PennyMac Financial Services, Inc. Reports Fourth Quarter 2014 Results

PennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income of $45.9 million for the fourth quarter of 2014, on revenue of $141.7 million. Net income attributable to PFSI common stockholders was $8.8 million, or $0.41 per diluted share.

Fourth Quarter 2014 Highlights

• Pretax income of $53.2 million, down 15 percent from the prior quarter
• Total net revenue of $141.7 million, up 1 percent from the prior quarter
  • Production revenue of $72.4 million, up 1 percent from the prior quarter
  • Servicing revenue of $57.6 million, up 3 percent from the prior quarter
  • Investment Management revenue of $10.4 million, down 22 percent from the prior quarter
• Total loan production activity of $8.0 billion in unpaid principal balance (UPB), down 7 percent from the prior quarter
• Servicing portfolio reached $106.0 billion in UPB, up 6 percent from September 30, 2014
• Net assets under management remained $2.0 billion

Notable activity after quarter end:

• Entered into letters of intent to acquire approximately $21 billion in UPB of Agency mortgage servicing rights (MSRs) and expect to sell the excess servicing spread associated with these portfolios to PennyMac Mortgage Investment Trust (PMT)1

Full-Year 2014 Highlights

• Pretax income of $223.0 million, up 22 percent from the prior year
• Total net revenue of $518.3 million, up 34 percent from the prior year
• Mortgage Banking revenue of $467.9 million, up 41 percent from the prior year
• Investment Management revenue of $49.0 million, down 11 percent from the prior year
• Loan production totaled $29.1 billion, a decrease of 8 percent from the prior year, which included $1.9 billion of consumer direct production, an increase of 74 percent from the prior year

“PennyMac Financial continued to grow its core mortgage banking businesses during the fourth quarter with strong performance in consumer direct originations and loan servicing portfolio growth,” said Chairman and Chief Executive Officer Stanford L. Kurland. “The mortgage origination market is gaining momentum with the low interest rate environment, and the FHA’s recent reduction to its annual mortgage insurance premiums makes mortgage financing more affordable for many borrowers. Industry forecasts expect these factors to lead to an increase in refinance and home purchase activity, and we believe that PFSI is well positioned to capture these opportunities, evidenced by our growing consumer direct origination activities and the pending bulk acquisitions of $21 billion in UPB of Agency MSRs.”

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1 The MSR acquisitions by the Company and PMT’s purchase of excess servicing spread are subject to the negotiation and execution of definitive documentation, continuing due diligence and customary closing conditions, including required regulatory approvals. There can be no assurance that the committed amounts will ultimately be acquired or that the transactions will be completed at all.

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 PMT, and consumer direct lending.

PennyMac Financial’s loan production activity totaled $8.0 billion in UPB, of which $5.1 billion in UPB was for its own account, and $2.9 billion was fee-based fulfillment activity for PMT. Interest rate lock commitments (IRLCs) on correspondent government-insured and consumer direct loans totaled $5.9 billion in UPB.

Production segment pretax income totaled $37.8 million, a decrease of 3 percent from the third quarter, driven by a decrease in fulfillment fees received from PMT, partially offset by an increase in net gains on mortgage loans held for sale.

The components of net gains on mortgage loans held for sale 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 $11.9 million in the fourth quarter, compared to $15.5 million in the third quarter. The decrease was driven by a lower volume of conventional conforming and jumbo correspondent acquisitions by PMT during the fourth quarter. The average fulfillment fee earned for the fourth quarter was 41 basis points.

Production segment expenses increased to $34.6 million, a 6 percent increase from the third quarter, primarily driven by increased headcount to support higher volumes of consumer direct lending and correspondent aggregation activity.

Servicing Segment

Servicing includes income from owned MSRs, in addition to subservicing and special servicing activities. Loan servicing pretax income totaled $11.4 million in the fourth quarter, a decrease of 34 percent from the prior quarter. Net loan servicing fees totaled $62.3 million for the quarter, a 16 percent quarter-over-quarter increase, which included $69.9 million in servicing fees reduced by $21.7 million of amortization; $8.8 million of impairment and fair value losses offset, by a $4.3 million gain in fair value of the excess servicing spread financing; and $18.6 million of hedging gains.

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

Servicing segment expenses totaled $46.1 million, a 21 percent increase from the third quarter, primarily due to higher losses and loss provisions on claims to the government agencies on defaulted loans, including loans purchased out of Ginnie Mae pools.

The total servicing portfolio reached $106.0 billion in UPB at December 31, 2014, an increase of 6 percent from the prior quarter end. Of the total servicing portfolio, prime servicing was $101.7 billion in UPB and special servicing was $4.3 billion in UPB. The Company subservices and services under contract $39.7 billion in UPB, an increase of 6 percent from September 30, 2014, primarily resulting from new correspondent acquisitions by PMT. PennyMac Financial’s MSR portfolio grew to $64.7 billion in UPB, an increase of 6 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 $1.7 billion in UPB from mini-bulk and flow transactions.

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

Investment Management Segment

PennyMac Financial manages PMT and certain private investment funds, for which it earns base management fees and incentive compensation. Net assets under management were approximately $2.0 billion as of December 30, 2014, a decrease of 1 percent from September 30, 2014.

Pretax income for the Investment Management segment was $2.6 million, a decrease of 58 percent from the third quarter. Carried interest income from the Investment Funds declined by $1.6 million, driven by lower gains in their distressed loan investments during the quarter. Management fees, which include base management fees and incentive fees from PMT and management fees from the Investment Funds, decreased 12 percent from the prior quarter, primarily due to a $1.1 million decline in incentive fee revenue from PMT.

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

Expenses

Total expenses for the fourth quarter totaled $88.5 million, a 14 percent increase from the third quarter. Compensation expense increased 8 percent from the third quarter to $52.5 million, driven primarily by headcount growth in the consumer direct, correspondent production and servicing areas to support increased volumes of activity.

“The mortgage banking business is one that requires high levels of expertise and operational capabilities,” concluded Mr. Kurland. “Since our inception over seven years ago, we have invested in our operating platform and enterprise risk-management capabilities to ensure we have best-in-class compliance, governance and operational functionality. Our highly scalable and legacy-free operating platform has the ability to support future growth and deliver further economies of scale going forward.”

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, February 4, 2015.

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. 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 and purchased mortgage servicing rights; 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.