PennyMac Financial Services, Inc. — Q1 2023 Form 10-Q
Reporting period: Quarter ended March 31, 2023; financial statements are unaudited. PFSI originates and services U.S. residential mortgages and manages mortgage-related investments, including activities conducted for PennyMac Mortgage Investment Trust (PMT).
Financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total net revenue | $302.9 million | $657.5 million | Down 53.9% |
| Income before taxes | $38.1 million | $234.5 million | Down 83.7% |
| Net income | $30.4 million | $173.6 million | Down 82.5% |
| Diluted EPS | $0.57 | $2.94 | Down 80.6% |
| Adjusted EBITDA (non-GAAP) | $129.0 million | $168.0 million | Down 23.3% |
Net margin (net income divided by total net revenue) was approximately 10.0%, versus 26.4% a year earlier. Annualized return on average equity was 3.5%, compared with 20.4%.
- Revenue drivers: Net gains on loans held for sale fell to $104.4 million from $298.5 million, and loan origination fees declined to $31.4 million from $67.9 million. Net loan servicing fees were $148.8 million versus $286.3 million, including a $189.2 million net loss from MSR/MSL valuation changes and hedging, compared with a $4.9 million loss last year. Contractual servicing fees rose, supported by portfolio growth.
- Expenses and segments: Total expenses declined 37.4% to $264.7 million, chiefly from lower compensation and loan-origination costs. Production reported a $19.6 million pretax loss, compared with $9.3 million pretax income; servicing pretax income was $57.4 million, down from $225.2 million.
- Cash flow: Operating activities used $3.265 billion, versus providing $4.427 billion in Q1 2022, primarily reflecting the timing and growth of mortgage-loan inventory. Financing activities provided $3.455 billion, largely from increased borrowings. Cash and restricted cash ended at $1.498 billion, up $169.4 million during the quarter.
- Balance sheet and debt: Total assets were $20.103 billion and stockholders’ equity was $3.452 billion at March 31. Total debt was $10.532 billion, up from $7.011 billion at year-end; debt-to-equity increased to 3.1x from 2.0x. The company reported $6.279 billion of short-term debt and $4.253 billion of long-term debt. Loans held for sale rose to $6.772 billion from $3.509 billion.
- Interest and liquidity: Net interest expense narrowed to $3.3 million from $23.4 million as higher interest income and custodial-fund placement fees partly offset sharply higher borrowing costs. Management said liquidity was sufficient for current needs and reported compliance with financing covenants and Agency capital and liquidity requirements at quarter-end.
Material changes and management commentary
- Management attributed weaker pretax income primarily to lower mortgage-production volumes and lower EBO loan redelivery gains, reduced origination fees, and unfavorable MSR valuation and hedge results. It cited rising rates and a slowing economy as pressures on mortgage demand and production.
- Management referenced an external 2023 U.S. mortgage-origination market estimate of $1.6 trillion to $1.8 trillion, compared with an estimated $2.3 trillion in 2022. This is an industry forecast, not company earnings guidance.
- The servicing portfolio grew to $564.5 billion UPB from $551.7 billion at year-end. The owned MSR asset was $6.003 billion; a 10% adverse change in the disclosed prepayment-speed assumption was estimated to reduce MSR fair value by $167.2 million, all else equal.
- PFSI purchased 84% of newly originated loan production from PMT in Q1, versus 55% a year earlier; PMT-related revenue was 14% of total net revenue, versus 6%. Management said it had increased conventional-loan acquisitions from PMT and intended to continue them in Q2.
- Management reduced staffing and other expenses to match lower production activity. Average headcount was 4,143 versus 6,924 a year earlier.
Outlook, risks, and contingencies
- No formal company earnings or EPS guidance is provided. Management’s outlook notes continued exposure to interest rates, mortgage-market activity, prepayment behavior, and funding costs.
- Short-term borrowings are secured by mortgage-related assets and subject to margin calls; many facilities have short maturities and require renewal or replacement. The filing reports maturities and extensions, and states facilities maturing before the report date were renewed or extended.
- The company identifies substantial indebtedness, liquidity and covenant compliance, fair-value estimation, counterparty performance, mortgage delinquencies, loan repurchase obligations, regulatory requirements, and cybersecurity among relevant risks. Higher rates and economic slowdown could increase defaults and losses under representations and warranties; management considered the $31.1 million recorded liability adequate.
- Contingencies include a Black Knight trade-secret/contract dispute in arbitration and a pending CFPB NORA matter concerning alleged historical RESPA and TILA violations. PFSI disputes the claims and says it does not expect a material adverse effect; outcomes remain uncertain.
- Q1 included $45.4 million of share repurchases and a $0.20-per-share dividend. The board declared another $0.20-per-share dividend after quarter-end, payable May 26, 2023. The filing reports $238.5 million remaining under the $2 billion repurchase authorization at March 31.
Investor verification priorities
- Reconcile the sharp GAAP earnings decline with the comparatively smaller decrease in Adjusted EBITDA, including the non-GAAP adjustments and fair-value assumptions.
- Assess loan-inventory growth, borrowing needs, leverage, borrowing costs, facility maturities, and exposure to margin calls and refinancing.
- Review MSR valuation sensitivity and hedging effectiveness, especially under changing rates and prepayment speeds.
- Monitor production volumes, PMT dependence and related-party loan sourcing, and the profitability of the production segment.
- Track Agency capital and liquidity requirements, delinquency trends, representations-and-warranties claims, and developments in the CFPB and Black Knight matters.