PennyMac Financial Services, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. PFSI is a mortgage banking and investment management company operating through production, servicing, and investment management segments. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total net revenue | $786.6 | $1,120.0 | $2,473.6 | $2,663.5 |
| Income before taxes | $339.5 | $728.3 | $1,125.1 | $1,623.4 |
| Net income | $249.3 | $535.2 | $830.4 | $1,194.1 |
| Diluted EPS | $3.80 | $7.03 | $11.98 | $15.00 |
| Operating cash flow | Not presented for quarter | $2,770.1 | $(3,923.5) |
- Q3 total net revenue fell about 30% year over year and net income fell about 53%. Pretax margin on total net revenue was approximately 43%, versus 65% in Q3 2020.
- For the first nine months, total net revenue declined about 7% and net income declined about 30%; diluted EPS was down about 20%.
- At September 30, cash was $476.5 million, total assets $19.7 billion, total liabilities $16.2 billion and stockholders’ equity $3.5 billion. Total debt, as summarized by management, was $10.5 billion, or 3.0 times equity, versus 3.6 times at year-end 2020.
- Cash and restricted cash decreased $56.3 million over the first nine months. The company reported $8.9 billion of available repurchase-agreement borrowing capacity, including $8.2 billion uncommitted; availability is subject to collateral, margin, and lender terms.
Business drivers and changes
- Q3 pretax income declined $388.7 million year over year. Management attributed the decline mainly to lower production gain-on-sale margins, weaker servicing results from fair-value changes and hedging, and higher expenses.
- Net gains on loans held for sale were $626.8 million in Q3, down $228.5 million. For the nine months, they rose $82.0 million to $2.0 billion, as higher production volume more than offset lower margins.
- Net loan servicing fees fell to $33.6 million in Q3 from $132.8 million. Fair-value changes and hedging together reduced servicing results by $234.1 million in Q3 and $699.0 million year to date. MSR fair value was $3.6 billion at quarter-end, up from $2.6 billion at December 2020; Q3 MSR fair-value change was negative $233.9 million.
- Expenses increased 14% in Q3 to $447.1 million, with higher compensation and origination costs reflecting business growth. Headcount at quarter-end was 7,261, compared with 6,019 a year earlier. Servicing expense declined, partly reflecting reversal of prior servicing-advance loss provisions.
- The servicing portfolio grew to $495.4 billion UPB from $426.8 billion at year-end 2020. Delinquent loans in COVID-related forbearance totaled $9.2 billion across owned and subserviced portfolios, down from $22.4 billion at year-end.
- Loans eligible for repurchase and the corresponding liability fell to $4.3 billion from $14.6 billion at year-end, primarily due to increased early-buyout activity. PFSI purchased $16.4 billion UPB of early-buyout loans during the first nine months.
Outlook, liquidity, risks, and unusual items
- The filing provides no company-specific earnings or production guidance. Management cited an industry mortgage-origination estimate of $4.2 trillion for 2021 and said production margins had moderated from 2020 amid adjusted industry capacity and competitive pressure.
- Management stated that liquidity was sufficient for current needs and that the company was in compliance with applicable financing covenants and Agency capital and liquidity requirements at September 30. Borrowings include short-term facilities subject to renewal, collateral valuation, and margin calls.
- COVID-19 remains a source of uncertainty. Forbearance-related servicing advances and higher servicing costs may continue; management noted that activity could normalize as borrowers exit forbearance. Interest rates, prepayments, MSR valuations, and hedging outcomes can materially affect earnings.
- PFSI issued $500 million of 5.75% senior notes due 2031 in September; unsecured senior-note principal totaled $1.8 billion at quarter-end. The company repurchased $700.8 million of shares during the first nine months and increased its repurchase authorization to $2 billion. A $0.20-per-share dividend was declared for payment in November.
- Key contingencies include a pending CFPB NORA process concerning alleged historical RESPA and TILA violations; PFSI said the alleged violations had been remediated and borrower restitution completed. A Black Knight subsidiary’s trade-secret and contract claims against PLS remain in arbitration; PFSI says it will vigorously defend the matter. Management does not expect either matter to have a material adverse effect, but outcomes are uncertain.
- Results include material non-cash fair-value estimates, particularly for MSRs, mortgage servicing liabilities, loans, and related derivatives. Management noted that these estimates are sensitive to assumptions and should not be treated as earnings forecasts.
Most important facts for investors to verify
- Whether production margins and loan volumes continue to weaken, and how that affects gain-on-sale income and earnings.
- MSR fair-value assumptions, hedge effectiveness, and the resulting volatility in servicing income and equity.
- Early-buyout loan performance, servicing advances, forbearance exits, and related financing needs.
- Availability and renewal of short-term, partly uncommitted funding; collateral requirements, margin-call exposure, and debt covenant headroom.
- Developments and potential financial consequences of the CFPB matter, Black Knight arbitration, and representations-and-warranties repurchase claims.
- Capital allocation after substantial buybacks and the increased repurchase authorization, including the effect on liquidity and leverage.