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Section 1: 8-K (FORM 8-K)

 

 

 

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): May 7, 2020

 

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))

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.0001 par value PFSI New York Stock Exchange

 

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 May 7, 2020, PennyMac Financial Services, Inc. (the “Company”) issued a press release announcing its financial results for the fiscal quarter ended March 31, 2020. 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 May 7, 2020 and are furnished as Exhibits 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 May 7, 2020, issued by PennyMac Financial Services, Inc. pertaining to its financial results for the fiscal quarter ended March 31, 2020.
     
99.2   Slide Presentation for use beginning on May 7, 2020 in connection with a recorded presentation of financial results for the fiscal quarter ended March 31, 2020.

 

 

 

 

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:  May 7, 2020 /s/ Andrew S. Chang
  Andrew S. Chang
  Senior Managing Director and Chief Financial Officer

 

 

 

(Back To Top)

Section 2: EX-99.1 (EXHIBIT 99.1)

Exhibit 99.1

 

 


  Media  Investors
  Janis Allen  Isaac Garden
  (805) 330-4899  (818) 264-4907

 

PennyMac Financial Services, Inc. Reports

First Quarter 2020 Results

 

Westlake Village, CA, May 7th, 2020 – PennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income of $306.2 million for the first quarter of 2020, or $3.73 per share on a diluted basis, on revenue of $721.8 million. Book value per share increased to $29.85 from $26.26 at December 31, 2019.

 

PFSI’s Board of Directors declared a first quarter cash dividend of $0.12 per share, payable on May 28, 2020, to common stockholders of record as of May 18, 2020.

 

First Quarter 2020 Highlights

 

·Pretax income was $414.7 million, up 104 percent from the prior quarter and 588 percent from the first quarter of 2019
oRecord earnings driven by continued strong production results combined with substantial gains on our interest rate hedge instruments which more than offset substantial fair value losses on mortgage servicing rights (MSRs)
oIn March, repurchased approximately 238,000 shares of PFSI’s common stock for an approximate cost of $4.1 million and a weighted average price of $17.31 per share
·Record Production segment pretax income of $240.1 million, up 18 percent from the prior quarter and 411 percent from the first quarter of 2019, driven by record volumes in the direct lending channels and elevated margins across all channels
oDirect lending interest rate lock commitments (IRLCs) were a record $9.9 billion in unpaid principal balance (UPB), up 38 percent from the prior quarter and 229 percent from the first quarter of 2019 –$7.2 billion in UPB of IRLCs in the consumer direct channel; $2.8 billion in UPB of IRLCs in the broker direct channel

 

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oGovernment correspondent IRLCs totaled $14.9 billion in UPB, down 8 percent from the prior quarter and up 101 percent from the first quarter of 2019
oTotal loan acquisitions and originations were $35.4 billion in UPB, down 17 percent from the prior quarter and up 113 percent from the first quarter of 2019
oCorrespondent acquisitions of conventional loans fulfilled for PennyMac Mortgage Investment Trust (NYSE: PMT) were $16.2 billion in UPB, down 21 percent from the prior quarter and up 99 percent from the first quarter of 2019
·Record Servicing segment pretax income of $170.8 million, versus a pretax loss of $5.1 million in the prior quarter and pretax income of $11.2 million in the first quarter of 2019

oValuation-related items included $920.3 million in MSR fair value losses offset by $1.1 billion in hedging and other gains; net impact on pretax income was $130.8 million and on earnings per share was $1.17
oPretax income excluding valuation-related items was $42.3 million, up 8 percent from the prior quarter and 20 percent from the first quarter of 2019
oServicing portfolio grew to $384.2 billion in UPB, up 4 percent from December 31, 2019 and 18 percent from March 31, 2019
·Investment Management segment pretax income was $3.8 million, down from $5.2 million in the prior quarter and up from $2.1 million in the first quarter of 2019

oRevenue of $9.9 million, down 16 percent from the prior quarter and up 12 percent from the first quarter of 2019
oNet assets under management (AUM) were $1.8 billion, down 26 percent from December 31, 2019, driven by a reduction in PMT’s shareholders’ equity

Notable activity after quarter-end:

·In April, after more than a year in development, PennyMac Financial announced an enhancement to PNMAC GMSR ISSUER TRUST, to provide private market financing for Ginnie Mae servicing advances

oPFSI currently has $600 million of committed capacity available to finance Ginnie Mae MSRs and servicing advances

 

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“I am very proud of our record quarterly financial performance and success given the significant dislocations resulting from the spread of COVID-19 during this period,” said President and CEO David Spector. “Interest rates have fallen to new historic lows providing a favorable environment for mortgage origination. With certain competitors forced to reduce or limit their participation, PennyMac Financial is capturing elevated production volumes and margins across all three production channels, and I would like to thank every one of our nearly 4,500 dedicated employees, who enthusiastically adapted to working from home. Over the last twelve years, our highly-experienced management team has maintained its disciplined approach to interest rate, credit, and operational risks, which has proven essential in the current market environment. As a result, PennyMac Financial reported record earnings and 14 percent book value growth in the first quarter, driven by record production segment profitability and outstanding performance from our interest rate hedging strategies, which more than offset significant fair value losses on mortgage servicing rights.”

 

Mr. Spector continued, “Additionally, we recognize that the environment is causing increased hardship to customers. We are well positioned as one of the largest and best capitalized independent mortgage producers and servicers in the country to offer and fulfill the forbearance programs announced and required by policymakers. PennyMac Financial was quick to incorporate these requirements into its technology platform and offer borrowers the ability to request forbearance immediately using the self-service capabilities made available. Our expertise in loss mitigation strategies will help assist our customers to stay in their homes with opportunities for them to refinance or seek modifications to improve their financial well-being. Since the company’s founding in 2008, we have successfully navigated periods of market volatility and operational disruptions driven by external influences and we are confident in our ability to address the current challenges and opportunities presented by the impact of COVID-19. While prospects for the U.S. economy are uncertain and present some headwinds for PFSI’s businesses, given the present market environment, we expect PFSI’s overall financial performance to remain elevated throughout 2020.”

 

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

 

   Quarter ended March 31, 2020 
   Mortgage Banking   Investment     
   Production   Servicing   Total   Management   Total 
   (in thousands) 
Revenue                    
Net gains on loans held for sale at fair value  $316,635   $27,647   $344,282   $-   $344,282 
Loan origination fees   57,571    -    57,571    -    57,571 
Fulfillment fees from PMT   41,940    -    41,940    -    41,940 
Net loan servicing fees   -    257,808    257,808    -    257,808 
Management fees   -    -    -    9,055    9,055 
Net interest income (expense):                         
Interest income   26,585    45,979    72,564    -    72,564 
Interest expense   20,157    41,346    61,503    9    61,512 
    6,428    4,633    11,061    (9)   11,052 
Other   (10)   (680)   (690)   807    117 
Total net revenue   422,564    289,408    711,972    9,853    721,825 
Expenses   182,433    118,566    300,999    6,096    307,095 
Pretax income  $240,131   $170,842   $410,973   $3,757   $414,730 

 

Production Segment

 

Production includes the correspondent acquisition of newly originated government-insured mortgage loans for PennyMac Financial’s own account, fulfillment services on behalf of PMT and direct lending through the consumer direct and broker direct channels, including the underwriting and acquisition of loans from correspondent sellers on a non-delegated basis.

 

PennyMac Financial’s loan production activity for the quarter totaled $35.4 billion in UPB, $19.2 billion of which was for its own account, and $16.2 billion of which was fee-based fulfillment activity for PMT. Correspondent government and direct lending IRLCs totaled $24.8 billion in UPB, up 6 percent from the prior quarter and 138 percent from the first quarter of 2019.

 

Production segment pretax income was $240.1 million, up 18 percent from the prior quarter and 411 percent from the first quarter of 2019. Production revenue totaled $422.6 million, up 20 percent from the prior quarter and 227 percent from the first quarter of 2019. The quarter-over-quarter increase was driven by an $88.9 million increase in net gains on loans held for sale driven by record volumes in the direct lending channels and elevated margins across all channels.

 

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

 

   Quarter ended 
   March 31,
2020
   December 31,
2019
   March 31,
2019
 
   (in thousands) 
Receipt of MSRs in loan sale transactions  $275,739   $328,182   $114,957 
Mortgage servicing rights recapture payable to PennyMac Mortgage Investment Trust   (3,308)   (2,624)   (1,123)
(Provision) Reversal of liability for representations and warranties, net   (2,036)   (1,583)   3,143 
Cash investment (1)   70,315    4,694    (23,023)
Fair value changes of pipeline, inventory and hedges   3,572    (71,182)   (9,178)
Net gains on mortgage loans held for sale  $344,282   $257,487   $84,776 
Net gains on mortgage loans held for sale by segment:               
Production  $316,635   $227,751   $66,721 
Servicing  $27,647   $29,736   $18,055 

 

(1) Net of cash hedging results

 

PennyMac Financial performs fulfillment services for conventional conforming and jumbo loans acquired by PMT from non-affiliates in its correspondent production business. These services include, but are not limited to, marketing, relationship management, correspondent seller approval and monitoring, loan file review, underwriting, pricing, hedging and activities related to the subsequent sale and securitization of loans in the secondary mortgage markets for PMT.

 

Fees earned from the fulfillment of correspondent loans on behalf of PMT totaled $41.9 million in the first quarter, down 28 percent from the prior quarter and up 52 percent from the first quarter of 2019. The quarter-over-quarter decrease in fulfillment fee revenue was driven primarily by a 21 percent decrease in acquisition volumes by PMT and a decrease in the weighted average fulfillment fee rate to 26 basis points from 28 basis points in the prior quarter.

 

Net interest income totaled $6.4 million, up from $2.9 million in the prior quarter and down from $10.5 million in the first quarter of 2019. Net interest income in the first quarter of 2019 included incentives totaling $9.3 million, which the Company was entitled to receive under one of its master repurchase agreements to finance mortgage loans that satisfied certain consumer relief characteristics. There were no consumer relief incentives in the first quarter of 2020.

 

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Production segment expenses were $182.4 million, up 22 percent from the prior quarter and 122 percent from the first quarter of 2019 as a result of the increase in volumes.

 

Servicing Segment

 

Servicing includes income from owned MSRs, subservicing and special servicing activities. Servicing segment pretax income was $170.8 million, versus a pretax loss of $5.1 million in the prior quarter and pretax income of $11.2 million in the first quarter of 2019. Servicing segment revenues totaled $289.4 million, up 131 percent from the prior quarter and 164 percent from the first quarter of 2019 driven by net valuation-related gains versus losses in the prior periods.

 

Net loan servicing fees totaled $257.8 million and included $241.9 million in servicing fees reduced by $114.9 million from the realization of MSR cash flows. Net valuation-related gains totaled $130.8 million, and included hedging gains of $1.0 billion and a $14.5 million change in the fair value of the excess servicing spread liability partially offset by MSR fair value losses of $920.3 million. The MSR fair value losses primarily resulted from expectations for increased prepayment activity in the future as a result of lower interest rates in the first quarter combined with expected higher expected cost to service loans due to increases in delinquencies and increased returns demanded by market participants.

 

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

 

   Quarter ended 
   March 31,
2020
   December 31,
2019
   March 31,
2019
 
   (in thousands) 
Loan servicing fees (1)  $241,929   $234,871   $199,377 
Changes in fair value of MSRs and MSLs resulting from:               
Realization of cash flows   (114,919)   (113,102)   (92,475)
Change in fair value inputs   (920,294)   160,611    (164,939)
Change in fair value of excess servicing spread financing   14,522    (2,263)   4,051 
Hedging gains(losses)   1,036,570    (192,386)   134,557 
Net change in fair value of MSRs and MSLs   15,879    (147,140)   (118,806)
Net loan servicing fees  $257,808   $87,731   $80,571 

 

(1) Includes contractually-specified servicing fees

 

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Servicing segment revenue also included $27.6 million in net gains on loans held for sale from the securitization of reperforming government-insured and guaranteed loans, compared to $29.7 million in the prior quarter and $18.1 million in the first quarter of 2019. 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 $4.6 million, down from $8.0 million in the prior quarter and $10.3 million in the first quarter of 2019. Interest income decreased by $3.4 million from the prior quarter, primarily driven by lower income related to custodial deposit balances as earnings rates declined. Interest expense was essentially unchanged from the prior quarter.

 

Servicing segment expenses totaled $118.6 million, down 9 percent from the prior quarter driven by a full quarter of cost savings related to Servicing Systems Environment (SSE), the Company’s proprietary, cloud-based servicing platform, partially offset by seasonally higher expenses related to payroll taxes and benefits.

 

The total servicing portfolio grew to $384.2 billion in UPB at March 31, 2020, an increase of 4 percent from December 31, 2019 and 18 percent from March 31, 2019, driven primarily by the Company’s loan production activities. PennyMac Financial subservices and conducts special servicing for $144.8 billion in UPB, an increase of 7 percent from December 31, 2019 and 43 percent from March 31, 2019. PennyMac Financial’s owned MSR portfolio grew to $239.4 billion in UPB, an increase of 3 percent from December 31, 2019 and 7 percent from March 31, 2019.

 

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

 

   March 31,
2020
   December 31,
2019
   March 31,
2019
 
   (in thousands) 
Prime servicing:               
Owned               
Mortgage servicing rights               
Originated  $173,171,678   $166,188,825   $147,987,738 
Acquisitions   58,312,483    59,598,279    71,846,623 
    231,484,161    225,787,104    219,834,361 
Mortgage servicing liabilities   2,635,734    2,758,454    1,000,403 
Loans held for sale   5,276,688    4,724,006    2,573,121 
    239,396,583    233,269,564    223,407,885 
Subserviced for PMT   144,734,874    135,288,944    100,939,297 
Total prime servicing   384,131,457    368,558,508    324,347,182 
Special servicing - subserviced for PMT   95,169    125,724    348,131 
Total loans serviced  $384,226,626   $368,684,232   $324,695,313 
                
Loans serviced:               
Owned               
Mortgage servicing rights  $231,484,161   $225,787,104   $219,834,361 
Mortgage servicing liabilities   2,635,734    2,758,454    1,000,403 
Loans held for sale   5,276,688    4,724,006    2,573,121 
    239,396,583    233,269,564    223,407,885 
Subserviced   144,830,043    135,414,668    101,287,428 
Total loans serviced  $384,226,626   $368,684,232   $324,695,313 

 

Investment Management Segment

 

PennyMac Financial manages PMT for which it earns base management fees and may earn incentive compensation. Net AUM were $1.8 billion as of March 31, 2020, down 26 percent from December 31, 2019, due to a reduction in PMT’s shareholders’ equity driven by significant non-cash fair value losses on its government-sponsored enterprise (GSE) credit risk transfer (CRT) investments.

 

Pretax income for the Investment Management segment was $3.8 million, down from $5.2 million in the prior quarter and up from $2.1 million in the first quarter of 2019. Management fees, which include base management and performance incentive fees from PMT, decreased 12 percent from the prior quarter and increased 25 percent from the first quarter of 2019. Base management fees were $9.1 million, up from $8.4 million in the prior quarter and $6.1 million in the first quarter of 2019. Average AUM was up for the quarter, however as of March 31 ,2020, AUM declined 26 percent from December 31, 2019 due to significant non-cash fair value losses on PMT’s investments in GSE CRT. Performance-based incentive fees were not earned in the first quarter and are not expected to be earned for some time.

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The following table presents a breakdown of management fees:

 

   Quarter ended 
   March 31,
2020
   December 31,
2019
   March 31,
2019
 
   (in thousands) 
Management fees:               
PennyMac Mortgage Investment Trust               
Base  $9,055   $8,441   $6,109 
Performance incentive   -    1,873    1,139 
Total management fees  $9,055   $10,314   $7,248 
                
Net assets of PennyMac Mortgage Investment Trust  $1,823,368   $2,450,916   $1,727,589 

 

Investment Management segment expenses totaled $6.1 million, down 7 percent from the prior quarter and 9 percent from the first quarter of 2019.

 

Consolidated Expenses

 

Total expenses were $307.1 million, up 7 percent from the prior quarter and 64 percent from the first quarter of 2019. The year-over-year change was primarily driven by higher volumes of activity in the Production segment.

 

***

 

Management’s slide presentation will be available in the Investor Relations section of the Company’s website at ir.pennymacfinancial.com beginning at 1:30 p.m. (Pacific Time) on Thursday, May 7, 2020.

 

About PennyMac Financial Services, Inc.

 

PennyMac Financial Services, Inc. is a specialty financial services firm with a comprehensive mortgage platform and integrated business focused on the production and servicing of U.S. mortgage loans and the management of investments related to the U.S. mortgage market. Additional information about PennyMac Financial Services, Inc. is available at ir.pennymacfinancial.com.

 

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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: our exposure to risks of loss and disruptions in operations resulting from adverse weather conditions, man-made or natural disasters, climate change and pandemics such as COVID-19; the continually changing federal, state and local laws and regulations applicable to the highly regulated industry in which we operate; lawsuits or governmental actions that may result from any noncompliance with the laws and regulations applicable to our businesses; the mortgage lending and servicing-related regulations promulgated by the Consumer Financial Protection Bureau and its enforcement of these regulations; our dependence on U.S. government-sponsored entities and changes in their current roles or their guarantees or guidelines; changes to government mortgage modification programs; the licensing and operational requirements of states and other jurisdictions applicable to the Company’s businesses, to which our bank competitors are not subject; foreclosure delays and changes in foreclosure practices; certain banking regulations that may limit our business activities; changes in macroeconomic and U.S. real estate market conditions; difficulties inherent in growing loan production volume; difficulties inherent in adjusting the size of our operations to reflect changes in business levels; purchase opportunities for mortgage servicing rights and our success in winning bids; changes in prevailing interest rates; expected discontinuation of LIBOR; increases in loan delinquencies and defaults; our reliance on PennyMac Mortgage Investment Trust (NYSE: PMT) as a significant source of financing for, and revenue related to, our mortgage banking business; any required additional capital and liquidity to support business growth that may not be available on acceptable terms, if at all; our obligation to indemnify third-party purchasers or repurchase loans if loans that we originate, acquire, service or assist in the fulfillment of, fail to meet certain criteria or characteristics or under other circumstances; our obligation to indemnify PMT if its services fail to meet certain criteria or characteristics or under other circumstances; decreases in the returns on the assets that we select and manage for our clients, and our resulting management and incentive fees; the extensive amount of regulation applicable to our investment management segment; conflicts of interest in allocating our services and investment opportunities among us and our advised entities; the effect of public opinion on our reputation; our recent growth; our ability to effectively identify, manage, monitor and mitigate financial risks; our initiation of new business activities or investment strategies or expansion of existing business activities or investment strategies; our ability to detect misconduct and fraud; our ability to mitigate cybersecurity risks and cyber incidents; our ability to pay dividends to our stockholders; and our organizational structure and certain requirements in our charter documents. You should not place undue reliance on any forward- looking statement and should consider all of the uncertainties and risks described above, as well as those more fully discussed in reports and other documents filed by the Company with the Securities and Exchange Commission from time to time. The Company undertakes no obligation to publicly update or revise any forward-looking statements or any other information contained herein, and the statements made in this press release are current as of the date of this release only.

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

   March 31,
2020
   December 31,
2019
   March 31,
2019
 
   (in thousands, except share amounts) 
ASSETS               
Cash  $878,826   $188,291   $144,266 
Short-term investments at fair value   1,884    74,611    149,372 
Loans held for sale at fair value   5,541,987    4,912,953    2,668,929 
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors   99,766    107,512    125,929 
Derivative assets   433,211    159,686    121,153 
Servicing advances, net   299,550    331,169    284,230 
Investment in PennyMac Mortgage Investment Trust at fair value   797    1,672    1,553 
Mortgage servicing rights   2,193,697    2,926,790    2,905,090 
Real estate acquired in settlement of loans   20,197    20,326    1,690 
Operating lease right-of-use assets   71,639    73,090    56,239 
Furniture, fixtures, equipment and building improvements, net   29,177    30,480    33,423 
Capitalized software, net   74,183    63,130    45,416 
Receivable from PennyMac Mortgage Investment Trust   56,223    48,159    29,951 
Loans eligible for repurchase   980,618    1,046,527    1,094,702 
Other   209,378    219,621    157,057 
Total assets  $10,891,133   $10,204,017   $7,819,000 
                
LIABILITIES               
Assets sold under agreements to repurchase  $4,444,545   $4,141,053   $2,151,938 
Mortgage loan participation and sale agreements   528,750    497,948    547,879 
Notes payable secured by mortgage servicing assets   1,294,514    1,294,070    1,292,736 
Obligations under capital lease   18,145    20,810    5,091 
Excess servicing spread financing payable  to PennyMac Mortgage Investment Trust at fair value   157,109    178,586    205,081 
Derivative liabilities   43,152    22,330    17,838 
Operating lease liabilities   89,829    91,320    76,373 
Mortgage servicing liabilities at fair value   29,761    29,140    7,844 
Accounts payable and accrued expenses   198,897    175,273    162,677 
Payable to PennyMac Mortgage Investment Trust   59,281    73,280    76,494 
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement   46,158    46,158    46,537 
Income taxes payable   613,043    504,569    414,636 
Liability for loans eligible for repurchase   980,618    1,046,527    1,094,702 
Liability for losses under representations and warranties   23,202    21,446    17,982 
Total liabilities   8,527,004    8,142,510    6,117,808 
                
STOCKHOLDERS' EQUITY               
Common stock¾authorized 200,000,000 shares of $0.0001 par value; issued and outstanding 79,190,245, 78,515,047, and 78,317,843 shares, respectively   8    8    8 
Additional paid-in capital   1,341,219    1,335,107    1,311,914 
Retained earnings   1,022,902    726,392    389,270 
Total stockholders' equity attributable to PennyMac Financial Services, Inc. common stockholders   2,364,129    2,061,507    1,701,192 
Total liabilities and stockholders’ equity  $10,891,133   $10,204,017   $7,819,000 

 

11

 

 

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

   Quarter ended 
   March 31,
2020
   December 31,
2019
   March 31,
2019
 
   (in thousands, except earnings per share) 
Revenue               
Net gains on loans held for sale at fair value  $344,282   $257,487   $84,776 
Loan origination fees   57,571    63,868    23,930 
Fulfillment fees from PennyMac Mortgage Investment Trust   41,940    58,297    27,574 
Net loan servicing fees:               
Loan servicing fees   241,929    234,871    199,377 
Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing, net of hedging results   15,879    (147,140)   (118,806)
Net loan servicing fees   257,808    87,731    80,571 
Net interest income:               
Interest income   72,564    76,015    58,333 
Interest expense   61,512    65,132    37,543 
    11,052    10,883    20,790 
Management fees from PennyMac Mortgage Investment Trust   9,055    10,314    7,248 
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust   (857)   39    192 
Results of real estate acquired in settlement of loans   (707)   (648)   274 
Other   1,681    2,404    2,350 
Total net revenue   721,825    490,375    247,705 
Expenses               
Compensation   168,436    141,009    106,600 
Loan origination   46,004    44,919    14,497 
Servicing   42,166    57,487    30,293 
Technology   19,107    15,515    15,966 
Professional services   13,404    10,983    5,881 
Occupancy and equipment   8,038    7,841    6,776 
Other   9,940    9,255    7,401 
Total expenses   307,095    287,009    187,414 
Income before provision for income taxes   414,730    203,366    60,291 
Provision for income taxes   108,487    50,705    14,156 
Net income  $306,243   $152,661   $46,135 
                
Earnings per share               
Basic  $3.89   $1.95   $0.59 
Diluted  $3.73   $1.88   $0.58 
Weighted-average common shares outstanding               
Basic   78,689    78,466    77,653 
Diluted   82,008    81,076    79,286 

 

12

 

(Back To Top)

Section 3: EX-99.2 (EXHIBIT 99.2)

Exhibit 99.2

 

First Quarter 2020 Earnings Report

 

 

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, regardinrg management’s beliefs, estimates, projections and assumptions with respect to, among other things, the Company’s financial res ult s, future operations, business plans and investment strategies, as well as industry and market conditions, all of which are subject to change. Words like “b eli eve,” “expect,” “anticipate,” “promise,” “plan,” and other expressions or words of similar meanings, as well as future or conditional verbs such as “will,” “w ould,” “should,” “could,” or “may” are generally intended to identify forward - looking statements. Actual results and operations for any future period may vary material ly from those projected herein and from past results discussed herein. These forward - looking statements include statements regarding the Company’s corporate reorga nization, the expected benefits of such reorganization and the related impact on existing stakeholders, estimates regarding future market capitaliza tio n 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 limit ed to: our exposure to risks of loss and disruptions in operations resulting from adverse weather conditions, man - made or natural disasters, climate change and pande mics such as COVID - 19;the continually changing federal, state and local laws and regulations applicable to the highly regulated industry in which we operate; lawsuits or go ver nmental actions that may result from any noncompliance with the laws and regulations applicable to our businesses; the mortgage lendi ng 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 pr ogr ams; the licensing and operational requirements of states and other jurisdictions applicable to the Company’s businesses, to which our bank competit ors are not subject; foreclosure delays and changes in foreclosure practices; certain banking regulations that may limit our business activities; changes in m acr oeconomic and U.S. real estate market conditions; difficulties inherent in growing loan production volume; difficulties inherent in adjusting the size of ou r o perations to reflect changes in business levels; purchase opportunities for mortgage servicing rights and our success in winning bids; changes in prevailing interest rat es; expected discontinuation of LIBOR; increases in loan delinquencies and defaults; our reliance on PennyMac Mortgage Investment Trust (NYSE: PMT) as a significant source of financing for, and revenue related to, our mortgage banking business; any required additional capital and liquidity to support business grow th 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 PM T i f 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 cli ent s, 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 ; o ur ability to effectively identify, manage, monitor and mitigate financial risks; our initiation of new business activities or expansion of existing business act ivi ties; our ability to detect misconduct and fraud; and our ability to mitigate cybersecurity risks and cyber incidents;; our ability to pay dividends to our stockhol der s; 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 describe d above, as well as those more fully discussed in reports and other documents filed by the Company with the Securities and Exchange Commission from tim e t o 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

 

 

First Quarter Highlights 3 ▪ Net income was $306.2 million; diluted earnings per share (EPS) were $3.73 – Record earnings driven by continued strong production results combined with substantial gains on our interest rate hedge investments which more than offset fair value losses on mortgage servicing rights (MSRs) – Book value per share increased to $29.85 from $26.26 at December 31, 2019 – In March, repurchased approximately 238,000 shares of PFSI’s common stock for an approximate cost of $4.1 million and a weighted average price of $ 17.31 per share – PFSI’s Board of Directors declared a first quarter cash dividend of $0.12 per share, payable on May 28, 2020 to common stockholders of record as of May 18, 2020 ▪ Record Production segment pretax income of $240.1 million, up 18% from 4Q19 and 411% from 1Q19 driven by record volumes in the direct lending channels and elevated margins across all channels – Direct lending locks were a record $9.9 billion in unpaid principal balance (UPB), up 38% from 4Q19 and 229% from 1Q19 o $7.2 billion in UPB of locks in the consumer direct channel; $2.8 billion in UPB of locks in the broker direct channel – Government correspondent lock volume totaled $14.9 billion in UPB, down 8% Q/Q and up 101% Y/Y – Total loan acquisitions and originations were $35.4 billion in UPB, down 17% from 4Q19 and up 113% from 1Q19 – Correspondent acquisitions of conventional loans fulfilled for PennyMac Mortgage Investment Trust (NYSE: PMT) were $16.2 billion in UPB, down 21% from 4Q19 and up 99% from 1Q19

 

 

4 ▪ Record servicing segment pretax income of $170.8 million, versus a pretax loss of $5.1 million in 4Q19 and pretax income of $ 11.2 million in 1Q19 – Valuation - related items included $920.3 million in MSR fair value losses offset by $1.1 billion in hedging and other gains; net impact on pretax income was $130.8 million and on EPS was $1.17 – Pretax income excluding valuation - related items was $42.3 million, up 8% from 4Q19 and 20% from 1Q19 – Servicing portfolio grew to $384.2 billion in UPB, up 4% from December 31, 2019 and 18% from March 31, 2019 ▪ Investment Management segment pretax income was $ 3.8 million, down from $ 5.2 million in 4Q19 and up from $2.1 million in 1Q19 – Revenue of $ 9.9 million, down 16% from 4Q19 and up 12% from 1Q19 – Net assets under management (AUM) were $ 1.8 billion, down 26% from December 31, 2019 driven by a reduction in PMT’s shareholders’ equity Notable activity after quarter - end: ▪ In April, after more than a year in development, PennyMac Financial announced an enhancement to PNMAC GMSR ISSUER TRUST, to provide private market financing for Ginnie Mae servicing advances – PFSI currently has $600 million of committed capacity available to finance Ginnie Mae MSRs and servicing advances First Quarter Highlights (continued)

 

 

Developments That Have Affected the Mortgage Markets 5 ▪ Substantial slowdown in the economy related to COVID - 19 and public health measures ‒ Over the last six weeks 30.3 million workers have filed jobless claims, evidencing increased hardships for homeowners and borrowers leading to expectations for higher delinquencies in the future ▪ In response the federal government enacted the CARES Act, providing $2 trillion of fiscal stimulus as well as granting homeowners with federally backed mortgages up to 12 months of forbearance if impacted directly or indirectly by COVID - 19 ‒ Requests for forbearance designed to reduce consumer credit losses but increase the advance obligations for mortgage servicers, putting strain on the liquidity of undercapitalized sellers/servicers ▪ Financial markets have also experienced substantial volatility and reduced liquidity ‒ In response, the Federal Reserve reduced the Fed Funds rate to near zero and the Federal Open Market Committee announced it would purchase at least $500 billion of Treasury securities and at least $200 billion of Agency mortgage - backed securities to support liquidity ‒ Significant decline in the value of many credit assets, including government - sponsored enterprise (GSE) credit risk transfer (CRT) – driven by increased expectations for delinquencies and actual losses in addition to increased returns required by market participants ‒ Reduction of servicing asset values driven by the estimated impact on servicing costs and liquidity from higher expected delinquencies as a result of forbearance ▪ PFSI’s strong balance sheet, low leverage and disciplined approach to liquidity management have been critically important in this market environment; total liquidity has increased since February

 

 

3.0% 3.5% 4.0% 4.5% 5.0% Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Update on the Mortgage Origination Market 6 U.S. Mortgage Origination Market (1) (UPB in billions) (1) Actual originations: Inside Mortgage Finance. Total originations forecast: Average of Mortgage Bankers Association (4/2/20), Fa nnie Mae (4/10/20), and Freddie Mac (4/13/20) forecasts. (2) Freddie Mac Primary Mortgage Market Survey. 3.23% as of 4/30/20 $2,325 $2,432 2019 2020 Purchase Refinance Average 30 - year fixed rate mortgage (2) 3.74% 3.50% ▪ Economic forecasts currently estimate total originations of $2.4 trillion in 2020, versus $2.3 trillion in 2019 ‒ Low rates continue to support robust refinance volumes while stay - at - home orders have resulted in a decline in expected purchase activity ‒ Refinance demand in April has remained elevated ▪ The primary/secondary spread is expected to remain wide for an extended period of time ▪ Some originators and aggregators experienced challenges in secondary market execution and/or pipeline hedging due to the market volatility ▪ Certain competitors, primarily in the broker and correspondent lending channels, have reduced or limited their participation due to operational, liquidity and capital issues ▪ As a result of its risk management, mortgage market expertise, capital advantages and scale, PennyMac has continuously originated, funded and settled loans throughout the crisis

 

 

7 Impact of Current Market Environment on PFSI by Business Segment Loan Production Loan Servicing Investment Management ▪ Elevated margins across all channels ‒ Driven by reduced competition and already limited industry capacity constraints ▪ Expect large volumes due to market opportunity and maintaining and growing market share, especially in consumer and broker direct channels ▪ Substantial fair value losses on PMT’s CRT investments drove decline in PFSI’s AUM ‒ Lower base management fees ‒ Performance - based incentive fees are not expected to be earned for some time due to PMT’s significant 1Q20 loss ▪ Changes in servicing profitability, aside from changes in MSR value and related hedging results, due to: ‒ Reduced servicing fee revenue due to increased borrower delinquencies, offset by expected portfolio growth and potential increased fees from PMT related to delinquent loans ‒ Reduced interest income on custodial deposits as short - term interest rates have declined ‒ Increased expenses from additional staff required to address borrower hardships and financing costs for the expected increase in servicing advances ‒ Near - term reduction in gains from the redelivery of early buyout (EBO) loans, followed by expected increases in redelivery gains as borrowers emerge from forbearance While prospects for the U.S. economy are uncertain and present some headwinds for PFSI’s businesses, given the present market environment, we expect PFSI’s overall financial performance to remain elevated throughout 2020

 

 

Correspondent Production (1)(2) Market Share Market Share Consumer Direct Production (1 ) Loan Servicing (1) Market Share Broker Direct Production (1)(2) Market Share 8 Trends in PennyMac Financial’s Businesses (1) Source: Inside Mortgage Finance and company estimates for 1Q20 or as of 3/31/20. Inside Mortgage Finance estimates total 1Q20 o rigination market of $670 billion. Correspondent production share estimate is based on PFSI and PMT acquisition volume of $29.8 billion divided by $196 billion for the correspondent market (estimated to be 30% of total origination market). Consumer direct production share is based on PFSI originations of $4.0 billion divided by $380 billion for the retail market (estimated to be 56% of total origination market). Broker direct production share is based on PFSI originations of $1.6 b illion divided by $94 billion for the broker market (estimated to be 14% of total origination market). Loan servicing market share is based on PFSI’s servicing UPB of $384.2 billion divided by an es tim ated $11.2 trillion in mortgage debt outstanding as of March 31, 2020. (2) Historical and current period correspondent production and broker direct market share estimates have been adjusted as loans p re viously reported as non - delegated correspondent are now included in the broker direct channel 2.40% 2.98% 3.36% 3.44% 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20E 10.44% 13.66% 16.00% 15.18% 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20E 0.74% 1.40% 1.66% 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20E 0.60% 0.69% 0.90% 1.06% 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20E

 

 

$6.8 $16.7 $13.6 $8.1 $20.5 $16.2 $16.4 $36.0 $34.0 1Q19 4Q19 1Q20 Government loans Conventional loans for PMT Total locks 9 (UPB in billions) Correspondent Volume and Mix (1) Production Segment Highlights – Correspondent Channel (3) (4) ▪ Correspondent acquisitions by PMT in 1Q20 totaled $29.8 billion in UPB, down 20% Q/Q and up 100% Y/Y – 46% government loans; 54% conventional loans – Government acquisitions of $ 13.6 billion in UPB, down 1 8 % Q/Q and up 102% Y/Y – Conventional conforming acquisitions of $16.2 billion in UPB, down 21% Q/Q and up 99% Y/Y ▪ Government correspondent lock volume totaled $14.9 billion in UPB, down 8 % Q/Q and up 101% Y/Y ▪ PennyMac maintained its leadership position in 1Q20 as competition subsided amidst market volatility ▪ April correspondent acquisitions totaled $11.1 billion in UPB; locks totaled $11.2 billion in UPB ▪ Historical and current period non - delegated correspondent acquisition and lock volumes are now reported in the broker direct lending channel (1) As of 1Q20, historical and current period non - delegated correspondent acquisition and lock volumes are reported in the broker d irect lending channel (see slides 26 and 27 for more details). (2) For government - insured loans, PFSI earns income from holding and selling or securitizing the loans (3) For conventional and jumbo loans, PFSI earns a fulfillment fee from PMT rather than income from holding and selling or securitizing the loans (4) Includes locks related to PMT loan acquisitions, including conventional loans for which PFSI earns a fulfillment fee upon loan funding (5) Includes net gains on loans held for sale, loan origination fees and net interest income for government - insured loans; lock volume adjusted for expected fallout for government - insured correspondent locks (4%) (6) Based on funded loans subject to fulfillment fee. The rate may reflect discretionary adjustments to facilitate the successful completion of certain loan transactions (7) Correspondent seller relationships has been reduced by 116 and 123 for 1Q20 and 4Q19, respectively to no longer include non - delegated only correspondent sellers (see slides 26 and 27 for more details) (2) 4Q19 1Q20 Revenue per fallout-adjusted government lock (5) 38 76 Weighted average fulfillment fee (bps) (6) 28 26 4Q19 1Q20 Delegated correspondent seller relationships (7) 676 690 Purchase-money loans, as a % of total acquisitions 55% 58% Key Financial Metrics Selected Operational Metrics

 

 

$0.6 $1.2 $1.7 $0.7 $2.6 $2.4 $1.4 $3.8 $4.0 $1.0 $2.4 $3.4 1Q19 4Q19 1Q20 Conventional Government Committed pipeline (UPB in b illions ) Consumer Direct Production Volume 10 Production Segment Highlights – Consumer Direct Channel (1) (1) Commitments to originate mortgage loans at specified terms at period end (2) Includes net gains on loans held for sale, loan origination fees and net interest income; lock volume adjusted for expected fallout , which was 31% in 1Q20 for consumer direct locks ▪ Consumer direct production volume in 1Q20 totaled $4.0 billion in UPB, up 7 % Q/Q and 197% Y/Y ▪ Record volumes driven by low rates and investments to scale the production platform to address the opportunity ▪ Enriched use of data analytics driving improved lead generation abilities and recapture rates ▪ Margins improved further from elevated levels in 4Q19 ▪ April 2020 consumer direct originations totaled $1.7 billion in UPB; locks totaled $2.9 billion in UPB – $3.7 billion committed pipeline at April 30, 2020 (1) 4Q19 1Q20 Revenue per fallout-adjusted consumer direct lock (bps) (2) 424 464 Purchase-money loans, as a % of total originations 6% 5% Consumer Direct Metrics

 

 

$0.2 $0.9 $1.2 $0.1 $0.5 $0.4 $0.4 $1.4 $1.6 $0.3 $0.6 $1.2 1Q19 4Q19 1Q20 Conventional loans Government loans Committed pipeline 11 Production Segment Highlights – Broker Direct Channel Broker Direct Production Volume (1) (UPB in b illions ) (2) (1) As of 1Q20, historical and current period non - delegated correspondent acquisition and lock volumes are reported in the broker di rect lending channel (see pages 26 and 27 for more details). For guaranteed non - delegated loans, PFSI earns income from holding and selling or securitizing the loans. ( 2 ) Commitments to originate mortgage loans at specified terms at period end; as of 1Q20 non - delegated loans were reclassified to the broker direct channel. Committed pipeline for 1Q20 includes $576M in non - delegated loans (3) Includes net gains on loans held for sale, loan origination fees and net interest income; lock volume adjusted for expected fallout, which was 23% in 1Q20 for broker direct locks (4) Non - delegated correspondent sellers previously reported as correspondent sellers under the correspondent channel ▪ Historical and current period non - delegated correspondent acquisition and lock volumes are now reported in the broker direct lending channel ▪ Broker direct production volume in 1Q20 totaled $1.6 b illion in UPB, up 10% Q/Q and up from $369 million in 1Q19 ▪ Lock volume of $2.8 billion in UPB, up 62% Q/Q and up from $0.7 b illion in 1Q19 ▪ Approved brokers totaled 1,074 at March 31, 2020, up 11% from December 31, 2019 ▪ Continue to increase capacity to address elevated demand and grow market position ▪ April 2020 broker direct originations totaled $700 million in UPB; locks totaled $1.3 b illion in UPB – $1.6 billion committed pipeline at April 30, 2020 (2) 4Q19 1Q20 Revenue per fallout-adjusted broker direct lock (bps) (3) 116 162 Approved brokers 968 1,074 Non-delegated only correspondent sellers (4) 123 116 Purchase-money loans, as a % of total originations 41% 33% Broker Direct Metrics

 

 

$368.7 $384.2 $(22.2) $35.4 $2.4 At 12/31/19 Runoff Additions from loan production MSR acquisitions At 3/31/20 (1) 12 Servicing Segment Highlights (1) Owned portfolio in predominantly government - insured and guaranteed loans under the FHA (53%), VA (38%), and USDA (9%) programs; delinquency data based on loan count (i.e., not UPB) (2) Represents PMT’s MSRs. Excludes distressed loan investments (3) Early buyouts of delinquent loans from Ginnie Mae pools during the period (4) Also includes loans servicing released in connection with recent asset sales by PMT (5) Includes consumer direct production, government correspondent acquisitions, and conventional conforming and jumbo loan acquis it ions subserviced for PMT (UPB in billions ) ▪ Servicing portfolio totaled $384.2 billion in UPB at March 31, 2020, up 4% Q/Q and 18% Y/Y ▪ Strong production volumes continue to support portfolio growth despite elevated prepayment activity ▪ Modest decrease in delinquency rate at March 31 driven by seasonal factors; expected to significantly increase due to COVID - 19 hardships and forbearance Loan Servicing Portfolio Composition Net Portfolio Growth (UPB in billions ) (4) (5) $324.7 $368.7 $384.2 3/31/2019 12/31/2019 3/31/2020 Prime owned Prime subserviced and other 4Q19 1Q20 Loans serviced (in thousands) 1,778 1,839 60+ day delinquency rate - owned portfolio (1) 3.7% 3.3% 60+ day delinquency rate - sub-serviced portfolio (2) 0.4% 0.4% Actual CPR - owned portfolio (1) 21.0% 20.6% Actual CPR - sub-serviced (2) 20.0% 19.2% UPB of completed modifications ($ in millions) $546 $713 EBO loan volume ($ in millions) (3) $1,682 $1,637 Selected Operational Metrics

 

 

Investment Management Revenues (1) 13 Investment Management Segment Highlights Investment Management AUM ($ in billions ) ▪ Net AUM as of March 31, 2020 were $1.8 billion, down 26% from Dec ember 31, 2019 primarily due to significant non - cash fair value losses on PMT’s investments in government - sponsored enterprise (GSE) credit risk transfer ‒ We believe PMT’s fair value losses on its CRT investments are outsized compared to the additional credit losses PMT expects to incur over the life of these investments ▪ Investment management revenues were $9.9 million, down from the prior quarter as there was no incentive fee earned for the quarter as a result of the net loss at PMT ▪ While recent market dislocations have affected competitors and created attractive investment opportunities for PMT, we expect PFSI’s base management fees will be lower and do not expect performance incentive fees for some time due to the impact of PMT’s significant Q1 loss ($ in millions ) $7.7 $9.9 $9.9 $1.1 $1.9 $8.8 $11.8 $9.9 1Q19 4Q19 1Q20 Base management fees & other revenue Performance incentive $1.73 $2.45 $1.82 3/31/2019 12/31/2019 3/31/2020

 

 

14 MSR Valuation Changes and Offsets ($ in millions) Hedging Approach Continues to Moderate the Volatility of PFSI’s Results Note: Figures may not sum exactly due to rounding ▪ 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 ▪ MSR fair value decreased significantly in 1Q20 – Expectations for increased prepayment activity in the future related to lower interest rates – Higher expected cost to service due to increases in delinquencies – Increased returns demanded by market participants – Decrease represented approximately 31% of the fair value at December 31, 2019 ▪ Hedging and other gains more than offset MSR fair value losses – Utilizing option coverage for significant movements in rates provided substantial benefit in 1Q20 ($164.9) $160.6 ($920.3) $138.6 ($194.6) $1,051.1 $47.0 $203.3 $240.1 1Q19 4Q19 1Q20 MSR fair value change before recognition of realization of cash flows Hedging and other gains (losses) Production pretax income

 

 

15 (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 a mortization 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 1Q20 Servicing Profitability Excluding Valuation - Related Changes 1Q20 ▪ Operating revenue decreased Q/Q driven by decreased income from custodial deposits due to lower earnings rates ▪ Operating expenses decreased as a percentage of the average servicing portfolio; full quarter of cost savings related to Serv ici ng Systems Environment (SSE) offset by seasonally higher expenses in Q1 related to payroll taxes and benefits ▪ Interest shortfall from prepayments decreased modestly Q/Q but remains elevated ▪ Credit losses and provisions for defaulted loans decreased Q/Q due to a combination of seasonality and initiatives related to lo ss mitigation ▪ EBO - related income increased Q/Q driven by gains from the reperformance of loans bought out in prior periods 4Q19 1 Q19 $ in millions basis points (1) $ in millions basis points (1) $ in millions basis points (1) Operating revenue 225.0$ 29.2 273.0$ 30.4 266.5$ 28.3 Realization of MSR cash flows (92.5) (12.0) (113.1) (12.6) (114.9) (12.2) EBO loan-related revenue (2) 35.1 4.6 40.3 4.5 47.8 5.1 Servicing expenses: Operating expenses (75.8) (9.8) (80.5) (9.0) (84.1) (8.9) Interest shortfall (4.3) (0.6) (16.5) (1.8) (14.9) (1.6) Credit losses and provisions for defaulted loans (15.1) (2.0) (23.8) (2.6) (16.0) (1.7) EBO loan transaction-related expense (10.7) (1.4) (18.5) (2.1) (18.6) (2.0) Financing expenses: Interest on ESS (3.1) (0.4) (2.2) (0.2) (2.0) (0.2) Interest to third parties (23.3) (3.0) (19.7) (2.2) (21.6) (2.3) Pretax income excluding valuation-related changes 35.3$ 4.6 39.1$ 4.4 42.3$ 4.5 Valuation-related changes (3) MSR fair value (4) (164.9) 160.6 (920.3) ESS liability fair value 4.1 (2.3) 14.5 Hedging derivatives gains 134.6 (192.4) 1,036.6 Provision for credit losses on active loans (5) 2.2 (10.2) (2.3) Servicing segment pretax income 11.2$ (5.1)$ 170.8$ Average servicing portfolio UPB 308,212$ 359,022$ 377,295$

 

 

7.0% 6.0% 6.0% 7.6% 7.2% 13.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 12/31/18 3/31/19 6/30/19 9/30/19 12/31/19 3/31/20 Servicing Trends – Delinquency and Forbearance for PFSI’s Owned Portfolio 16 ▪ PFSI is in a strong position to successfully manage hardships related to COVID - 19 given its leading operatin g platform including proprietary technology and specialty servicing expertise ▪ PFSI began offering COVID - 19 forbearance plans on March 19 following the GSEs’ initial guidance (before the CARES Act was passed) and deployed technology changes over the weekend of March 21 - 22 to allow customers to request, be evaluated for, and receive forbearance through automated systems including our website – 93 % of PFSI’s customers in a forbearance plan have been enrolled through an automated channel ▪ For delinquent borrowers (including those in forbearance plans), PFSI has the responsibility to fund servicing advances for i ts owned portfolio, which is predominately Ginnie Mae MSRs ‒ For the subserviced portfolio, any servicing advances are the responsibility of the MSR owner (PMT), and PFSI may receive increased per - loan subservicing revenue for a delinquent loan versus a current loan 30+ Day Delinquency Rate (1) 12/31/18 3/31/19 4/30/19 12/31/19 3/31/20 4/30/20 Forbearance Rate Note: Figures may not sum exactly due to rounding ( 1) Owned portfolio in predominantly government - insured and guaranteed loans under the FHA (53%), VA (38%), and USDA (9%) programs; delinquency data based on loan count (i.e., not UPB) Delinq uent 9.0% Curre nt 4.3% ​ 13.2% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 4/30/20

 

 

17 Projected Needs for Servicing Advances ▪ Ginnie Mae requires a servicer to continue advancing principal and interest (P&I) payments for delinquent loans until it buys such loans out of the MBS, unlike GSE servicing where P&I advances are limited to four months ‒ These P&I advances are typically covered by prepayment activity, except in adverse scenarios where high delinquency rates combine with extended average periods of delinquency; in the moderate case above, PFSI is not projected to have any P&I advances ‒ The majority of advances related to PFSI’s MSR portfolio are expected to be related to property taxes and insurance to protec t investors’ interest in the properties securing the underlying loans ▪ Advance projections could increase if recoveries of advances from borrowers or insuring agencies are prolonged or delayed significantly after borrower reinstatement or loan modification ▪ PFSI has historically funded any required servicing advances with corporate cash ‒ Servicing advances outstanding were $260 million at April 30, 2020 ‒ PFSI has $1.4 billion in available liquidity (1) , less $223 million in minimum liquidity required by Ginnie Mae, as of April 30, 2020 ▪ PFSI is currently able to borrow up to $600 million against Ginnie Mae MSRs and servicing advances from Credit Suisse; financing structure for servicing advances allows for expansion via addition of other lenders or issuance of term notes ‒ Ginnie Mae servicing advances can be financed at an average of 81% (1 ) Available liquidity is defined as cash on hand plus the amount that can be immediately borrowed with available collateral Borrower hardship Average months delinquent Peak servicing advances Moderate Case 4 months for delinquent loans before start of recovery $450 million (no P&I) in 4Q20 Stress Case 8 months for delinquent loans before start of recovery $1.7 billion (38% P&I, 62% other advances) in 2Q21 Assumptions for PFSI Servicing Portfolio • 25% in forbearance plans • Overall delinquency rate peaks at 20%

 

 

Appendix

 

 

▪ 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 PMT, which invests in mortgage - related assets: – GSE credit risk transfers – MSRs and ESS – Investments in prime non - Agency MBS and asset - backed securities ▪ 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 19 Overview of PennyMac Financial’s Businesses

 

 

PennyMac Financial Is a Strong Independent Mortgage Company 20 ▪ Comprehensive mortgage platform and balanced model with leading production and servicing businesses ▪ Strong balance sheet with low leverage versus competitors – Debt to equity of 2.7x ▪ Diversified liquidity sources and term debt that finances the largest long - term asset (MSRs) – Unique and cost effective funding structures with strong bank partnerships to support growth ▪ Well - developed and sophisticated risk management structure combines extensive market expertise with technology to identify and monitor risks across the enterprise ▪ PFSI’s strong balance sheet, low leverage, and disciplined approach to liquidity management have proven critically important in the current market environment Considerable oversight from State regulators, the CFPB, GSEs, ratings agencies and bank counterparties As of March 31, 2020 ($ in millions) Mortgage Servicing Rights $2,194 Servicing Advances $300 Cash & Short - term Investments, receivables, other $1,875 Loans eligible for repurchase $981 Loans Held for Sale $5,542 Stockholders' Equity $2,364 MSR Financing $1,345 ESS Financing $157 Other Liabilities & Payables $1,121 Liability for loans eligible for repurchase $981 Warehouse Financing $4,923 $10,891 $10,891 Assets Liabilities & Equity

 

 

▪ MSR financing structure to include servicer advances 21 PFSI Has Developed in a Sustainable Manner for Long - Term Growth ▪ Disciplined growth to address the demands of the GSEs, Agencies, regulators and our financing partners - Since inception, PennyMac has focused on building and testing processes and systems before adding significant transaction volumes ▪ Highly experienced management team has created a robust corporate governance system centered on compliance, risk management and quality control ▪ Operations launched; de novo build of legacy - free mortgage servicer ▪ Raised $500 million of capital in private opportunity funds ▪ PMT formed in an initial public offering raising $320 million ▪ Correspondent group established with a focus on operations development and process design ▪ Added servicing leadership for prime portfolio and to drive scalable growth ▪ Correspondent system launches ▪ Expanded infrastructure with flagship operations facility in Moorpark, CA ▪ Correspondent leadership team expands ▪ Expanded infrastructure in Tampa, FL ▪ Became largest non - bank correspondent aggregator ▪ PFSI completed initial public offering ▪ Expanded infrastructure in Fort Worth, TX ▪ Continued organic growth ▪ Servicing UPB reaches $100 billion ▪ Stockholders’ equity surpasses $1 billion ▪ Substantial growth in consumer direct capacity ▪ Issued MSR - backed term notes ▪ PFSI completes corporate reorganization ▪ Launched proprietary, cloud - based Servicing Systems Environment (SSE) Period End: Employees: 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 (1) 72 128 230 435 1,008 1,373 1,816 2,523 3,099 3,248 3,460 4,215 4,458 2020 (1) 2020 figure is as of March 31, 2020

 

 

22 Industry - leading platform built organically – not through acquisitions ▪ Disciplined, sustainable growth for more than 12 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 ▪ Nearly 4,500 employees ▪ Highly experienced management team – 132 senior - most executives have, on average, 24 years of relevant industry experience Strong governance and compliance culture ▪ Led by distinguished board which includes eight independent directors ▪ Robust management governance structure with 9 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

 

 

23 Why Are MSR Sales Occurring? How Do MSRs Come to Market? ▪ Large servicers may sell MSRs due to operational pressures, regulatory capital constraints for banks and a re - focus on core customers/businesses ▪ Independent mortgage banks sell MSRs from time to time due to a need for capital ▪ Opportunities may arise in the current market driven by dislocation and liquidity concerns ▪ 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

 

 

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 wholly - owned 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

 

 

25 MSR Asset Valuation Note: Figures may not sum exactly due to rounding (1) Represents weighted average (2) Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic disc oun t rates. The Company applies a pricing spread to the United States Dollar London Interbank Offered Rate (“LIBOR”)/swap curve for purposes of discounting cash flows relating to MSRs and ESS. Pool UPB $212,753 $18,731 $231,484 Coupon (1) 3.89% 4.19% 3.91% Servicing fee/spread (1) 0.35% 0.34% 0.35% Fair value $2,010.0 $183.7 $2,193.7 As a multiple of servicing fee 2.69 2.87 2.70 Pricing spread (1)(2) 10.7% 10.9% 10.7% Prepayment speed assumption (CPR) (1) 16.8% 11.9% 16.5% Equivalent life (in years) (1) 5.0 5.8 5.0 Annual per-loan cost of servicing (1) $107 $109 $108 Related excess servicing spread liability - $157.1 $157.1 Pool UPB $206,302 $19,485 $225,787 Coupon (1) 3.92% 4.19% 3.95% Servicing fee/spread (1) 0.35% 0.34% 0.35% Fair value $2,677.7 $249.1 $2,926.8 As a multiple of servicing fee 3.75 3.75 3.75 Pricing spread (1)(2) 8.4% 8.6% 8.5% Prepayment speed assumption (CPR) (1) 12.9% 10.9% 12.7% Equivalent life (in years) (1) 6.1 6.2 6.1 Annual per-loan cost of servicing (1) $96 $98 $97 Related excess servicing spread liability - $178.6 $178.6 March 31, 2020 Unaudited ($ in millions) December 31, 2019 ($ in millions) Total Subject to excess servicing spread liability Not subject to excess servicing spread liability Total Subject to excess servicing spread liability Not subject to excess servicing spread liability

 

 

26 Note: Figures may not sum exactly due to rounding (1 ) The UPB of historical period correspondent conventional conforming acquisitions has been reduced by $128 million, $308 million, $410 million, and $421 million, and the UPB of historical and current period correspondent government acquisitions has been reduced by $39 million, $88 million, $117 million , and $158 million in UPB for the quarterly periods 1Q19 through 4Q19, respectively as the UPB of loans previously classified as non - delegated in the correspondent channel is now reported in PFSI’s broker direct lending channel. As a result, the UPB of historical and current period broker direct originations has been increased by equal amounts as descr ibe d above for the quarterly periods 1Q19 through 4Q19. (2) Consists of prime jumbo and non - QM loans Acquisitions and Originations by Product First Lien Acquisitions/Originations Second Lien Originations Consumer Direct Fundings HELOC 1$ 1$ 1$ 2$ 1$ Unaudited ($ in millions) Correspondent Acquisitions (1) Conventional Conforming 8,130$ 10,737$ 16,644$ 20,510$ 16,153$ Government 6,752 10,574 14,346 16,653 13,616 Non-Agency (2) 5 4 3 - - Total 14,887$ 21,315$ 30,993$ 37,163$ 29,768$ Consumer Direct Originations Conventional Conforming 609$ 838$ 1,006$ 1,203$ 1,670$ Government 748 1,127 1,651 2,566 2,354 Jumbo - - - - - Total 1,357$ 1,965$ 2,657$ 3,768$ 4,024$ Broker Direct Originations (1) Conventional Conforming 249$ 597$ 842$ 940$ 1,163$ Government 114 240 359 481 403 Non-Agency (2) 7 7 4 - - Total 369$ 844$ 1,206$ 1,421$ 1,566$ Total acquisitions/originations 16,614$ 24,125$ 34,856$ 42,353$ 35,358$ UPB of loans fulfilled for PMT 8,136$ 10,741$ 16,647$ 20,510$ 16,153$ 1Q19 2Q19 4Q19 3Q19 1Q20

 

 

27 Interest Rate Locks by Product First Lien Locks Unaudited ($ in millions) Correspondent Locks (1) Conventional Conforming 8,974$ 12,628$ 19,461$ 19,736$ 19,109$ Government 7,385 12,028 15,933 16,225 14,871 Non-Agency (2) 13 14 1 - - Total 16,372$ 24,671$ 35,395$ 35,961$ 33,980$ Consumer Direct Locks Conventional Conforming 1,103$ 1,413$ 1,777$ 2,053$ 3,603$ Government 1,226 1,938 2,844 3,407 3,548 Jumbo 11 6 6 6 8 Total 2,340$ 3,357$ 4,627$ 5,466$ 7,159$ Broker Direct Locks (1) Conventional Conforming 449$ 927$ 1,253$ 1,147$ 2,163$ Government 220 394 606 566 610 Non-Agency (2) 13 25 2 - - Total 681$ 1,346$ 1,860$ 1,713$ 2,773$ Total locks 19,394$ 29,373$ 41,883$ 43,140$ 43,912$ 1Q19 2Q19 3Q19 4Q19 1Q20 Note: Figures may not sum exactly due to rounding (1 ) The UPB of historical and current period correspondent conventional conforming locks has been reduced by $261 million, $466 million, $635 million , and $485 million , and the UPB of historical and current period correspondent government locks has been reduced by $86 million, $145 million, $216 million, and $162 million for the quarterly periods 1Q19 through 4Q19, respectively as the UPB of loans previously classified as non - delegated in the correspondent lending channel is now reported in PFSI’s broker direct lending channel. As a result, the UPB of historical and current period broker direct locks has been increased by equal amounts as described ab ove for the quarterly periods 1Q19 through 4Q19. (2) Consists of prime jumbo and non - QM loans

 

 

28 Credit Characteristics by Acquisition / Origination Period Correspondent Consumer Direct Broker Direct 1Q19 2Q19 3Q19 4Q19 1Q20 1Q19 2Q19 3Q19 4Q19 1Q20 Government-insured 699 698 701 703 700 Government-insured 44 43 42 42 42 Conventional 750 755 760 762 763 Conventional 38 36 35 35 34 Weighted Average DTIWeighted Average FICO 1Q19 2Q19 3Q19 4Q19 1Q20 1Q19 2Q19 3Q19 4Q19 1Q20 Government-insured 699 703 709 711 710 Government-insured 44 43 42 42 42 Conventional 733 738 743 747 748 Conventional 37 37 36 35 35 Weighted Average DTIWeighted Average FICO 1Q19 2Q19 3Q19 4Q19 1Q20 1Q19 2Q19 3Q19 4Q19 1Q20 Government-insured 680 697 712 715 712 Government-insured 45 44 43 43 43 Conventional 742 752 759 758 761 Conventional 38 37 36 36 34 Weighted Average DTIWeighted Average FICO

 

 

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