PennyMac Financial Services, Inc. Reports First Quarter 2015 Results

PennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income of $47.1 million for the first quarter of 2015, on revenue of $140.3 million. Net income attributable to PFSI common stockholders was $9.0 million, or $0.42 per diluted share.

First Quarter 2015 Highlights

• Pretax income of $53.2 million, unchanged from the prior quarter
• Total net revenue of $140.3 million, down 1 percent from the prior quarter
  • Production revenue of $110.8 million, up 53 percent from the prior quarter
  • Servicing revenue of $19.5 million, down 66 percent from the prior quarter
  • Investment Management revenue of $10.0 million, down 4 percent from the prior quarter
• Total loan production activity of $8.9 billion in unpaid principal balance (UPB), up 12 percent from the prior quarter
• Servicing portfolio reached $115.2 billion in UPB, up 9 percent from December 31, 2014
• Net assets under management remained $2.0 billion

Notable activity after quarter end:

• Completed the previously announced acquisition of $15 billion in UPB of Agency Mortgage Servicing Rights (MSR) with associated excess servicing spread (ESS) sold to PennyMac Mortgage Investment Trust (PMT)
• Entered into a letter of intent to acquire approximately $9 billion in UPB of Ginnie Mae MSRs; expect to close and transfer the portfolio and sell the associated ESS to PMT in early 3Q151
• Amended PennyMac Financial’s Ginnie Mae MSR financing facility to allow the financing of related ESS by PMT to facilitate continued co-investment by PMT in Ginnie Mae MSR acquisitions

“PennyMac Financial delivered strong earnings in the first quarter, driven by higher volumes and revenue from our loan production business,” said Chairman and Chief Executive Officer Stanford L. Kurland. “The opportunity in mortgage production is substantial, driven by continued low mortgage rates, the FHA's reduction of its mortgage insurance premium, and limited origination capacity in the market. While this opportunity also results in higher prepayment activity, which negatively impacted our loan servicing segment during this quarter, we believe that PennyMac Financial is well positioned for continued success in this vibrant market.”

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1 The MSR acquisition 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 $8.9 billion in UPB, of which $6.0 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 $7.8 billion in UPB.

Production segment pretax income totaled $70.7 million, an increase of 87 percent from the fourth quarter due to higher mortgage production volume driven by a decline in mortgage interest rates and the FHA’s reduction in its annual mortgage insurance premium (MIP).

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 $12.9 million in the first quarter, compared to $11.9 million in the fourth quarter. The increase was driven by a higher average fulfillment fee rate during the first quarter of 45 basis points compared to 41 basis points in the fourth quarter.

Production segment expenses increased to $40.1 million, a 16 percent increase from the fourth quarter, primarily driven by increased headcount to support higher volumes of consumer direct lending.

Servicing Segment

Servicing includes income from owned MSRs, in addition to subservicing and special servicing activities. Loan servicing pretax loss totaled ($18.5) million in the first quarter, versus a pretax income of $11.4 million in the fourth quarter. Net loan servicing fees totaled $26.8 million for the quarter, a 57 percent quarter-over-quarter decrease, which included $72.9 million in servicing fees reduced by $24.1 million of amortization and $46.7 million of impairment and fair value losses related to MSRs, offset by a $7.5 million benefit from the change in fair value of the ESS financing and $17.1 million of hedging gains. Lower mortgage rates and the FHA’s unanticipated MIP reduction drove higher actual and projected prepayments, adversely impacting the value of our MSR asset.

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

Servicing segment expenses totaled $38.1 million, an 18 percent decrease from the fourth quarter, primarily driven by a decrease in loss provisions on claims to the government agencies related to defaulted loans and fewer buyouts of delinquent Ginnie Mae loans.

The total servicing portfolio reached $115.2 billion in UPB at March 31, 2015, an increase of 9 percent from the prior quarter end. Of the total servicing portfolio, prime servicing was $110.8 billion in UPB and special servicing was $4.4 billion in UPB. The Company subservices and services under contract $41.5 billion in UPB, an increase of 5 percent from December 31, 2014, primarily due to new correspondent acquisitions by PMT. PennyMac Financial’s MSR portfolio grew to $72.0 billion in UPB, an increase of 11 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 $6.4 billion in UPB.

The table below details PennyMac Financial’s servicing portfolio UPB as of March 31, 2015:

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 March 31, 2015, a decrease of 2 percent from December 31, 2014.

Pretax income for the Investment Management segment was $1.1 million, a decrease of 58 percent from the fourth quarter of 2014. Management fees, which include base management fees and incentive fees from PMT and management fees from the Investment Funds, decreased 15 percent from the prior quarter, primarily due to a $1.2 million decline in incentive fee revenue from PMT.

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

Investment Management segment expenses totaled $8.9 million, a 15 percent increase from the fourth quarter driven by higher overhead allocations.

Expenses

Total expenses for the first quarter totaled $87.1 million, a 2 percent decrease from the fourth quarter. Compensation expense increased $5.7 million from the fourth quarter to $58.1 million, driven primarily by headcount growth in consumer direct and servicing to support increased volumes of activity, offset by a $10.0 million reduction in servicing expenses due to reduced loss provisions on claims to the government agencies on defaulted loans and fewer buyouts of delinquent Ginnie Mae loans.

Mr. Kurland concluded, “The opportunities available to PennyMac Financial are substantial, both in today’s vibrant market and in the mortgage markets over time. We are capturing increasing economies of scale with higher volumes in loan production and the significant growth of our loan servicing portfolio. We have made significant progress putting in place several key initiatives for PMT, our primary managed entity. We continue to invest in our operations, systems, and management for sustainable success across our businesses. Together, we believe that these initiatives will drive continued growth in revenue and earnings for our shareholders.”

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 Daylight Time) on Wednesday, May 6, 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.