PennyMac Financial Services, Inc. Reports Second Quarter 2014 Results

PennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income of $51.4 million for the second quarter of 2014, on revenue of $130.4 million. Net income attributable to PFSI common stockholders was $9.6 million, or $0.45 per diluted share.

Second Quarter 2014 Highlights

• Pretax income of $58.0 million, up 18 percent from the prior quarter
• Total net revenue of $130.4 million, up 24 percent from the prior quarter
  • Production revenue of $63.9 million, up 21 percent from the prior quarter
  • Servicing revenue of $53.7 million, up 34 percent from the prior quarter
  • Investment Management revenue of $12.8 million, up 2 percent from the prior quarter
• Total loan production activity of $7.4 billion in unpaid principal balance (UPB), up 44 percent from the prior quarter
• Servicing portfolio reached $93.6 billion in UPB, up 12 percent from March 31, 2014
• Net assets under management increased modestly to $2.14 billion, up from $2.10 billion at March 31, 2014.

“PennyMac Financial had a strong second quarter with significant earnings contributions and revenue growth in each of our businesses – loan production, loan servicing, and investment management,” said Chairman and Chief Executive Officer Stanford L. Kurland. “We believe that our organically built platform, combined with a strong compliance and governance culture, distinguishes PennyMac among mortgage companies. This solid foundation has enabled our continued growth and ability to profitably capture the considerable opportunities in the residential mortgage market.”

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

Production Segment

Production includes the correspondent acquisition of newly originated mortgage loans for PennyMac Financial’s own account, fulfillment services on behalf of PennyMac Mortgage Investment Trust (PMT), and consumer-direct lending.

PennyMac Financial’s loan production activity totaled $7.4 billion in UPB, of which $4.4 billion in UPB was for its own account, and $3.0 billion was fee-based fulfillment activity for PMT. Interest rate lock commitments (IRLCs) on correspondent government-insured and consumer-direct loans totaled $5.2 billion in UPB.

Production segment pretax income totaled $32.8 million, an increase of 26 percent from the first quarter, driven by a 10 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 production business. These services include, but are not limited to: marketing, relationship management, the approval of correspondent sellers and the ongoing monitoring of their performance; 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 $12.4 million in the second quarter, compared to $8.9 million in the first quarter. The increase was primarily driven by a 56% increase in the volume of conventional conforming and jumbo correspondent acquisitions by PMT during the second quarter. The average fulfillment fee earned for the second quarter was 42 basis points.

Servicing Segment

Servicing includes income from owned servicing rights in addition to subservicing and special servicing activities. Loan servicing pretax income totaled $20.0 million in the second quarter, an increase of 17 percent from the prior quarter. Net loan servicing fees totaled $57.0 million for the quarter, a 30 percent quarter-over-quarter increase, which included a $12.5 million reduction in fair value of mortgage servicing rights (MSRs) carried at fair value and provisioning for impairment of MSRs carried at lower of amortized cost or fair value, which was more than offset by a $10.1 million reduction in the excess servicing spread financing liability, and $9.6 million in MSR-associated hedge gains.

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

Servicing segment expenses increased to $33.8 million, a 46 percent increase from the first quarter, primarily driven by the growth in the servicing portfolio and the initiation of an early buyout (EBO) program to purchase defaulted loans primarily out of legacy Ginnie Mae pools. Approximately $7 million in servicing expense during the second quarter was related to EBO transactions, which was mostly offset by an increase in the fair value of the MSR asset, as forecasted future costs are reduced by removal of loans from the MSR pool.

The total servicing portfolio reached $93.6 billion in UPB, an increase of 12 percent from March 31, 2014. Of the total servicing portfolio at June 30, 2014, prime servicing was $89.2 billion in UPB and special servicing was $4.4 billion in UPB. The Company subservices and services under contract $35.6 billion in UPB, an increase of 8 percent from March 31, 2014, driven by new correspondent acquisitions by PMT. PennyMac Financial’s MSR portfolio grew to $57.1 billion in UPB, an increase of 14 percent over the prior quarter, resulting from the acquisition of government-insured loans in correspondent production, consumer-direct lending activities, and the acquisition of MSR portfolios totaling $5.5 billion in UPB.

The table below details PennyMac Financial’s servicing portfolio as of June 30, 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 $2.14 billion as of June 30, 2014, an increase of 2 percent from March 31, 2014. The increase was primarily due to PMT’s increase in the book value of its shareholders’ equity.

Pretax income for the Investment Management segment was $5.3 million, a decrease of 11 percent from the first quarter. Management fees, which include base management fees and incentive fees from PMT and management fees from the Investment Funds, increased 9 percent from the prior quarter primarily due to a $0.5 million increase in incentive fee revenue from PMT as a result of improved performance. Carried interest income from the Investment Funds declined by $0.3 million.

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

Expenses

Expenses for the second quarter totaled $72.4 million, a 28 percent increase from the first quarter, primarily driven by the servicing expenses associated with the Ginnie Mae early buyout program and an increase in compensation expenses resulting from an increase in the accrual for incentive compensation and headcount growth.

“We see many opportunities across the residential mortgage market that PennyMac Financial is uniquely positioned to capture,” concluded Mr. Kurland. “Our servicing portfolio continues to grow organically through loan production supplemented by bulk and flow acquisitions of MSRs. We continue to enhance our capabilities in our consumer-direct business, which is a growing contributor to PennyMac Financial's revenues, and we continue to profitably grow our correspondent production business. We are well positioned to manage additional investment capital for mortgage-related assets. In sum, PennyMac Financial is well positioned to grow profitably and sustainably over the long term.”

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, August 6, 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 production 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.