PennyMac Financial Services, Inc. Reports Fourth Quarter 2015 Results

MOORPARK, Calif.--()--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.

“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”

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:

 
Quarter ended December 31, 2015
Mortgage Banking    

 

 
Production   Servicing Total

Investment
Management

Total
(in thousands)
Revenue

Net gains on mortgage loans held for sale at fair value

$ 65,893 $ 12,843 $ 78,736 $ - $ 78,736
Loan origination fees 20,969 - 20,969 - 20,969
Fulfillment fees from PMT 12,855 - 12,855 - 12,855
Net servicing fees - 76,969 76,969 - 76,969
Management fees - - - 6,329 6,329
Carried Interest from Investment Funds - - - (270 ) (270 )
Net interest income (expense):
Interest income 9,197 2,788 11,985 - 11,985
Interest expense   4,841   14,635     19,476     -     19,476  
4,356 (11,847 ) (7,491 ) - (7,491 )
Other   438   247     685     91     776  
Total net revenue 104,511 78,212 182,723 6,150 188,873
Expenses   54,219   50,287     104,506     5,494     110,000  
Income before provision for income taxes and

non-segment activities

50,292 27,925 78,217 656 78,873
Non-segment activities (1)   -   -     -     -     (1,640 )
Income before provision for income taxes $ 50,292 $ 27,925   $ 78,217   $ 656   $ 77,233  
 
(1) Consists primarily of the expense associated with an increase 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 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:

 
Quarter ended
December 31,

2015

  September 30,

2015

  December 31,

2014

(in thousands)
MSR value $ 112,196 $ 153,338 $ 59,511

Mortgage servicing rights recapture payable to PennyMac Mortgage Investment Trust

(1,993 ) (3,098 ) (1,270 )
Provision for representations and warranties (1,978 ) (2,292 ) (1,652 )
Cash investment (1) (7,885 ) (85,426 ) (20,099 )

Fair value changes of pipeline, inventory and hedges

  (21,604 )   20,124     8,159  
Net gains on mortgage loans held for sale $ 78,736   $ 82,646   $ 44,649  
 

Net gains on mortgage loans held for sale by segment:

Production $ 65,893   $ 81,005  
Servicing $ 12,843   $ 1,641  
 
(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; 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:

     
Quarter ended
December 31,

2015

September 30,

2015

December 31,

2014

(in thousands)
Servicing fees (1) $ 112,699 $ 106,052 $ 69,901
Effect of MSRs:
Amortization and realization of cash flows (47,403 ) (41,594 ) (21,690 )

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

45,513 (47,926 ) (8,755 )
Change in fair value of excess servicing spread

financing

(6,864 ) 10,271 4,271
Hedging (losses) gains   (26,976 )   30,455     18,551  

Total amortization, impairment and change in fair value of MSRs

  (35,730 )   (48,794 )   (7,623 )
Net loan servicing fees $ 76,969   $ 57,258   $ 62,278  
 
(1) Includes contractually-specified 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:

     
December 31,

2015

September 30,

2015

December 31,

2014

(in thousands)
Loans serviced at period end:
Prime servicing:
Owned
Mortgage servicing rights
Originated $ 59,880,349 $ 54,259,297 $ 36,564,434
Acquisitions   50,722,355   52,717,209   28,126,179
110,602,704 106,976,506 64,690,613
Mortgage servicing liabilities 806,897 957,113 478,581
Mortgage loans held for sale   1,052,485   1,602,692   1,100,910
112,462,086 109,536,311 66,270,104
Subserviced for Advised Entities   43,963,378   41,303,357   35,416,466
Total prime servicing   156,425,464   150,839,668   101,686,570
Special servicing:
Subserviced for Advised Entities   3,847,254   3,990,744   4,293,479
Total special servicing   3,847,254   3,990,744   4,293,479
Total loans serviced $ 160,272,718 $ 154,830,412 $ 105,980,049
 
Mortgage loans serviced:
Owned
Mortgage servicing rights $ 110,602,704 $ 106,976,506 $ 64,690,613
Mortgage servicing liabilities 806,897 957,113 478,581
Mortgage loans held for sale   1,052,485   1,602,692   1,100,910
112,462,086 109,536,311 66,270,104
Subserviced   47,810,632   45,294,101   39,709,945
Total mortgage loans serviced $ 160,272,718 $ 154,830,412 $ 105,980,049
 

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:

     
Quarter ended
December 31,

2015

September 30,

2015

December 31,

2014

(in thousands)
Management fees:
PennyMac Mortgage Investment Trust
Base $ 5,670 $ 5,742 $ 5,938
Performance incentive   -     -   2,488
5,670 5,742 8,426
Investment Funds   659     714   1,596
Total management fees 6,329 6,456 10,022
Carried Interest   (270 )   1,483   263
Total management fees and Carried Interest $ 6,059   $ 7,939 $ 10,285
 
Net assets of Advised Entities:
PennyMac Mortgage Investment Trust $ 1,496,112 $ 1,514,430 $ 1,578,172
Investment Funds   231,744     238,349   424,182
$ 1,727,856   $ 1,752,779 $ 2,002,354
 

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.

     

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 
December 31,

2015

September 30,

2015

December 31,

2014

(in thousands, except share data)
ASSETS
Cash $ 105,472 $ 47,415 $ 76,256
Short-term investments at fair value 46,319 24,766 21,687
Mortgage loans held for sale at fair value 1,101,204 1,696,980 1,147,884
Derivative assets 50,280 53,569 38,457
Servicing advances, net 299,354 252,172 228,630
Carried Interest due from Investment Funds 69,926 70,196 67,298
Investment in PennyMac Mortgage Investment Trust at fair value 1,145 1,160 1,582
Mortgage servicing rights 1,411,935 1,307,392 730,828
Furniture, fixtures, equipment and building improvements, net 16,311 14,107 11,339
Note receivable from PennyMac Mortgage Investment Trust secured 150,000 150,000 -
Receivable from Investment Funds 1,316 1,542 2,291
Receivable from PennyMac Mortgage Investment Trust 18,965 17,220 23,871
Capitalized software, net 3,025 2,035 567
Deferred tax asset 18,378 25,878 46,038
Loans eligible for repurchase 166,070 97,455 72,539
Other   45,594   53,435   37,419
Total assets $ 3,505,294 $ 3,815,322 $ 2,506,686
 
LIABILITIES
Assets sold under agreements to repurchase $ 1,166,731 $ 1,286,411 $ 822,252
Mortgage loan participation and sale agreement 234,872 247,410 143,568
Note payable 61,136 406,990 146,855
Obligations under capital lease 13,579 - -
Excess servicing spread financing at fair value 412,425 418,573 191,166
Derivative liabilities 9,083 4,632 6,513
Mortgage servicing liabilities at fair value 1,399 10,724 6,306
Accounts payable and accrued expenses 89,914 85,530 62,715
Payable to Investment Funds 30,429 30,211 35,908
Payable to PennyMac Mortgage Investment Trust 162,379 147,326 123,315
Payable to exchanged Private National Mortgage Acceptance Company, LLC

unitholders under tax receivable agreement

74,315 72,275 75,024
Liability for loans eligible for repurchase 166,070 97,455 72,539
Liability for losses under representations and warranties   20,612   18,478   13,259
Total liabilities   2,442,944   2,826,015   1,699,420
 
STOCKHOLDERS' EQUITY
Class A common stock---authorized 200,000,000 shares of $0.0001 par value;

issued and outstanding, 21,990,831, 21,842,868 and 21,577,686 shares,

respectively

2 2 2
Class B common stock---authorized 1,000 shares of $0.0001 par value;

issued and outstanding, 51, 51 and 54 shares, respectively

- - -
Additional paid-in capital 172,354 169,297 162,720
Retained earnings   98,470   85,699   51,242
Total stockholders' equity attributable to PennyMac Financial Services, Inc.

common stockholders

  270,826   254,998   213,964

Noncontrolling interests in Private National Mortgage Acceptance Company, LLC

  791,524   734,309   593,302
Total stockholders' equity   1,062,350   989,307   807,266
Total liabilities and stockholders’ equity $ 3,505,294 $ 3,815,322 $ 2,506,686
 

 

   

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 
Quarter ended
December 31,

2015

  September 30,

2015

December 31,

2014

(in thousands, except per share data)
Revenue
Net gains on mortgage loans held for sale at fair value $ 78,736 $ 82,646 $ 44,649
Loan origination fees 20,969 29,448 12,528
Fulfillment fees from PennyMac Mortgage Investment Trust 12,855 17,553 11,887
Net servicing fees:
Loan servicing fees
From non-affiliates 90,081 83,424 48,944
From PennyMac Mortgage Investment Trust 11,880 11,736 11,426
From Investment Funds 720 796 (329 )
Ancillary and other fees   10,018     10,096     9,860  
112,699 106,052 69,901

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

  (35,730 )   (48,794 )   (7,623 )
Net servicing fees   76,969     57,258     62,278  
Management fees:
From PennyMac Mortgage Investment Trust 5,670 5,742 8,426
From Investment Funds   659     714     1,596  
  6,329     6,456     10,022  
Carried Interest from Investment Funds (270 ) 1,483 263
Net interest expense:
Interest income 11,985 15,053 8,434
Interest expense   19,415     20,944     10,426  
(7,430 ) (5,891 ) (1,992 )

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

65 (158 ) (26 )
Other   (984 )   410     2,116  
Total net revenue   187,239     189,205     141,725  
Expenses
Compensation 71,566 74,129 52,475
Servicing 12,979 16,770 19,732
Technology 7,059 6,676 4,525
Professional services 4,763 3,803 2,958
Loan origination 4,583 4,314 3,602
Other   9,056     9,590     5,200  
Total expenses   110,006     115,282     88,492  
Income before provision for income taxes 77,233 73,923 53,233
Provision for income taxes   8,327     8,575     7,337  
Net income 68,906 65,348 45,896
Less: Net income attributable to noncontrolling interest   56,135     52,668     37,133  
Net income attributable to PennyMac Financial Services, Inc.

common stockholders

$ 12,771   $ 12,680   $ 8,763  
 
Earnings per share
Basic $ 0.58 $ 0.58 $ 0.41
Diluted $ 0.58 $ 0.58 $ 0.41
Weighted-average common shares outstanding
Basic 21,912 21,810 21,549
Diluted 76,132 76,138 76,004
 
     

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 
Year ended December 31,
2015   2014   2013  
(in thousands, except per share data)
Revenue
Net gains on mortgage loans held for sale at fair value $ 320,715

$

167,024

$

138,013

Loan origination fees 91,520 41,576 23,575
Fulfillment fees from PennyMac Mortgage Investment Trust 58,607 48,719 79,712
Net loan servicing fees:
Loan servicing fees
From non-affiliates

290,474

173,005

61,523
From PennyMac Mortgage Investment Trust 46,423 52,522 39,413
From Investment Funds 2,636 6,425 7,099
Ancillary and other fees   43,139     26,469     11,426  

382,672

258,421

119,461

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

 

(153,129

)

 

(41,502

)

 

(29,451

)

Net loan servicing fees  

229,543

   

216,919

    90,010  
Management fees:
From PennyMac Mortgage Investment Trust 24,194 35,035 32,410
From Investment Funds   4,043     7,473     7,920  
  28,237     42,508     40,330  
Carried Interest from Investment Funds 2,628 6,156 13,419
Net interest expense:
Interest income 49,155 27,771 15,632
Interest expense   68,537     37,257     16,673  
Net interest expense

 

(19,383

)

 

(9,486

)

  (1,041 )

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

(230 ) (6 ) 41
Other   1,472     4,867     2,500  
Total net revenue   713,110    

518,277

   

386,559

 
Expenses
Compensation

274,256

190,707

148,576

Servicing 68,085 48,430 7,028
Technology 25,164 15,439 9,205
Professional services 15,473 11,108 10,571
Loan origination 17,396 9,554 9,943
Other   33,543     20,006     19,110  
Total expenses   433,917    

295,244

   

204,433

 
Income before provision for income taxes 279,193

223,033

182,126

Provision for income taxes   31,635     26,722     9,961  
Net income

247,558

196,311

172,165

Less: Net income attributable to noncontrolling interest  

200,330

   

159,469

   

157,765

 
Net income attributable to PennyMac Financial Services, Inc. common stockholders $ 47,228   $ 36,842   $ 14,400  
 
Earnings per share
Basic $ 2.17 $ 1.73 $ 0.83
Diluted $ 2.17

$

1.73

$

0.82
Weighted-average common shares outstanding
Basic 21,755 21,250 17,311
Diluted 76,104 75,955 75,892

Contacts

PennyMac Financial Services, Inc.
Christopher Oltmann
(818) 264-4907

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