PennyMac Financial Services, Inc. Reports Fourth Quarter 2015 Results

PennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income of $68.9 million for the fourth quarter of 2015, on revenue of $187.2 million. Net income attributable to PFSI common stockholders was $12.8 million or $0.58 per diluted share.

Fourth Quarter 2015 Highlights

• Pretax income of $77.2 million, up 4 percent from the prior quarter and the highest level on record for PennyMac Financial
• Total net revenue of $188.9 million, essentially unchanged from the prior quarter
  • Production revenue of $104.5 million, down 23 percent from the prior quarter
  • Servicing revenue of $78.2 million, up 70 percent from the prior quarter
  • Investment Management revenue of $6.2 million, down 21 percent from the prior quarter
• Total loan production activity of $11.1 billion in unpaid principal balance (UPB), down
  28 percent from the prior quarter
• Servicing portfolio reached $160.3 billion in UPB, up 4 percent from September 30, 2015
• Net assets under management were approximately $1.7 billion, down 1 percent from the prior quarter

Full-Year 2015 Highlights

• Pretax income of $279.2 million, up 25 percent from the prior year
• Total net revenue of $713.1 million, up 38 percent from the prior year
• Loan production totaled $48.4 billion in UPB, an increase of 67 percent from the prior year, which included $4.1 billion in UPB of consumer direct production, an increase of 113 percent from the prior year
• Servicing portfolio reached $160.3 billion in UPB, up 51 percent from December 31, 2014, driven by the organic additions from loan production and $32.8 billion in UPB of mortgage servicing rights (MSR) acquisitions

“PennyMac Financial concluded another record year with solid financial and operational performance in the fourth quarter, which reflected balanced earnings contributions from the production and servicing segments,” said Chairman and Chief Executive Officer Stanford L. Kurland. “Our mortgage production volumes remained strong despite a seasonally smaller mortgage market and higher interest rates during the quarter. Our servicing segment delivered record pretax income, driven primarily by growth in core servicing profitability and MSR valuation gains that were largely offset by hedging activities. Our consistently strong financial performance reflects our dedicated approach to interest rate risk management across the production pipeline and the MSR asset.”

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 (NYSE: PMT), and consumer direct lending.

PennyMac Financial’s loan production totaled $11.1 billion in UPB, of which $7.6 billion in UPB was for its own account, and $3.5 billion was fee-based fulfillment activity for PMT. Interest rate lock commitments (IRLCs) on correspondent government-insured and consumer direct loans totaled $8.8 billion in UPB.

Production segment pretax income was $50.3 million, a decrease of 35 percent from the third quarter. Production revenue totaled $104.5 million, a decrease of 23 percent from the third quarter, primarily resulting from a 19 percent quarter-over-quarter decrease in net gains on mortgage loans held for sale. The decrease in preduction revenue was driven by a reduction in government-insured correspondent lock volumes from the elevated levels in the third quarter and reduced margins in the consumer direct lending channel during the fourth quarter. The lower volumes were primarily the result of higher mortgage rates and a seasonally smaller mortgage origination market.

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; review of loan data, documentation and appraisals to assess loan quality and risk; 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 fourth quarter, compared to $17.6 million in the third quarter. The decrease was driven by a 15 percent reduction in conventional loan acquisitions from the third quarter and a decline in the average fulfillment fee rate to 37 basis points, compared to 43 basis points in the third quarter, primarily resulting from contractual discretionary reductions in the fulfillment fee in order to facilitate PMT's successful acquisition of certain loan transactions.

Production segment expenses were $54.2 million, a 6 percent decrease from the third quarter, primarily driven by the decrease in loan production volumes.

Servicing Segment

Servicing includes income from owned MSRs, in addition to subservicing and special servicing activities. The Servicing segment posted pretax income of $27.9 million in the fourth quarter, versus a pretax loss of $6.1 million in the third quarter. Servicing segment revenues in the fourth quarter totaled $78.2 million, a 70 percent increase from the third quarter, primarily resulting from a 34 percent increase in net loan servicing fees.

Net loan servicing fees totaled $77.0 million for the quarter and included $112.7 million in servicing fees reduced by $47.4 million of amortization and realization of MSR cash flows. Net loan servicing fees also included $45.5 million of fair value gains and impairment reversal related to MSRs, partially offset by a $6.9 million loss from the change in fair value of the excess servicing spread (ESS) financing and $27.0 million of related hedging losses.

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

Servicing segment revenue also included $12.8 million in net gains on mortgage loans held for sale at fair value in the fourth quarter resulting from the securitization of reperforming government-insured loans, versus $1.6 million in the third quarter. These loans were previously purchased out of Ginnie Mae securitizations and brought back to performing status through PennyMac Financial’s successful servicing efforts, primarily with the use of loan modifications.

Servicing segment expenses totaled $50.3 million, a $1.9 million decrease from the third quarter, largely due to a decline in credit and advance losses partially offset by a modest increase in direct operating expenses driven by the larger portfolio.

The total servicing portfolio reached $160.3 billion in UPB at December 31, 2015, an increase of 4 percent from the prior quarter end. Of the total servicing portfolio, prime servicing was $156.4 billion in UPB and special servicing was $3.8 billion in UPB. The Company subservices and services under contract $47.8 billion in UPB, an increase of 6 percent from September 30, 2015, primarily due to new correspondent acquisitions by PMT. PennyMac Financial’s MSR portfolio grew to $110.6 billion in UPB, an increase of 3 percent over the prior quarter, primarily resulting from the acquisition of government-insured loans in correspondent production and from consumer direct lending activities.

The table below details PennyMac Financial’s servicing portfolio UPB:

Investment Management Segment

PennyMac Financial manages PMT and certain private investment funds, for which it may earn base management fees and incentive compensation. Net assets under management were approximately $1.7 billion as of December 31, 2015, down 1 percent from September 30, 2015.

Pretax income for the Investment Management segment was $0.7 million, a decrease of $1.5 million from the third quarter of 2015. Management fees, which include base management fees from PMT and the private investment funds and any earned incentive fees from PMT, decreased 2 percent from the prior quarter. Carried interest from the private investment funds decreased by $1.8 million from the prior quarter resulting from the reduced performance of the funds during the quarter.

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

Investment Management segment expenses totaled $5.5 million, a 2 percent decrease from the third quarter.

Consolidated Expenses

Total expenses for the fourth quarter were $110.0 million, a 5 percent decrease from the third quarter. The decline in total expenses was largely due to a $2.6 million decrease in compensation expense from the third quarter to refine performance and incentive-based compensation accruals to actual headcount and payment rate.

Mr. Kurland concluded, “PennyMac Financial’s consistently strong financial performance and outperformance relative to the mortgage industry reflects the significant investments we have made in our operational infrastructure, dedicated approach to risk management, and governance culture. We are building the PennyMac platform for continued growth in mortgage lending and for long-term success. We believe our operational infrastructure is highly scalable and well positioned to respond to market opportunities, including the most recent decline in mortgage rates that could drive higher refinance demand.”

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 3, 2016.

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.

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