WESTLAKE VILLAGE, Calif.--(BUSINESS WIRE)-- 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

View source version on businesswire.com: http://www.businesswire.com/news/home/20170504006719/en/

PennyMac Financial Services, Inc.

Media

Stephen Hagey, (805) 530-5817

or

Investors

Christopher Oltmann, (818) 264-4907

Source: PennyMac Financial Services, Inc.

Press Releases

Pennymac Financial Services (PFSI) Misses Q1 EPS by 17cMay 4, 2017 4:54 PM