PennyMac Financial Services, Inc. Reports Third Quarter 2014 Results

PennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income of $55.5 million for the third quarter of 2014, on revenue of $140.6 million. Net income attributable to PFSI common stockholders was $10.5 million, or $0.49 per diluted share.

Third Quarter 2014 Highlights

• Pretax income of $62.7 million, up 8 percent from the prior quarter
• Total net revenue of $140.6 million, up 8 percent from the prior quarter
  • Production revenue of $71.6 million, up 12 percent from the prior quarter
  • Servicing revenue of $55.7 million, up 4 percent from the prior quarter
  • Investment Management revenue of $13.3 million, up 4 percent from the prior quarter
• Total loan production activity of $8.6 billion in unpaid principal balance (UPB), up 16 percent from the prior quarter
• Servicing portfolio reached $100.1 billion in UPB, up 7 percent from June 30, 2014
• Net assets under management declined modestly to $2.02 billion, down from $2.14 billion at June 30, 2014

“PennyMac Financial enjoyed record earnings in the third quarter, driven by continued revenue growth in each of our businesses – loan production, loan servicing and investment management,” said Chairman and Chief Executive Officer Stanford L. Kurland. “We see strong growth momentum in our mortgage banking businesses, including consumer direct lending which is making notable and increasing contributions to our production revenue. Since our formation nearly seven years ago, we have worked to build a solid operational foundation and culture of strong compliance and governance, which are the essential building blocks for a specialist mortgage firm in today’s 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 $8.6 billion in UPB, of which $4.9 billion in UPB was for its own account, and $3.7 billion was fee-based fulfillment activity for PMT. Interest rate lock commitments (IRLCs) on correspondent government-insured and consumer direct loans totaled $5.6 billion in UPB.

Production segment pretax income totaled $39.1 million, an increase of 19 percent from the second quarter, driven by an increase in fulfillment fees received from PMT and net gains on mortgage loans held for sale, which benefitted from a 35 percent increase in consumer direct lock volumes.

The components of net gains 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 $15.5 million in the third quarter, compared to $12.4 million in the second quarter. The increase was driven by a higher volume of conventional conforming and jumbo correspondent acquisitions by PMT during the third quarter. The average fulfillment fee earned for the third quarter was 42 basis points.

Servicing Segment

Servicing includes income from owned mortgage servicing rights, in addition to subservicing and special servicing activities. Loan servicing pretax income totaled $17.4 million in the third quarter, a decrease of 13 percent from the prior quarter. Net loan servicing fees totaled $53.9 million for the quarter, a 5 percent quarter-over-quarter decrease, which included a $1.8 million decline in servicing fees due to lower activity fees in special servicing, a $3.0 million increase in amortization from a growing servicing portfolio, and a $2.2 million improvement in valuation changes for MSRs and hedges.

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

Servicing segment expenses increased to $38.3 million, a 13 percent increase from the second quarter, primarily driven by the growth in the servicing portfolio and an increase in loss reserves associated with servicing advances on Ginnie Mae loans.

The total servicing portfolio reached $100.1 billion in UPB, an increase of 7 percent from June 30, 2014. Of the total servicing portfolio at September 30, 2014, prime servicing was $95.9 billion in UPB and special servicing was $4.2 billion in UPB. The Company subservices and services under contract $38.0 billion in UPB, an increase of 7 percent from June 30, 2014, resulting from new correspondent acquisitions by PMT. PennyMac Financial’s MSR portfolio grew to $60.9 billion in UPB, an increase of 7 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 $1.6 billion in UPB.

The table below details PennyMac Financial’s servicing portfolio as of September 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 $2.02 billion as of September 30, 2014, a decrease of 6 percent from June 30, 2014. The decrease was primarily due to a reduction in the private investment funds resulting from the planned return of capital to their investors.

Pretax income for the Investment Management segment was $6.2 million, an increase of 16 percent from the second quarter. Management fees, which include base management fees and incentive fees from PMT and management fees from the Investment Funds, increased 3 percent from the prior quarter, primarily due to a $0.5 million increase in incentive fee revenue from PMT resulting from improved performance in recent periods. Carried interest income from the Investment Funds increased by $0.1 million.

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

Expenses

Expenses for the third quarter totaled $77.9 million, an 8 percent increase from the second quarter, primarily driven by the growing servicing portfolio, increase in loss reserves associated with servicing advances on Ginnie Mae loans, and headcount growth.

“The organic growth of PennyMac Financial is being achieved through the execution of our strategic initiatives through a constantly changing interest rate environment and is not dependent on large acquisitions for success,” concluded Mr. Kurland. “We have in place the core infrastructure, management, and systems to significantly grow all of our businesses, including loan servicing where our portfolio surpassed $100 billion this quarter. We believe that our platform is uniquely positioned for further growth in advancing 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.ir.pennymacfinancial.com beginning at 1:30 p.m. (Pacific Standard Time) on Wednesday, November 5, 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.ir.pennymacfinancial.com.

This press release contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding management’s beliefs, estimates, projections 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.