PennyMac Financial Services, Inc. Reports Fourth Quarter and Full-Year 2020 Results and Increases Quarterly Dividend

WESTLAKE VILLAGE, Calif.–(BUSINESS WIRE)–Feb 4, 2021–

PennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income of $452.8 million for the fourth quarter of 2020, or $5.97 per share on a diluted basis, on revenue of $1.0 billion. Book value per share increased to $47.80 from $41.67 at September 30, 2020.

PFSI’s Board of Directors declared a fourth quarter cash dividend of $0.20 per share, a 33 percent increase from the prior quarter, payable on February 25, 2021, to common stockholders of record as of February 12, 2021.

PFSI’s Board of Directors also approved an increase to its stock repurchase authorization from $500 million to $1.0 billion of outstanding common stock.

Fourth Quarter 2020 Highlights

• Pretax income was $617.2 million, down 15 percent from the prior quarter and up 204 percent from the fourth quarter of 2019
  • Strong earnings driven by core production and servicing results partially offset by fair value losses on mortgage servicing rights (MSRs) and associated hedging and other losses
  • Repurchased approximately 1.6 million shares of PFSI’s common stock for an approximate cost of $89.3 million
• Production segment pretax income was $572.6 million, down 7 percent from the prior quarter and up 182 percent from the fourth quarter of 2019, driven by strong performance across all channels
  • Direct lending interest rate lock commitments (IRLCs) were a record $18.6 billion in unpaid principal balance (UPB), up 13 percent from the prior quarter and 158 percent from the fourth quarter of 2019
    – $12.8 billion in UPB of IRLCs in the consumer direct channel; $5.7 billion in UPB of IRLCs in the broker direct channel
  • Government correspondent IRLCs totaled $19.7 billion in UPB, down 2 percent from the prior quarter and up 22 percent from the fourth quarter of 2019
  • Total loan acquisitions and originations were a record $69.4 billion in UPB, up 28 percent from the prior quarter and 64 percent from the fourth quarter of 2019
  • Correspondent acquisitions of conventional loans fulfilled for PennyMac Mortgage Investment Trust (NYSE: PMT) were $38.0 billion in UPB, up 39 percent from the prior quarter and 85 percent from the fourth quarter of 2019
• Servicing segment pretax income was $42.0 million, down from pretax income of $111.7 million in the prior quarter and up from a pretax loss of $5.1 million in the fourth quarter of 2019
  • Pretax income excluding valuation-related items was $234.3 million, up 230 percent from the prior quarter and 499 percent from the fourth quarter of 2019, driven by continued loss mitigation activities related to COVID-19
  • Valuation items included:
    – $44.2 million in MSR fair value losses driven by faster-than-expected prepayment speeds and $102.5 million in hedging and other losses; net impact on pretax income related to these items was $(146.6) million and on earnings per share was $(1.42)
    – A $45.6 million provision for credit losses on active loans related to COVID-19
  • Servicing portfolio grew to $426.8 billion in UPB, up 6 percent from September 30, 2020 and 16 percent from December 31, 2019, driven by record production volumes offsetting elevated prepayment activity
• Investment Management segment pretax income was $2.6 million, down from $3.3 million in the prior quarter and $5.2 million in the fourth quarter of 2019
  • Net assets under management (AUM) were $2.3 billion, up 1 percent from September 30, 2020

Notable activity after quarter-end:

• Repurchased an additional approximately 1.1 million shares of PFSI’s common stock for an approximate cost of $66 million through February 3, 2021

Full-Year 2020 Highlights

• Pretax income of $2.2 billion, up 323 percent from the prior year and the highest level on record for PennyMac Financial
  • Diluted earnings per share of $20.92, up from $4.89 in 2019 and also a record
• Total net revenue of $3.7 billion, up 151 percent from the prior year
• Repurchased approximately 8.9 million shares of PFSI’s common stock, or approximately 11 percent of the total outstanding at the beginning of the year, for an approximate cost of $337 million
• Record loan production of $196.6 billion in UPB, an increase of 67 percent from the prior year
  • $36 billion in UPB of originations in the direct lending channels, up 163 percent from 2019
• Servicing portfolio UPB of $426.8 billion at year end, up 16 percent from December 31, 2019

“PennyMac Financial delivered another strong quarter,” said President and CEO David Spector, “with book value per share increasing 15% on record production levels. PFSI’s third quarter momentum carried into the fourth quarter with net income near record levels and producing a return on equity of 56% for the quarter. Our direct lending channels showed incredible growth with consumer direct and broker direct originations growing 27% and 29%, respectively. Our modest market share in both of these channels provides ample room for growth and with foundational investments made in technology and back office fulfillment, we are well positioned to scale those businesses. As we grow our origination business we are organically increasing our servicing portfolio, which ended the year at over $426 billion in unpaid principal balance. This portfolio growth contributed to strong servicing income and, when excluding valuation-related items, resulted in record pretax income for the fourth quarter. All of this while helping thousands of borrowers who were affected by COVID-19 exit successfully from their forbearance plans.”

Mr. Spector continued, “The outstanding fourth quarter was the culmination of a remarkable year for PennyMac Financial. Funding nearly $200 billion in unpaid principal balance and ending the year with a servicing portfolio of nearly 2 million customers, 2020 was certainly a record year for PFSI. We also successfully protected our asset values as our disciplined hedging and risk management strategy largely offset the $1 billion write-down on the fair value of the MSR. Additionally, we granted approximately 291 thousand homeowners forbearance plans in 2020 and have helped, or are in the process of helping, approximately 145 thousand borrowers successfully emerge from their forbearance plans. This was all done while the vast majority of our employees were working from home for most of the year. I am incredibly thankful and proud of the over 6,000 PennyMac employees who managed through the challenges of the pandemic to deliver extraordinary results. We believe we are well positioned to continue our success and expect the Company’s exceptional financial performance to persist through 2021.”

Mr. Spector concluded, “All of us at PennyMac are grateful for the many kind thoughts and tributes we have received since announcing the sad passing of Stan Kurland, our founder and Chairman. While Stan had retired from day-to-day responsibilities at PennyMac, he remained a trusted advisor and dear friend. His leadership helped lay the foundation for PennyMac’s long-term success which included building and developing a deep management team that carries on his legacy.”

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

Production Segment

The Production segment 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 $69.4 billion in UPB, $31.4 billion of which was for its own account, and $38.0 billion of which was fee-based fulfillment activity for PMT. Correspondent government and direct lending IRLCs totaled $38.3 billion in UPB, up 5 percent from the prior quarter and 64 percent from the fourth quarter of 2019.

Production segment pretax income was $572.6 million, down 7 percent from the prior quarter and up 182 percent from the fourth quarter of 2019. Production revenue totaled $824.9 million, down 2 percent from the prior quarter and up 134 percent from the fourth quarter of 2019. The quarter-over-quarter decrease was primarily driven by a $40.9 million decrease in net gains on loans held for sale. The decrease was driven by lower production margins and was offset by a $17.9 million increase in loan origination fees and a $17.8 million increase in fulfillment fees, driven by record volumes across all channels.

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

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 $72.6 million in the fourth quarter, up 32 percent from the prior quarter and up 25 percent from the fourth quarter of 2019. The quarter-over-quarter increase in fulfillment fee revenue was driven primarily by a 39 percent increase in acquisition volumes by PMT slightly offset by a decrease in the weighted average fulfillment fee rate to 19 basis points from 20 basis points in the prior quarter.

Net interest expense totaled $1.3 million, down from net interest income of $7.7 million in the prior quarter and net interest income of $2.9 million in the fourth quarter of 2019.

Production segment expenses were $252.3 million, up 12 percent from the prior quarter and 68 percent from the fourth quarter of 2019, as a result of record volumes across all channels.

Servicing Segment

The Servicing segment includes income from owned MSRs, subservicing and special servicing activities. Servicing segment pretax income was $42.0 million, versus pretax income of $111.7 million in the prior quarter and a pretax loss of $5.1 million in the fourth quarter of 2019. Servicing segment net revenues totaled $207.6 million, down 23 percent from the prior quarter and up 65 percent from the fourth quarter of 2019. The quarter-over-quarter decrease was driven by lower net loan servicing fees.

Revenue from net loan servicing fees totaled $26.5 million, down from $132.8 million in the prior quarter, as a result of higher net valuation related losses. Revenue from net loan servicing fees included $262.7 million in servicing fees, reduced by $89.6 million from the realization of MSR cash flows. Net valuation-related losses totaled $146.6 million, and included MSR fair value losses of $44.2 million, and hedging and other losses of $102.5 million.

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

Servicing segment revenue included $199.1 million in net gains on loans held for sale related to reperforming government-insured and guaranteed loans, up significantly from $154.4 million in the prior quarter and $29.7 million in the fourth quarter of 2019, as a result of increased loss mitigation activity on loans emerging from forbearance. These previously delinquent loans were purchased out of Ginnie Mae securitizations and brought back to performing status through PennyMac Financial’s successful servicing efforts, primarily through loan modifications or FHA Partial Claims. With respect to the FHA Partial Claims, the reperforming loans must remain current for a minimum of six months to be eligible for resecuritization. Net interest expense totaled $18.2 million, versus net interest expense of $17.9 million in the prior quarter and net interest income of $8.0 million in the fourth quarter of 2019. Interest income was $44.4 million, up from $26.9 million in the prior quarter, driven by the increase in interest received on loans bought out in prior periods. Interest expense was $62.6 million, up from $44.9 million in the prior quarter driven by the financing of increased balances of loans purchased out of Ginnie Mae securitizations.

Servicing segment expenses totaled $165.6 million, up 4 percent from the prior quarter driven by portfolio growth.

The total servicing portfolio grew to $426.8 billion in UPB at December 31, 2020, an increase of 6 percent from September 30, 2020 and 16 percent from December 31, 2019. PennyMac Financial subservices and conducts special servicing for $174.4 billion in UPB, an increase of 11 percent from September 30, 2020 and 29 percent from December 31, 2019. PennyMac Financial’s owned MSR portfolio grew to $252.3 billion in UPB, an increase of 3 percent from September 30, 2020 and 8 percent from December 31, 2019.

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