News Column

PennyMac Financial Services, Inc. Reports Fourth Quarter 2013 Results

February 5, 2014

MOORPARK, Calif. --(BUSINESS WIRE)-- PennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income of $37.3 million for the fourth quarter of 2013, on revenue of $90.4 million . Net income attributable to PFSI common stockholders was $6.4 million , or $0.32 per diluted share. Fourth Quarter 2013 Highlights Total net revenue of $90.4 million , up 4 percent from the prior quarter Mortgage Banking revenue of $75.7 million , up 4 percent from the prior quarter Investment Management revenue of $14.7 million , up 3 percent from the prior quarter Total loan production activity of $6.0 billion in unpaid principal balance (UPB), down 25 percent from the prior quarter Servicing portfolio reached $78.2 billion in UPB, up 48 percent from September 30, 2013 Net assets under management totaled $2.0 billion , down 1 percent from September 30, 2013 Successfully closed and transferred two previously announced bulk mortgage servicing rights (MSR) portfolio acquisitions totaling $20.1 billion in UPB, with co-investment by PennyMac Mortgage Investment Trust (NYSE: PMT) in the excess servicing spread Full-Year 2013 Highlights Pretax income of $182.1 million , up 54 percent from the prior year Total net revenue of $386.6 million , up 46 percent from the prior year Mortgage Banking revenue of $330.2 million , up 44 percent from the prior year Investment Management revenue of $56.3 million , up 57 percent from the prior year Loan production totaled $31.7 billion , an increase of 44 percent from the prior year, which includes over $1 billion in originations in PFSI’s retail lending business. “PennyMac Financial ended a successful year with a solid quarter despite continuing headwinds in the mortgage origination market,” said Chairman and Chief Executive Officer Stanford L. Kurland . “We successfully completed and transferred two bulk MSR acquisitions, helping to grow our servicing portfolio by 48 percent and presenting attractive opportunities for our retail lending business. Loan production volumes were lower, driven by a decline in the U.S. origination market. Nevertheless, our mortgage banking revenues increased quarter-over-quarter and we remained focused on expense management, leading to a 19 percent increase in net income for the quarter.” The following table presents the contribution of PFSI’s Mortgage Banking and Investment Management segments to pretax income: Quarter ended December 31, 2013 Unaudited ($ in thousands) Mortgage banking Investment management Total Revenue: Net gains on mortgage loans held for sale at fair value $ 29,453 $ - $ 29,453 Loan origination fees 5,315 - 5,315 Fulfillment fees from PMT 11,087 - 11,087 Net servicing fees 30,500 - 30,500 Management fees - 10,955 10,955 Carried Interest from Investment Funds - 3,008 3,008 Net interest (expense) income: Interest income 4,314 8 4,322 Interest expense (4,987 ) - (4,987 ) (673 ) 8 (665 ) Other - 767 767 75,682 14,738 90,420 Expenses: Compensation 33,136 1,575 34,711 Loan origination 2,118 - 2,118 Other 11,508 396 11,904 46,762 1,971 48,733 Pretax income $ 28,920 $ 12,767 $ 41,687 Segment assets at period end $ 1,481,790 $ 56,022 $ 1,537,812 Mortgage Banking Segment PFSI’s Mortgage Banking segment consists of loan production, which includes retail lending and correspondent lending both for its own account and on behalf of PMT for which it provides fulfillment services, and loan servicing, which includes owned servicing rights and subservicing activities. Mortgage Banking revenues were $75.7 million , an increase of 4 percent from the third quarter, driven by an increase in net servicing income. During the quarter, PFSI’s loan production activity totaled $6.0 billion in UPB, of which $2.4 billion was fee-based fulfillment activity for PMT. Loan Production During the fourth quarter, PFSI originated and managed the acquisition of $3.6 billion in UPB of loans for its own account, and interest rate lock commitments (IRLCs) totaled $3.9 billion , compared to $4.3 billion and $4.1 billion , respectively, in the third quarter. PFSI generated $29.5 million in net gains on mortgage loans held for sale in the fourth quarter, a 14 percent increase from the third quarter. The net gain on mortgage loans held for sale is detailed in the following table: Quarter ended December 31 , 2013 September 30 , 2013 December 31 , 2012 ($ in thousands) MSR Value $ 50,630 $ 60,051 $ 39,466 Provision for representations and warranties (909 ) (1,069 ) (1,199 ) Cash investment (1) (31,686 ) (4,936 ) (1,664 ) Fair value changes of pipeline, inventory and hedges 11,418 (28,097 ) 13,080 Net gain on mortgage loans held for sale $ 29,453 $ 25,949 $ 49,683 (1) Cash receipt at sale, net of cash hedge expense. PFSI performs fulfillment services for conventional conforming and jumbo loans acquired by PMT in its correspondent lending business. These services include, but are not limited to, reviews of loan data, documentation and appraisals to assess loan quality and risk; the approval of correspondent sellers and monitoring of their ongoing performance; and 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 $11.1 million in the fourth quarter, compared to $18.3 million in the third quarter, primarily driven by a decrease in the volume of correspondent acquisitions by PMT in the fourth quarter. The average fulfillment fee for the fourth quarter was 46 basis points. Loan Servicing Net loan servicing fees for the quarter ended December 31, 2013 totaled $30.5 million , an increase of 43 percent from the third quarter. This included $1.1 million in provision for impairment of MSRs carried at lower of amortized cost or fair value and a $0.6 million reduction in fair value of MSRs carried at fair value primarily related to changes in the projected performance of government-insured and guaranteed loans, partially offset by a reduction in prepayment speed expectations during the quarter. The following table presents a breakdown of the net servicing fees: Quarter ended December 31 , 2013 September 30 , 2013 December 31 , 2012 ($ in thousands) Servicing fees (1) $ 43,588 $ 29,562 $ 17,987 Effect of MSRs: Amortization (6,538 ) (5,367 ) (2,076 ) Provision for impairment of MSRs carried at lower of amortized cost or fair value (1,094 ) (1,192 ) (1,124 ) Change in fair value of MSRs carried at fair value: Due to changes in valuation inputs or assumptions used in valuation model (574 ) (635 ) (332 ) Due to realization of cash flows (2,488 ) (940 ) (1,068 ) (3,062 ) (1,575 ) (1,400 ) Change in fair value of excess servicing spread financing liability (2,394 ) (29 ) - Net gains on hedging derivatives - - 1,372 Net loan servicing fees $ 30,500 $ 21,399 $ 14,759 (1) Includes contractually-specified servicing fees. In addition, the payment of excess servicing spread to PMT for the quarter amounted to $1.1 million and is included in interest expense. The total servicing portfolio reached $78.2 billion in UPB, an increase of 48 percent from September 30, 2013 , primarily as a result of the completion of the two bulk portfolio acquisitions during the quarter totaling $20.1 billion in UPB. Of the total servicing portfolio at December 31, 2013 , prime servicing was $72.3 billion in UPB and special servicing was $5.9 billion in UPB. The Company subservices and services under contract $31.7 billion in UPB, an increase of 7 percent from September 30, 2013 , due to correspondent acquisitions and distressed whole loan acquisitions by PMT. PFSI’s MSR portfolio grew to $45.9 billion in UPB, an increase of 102 percent over the prior quarter, resulting from the purchase of the bulk MSR portfolios, the acquisition of government-insured loans via PMT’s correspondent business, and PFSI’s retail lending activities. The table below details PFSI’s servicing portfolio as of December 31, 2013 : December 31 , 2013 September 30 , 2013 December 31 , 2012 (in thousands) Loans serviced at period end: Prime servicing: Subserviced for Advised Entities $ 26,788,479 $ 24,540,141 $ 12,993,046 Owned MSRs—Originations 22,499,847 20,024,781 8,919,765 Owned MSRs—Acquisitions 22,469,179 1,700,612 990,461 Mortgage loans held for sale 506,540 490,088 417,742 Total prime servicing 72,264,045 46,755,622 23,321,014 Special servicing: Subserviced for Advised Entities 4,844,239 5,015,113 3,559,893 Subserviced for non-affiliates 89,361 50,379 - Owned MSRs—Acquisitions 969,794 1,051,220 1,271,642 Total special servicing 5,903,394 6,116,712 4,831,535 Total loans serviced $ 78,167,439 $ 52,872,334 $ 28,152,549 Investment Management Segment PFSI earns management fees and incentive compensation from its advised entities, which had combined net assets of approximately $2.0 billion as of December 31, 2013 , a decrease of 1 percent from the third quarter. The modest decrease was primarily driven by a reduction in PMT shareholders’ equity due to a shift in the timing of PMT’s regular dividend implemented during the quarter. Total revenue for the Investment Management segment was $14.7 million , up 3 percent from the third quarter. Base management fees, incentive fees, and carried interest rose 5 percent quarter-over-quarter largely due to higher management fees from PMT. Pretax income for the segment was up 4 percent for the quarter. Expenses Expenses for the fourth quarter of 2013 totaled $48.7 million , a decrease of 7 percent from the third quarter, driven by lower compensation and other expenses. Compensation expenses fell to $34.7 million , a 3 percent decline from the third quarter, partly as a result of headcount reductions in the third and fourth quarters. The other expenses line item declined to $3.4 million from the third quarter in part due to lower marketing expenses. “2013 was a transformational year for PFSI that included many important accomplishments: year-over-year servicing portfolio growth of 178 percent, loan production growth of 44 percent, and total revenue growth of 46 percent,” concluded Mr. Kurland . “The opportunities for a non-bank lender and servicer in the U.S. mortgage markets remain substantial. PennyMac Financial remains focused on growing volumes in correspondent and retail lending, driving servicing growth through organic production and additional MSR acquisitions, and increasing the profitability of our businesses. We believe that PennyMac Financial is uniquely positioned with the expertise across mortgage production, servicing and investment management in addition to the operational capabilities required to successfully and sustainably manage this growth over the long term.” Management’s slide presentation will be available in the Investor Relations section of the Company’s website at www.PennyMacFinancial.com beginning at 1:30 p.m. (Pacific Standard Time) on Wednesday, February 5, 2014 . We encourage investors to submit questions via email to InvestorRelations@pnmac.com ; if any questions are submitted, we will post responses via a document on our website. 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. residential mortgage loans and the management of investments related to the U.S. residential 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.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 lending business; 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 (In thousands, except share data) December 31 , 2013 September 30 , 2013 December 31 , 2012 (in thousands, except share data) ASSETS Cash $ 30,639 $ 56,398 $ 12,323 Short-term investments at fair value 142,582 127,487 53,164 Mortgage loans held for sale at fair value 531,004 530,248 448,384 Derivative assets 21,540 24,066 27,290 Servicing advances 154,328 105,344 93,152 Real estate acquired in settlement of loans - - - Carried Interest due from Investment Funds 61,142 58,134 47,723 Investment in PennyMac Mortgage Investment Trust at fair value 1,722 1,701 1,897 Mortgage servicing rights at lower of cost or fair value 258,751 226,090 89,177 Mortgage servicing rights at fair value 224,913 26,768 19,798 Furniture, fixtures, equipment and building improvements, net 9,837 8,498 5,065 Capitalized software, net 764 743 795 Receivable from Investment Funds 2,915 2,541 3,672 Receivable from PennyMac Mortgage Investment Trust 18,636 20,030 16,691 Deferred tax asset 63,117 54,530 - Other 15,922 11,806 13,032 Total assets $ 1,537,812 $ 1,254,384 $ 832,163 LIABILITIES Mortgage loans sold under agreements to repurchase $ 471,592 $ 387,883 $ 393,534 Excess servicing spread financing at fair value 138,723 2,857 - Note payable 52,154 56,775 53,013 Derivative liabilities 2,462 5,776 509 Accounts payable and accrued expenses 46,387 53,355 36,279 Payable to PennyMac Mortgage Investment Trust 81,174 55,523 46,779 Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement 71,056 58,615 - Payable to Investment Funds 36,937 36,424 36,795 Liability for losses under representations and warranties 8,123 7,215 3,504 Total liabilities 908,608 664,423 570,413 STOCKHOLDERS' EQUITY Class A common stock, par value $0.0001 per share, 200,000,000 shares authorized, 20,812,777 shares issued and outstanding 2 2 - Class B common stock, par value $0.0001 per share, 1,000 shares authorized, 61 shares issued and outstanding - - - Additional paid-in capital 153,000 136,484 - Retained earnings 14,304 7,990 - Total stockholders' equity attributable to PennyMac Financial Services, Inc. common stockholders 167,306 144,476 - Members' equity attributable to Private National Mortgage Acceptance Company, LLC - - 261,750 Noncontrolling interests in Private National Mortgage Acceptance Company, LLC 461,898 445,485 - Total stockholders' equity 629,204 589,961 261,750 Total liabilities and stockholders’ equity $ 1,537,812 $ 1,254,384 $ 832,163 PENNYMAC FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share data) Quarter ended December 31 , 2013 September 30 , 2013 December 31 , 2012 (in thousands, except per share data) Revenue Net gains on mortgage loans held for sale at fair value $ 29,453 $ 25,949 $ 49,683 Loan origination fees 5,315 6,280 4,195 Fulfillment fees from PennyMac Mortgage Investment Trust 11,087 18,327 31,809 Net servicing fees: Loan servicing fees From non-affiliates 26,126 14,596 11,897 From PennyMac Mortgage Investment Trust 12,162 10,738 5,445 From Investment Funds 1,739 1,813 2,586 Mortgage servicing rebate to Investment Funds (165 ) (362 ) (525 ) Ancillary and other fees 3,726 2,777 (1,416 ) 43,588 29,562 17,987 Amortization, impairment and change in estimated fair value of mortgage servicing rights (13,088 ) (8,163 ) (3,228 ) Net servicing fees 30,500 21,399 14,759 Management fees: From PennyMac Mortgage Investment Trust 8,924 8,539 4,472 From Investment Funds 2,031 2,001 2,164 10,955 10,540 6,636 Carried Interest from Investment Funds 3,008 2,812 3,219 Net interest (expense) income: Interest income 4,322 5,093 1,863 Interest expense 4,987 4,156 3,653 (665 ) 937 (1,790 ) Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust 109 165 187 Other 658 785 821 Total net revenue 90,420 87,194 109,519 Expenses Compensation 34,711 35,830 46,258 Professional services 2,705 2,831 2,030 Loan origination 2,118 2,802 1,150 Servicing 1,956 1,931 1,294 Technology 3,002 2,587 1,204 Occupancy 862 796 443 Other 3,379 5,500 1,720 Total expenses 48,733 52,277 54,099 Income before provision for income taxes 41,687 34,917 55,420 Provision for income taxes 4,430 3,493 - Net income 37,257 31,424 $ 55,420 Less: Net income attributable to noncontrolling interest 30,847 26,227 Net income attributable to PennyMac Financial Services, Inc. common stockholders $ 6,410 $ 5,197 Earnings per common share Basic $ 0.33 $ 0.29 Diluted $ 0.32 $ 0.28 Weighted-average common share outstanding Basic 19,324 17,958 Diluted 75,922 75,892 PENNYMAC FINANCIAL SERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share data) Year ended December 31 , 2013 2012 (in thousands, except per share data) Revenue Net gains on mortgage loans held for sale at fair value $ 138,013 $ 118,170 Loan origination fees 23,575 9,634 Fulfillment fees from PennyMac Mortgage Investment Trust 79,712 62,906 Net servicing income: Loan servicing fees From non-affiliates 61,523 20,673 From PennyMac Mortgage Investment Trust 39,413 18,608 From Investment Funds 7,799 11,716 Mortgage servicing rebate from (to) Investment Funds (700 ) (885 ) Ancillary and other fees 11,426 2,245 119,461 52,357 Amortization, impairment and change in estimated fair value of mortgage servicing rights (29,451 ) (12,252 ) Net servicing income 90,010 40,105 Management fees: From PennyMac Mortgage Investment Trust 32,410 12,436 From Investment Funds 7,920 9,363 40,330 21,799 Carried Interest from Investment Funds 13,419 10,473 Net interest income (expense): Interest income 15,632 6,354 Interest expense 16,673 7,879 (1,041 ) (1,525 ) Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust 41 817 Other 2,500 2,707 Total net revenue 386,559 265,086 Expenses Compensation 148,561 124,014 Professional services 10,606 5,568 Loan origination 9,943 2,953 Technology 9,205 4,455 Servicing 7,028 3,642 Occupancy 2,745 1,521 Other 16,345 4,610 Total expenses 204,433 146,763 Income before provision for income taxes 182,126 118,323 Provision for income taxes 9,961 - Net income 172,165 $ 118,323 Less: Net income attributable to noncontrolling interest 157,765 Net income attributable to PennyMac Financial Services, Inc. common shareholders $ 14,400 Earnings per common share Basic $ 0.83 Diluted $ 0.82 Weighted-average common shares outstanding Basic 17,311 Diluted 75,892 PennyMac Financial Services, Inc. Christopher Oltmann , (818) 746-2046 Source: PennyMac Financial Services, Inc.


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