production(1) 100% = $1.7 trillion Mortgage Market Participants Servicing(2) 100% = $10.8 trillion


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1.7% 3.8% 2013 9 Mos 2018 8 (1) Source: Inside Mortgage Finance, for the 9 months ended September 30, 2018 or as of September 30, 2018 (2) Pro forma for corporate reorganization. Please refer to page 29 for a reconciliation of reported to pro forma book value per share at September 30, 2018 Loan Production Market Share Loan Servicing Market Share Book Value per Share  11th year of operations; IPO in May 2013 Leading Market Position  4th largest mortgage producer(1)  8th largest mortgage servicer(1) Unique Capabilities  Large scale and efficient operations with considerable opportunities for growth  History of developing and deploying technology for competitive advantages and to capture efficiencies  Deep mortgage and capital markets expertise and ability to develop new products  Partnership with PMT, a tax-efficient investment vehicle with a balance sheet optimized to hold residential mortgage-related assets  Largest government-insured producer(1)  2nd largest correspondent producer(1) PFSI is a Leading Nonbank Residential Mortgage Specialist 0.8% 2.6% 12/31/13 9/30/18 (2) $7.27 $20.67 6/30/2013 9/30/2018


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Synergistic Partnership with PMT Is a Key Competitive Advantage 9 Best-in-Class Operating Platform (NYSE: PFSI) Management Agreements Tax-Efficient Investment Vehicle (NYSE: PMT) Services Agreements .. $1.6 billion of shareholders’ equity(1) .. Leading nonbank residential mortgage specialist .. Legacy-free, specialized and scalable operating platform .. Large-scale, technology driven operations .. Seasoned and highly experienced management team .. Well capitalized with diversified funding sources .. $1.5 billion of shareholders’ equity, including $300 million of preferred equity(1) .. Grew balance sheet from $324 million in assets at time of IPO to over $7 billion at September 30th, 2018 .. Leading residential credit investor .. Current investment focus: – GSE Credit Risk Transfer (CRT) – Mortgage Servicing Rights (MSRs) .. Pursuing new opportunities: – Investments from Prime Non- Agency and Home Equity Line of Credit (HELOC) securitizations (1) As of September 30, 2018. PFSI figure is pro forma for the corporate reorganization. Please refer to page 29 for a reconciliation of GAAP to pro forma book value per share at September 30, 2018


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Consumer Direct Production .. Maximize conversion and portfolio recapture .. Add new affinity relationships to increase non-portfolio growth .. portal enhancements and new products Broker Direct Production .. Ramp sales resources and increase number of approved brokers .. portal enhancements and new products Strategic Initiatives to Drive Growth 10 Correspondent Production .. Grow non-delegated – represents about 30% of correspondent market .. Increase share from smaller correspondents .. Leverage PMT’s ability to invest in credit risk .. New products .. Grow share in all three production channels – correspondent, consumer direct, and broker direct – focusing on segments with the highest potential for growth .. Continue to invest in and deploy technology required to facilitate the loan origination process to effectively compete for consumer and broker business and capture greater share .. Develop and introduce new products including HELOC and prime non-Agency loans to meet customer needs as the origination market adjusts to a higher rate environment Servicing .. Grow portfolio via production and maximize recapture .. Strategically acquire bulk MSR portfolios ..Servicing system platform enhancements Successful execution of our growth initiatives is expected to facilitate additional investment opportunities for PMT and increase Investment Management income


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Correspondent Production(1) Market Share Market Share Consumer Direct Production(1) Loan Servicing(1) Market Share Investment Management AUM (billions) 11 Trends in PennyMac Financial’s Businesses 10.17% 10.36% 10.83% 11.71% 0% 2% 4% 6% 8% 10% 12% 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18E 0.49% 0.56% 0.36% 0.53% 0.00% 0.20% 0.40% 0.60% 0.80% 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18E 1.82% 2.26% 2.45% 2.64% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18E (1) Source: Inside Mortgage Finance and company estimates. Inside Mortgage Finance estimates total 3Q18 origination market of $435 billion. Correspondent production share estimate is based on PFSI and PMT acquisition volume of $16.6 billion divided by $141 billion for the correspondent market (estimated to be 33% of total origination market). Consumer direct production share is based on PFSI originations of $1.3 billion divided by $244 billion for the retail market (estimated to be 56% of total origination market). Loan servicing market share is based on PFSI’s servicing UPB of $284.5 billion divided by an estimated $10.8 trillion in mortgage debt outstanding as of September 30, 2018. $1.56 $1.64 $1.55 $1.59 $0.0 $0.5 $1.0 $1.5 $2.0 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18


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12 (UPB in billions) (1) For government-insured and guaranteed loans and jumbo loans, PFSI earns income from holding and selling or securitizing the loans (2) For conventional loans, PFSI earns a fulfillment fee from PMT rather than income from holding and selling or securitizing the loans (3) Includes locks related to PMT loan acquisitions, including conventional loans for which PFSI earns a fulfillment fee upon loan funding (4) Includes net gains on mortgage loans held for sale, loan origination fees and net interest income for government-insured correspondent loans; lock volume adjusted for expected fallout, which was 3% in 3Q18 for government-insured correspondent locks (5) Based on funded loans subject to fulfillment fee. The weighted average fulfillment fee rate may reflect discretionary adjustments to facilitate the successful completion of certain loan transactions Correspondent Volume and Mix. Correspondent acquisitions by PMT in 3Q18 totaled $16.5 billion, up 10% Q/Q and down 5% Y/Y – 54% government loans; 46% conventional loans – 39% Q/Q increase in conventional conforming acquisitions; up 15% Y/Y – 6% Q/Q decrease in government acquisitions; down 18% Y/Y – Purchase-money loans comprised 87% of total 3Q18 acquisition volume, up from 85% in 2Q18 .. Correspondent lock volume of $17.7 billion, up 9% Q/Q and 2% Y/Y; government locks totaled $9.1 billion, down 9% Q/Q and 17% Y/Y; conventional locks totaled $8.5 billion, up 40% Q/Q and 34% Y/Y .. Growth in conventional volume reflects PMT’s unique execution capabilities and improved market conditions during the quarter .. Decrease in revenue per fallout-adjusted government lock reflects heightened competition .. Ongoing development of non-delegated and community bank and credit union relationships where we have traditionally under-indexed the market .. October correspondent acquisitions totaled $6.3 billion; locks totaled $6.8 billion Production Segment Highlights – Correspondent Channel (1) (2) (3) $10.9 $9.5 $9.0 $6.5 $5.4 $7.5 $17.4 $16.2 $17.7 3Q17 2Q18 3Q18 Government loans Conventional loans for PMT Total locks 2Q18 3Q18 Revenue per fallout-adjusted government lock (bps)(4) 44 35 Weighted average fulfillment fee (bps)(5) 27 35 2Q18 3Q18 Correspondent seller relationships 631 655 Purchase-money loans, as a % of total acquisitions 85% 87% Key Financial Metrics Selected Operational Metrics


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. Consumer direct production volume of $1.3 billion in 3Q18, up 41% Q/Q and down 16% Y/Y .. Continued transition to more operationally intensive loans (e.g. purchase money) – Increased volumes of cash-out refinance and purchase-money loans helping to mitigate decline in rate-and-term refinances – Streamlined documentation loans accounted for only 2% of funded loans in 3Q18 versus 60% in 3Q17 .. Higher origination volumes and margins reflect successful transition to a new interest rate environment .. portal introduced in April has captured $226 million in locks to date through quarter end .. October consumer direct originations totaled $465 million; locks totaled $615 million – $679 million committed pipeline at October 31, 2018(1) (UPB in billions) Consumer Direct Production Volume (1) Commitments to originate mortgage loans at specified terms at period end (2) Includes net gains on mortgage loans held for sale, loan origination fees and net interest income; lock volume adjusted for expected fallout, which was 33% in 3Q18 for consumer direct locks 13 Production Segment Highlights – Consumer Direct Channel (1) 2Q18 3Q18 Revenue per fallout-adjusted consumer direct lock (bps)(2) 337 363 Consumer Direct Margin $1.5 $0.9 $1.3 $0.9 $0.8 $0.7 3Q17 2Q18 3Q18 Portfolio-sourced fundings Non-portfolio fundings Committed pipeline


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(1) Commitments to originate mortgage loans at specified terms at period end (2) Includes net gains on mortgage loans held for sale, loan origination fees and net interest income; lock volume adjusted for expected fallout, which was 30% in 3Q18 for broker direct locks (3) As of June 30, 2018 and September 30, 2018 14 .. Broker direct production volume of $110.8 million in 3Q18, up from $61.8 million in 2Q18 .. Approved brokers totaled 428, up from 268 at June 30th .. Continuing to build out our institutionally-focused relationship sales effort .. POWER portal enhancements provide brokers greater process transparency and control – Loan tracking and milestone updates – Change requests and information validation – Supplemented by call center loan level process management .. Full suite of conventional and government offerings to be supplemented by the introduction of new products (prime jumbo, Fannie Mae’s HomeReady®) and features (Lender Paid Mortgage Insurance) .. October broker direct originations totaled $63 million; locks totaled $107 million – $96 million committed pipeline at October 31, 2018(1) Production Segment Highlights – Broker Direct Channel Broker Direct Production Volume (UPB in millions) (1) $3.5 $31.9 $69.7 $3.3 $29.9 $41.0 $29.8 $37.9 $64.4 1Q18 2Q18 3Q18 Conventional loans Government loans Committed pipeline 2Q18 3Q18 Revenue per fallout-adjusted broker direct lock (bps)(2) 47 84 Approved brokers 268 428 Broker Direct Metrics


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At 6/30/18 Runoff Additions from loan production MSR acquisitions At 9/30/18 (UPB in billions) .. Servicing portfolio totaled $284.5 billion in UPB at September 30th, up 8% Q/Q and 19% Y/Y .. Completed $11.6 billion in UPB of previously announced bulk MSR acquisitions – Also completed the acquisition of $3.2 billion in UPB of bulk MSRs after quarter end with an additional $1.2 billion pending settlement(1) .. Limited exposure to Hurricanes Michael and Florence – 16,181 loans in affected areas, compared to over 117,000 loans related to Hurricanes Harvey and Irma in 2017 Loan Servicing Portfolio Composition Net Portfolio Growth (UPB in billions) (1) 15 (1) These transactions are subject to continuing due diligence and customary closing conditions. There can be no assurance regarding the size of the transactions or that the transactions will be completed at all. (2) Represents PMT’s MSRs (3) Early buyouts of delinquent loans from Ginnie Mae pools during the period (4) Percent of serviced and subserviced loans that have registered on PennyMacUSA.com (5) Also includes loans servicing released in connection with recent asset sales by PMT and the Investment Funds (6) Includes consumer direct production, government correspondent acquisitions, and conventional conforming and jumbo loan acquisitions subserviced for PMT $263.5 Servicing Segment Highlights $238.4 $263.5 $284.5 3Q17 2Q18 3Q18 Prime owned Prime subserviced Special ($8.5) $17.9 $11.6 $284.5 (5) (6) 2Q18 3Q18 Loans serviced (in thousands) 1,328 1,392 60+ day delinquency rate 2.6% 2.4% Actual CPR - owned portfolio 12.2% 12.3% Actual CPR - sub-serviced(2) 8.9% 8.7% UPB of completed modifications ($ in millions) $1,038 $1,190 EBO transactions ($ in millions)(3) $797 $974 Electronic payments (% of portfolio) 88% 88% Customers registered for the website(4) 86% 92% Selected Operational Metrics


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28% 18% 22% 6% 26% Agency RMBS MSRs and ESS Credit Risk Transfer (CRT) Distressed whole loans and REO Loan inventory 16 ($ in billions) .. Net assets under management as of September 30, 2018 were $1.6 billion, up modestly from June 30, 2018 .. PMT’s continued strong performance resulted in $0.7 million in performance-based incentive fees .. New investments focused on CRT under a new transaction with Fannie Mae and associated MSRs .. Distressed loan investments represent only 6% of PMT’s mortgage assets .. Pursuing growth strategies beyond CRT and MSRs – Non-Agency securitizations – subordinate credit tranches on non-Agency securitizations of prime loans – Residual interests from HELOC securitizations Investment Management AUM Investment Management Segment Highlights PMT’s Mortgage Assets(1) 100% = $7.6 billion (1) As of September 30, 2018 except for credit risk transfer which is presented on a pro forma basis reflecting the settlement of the commitments to fund deposits securing CRT agreements related to our fourth CRT transaction and firm commitments to purchase CRT securities $1.61 $1.55 $1.56 $0.03 $1.64 $1.55 $1.56 3Q17 2Q18 3Q18 PMT Investment Funds


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17 .. PFSI seeks to moderate the impact of interest rate changes on the fair value of its MSR asset through a comprehensive hedge strategy that also considers production-related income .. In 3Q18, MSR fair value increased primarily due to increasing mortgage rates, resulting in expectations for lower prepayment activity in the future – Valuation increase was partially offset by higher than expected prepayment levels during the quarter .. MSR fair value gains largely offset by associated hedging costs and rate-driven fair value increase of the ESS liability MSR Valuation Changes and Offsets ($ in millions) Hedging Approach Continues to Moderate the Volatility of PFSI’s Results ($22.0) $42.3 $60.9 $12.0 ($25.3) ($54.1) $69.0 $19.0 $25.7 3Q17 2Q18 3Q18 MSR fair value change before recognition of realization of cash flows Change in fair value of hedges and ESS liability Production pretax income


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18 (1) Of average portfolio UPB, annualized (2) Comprised of net gains on mortgage loans held for sale at fair value and net interest income related to EBO loans (3) Changes in fair value do not include realization of MSR cash flows, which are included in amortization and realization of MSR cash flows above (4) Includes fair value changes and provision for impairment (5) Considered in the assessment of MSR fair value changes 3Q17 2Q18 3Q18 .. Pretax income excluding valuation-related changes decreased from 2Q18 and 3Q17, primarily driven by $4.6 million in interest expense related to the redemption of secured term notes in August .. Increase in operating revenue driven by portfolio growth and higher interest income from custodial deposits, partially offset by increased realization of MSR cash flows .. Income from early buyout (EBO) related activities decreased due to a reduced modification pipeline and lower redelivery margins as well as increased expenses resulting from higher loan buyout volumes Servicing Profitability Excluding Valuation-Related Changes $ in millions basis points(1) $ in millions basis points(1) $ in millions basis points(1) Operating revenue 167.4$ 28.4 180.8$ 27.7 198.3$ 28.5 Amortization and realization of MSR cash flows (65.7) (11.2) (65.2) (10.0) (71.4) (10.3) EBO-related revenue(2) 39.4 6.7 45.1 6.9 40.7 5.9 Servicing expenses: Operating expenses (65.2) (11.1) (74.4) (11.4) (75.8) (10.9) Credit losses and provisions for defaulted loans (10.4) (1.8) (15.0) (2.3) (18.6) (2.7) EBO transaction-related expense (6.1) (1.0) (11.4) (1.7) (14.0) (2.0) Financing expenses: Interest on ESS (4.0) (0.7) (3.9) (0.6) (3.7) (0.5) Interest to third parties (18.2) (3.1) (20.3) (3.1) (25.6) (3.7) Pretax income excluding valuation-related changes 37.1$ 6.3 35.8$ 5.5 29.9$ 4.3 Valuation-related changes(3) MSR fair value(4) (22.0) 42.3 60.9 ESS liability fair value 4.8 (1.0) (1.1) Hedging derivatives losses 7.2 (24.3) (53.0) Provision for credit losses on active loans(5) (2.7)$ 1.8 (3.1) Servicing segment pretax income (loss) 24.5$ 54.6$ 33.6$


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Appendix


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• Complex and highly regulated mortgage industry requires effective governance, compliance and operating systems • Operating platform has been developed organically and is highly scalable • Commitment to strong corporate governance, compliance and risk management since inception • PFSI is well positioned for continued growth in this market and regulatory environment Loan Production Loan Servicing Investment Management • Servicing for owned MSRs and subservicing for PMT • Major loan servicer for Fannie Mae, Freddie Mac and Ginnie Mae • Industry-leading capabilities in special servicing • Organic growth results from loan production, supplemented by MSR acquisitions and PMT investment activity • External manager of PennyMac Mortgage Investment Trust (NYSE: PMT), which is focused on investing in mortgage-related assets: – GSE credit risk transfers – MSRs and ESS – Investments in prime non-Agency MBS and ABS – Distressed whole loans • Synergistic partnership with PMT • Correspondent aggregation of newly originated loans from third-party sellers – PFSI earns gains on delegated government-insured and non- delegated loans – Fulfillment fees for PMT’s delegated conventional loans • Consumer direct origination of conventional and government- insured loans • Broker direct origination launched in 2018 20 Overview of PennyMac Financial’s Businesses


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PLS launches Broker Direct channel PennyMac Financial completes corporate reorganization simplifying corporate structure PennyMac Financial’s Ten Years of Continuous Growth and Development 21 2008 2009 2010 2012 2013 2016 2017 2018 PennyMac Loan Services, LLC (PLS) founded in 2008 with 72 employees August 9, 2009 PennyMac Mortgage Investment Trust IPOs on the NYSE (PMT) PLS launches correspondent group PLS reaches 1,000 employees May 14, 2013 PennyMac Financial Services, Inc. IPOs on the NYSE (PFSI) PMT becomes the 2nd largest correspondent aggregator overall(1) PLS reaches 1 million customers and 3,100 employees in January PLS becomes the 8th largest mortgager servicer with a portfolio over $229 billion in UPB (1) Leading nonbank residential mortgage specialist with capital, expertise, operational capabilities and breadth of management (1) Source: Inside Mortgage Finance


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22 Industry-leading platform built organically – not through acquisitions .. Disciplined, sustainable growth for more than 10 years .. Focused on building and testing processes and systems before large transaction volumes Distinctive expertise and full range of capabilities across mortgage banking and investment management  Loan production, e.g., loan fulfillment systems and operations, correspondent counterparty review and management  Credit, e.g., loan program development, underwriting and quality control  Capital markets, e.g., pooling and securitization, hedging/interest rate risk management  Servicing, e.g., customer service, default management, investor accounting  Corporate functions, e.g., enterprise risk management, internal audit, treasury, finance and accounting, legal, IT infrastructure and development .. Over 3,000 employees .. Highly experienced management team – 120 senior-most executives have, on average, 25 years of relevant industry experience Strong governance and compliance culture .. Led by distinguished board which includes eight independent Directors .. Robust management governance structure with 10 committees that oversee key risks and controls .. External oversight by regulators, business partners and other third parties Desired structure in place to compete effectively as a non-bank .. Synergistic partnership with PMT, a leading residential mortgage REIT and long-term investment vehicle .. Provides access to efficient capital and reduces balance sheet constraints on growth PennyMac Financial is in a Unique Position Among Mortgage Specialists


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23 Why Are MSR Sales Occurring? How Do MSRs Come to Market? .. Large servicers may sell MSRs due to continuing operational pressures, higher regulatory capital requirements for banks (treatment under Basel III) and a re-focus on core customers/businesses .. Independent mortgage banks sell MSRs from time to time due to a need for capital .. Intermittent large bulk portfolio sales ($10+ billion in UPB) Require considerable coordination with selling institutions and Agencies .. Mini-bulk sales (typically $500 million to $5 billion in UPB) .. Flow/co-issue MSR transactions (monthly commitments, typically $20-$100 million in UPB) Alternative delivery method typically from larger independent originators Which MSR Transactions Are Attractive? .. GSE and Ginnie Mae servicing in which PFSI has distinctive expertise .. MSRs sold and operational servicing transferred to PFSI (not subserviced by a third party) .. Measurable representation and warranty liability for PFSI PFSI is uniquely positioned to be a successful acquirer of MSRs • Proven track record of complex MSR and distressed loan transfers • Operational platform that addresses the demands of the Agencies, regulators and financing partners • Physical capacity in place to sustain servicing portfolio growth plans • Potential co-investment opportunity for PMT in the ESS Opportunity in MSR Acquisitions


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24 Excess Servicing Spread (e.g., 12.5bp) MSR Asset (e.g., 25bp servicing fee) Acquired by PFSI from Third-Party Seller(1) .. PMT has co-invested in Agency MSRs acquired from third-party sellers by PFSI; presently only related to certain Ginnie Mae MSRs .. PMT acquires the right to receive the ESS cash flows over the life of the underlying loans .. PFSI owns the MSRs and services the loans (1) The contractual servicer and MSR owner is PLS, an indirect controlled subsidiary of PFSI (2) Subject and subordinate to Agency rights (under the related servicer or issuer guide) and, as applicable, to PFSI’s pledge of MSRs under a note payable; does not change the contractual servicing fee paid by the Agency to the servicer Excess Servicing Spread(2) .. Interest income from a portion of the contractual servicing fee – Realized yield dependent on prepayment speeds and recapture Base MSR .. Income from a portion of the contractual servicing fee .. Also entitled to ancillary income .. Bears expenses of performing loan servicing activities .. Required to advance certain payments largely for delinquent loans Base MSR (e.g., 12.5bp) Acquired by PMT from PFSI(1) Example transaction: actual transaction details may vary materially PFSI’s Mortgage Servicing Rights Investments in Partnership with PMT


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25 MSR Asset Valuation Note: Figures may not sum exactly due to rounding UPB $170,001 $23,658 $193,659 Weighted average coupon 3.88% 4.18% 3.91% Prepayment speed assumption (CPR) 8.1% 9.0% 8.2% Weighted average servicing fee rate 0.32% 0.34% 0.32% Fair value of MSR $2,454.7 $331.2 $2,786.0 As a multiple of servicing fee 4.52 4.10 4.47 Related excess servicing spread liability - $223.3 - September 30, 2018 Unaudited ($ in millions) Total Fair value subject to excess servicing spread liability Fair value not subject to excess servicing spread


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26 Note: Figures may not sum exactly due to rounding Acquisitions and Originations by Product Unaudited ($ in millions) Correspondent Acquisitions Conventional 6,530$ 5,891$ 4,226$ 5,396$ 7,501$ Government 10,873 9,505 8,830 9,546 8,970$ Jumbo - - - 8 9$ Total 17,403$ 15,396$ 13,056$ 14,951$ 16,480$ Consumer Direct Originations Conventional 513$ 646$ 708$ 634$ 828$ Government 1,008 996 559 277 458 Jumbo - - - - - Total 1,522$ 1,642$ 1,266$ 911$ 1,286$ Broker Direct Originations Conventional -$ -$ 4$ 32$ 70$ Government - - 3 30 41 Jumbo - - - - - Total -$ -$ 7$ 62$ 111$ Total acquisitions/originations 18,925$ 17,038$ 14,329$ 15,924$ 17,876$ UPB of loans fulfilled for PMT 5,891$ 5,405$ 4,226$ 7,509$ 6,530$ 2Q183Q17 4Q17 1Q18 3Q18


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27 Note: Figures may not sum exactly due to rounding Interest Rate Locks by Product Unaudited ($ in millions) Correspondent Locks Conventional 6,356$ 6,293$ 4,392$ 6,091$ 8,535$ Government 10,999 9,571 9,162 10,082 9,146 Jumbo - - 13 59 33 Total 17,356$ 15,864$ 13,567$ 16,232$ 17,714$ Consumer Direct Locks Conventional 845$ 947$ 1,080$ 1,018$ 1,106$ Government 1,387 1,261 573 625 659 Jumbo - - 8 29 24 Total 2,232$ 2,209$ 1,661$ 1,672$ 1,789$ Broker Direct Locks Conventional -$ -$ 15$ 50$ 131$ Government - - 20 51 65 Jumbo - - - - - Total -$ -$ 35$ 101$ 196$ Total locks 19,588$ 18,073$ 15,263$ 18,005$ 19,699$ 2Q183Q17 4Q17 1Q18 3Q18


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28 Correspondent Consumer Direct Credit Characteristics by Acquisition / Origination Period 3Q17 4Q17 1Q18 2Q18 3Q18 Government-insured 693 693 697 697 699 Conventional 749 745 744 748 748 Weighted Average FICO 3Q17 4Q17 1Q18 2Q18 3Q18 Government-insured 692 695 697 709 700 Conventional 741 738 738 736 731 Weighted Average FICO


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29 Reconciliation of Reported to Pro Forma Book Value per Share at September 30, 2018 As presented Pro forma adjustments Pro forma STOCKHOLDERS' EQUITY Class A common stock 3$ 5$ 8$ Class B common stock - - - Additional paid-in-capital(1) 236,457 1,059,238 1,295,695 Retained earnings 304,386 - 304,386 Total stockholders' equity attributable to PennyMac Financial Services, Inc. common stockholders 540,846 1,059,243 1,600,089 Noncontrolling interest in Private National Mortgage Acceptance Company, LLC 1,375,864 (1,375,864) - Total stockholders' equity 1,916,710$ (316,621)$ 1,600,089$ Class A common shares outstanding 25,195 52,222 77,417 Book value per share $21.47 ($0.80) $20.67 (1) Adjustments to additional paid-in capital are comprised of the following: Transfer of non-controlling interest 1,375,864$ Par value of shares issued pursuant to conversion of PNMAC Class A Units (5) Deferred taxes attributable to converted Class A PNMAC units (316,621) 1,059,238$ (in thousands except book value per share)


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