PennyMac Financial Services, Inc. Reports First Quarter 2014 Results

PennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income of $43.5 million for the first quarter of 2014, on revenue of $105.5 million. Net income attributable to PFSI common stockholders was $8.0 million, or $0.38 per diluted share.

First Quarter 2014 Highlights

• Pretax income of $49.1 million, up 18 percent from the prior quarter
• Total net revenue of $105.5 million, up 17 percent from the prior quarter
  • Production revenue of $52.7 million, up 10 percent from the prior quarter
  • Servicing revenue of $40.2 million, up 43 percent from the prior quarter
  • Investment Management revenue of $12.5 million, down 13 percent from the prior quarter
• Total loan production activity of $5.1 billion in unpaid principal balance (UPB), down 14 percent from the prior quarter
• Servicing portfolio reached $83.8 billion in UPB, up 7 percent from December 31, 2013
• Net assets under management totaled $2.1 billion, up 4 percent from December 31, 2013

“PennyMac Financial had a strong quarter with increases in revenue and net income, reflecting how the company’s operating platform and business model are well positioned for a more normalized mortgage market,” said Chairman and Chief Executive Officer Stanford L. Kurland. “We gained market share in correspondent lending, retail lending and loan servicing, and investment management assets continued to grow. Our ability to profitably grow market share results from the solid foundation we have built in each of our businesses and the disciplined execution of our strategic initiatives.”

We have enhanced the reporting of our mortgage banking activities by dividing them into two segments: Production and Servicing.

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

Production Segment

Loan production includes correspondent lending for PennyMac Financial’s own account, fulfillment services on behalf of PennyMac Mortgage Investment Trust (PMT), and retail lending.

PennyMac Financial’s loan production activity totaled $5.1 billion in UPB, of which $3.2 billion in UPB was for its own account, and $1.9 billion was fee-based fulfillment activity for PMT. Interest rate lock commitments (IRLCs) on correspondent government and retail loans totaled $3.9 billion in UPB.

Production segment pretax income totaled $26.0 million, an increase of 14 percent from the fourth quarter, driven by a 17 percent increase in net gains on mortgage loans held for sale from the prior quarter. The components of net gain on mortgage loans held for sale revenue are detailed in the following table:

PennyMac Financial performs fulfillment services for conventional conforming and jumbo loans acquired by PMT in its correspondent lending business. These services include, but are not limited to: marketing, relationship management, the approval of correspondent sellers and the ongoing monitoring of their performance; reviews of loan data, documentation and appraisals to assess loan quality and risk; and pricing, hedging, and activities related to the subsequent sale and securitization of loans in the secondary mortgage markets for PMT. Fees earned from fulfillment of correspondent loans on behalf of PMT totaled $8.9 million in the first quarter, compared to $11.1 million in the fourth quarter. The decline was primarily driven by a decrease in the volume of conventional and jumbo correspondent acquisitions by PMT during the first quarter. The average fulfillment fee earned for the first quarter was 46 basis points.

Servicing Segment

Loan servicing includes income from owned servicing rights in addition to subservicing and special servicing activities. Loan servicing pretax income totaled $17.1 million in the first quarter, an increase of 94 percent from the prior quarter. Net loan servicing fees totaled $43.8 million for the quarter, a 43 percent quarter-over-quarter increase, which included a $3.4 million reduction in fair value of mortgage servicing rights (MSRs) carried at fair value and a $0.4 million provision for impairment of MSRs carried at lower of amortized cost or fair value, both driven by expectations for higher prepayment speeds as a result of lower interest rates at quarter end. The MSR valuation adjustments were partially offset by a $4.8 million decrease in the fair value of the excess servicing spread financing liability.

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

Servicing segment expenses increased to $23.1 million as the servicing portfolio continued to grow.

The total servicing portfolio reached $83.8 billion in UPB, an increase of 7 percent from December 31, 2013. Of the total servicing portfolio at March 31, 2014, prime servicing was $78.1 billion in UPB and special servicing was $5.8 billion in UPB. The Company subservices and services under contract $33.1 billion in UPB, an increase of 4 percent from December 31, 2013, driven by new correspondent acquisitions and distressed whole loan investments by PMT. PennyMac Financial’s MSR portfolio grew to $50.1 billion in UPB, an increase of 9 percent over the prior quarter, resulting from the acquisition of government-insured loans in correspondent lending, retail lending activities, and the acquisition of MSR portfolios totaling $2.4 billion in UPB.

The table below details PennyMac Financial’s servicing portfolio as of March 31, 2014:

Investment Management Segment

PennyMac Financial manages PMT and certain investment funds, for which it earns base management fees and incentive compensation. Net assets under management were approximately $2.1 billion as of March 31, 2014, an increase of 4 percent from December 31, 2013. The increase was primarily due to new equity raised by PMT during the quarter to support its continued growth.

Pretax income for the Investment Management segment was $6.0 million, a decline of 41 percent from the fourth quarter. Management fees, which include base management fees and incentive fees from PMT and management fees from the Investment Funds, declined 8 percent from the prior quarter primarily due to a $0.8 million decline in incentive fee revenue from PMT. Carried interest income from the Investment Funds declined by $0.9 million, driven by lower gains in their distressed loan investments during the quarter.

Expenses

Expenses for the first quarter totaled $56.4 million, a 16 percent increase from the fourth quarter, driven by higher compensation and servicing expenses. Compensation expenses in the first quarter rose to $42.9 million, a 24 percent quarter-over-quarter increase resulting from higher incentive compensation accruals. Incentive compensation accruals are based on PennyMac Financial’s performance against established targets and are evaluated quarterly. Servicing expenses totaled $3.1 million, up from $2.0 million in the fourth quarter, reflecting the full impact of the bulk MSR portfolio acquisitions completed during the fourth quarter in addition to servicing portfolio growth during the first quarter.

“As demonstrated by our performance in the first quarter and the strategic initiatives we are pursuing, we see many opportunities for PennyMac Financial to grow and outperform, even in a smaller mortgage origination market,” concluded Mr. Kurland. “While we have been successful in growing our mortgage servicing portfolio and platform, our servicing portfolio today represents less than one percent of all residential mortgages outstanding in the U.S. We have significant opportunities across our businesses of correspondent aggregation, consumer-direct lending, loan servicing, and investment management. Our company is uniquely positioned with the expertise and industry-leading capabilities required to continue growing in a responsible and sustainable manner. We believe that PennyMac Financial is well on the way toward achieving our objective of being the premier mortgage specialist firm in the U.S.”

Management’s slide presentation will be available in the Investor Relations section of the Company’s website at www.PennyMacFinancial.com beginning at 1:30 p.m. (Pacific Daylight Time) on Wednesday, May 7, 2014. We encourage investors to submit questions via email to InvestorRelations@pnmac.com; if any questions are submitted, we will post responses via a document on our website.

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. residential mortgage loans and the management of investments related to the U.S. residential mortgage market. PennyMac Financial Services, Inc. trades on the New York Stock Exchange under the symbol "PFSI." Additional information about PennyMac Financial Services, Inc. is available at www.PennyMacFinancial.com.

This press release contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding management’s beliefs, estimates, projections and assumptions with respect to, among other things, the Company’s financial results, future operations, business plans and investment strategies, as well as industry and market conditions, all of which are subject to change. Words like “believe,” “expect,” “anticipate,” “promise,” “plan,” and other expressions or words of similar meanings, as well as future or conditional verbs such as “will,” “would,” “should,” “could,” or “may” are generally intended to identify forward-looking statements. Actual results and operations for any future period may vary materially from those projected herein and from past results discussed herein. Factors which could cause actual results to differ materially from historical results or those anticipated include, but are not limited to: changes in federal, state and local laws and regulations applicable to the highly regulated industry in which we operate; lawsuits or governmental actions if we do not comply with the laws and regulations applicable to our businesses; the creation of the Consumer Financial Protection Bureau, or CFPB, and enforcement of its rules; changes in existing U.S. government-sponsored entities, 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 our 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. residential real estate market conditions; difficulties in growing loan production volume; changes in prevailing interest rates; increases in loan delinquencies and defaults; our reliance on PennyMac Mortgage Investment Trust as a significant source of financing for, and revenue related to, our correspondent lending business; availability of required additional capital and liquidity to support business growth; our obligation to indemnify third-party purchasers or repurchase loans that we originate, acquire or assist in with fulfillment; our obligation to indemnify advised entities or investment funds to meet certain criteria or characteristics or under other circumstances; decreases in the historical returns on the assets that we select and manage for our clients, and our resulting management and incentive fees; regulation applicable to our investment management segment; conflicts of interest in allocating our services and investment opportunities among ourselves and our advised entities; the potential damage to our reputation and adverse impact to our business resulting from ongoing negative publicity; and our rapid growth. 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.