PennyMac Financial Services, Inc. Reports First Quarter 2017 Results

WESTLAKE VILLAGE, Calif.--()--PennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income of $54.4 million for the first quarter of 2017, on revenue of $204.5 million. Net income attributable to PFSI common stockholders was $10.9 million, or $0.47 per diluted share. Book value per share increased to $16.01, up from $15.49 at December 31, 2016.

First Quarter 2017 Highlights

  • Pretax income was $62.0 million, down 52 percent from the prior quarter and up 106 percent from the first quarter of 2016; the quarter-over-quarter decrease reflects lower production earnings, driven by a reduction in refinance volumes due to higher mortgage rates and a seasonally slow purchase market
  • Production segment pretax income was $47.5 million, down 49 percent from the prior quarter and down 31 percent from the first quarter of 2016
    • Total loan production activity of $14.9 billion in unpaid principal balance (UPB), down 32 percent from the prior quarter and up 37 percent from the first quarter of 2016
    • $13.9 billion in UPB of correspondent production, down 31 percent from the prior quarter and up 44 percent from the first quarter of 2016
    • $1.0 billion in UPB of consumer direct originations, down 49 percent from the prior quarter and down 14 percent from the first quarter of 2016
    • Interest rate lock commitments (IRLCs) on correspondent government and consumer direct loans totaled $11.1 billion, down 24 percent from the prior quarter and up 27 percent from the first quarter of 2016
  • Servicing segment pretax income was $13.4 million, compared with $35.1 million in the prior quarter and a pretax loss of $39.5 million in the first quarter of 2016
    • Servicing segment pretax income excluding valuation-related changes was $22.3 million, down 9 percent from the prior quarter and up 36 percent from the first quarter of 20161
    • Servicing portfolio reached $202.9 billion in UPB, up 4 percent from December 31, 2016, and up 23 percent from March 31, 2016
  • Investment Management segment pretax income was $1.1 million, compared with $0.4 million in the prior quarter and $1.1 million in the first quarter of 2016
    • Net assets under management were $1.6 billion, up modestly from $1.5 billion at December 31, 2016 and down 4 percent from $1.6 billion at March 31, 2016
  • Issued $400 million in aggregate principal amount of 3-year term notes secured by Ginnie Mae mortgage servicing rights (MSRs) and excess servicing spread (ESS)

Notable activity after quarter end:

  • Acquired a bulk portfolio of Ginnie Mae MSRs with UPB of approximately $4.3 billion

“PennyMac Financial’s first quarter results reflect the combination of an abrupt rise in mortgage rates at the end of last year and the typical seasonal slowdown in origination volumes,” said President and Chief Executive Officer David Spector. “With respect to mortgage rates, we have recently seen a decline in rates that is expected to improve the second quarter’s mortgage origination outlook. As it pertains to seasonality, strong pending home sales bode well for home buying activity this spring and summer. Looking beyond the next quarter, we continue to invest in PennyMac’s unique operating platform, which we believe will enable us to thrive in a variety of different market conditions.”

The following table presents the contribution of PennyMac Financial’s Production, Servicing and Investment Management segments to pretax income:

  Quarter ended March 31, 2017  

Mortgage Banking

 

Investment

Production   Servicing   Total

Management

  Total

(in thousands)

Revenue
Net gains on mortgage loans held for sale at fair value $ 62,837 $ 24,119 $ 86,956 $ - $ 86,956
Loan origination fees 25,574 - 25,574 - 25,574
Fulfillment fees from PMT 16,570 - 16,570 - 16,570
Net servicing fees - 74,163

74,163

-

74,163

Management fees - - - 5,374 5,374
Carried Interest from Investment Funds - - - (128 ) (128 )
Net interest income (expense):
Interest income 12,936 10,923 23,859 - 23,859
Interest expense   8,822   20,641     29,463     11     29,474  
4,114 (9,718 ) (5,604 ) (11 ) (5,615 )
Other   945   471     1,416     163     1,579  
Total net revenue   110,040   89,035     199,075     5,398     204,473  
Expenses   62,536   75,619     138,155     4,286     142,441  
Pretax income $ 47,504 $ 13,416   $ 60,920   $ 1,112   $ 62,032  
 

Production Segment

Production includes the correspondent acquisition of newly originated government-insured 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 activity totaled $14.9 billion in UPB, of which $10.3 billion in UPB was for its own account, and $4.6 billion was fee-based fulfillment activity for PMT. IRLCs on correspondent government and consumer direct loans totaled $11.1 billion in UPB.

Production segment pretax income was $47.5 million, a decrease of 49 percent from the prior quarter and a decrease of 31 percent from the first quarter of 2016. Production revenue totaled $110.0 million, a decrease of 37 percent from the prior quarter and a decrease of 6 percent from the first quarter of 2016. The quarter-over-quarter decrease primarily resulted from a 39 percent quarter-over-quarter decrease in net gains on mortgage loans held for sale, reflecting lower lock volumes and margins in both the correspondent and consumer direct channels.

The components of net gains on mortgage loans held for sale are detailed in the following table:

  Quarter ended
March 31,

2017

  December 31,

2016

  March 31,

2016

(in thousands)
Receipt of MSRs in loan sale transactions $ 132,143 $ 190,735 $

95,373

Mortgage servicing rights recapture payable to PennyMac Mortgage Investment Trust

(1,695 ) (2,535 ) (1,952 )
Provision for representations and warranties, net (530 ) (845 ) (2,082 )

Cash investment (1)

(57,574 ) 29,038 (51,140 )

Fair value changes of pipeline, inventory and hedges

  14,612     (88,461 )  

51,325

 
Net gains on mortgage loans held for sale $ 86,956   $ 127,932   $

91,524

 
 

Net gains on mortgage loans held for sale by segment:

Production $ 62,837   $ 103,413   $ 78,214  
Servicing $ 24,119   $ 24,519   $ 13,310  
 
(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; reviewing 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 $16.6 million in the first quarter, down 39 percent from $27.2 million in the prior quarter and up 28 percent from $12.9 million in the first quarter of 2016. The quarter-over-quarter decline in fulfillment fee revenue was driven by a decrease in acquisition volumes by PMT. The weighted average fulfillment fee rate was 36 basis points, unchanged from the prior quarter.

Production segment expenses were $62.5 million, a 23 percent decrease from the prior quarter and a 28 percent increase from the first quarter of 2016.

Servicing Segment

Servicing includes income from owned MSRs, in addition to subservicing and special servicing activities. Servicing segment pretax income was $13.4 million compared with $35.1 million in the prior quarter and a pretax loss of $39.5 million in the first quarter of 2016. Servicing segment revenues totaled $89.0 million, an 18 percent decrease from the prior quarter and a 6 percent decrease from the first quarter of 2016. The quarter-over-quarter decrease was primarily due to a decrease in net loan servicing fees.

Net loan servicing fees totaled $74.2 million and included $129.3 million in servicing fees reduced by $48.5 million of amortization and realization of MSR cash flows. Amortization and realization of MSR cash flows decreased 3 percent from the prior quarter, driven by reduced projected prepayment activity. Net loan servicing fees also included $12.7 million in MSR fair value gains and recovery of impairment for MSRs carried at lower of amortized cost or fair value, primarily reflecting expectations for lower prepayment activity in the future and improvements in the delinquency profile. In addition, net loan servicing fees included $22.2 million in hedging losses and a gain of $2.8 million due to the change in fair value of the ESS liability.

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

  Quarter ended
March 31,

2017

  December 31,

2016

  March 31,

2016

(in thousands)
Servicing fees (1) $ 129,315 $ 127,483 $ 114,933
Effect of MSRs:
Amortization and realization of cash flows (2) (48,460 ) (50,204 ) (46,675 )

Change in fair value and provision for/recovery of impairment of MSRs carried at lower of amortized cost or fair value

12,701 151,599 (128,908 )

Change in fair value of excess servicing spread financing

2,773 (17,061 ) 19,449
Hedging (losses) gains   (22,166 )   (116,289 )   58,720  

Total amortization, impairment and change in fair value of MSRs

  (55,152 )   (31,955 )   (97,414 )
Net loan servicing fees $ 74,163   $ 95,528   $ 17,519  
 
(1) Includes contractually-specified servicing fees
(2) Includes realization of cash flows from the mortgage servicing liability which was previously included in change in fair value of MSRs. Prior periods have been adjusted accordingly.
 

Servicing segment revenue also included $24.1 million in net gains on mortgage loans held for sale from the securitization of reperforming government-insured and guaranteed loans, compared with $24.5 million in the prior quarter and $13.3 million in the first quarter of 2016. These loans were previously purchased out of Ginnie Mae securitizations (EBOs) and brought back to performing status through PennyMac Financial’s successful servicing efforts, primarily with the use of loan modifications.

Servicing segment expenses totaled $75.6 million, a 4 percent increase from the prior quarter and a 28 percent increase from the first quarter of 2016. The quarter-over-quarter increase was in line with growth of the servicing portfolio, primarily driven by increased allocation of compensation expense to the segment and higher technology costs. Interest expense also increased as a result of the term note issuance, which generated proceeds to support revenue growth opportunities, including MSR acquisitions and EBO transactions. The increased interest expense was partially offset by $4 million of interest income from EBO loans.

The total servicing portfolio reached $202.9 billion in UPB at March 31, 2017, an increase of 4 percent from the prior quarter end and 23 percent year-over-year. Of the total servicing portfolio, prime servicing was $200.6 billion in UPB and special servicing was $2.3 billion in UPB. PennyMac Financial subservices and conducts special servicing for $63.5 billion in UPB, an increase of 4 percent from December 31, 2016. PennyMac Financial’s owned MSR portfolio grew to $135.3 billion in UPB, an increase of 5 percent from the prior quarter end.

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

  Quarter Ended
March 31,

2017

  December 31,

2016

  March 31,

2016

(in thousands)
Loans serviced at period end:
Prime servicing:
Owned
Mortgage servicing rights
Originated $ 97,505,384 $ 89,516,155 $ 64,485,308
Acquisitions   37,843,903   39,660,951   48,351,570
135,349,287 129,177,106 112,836,878
Mortgage servicing liabilities 1,900,493 2,074,896 926,756
Mortgage loans held for sale   2,180,760   2,101,283   1,561,006
139,430,540 133,353,285 115,324,640
Subserviced for Advised Entities   61,144,328   58,327,748   45,940,082
Total prime servicing   200,574,868   191,681,033   161,264,722
Special servicing:
Subserviced for Advised Entities   2,308,468   2,558,969   3,641,873
Total special servicing   2,308,468   2,558,969   3,641,873
Total loans serviced $ 202,883,336 $ 194,240,002 $ 164,906,595
 
Mortgage loans serviced:
Owned
Mortgage servicing rights $ 135,349,287 $ 129,177,106 $ 112,836,878
Mortgage servicing liabilities 1,900,493 2,074,896 926,756
Mortgage loans held for sale   2,180,760   2,101,283   1,561,006
139,430,540 133,353,285 115,324,640
Subserviced   63,452,796   60,886,717   49,581,955
Total mortgage loans serviced $ 202,883,336 $ 194,240,002 $ 164,906,595
 

Investment Management Segment

PennyMac Financial manages PMT and two private Investment Funds for which it earns base management fees and may earn incentive compensation. Net assets under management were $1.6 billion as of March 31, 2017, up modestly from $1.5 billion at December 31, 2016, and down 4 percent from $1.6 billion at March 31, 2016.

Pretax income for the Investment Management segment was $1.1 million compared with $0.4 million in the prior quarter and $1.1 million in the first quarter of 2016. Management fees, which include base management fees from PMT and the private Investment Funds, as well as any earned incentive fees from PMT, decreased 4 percent from the prior quarter and 9 percent from the first quarter of 2016.

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

  Quarter ended
March 31,

2017

  December 31,

2016

  March 31,

2016

(in thousands)
Management fees:
PennyMac Mortgage Investment Trust
Base $ 5,008 $ 5,081 $ 5,352
Performance incentive   -     -   -
5,008 5,081 5,352
Investment Funds   366     502   560
Total management fees   5,374     5,583   5,912
Carried Interest   (128 )   36   593
Total management fees and Carried Interest $ 5,246   $ 5,619 $ 6,505
 
Net assets of Advised Entities:
PennyMac Mortgage Investment Trust $ 1,458,590 $ 1,351,114 $ 1,414,503
Investment Funds   97,551     197,550   207,706
$ 1,556,141   $ 1,548,664 $ 1,622,209
 

Investment Management segment expenses totaled $4.3 million, a 19 percent decrease from the prior quarter and the first quarter of 2016, driven by a refinement in the methodology for allocating expenses across segments.

Consolidated Expenses

Total expenses for the first quarter were $142.4 million, an 11 percent decrease from the prior quarter and a 26 percent increase from the first quarter of 2016. The quarter-over-quarter decrease in total expenses was largely due to a $9.3 million decrease in compensation expense attributable to lower incentive-based compensation accruals and reduced headcount to align with the current production market, in addition to lower loan origination expense resulting from the decline in loan production volumes.

“The current environment reflects our view coming into the first quarter that the mortgage market is transitioning from a period of historically elevated margins to a period of more normal margins,” concluded Executive Chairman Stanford L. Kurland. “We have consistently demonstrated an ability to operate through market volatility of various kinds and continue to invest in initiatives that we believe will drive long-term growth for our company. These include our consumer direct production channel, non-delegated correspondent, the future launch of our wholesale mortgage origination platform and the completion of our structure to expand financing for our largest asset, our Ginnie Mae mortgage servicing rights. We are confident that such investments and innovations will help ensure our company’s long-term financial and operational success.”

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 Thursday, May 4, 2017.

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.

1 Excludes changes in the fair value of MSRs, the ESS liability, and gains/(losses) on hedging derivatives which were $12.7 million, $2.8 million, and $(22.2) million, respectively, and provision for credit losses on active loans of $2.2 million in the first quarter.

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: the continually changing federal, state and local laws and regulations applicable to the highly regulated industry in which we operate; lawsuits or governmental actions that may result from any noncompliance with the laws and regulations applicable to our businesses; the mortgage lending and servicing-related regulations promulgated by the Consumer Financial Protection Bureau and its enforcement of these regulations; our dependence on U.S. government-sponsored entities and changes in 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 the Company’s 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; our dependence on the multifamily and commercial real estate sectors for future originations of commercial mortgage loans and other commercial real estate related loans; changes in macroeconomic and U.S. real estate market conditions; difficulties inherent in growing loan production volume; difficulties inherent in adjusting the size of our operations to reflect changes in business levels; purchase opportunities for mortgage servicing rights and our success in winning bids; changes in prevailing interest rates; increases in loan delinquencies and defaults; our reliance on PennyMac Mortgage Investment Trust (NYSE: PMT) as a significant source of financing for, and revenue related to, our mortgage banking business; any required additional capital and liquidity to support business growth that may not be available on acceptable terms, if at all; our obligation to indemnify third-party purchasers or repurchase loans if loans that we originate, acquire, service or assist in the fulfillment of, fail to meet certain criteria or characteristics or under other circumstances; our obligation to indemnify PMT and the Investment Funds if its services fail to meet certain criteria or characteristics or under other circumstances; decreases in the returns on the assets that we select and manage for our clients, and our resulting management and incentive fees; the extensive amount of regulation applicable to our investment management segment; conflicts of interest in allocating our services and investment opportunities among us and our advised entities; the effect of public opinion on our reputation; our recent growth; our ability to effectively identify, manage, monitor and mitigate financial risks; our initiation of new business activities or expansion of existing business activities; our ability to detect misconduct and fraud; and our ability to mitigate cybersecurity risks and cyber incidents. 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)
 
March 31, December 31, March 31,
  2017   2016   2016
(in thousands, except share amounts)
ASSETS
Cash $ 72,767 $ 99,367 $ 116,560
Short-term investments at fair value 116,334 85,964 28,264
Mortgage loans held for sale at fair value 2,277,751 2,172,815 1,653,963
Derivative assets 82,001 82,905 90,054
Servicing advances, net 317,513 348,306 284,140
Carried Interest due from Investment Funds 70,778 70,906 70,519
Investment in PennyMac Mortgage Investment Trust at fair value 1,331 1,228 1,023
Mortgage servicing rights 1,725,061 1,627,672 1,337,082
Real estate acquired in settlement of loans 1,014 1,418 2,320
Furniture, fixtures, equipment and building improvements, net 31,568 31,321 23,855
Capitalized software, net 15,453 11,205 4,323
Note receivable from PennyMac Mortgage Investment Trust 150,000 150,000 150,000
Receivable from Investment Funds 998 1,219 1,119
Receivable from PennyMac Mortgage Investment Trust 20,756 16,416 17,647
Deferred tax asset - - 14,637
Loans eligible for repurchase 318,378 382,268 139,009
Other   49,674   50,892   46,748
Total assets $ 5,251,377 $ 5,133,902 $ 3,981,263
 
LIABILITIES
Assets sold under agreements to repurchase $ 2,034,808 $ 1,735,114 $ 1,658,578
Mortgage loan participation and sale agreements 241,638 671,426 246,636
Notes payable 436,725 150,942 127,693
Obligations under capital lease 31,178 23,424 12,070

Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value

277,484 288,669 321,976
Derivative liabilities 15,873 22,362 9,915
Mortgage servicing liabilities at fair value 15,994 15,192 6,747
Accounts payable and accrued expenses 108,489 134,611 87,005
Payable to Investment Funds 18,356 20,393 28,843
Payable to PennyMac Mortgage Investment Trust 164,743 170,036 153,094

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

78,712 75,954 74,275
Income taxes payable 31,968 25,088 -
Liability for loans eligible for repurchase 318,378 382,268 139,009
Liability for losses under representations and warranties   19,436   19,067   22,209
Total liabilities   3,793,782   3,734,546   2,888,050
 
STOCKHOLDERS' EQUITY

Class A common stock---authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 22,917,545, 22,426,779 and 22,047,491 shares, respectively

2 2 2

Class B common stock---authorized 1,000 shares of $0.0001 par value; issued and outstanding, 49, 49 and 50 shares, respectively

- - -
Additional paid-in capital 191,514 182,772 174,005
Retained earnings   175,428   164,549   103,645

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

  366,944   347,323   277,652

Noncontrolling interests in Private National Mortgage Acceptance Company, LLC

  1,090,651   1,052,033   815,561
Total stockholders' equity   1,457,595   1,399,356   1,093,213
Total liabilities and stockholders’ equity $ 5,251,377 $ 5,133,902 $ 3,981,263
 
 
PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
   
Quarter ended
March 31,   December 31, March 31,
  2017     2016     2016  
(in thousands, except earnings per share)
Revenue
Net gains on mortgage loans held for sale at fair value $ 86,956 $ 127,932 $ 91,524
Mortgage loan origination fees 25,574 39,572 22,434
Fulfillment fees from PennyMac Mortgage Investment Trust 16,570 27,164 12,935
Net mortgage loan servicing fees:
Mortgage loan servicing fees
From non-affiliates 106,467 102,671 91,327

From PennyMac Mortgage Investment Trust

10,486 11,696 11,453
From Investment Funds 496 389 701
Ancillary and other fees   11,866     12,727     11,452  
129,315 127,483 114,933

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

  (55,152 )   (31,955 )   (97,414 )
Net mortgage loan servicing fees   74,163     95,528     17,519  
Management fees:
From PennyMac Mortgage Investment Trust 5,008 5,081 5,352
From Investment Funds   366     502     560  
  5,374     5,583     5,912  
Carried Interest from Investment Funds (128 ) 36 593
Net interest expense:
Interest income 23,859 24,335 13,529
Interest expense   29,474     32,237     20,987  
(5,615 ) (7,902 ) (7,458 )

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

139 94 (86 )
Results of real estate acquired in settlement of loans (25 ) (82 ) (435 )
Other   1,465     1,360     463  
Total net revenue   204,473     289,285     143,401  
Expenses
Compensation 85,240 94,576 68,298
Servicing 26,843 29,363 20,887
Technology 11,356 11,009 6,847
Loan origination 4,133 6,961 4,186
Professional services 3,818 5,155 3,733
Other   11,051     12,813     9,311  
Total expenses   142,441     159,877     113,262  
Income before provision for income taxes 62,032 129,408 30,139
Provision for income taxes   7,646     15,568     3,596  
Net income 54,386 113,840 26,543
Less: Net income attributable to noncontrolling interest   43,507     91,096     21,368  

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

$ 10,879   $ 22,744   $ 5,175  
 
Earnings per share
Basic $ 0.48 $ 1.02 $ 0.24
Diluted $ 0.47 $ 1.00 $ 0.23
Weighted-average common shares outstanding
Basic 22,619 22,339 22,006
Diluted 77,143 76,970 76,194

Contacts

PennyMac Financial Services, Inc.
Media
Stephen Hagey, (805) 530-5817
or
Investors
Christopher Oltmann, (818) 264-4907

Contacts

PennyMac Financial Services, Inc.
Media
Stephen Hagey, (805) 530-5817
or
Investors
Christopher Oltmann, (818) 264-4907