PennyMac Financial Services, Inc. Reports Fourth Quarter 2014 Results

MOORPARK, Calif.--()--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.

“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.”

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.”

_________________________________

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:

 
      Quarter ended December 31, 2014
Mortgage banking            

Investment

     
Production       Servicing Total Management Total
(in thousands)
Revenue

Net gains on mortgage loans held for sale at fair value

$ 44,811 $ (162 ) $ 44,649 $ - $ 44,649
Loan origination fees 12,528 - 12,528 - 12,528
Fulfillment fees from PMT 11,887 - 11,887 - 11,887
Net servicing fees - 62,278 62,278 - 62,278
Management fees - - - 10,022 10,022
Carried Interest from Investment Funds - - - 263 263
Net interest income (expense):
Interest income 6,311 2,123 8,434 - 8,434
Interest expense   3,491   6,935     10,426     -   10,426  
2,820 (4,812 ) (1,992 ) - (1,992 )
Other   386   261     647     65   712  
Total net revenue   72,432   57,565     129,997     10,350   140,347  
Expenses   34,607   46,143     80,750     7,742   88,492  

Income before provision for income taxes and non-segment activities

37,825 11,422 49,247 2,608 51,855
Non-segment activities (1)   1,378  
Income before provision for income taxes $ 37,825 $ 11,422   $ 49,247   $ 2,608 $ 53,233  
 
 

(1) Consists primarily of an adjustment to the Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement.

 

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:

 
      Quarter ended
December 31,       September 30,       December 31,
2014 2014 2013
(in thousands)
MSR value $ 59,511 $ 61,200 $ 50,753

Mortgage servicing rights recapture payable to PennyMac Mortgage Investment Trust

(1,270 ) (2,143 ) (123 )
Provision for representations and warranties (1,652 ) (1,584 ) (909 )
Cash investment (1) (20,099 ) (8,472 ) (31,686 )

Fair value changes of pipeline, inventory and hedges

  8,159     (868 )   11,418  

Net gains on mortgage loans held for sale

$ 44,649   $ 48,133   $ 29,453  
 
(1) Net of cash hedge expense.
 

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:

 
      Quarter ended
December 31,       September 30,       December 31,
2014 2014 2013
(in thousands)
Servicing fees (1) $ 69,901 $ 64,708 $ 43,588
Effect of MSRs:
Amortization and realization of cash flows (21,690 ) (19,703 ) (9,025 )

Change in fair value and (provision for) reversal of impairment of MSRs carried at lower of amortized cost or fair value

(8,755 ) 261 (1,669 )
Change in fair value of excess servicing spread

financing

4,271 9,539 (2,394 )
Hedging (losses) gains   18,551     (897 )   -  

Total amortization, impairment and change in fair value of MSRs

  (7,623 )   (10,800 )   (13,088 )
Net loan servicing fees $ 62,278   $ 53,908   $ 30,500  
 
(1) Includes contractually-specified 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:

 
      December 31,       September 30,       December 31,
2014 2014 2013
(in thousands)
Loans serviced at period end:
Prime servicing:
Owned
Mortgage servicing rights
Originated $ 36,564,434 $ 33,297,161 $ 22,499,847
Acquisitions   28,126,179   27,568,250   22,469,179
64,690,613 60,865,411 44,969,026
Mortgage servicing liabilities 478,581 391,588 -
Mortgage loans held for sale   1,100,910   1,217,599   506,540
66,270,104 62,474,598 45,475,566
Subserviced for Advised Entities   35,416,466   33,456,895   26,788,479
Total prime servicing   101,686,570   95,931,493   72,264,045
Special servicing:
Subserviced for Advised Entities 4,293,479 4,152,284 4,844,239
Subserviced for non-affiliates   -   -   89,361
4,293,479 4,152,284 4,933,600
Owned mortgage servicing rights—Acquisitions   -   -   969,794
Total special servicing   4,293,479   4,152,284   5,903,394
Total loans serviced $ 105,980,049 $ 100,083,777 $ 78,167,439
 
Mortgage loans serviced:
Owned
Mortgage servicing rights $ 64,690,613 $ 60,865,411 $ 45,938,820
Mortgage servicing liabilities 478,581 391,588 -
Mortgage loans held for sale   1,100,910   1,217,599   506,540
66,270,104 62,474,598 46,445,360
Subserviced   39,709,945   37,609,179   31,722,079
Total mortgage loans serviced $ 105,980,049 $ 100,083,777 $ 78,167,439
 

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:

 
      Quarter ended
December 31,       September 30,       December 31,
2014 2014 2013
(in thousands)
Management fees:
PennyMac Mortgage Investment Trust
Base $ 5,938 $ 6,033 $ 5,601
Performance incentive   2,488   3,590   3,323
8,426 9,623 8,924
Investment Funds   1,596   1,756   2,031
Total management fees   10,022   11,379   10,955
Carried Interest   263   1,902   3,008
Total management fees and Carried Interest $ 10,285 $ 13,281 $ 13,963
 
Net assets of Advised Entities:
PennyMac Mortgage Investment Trust $ 1,578,172 $ 1,588,041 $ 1,467,114
Investment Funds   424,182   428,040   557,956
$ 2,002,354 $ 2,016,081 $ 2,025,070
 

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.

 
PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
 
      December 31,       September 30,       December 31,
2014 2014 2013
(in thousands, except share data)
ASSETS
Cash $ 76,256 $ 77,251 $ 30,639
Short-term investments at fair value 21,687 36,335 142,582
Mortgage loans held for sale at fair value 1,147,884 1,259,991 531,004
Servicing advances, net 228,630 195,246 154,328
Derivative assets 38,457 28,400 21,540
Carried Interest due from Investment Funds 67,298 67,035 61,142
Investment in PennyMac Mortgage Investment Trust at fair value 1,582 1,607 1,722
Mortgage servicing rights 730,828 677,413 483,664
Receivable from Investment Funds 2,291 2,702 2,915
Receivable from PennyMac Mortgage Investment Trust 23,871 21,420 18,636
Furniture, fixtures, equipment and building improvements, net 11,339 11,574 9,837
Capitalized software, net 567 580 764
Deferred tax asset 46,038 52,820 63,117
Loans eligible for repurchase 72,539 58,145 46,663
Other   37,858   48,108   15,922
Total assets $ 2,507,125 $ 2,538,627 $ 1,584,475
 
LIABILITIES
Mortgage loans sold under agreements to repurchase $ 822,621 $ 929,747 $ 471,592
Mortgage loan participation and sale agreement 143,638 142,383 -
Note payable 146,855 154,948 52,154
Excess servicing spread financing at fair value 191,166 187,368 138,723
Derivative liabilities 6,513 4,440 2,462
Mortgage servicing liabilities at fair value 6,306 4,091 -
Accounts payable and accrued expenses 62,715 62,712 46,387
Payable to Investment Funds 35,908 35,874 36,937
Payable to PennyMac Mortgage Investment Trust 123,315 104,783 81,174

Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement

75,024 75,925 71,056
Liability for loans eligible for repurchase 72,539 58,145 46,663
Liability for losses under representations and warranties   13,259   11,762   8,123
Total liabilities   1,699,859   1,772,178   955,271
 
STOCKHOLDERS' EQUITY

Class A common stock---authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 21,577,686, 21,525,644 and 20,812,777 shares, respectively

2 2 2

Class B common stock---authorized 1,000 shares of $0.0001 par value; issued and outstanding, 54, 58 and 61 shares, respectively

- - -
Additional paid-in capital 162,720 161,309 153,000
Retained earnings   51,242   42,479   14,400

Total stockholders’ equity attributable to PennyMac Financial Services, Inc. common stockholders

  213,964   203,790   167,402

Noncontrolling interests in Private National Mortgage Acceptance Company, LLC

  593,302   562,659   461,802

Total stockholders’ equity

  807,266   766,449   629,204

Total liabilities and stockholders’ equity

$ 2,507,125 $ 2,538,627 $ 1,584,475
 
 
PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
 
      Quarter ended

December 31,

      September 30,       December 31,
2014 2014 2013
(in thousands, except per share data)
Revenue
Net gains (losses) on mortgage loans held for sale at fair value $ 44,649 $ 48,133 $ 29,453
Loan origination fees 12,528 11,823 5,315

Fulfillment fees from PennyMac Mortgage Investment Trust

11,887 15,497 11,087
Net servicing fees:
Loan servicing fees
From non-affiliates 48,944 44,647 26,126
From PennyMac Mortgage Investment Trust 11,426 12,325 12,162
From Investment Funds (329 ) 1,116 1,574
Ancillary and other fees   9,860     6,620     3,726  
69,901 64,708 43,588

Amortization, impairment and change in estimated fair value of mortgage servicing rights

  (7,623 )   (10,800 )   (13,088 )
Net servicing fees   62,278     53,908     30,500  
Management fees:
From PennyMac Mortgage Investment Trust 8,426 9,623 8,924
From Investment Funds   1,596     1,756     2,031  
  10,022     11,379     10,955  
Carried Interest from Investment Funds 263 1,902 3,008
Net interest expense:
Interest income 8,434 8,975 4,322
Interest expense   10,426     11,713     4,987  
(1,992 ) (2,738 ) (665 )

Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust

(26 ) 8 109
Other   2,116     713     658  
Total net revenue   141,725     140,625     90,420  
Expenses
Compensation 52,475 48,375 34,726
Servicing 19,732 13,914 1,956
Technology 4,525 4,350 3,002
Professional services 2,958 3,290 2,670
Loan origination 3,602 2,537 2,118
Other   5,200     5,467     4,261  
Total expenses   88,492     77,933     48,733  
Income before provision for income taxes 53,233 62,692 41,687
Provision for income taxes   7,337     7,232     4,430  
Net income 45,896 55,460 37,257

Less: Net income attributable to noncontrolling interest

  37,133     44,971     30,847  

Net income attributable to PennyMac Financial Services, Inc. common stockholders

$ 8,763   $ 10,489   $ 6,410  
 
Earnings per share
Basic $ 0.41 $ 0.49 $ 0.33
Diluted $ 0.41 $ 0.49 $ 0.32
Weighted-average common shares outstanding
Basic 21,549 21,432 19,324
Diluted 76,004 75,949 75,922
 
 
PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
 
      Year ended December 31,
2014       2013       2012
(in thousands, except per share data)
Revenue
Net gains on mortgage loans held for sale at fair value $ 167,024 138,013 118,170
Loan origination fees 41,576 23,575 9,634
Fulfillment fees from PennyMac Mortgage Investment Trust 48,719 79,712 62,906
Net loan servicing fees:
Loan servicing fees
From non-affiliates 173,005 61,523 20,673
From PennyMac Mortgage Investment Trust 52,522 39,413 18,608
From Investment Funds 6,425 7,099 10,831
Ancillary and other fees   26,469     11,426     2,245  
258,421 119,461 52,357

Amortization, impairment and change in fair value of mortgage servicing rights

  (41,502 )   (29,451 )   (12,252 )
Net loan servicing fees   216,919     90,010     40,105  
Management fees:
From PennyMac Mortgage Investment Trust 35,035 32,410 12,436
From Investment Funds   7,473     7,920     9,363  
  42,508     40,330     21,799  
Carried Interest from Investment Funds 6,156 13,419 10,473
Net interest (expense) income:
Interest income 27,771 15,632 6,354
Interest expense   37,257     16,673     7,879  
Net interest (expense) income   (9,486 )   (1,041 )   (1,525 )

Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust

(6 ) 41 817
Other   4,867     2,500     2,707  
Total net revenue   518,277     386,559     265,086  
Expenses
Compensation 190,707 148,576 124,014
Servicing 48,430 7,028 3,642
Technology 15,439 9,205 4,455
Professional services 11,108 10,571 5,568
Loan origination 9,554 9,943 2,953
Other   20,006     19,110     6,131  
Total expenses   295,244     204,433     146,763  
Income before provision for income taxes 223,033 182,126 118,323
Provision for income taxes   26,722     9,961     -  
Net income 196,311 172,165 $ 118,323  
Less: Net income attributable to noncontrolling interest   159,469     157,765  

Net income attributable to PennyMac Financial Services, Inc. common stockholders

$ 36,842   $ 14,400  
 
Earnings per share
Basic $ 1.73 $ 0.83
Diluted $ 1.73 0.82
Weighted-average common shares outstanding
Basic 21,250 17,311
Diluted 75,955 75,892
 

Contacts

PennyMac Financial Services, Inc.
Investors and Media
Christopher Oltmann, 818-264-4907

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