PennyMac Financial Services, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited consolidated results; dollar amounts below are in U.S. dollars. PennyMac operates mortgage loan production, servicing, and investment management businesses, with significant business relationships with PennyMac Mortgage Investment Trust (PMT).
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total net revenue | $742.3 million | $821.6 million | $1.687 billion | $1.543 billion |
| Income before taxes | $279.5 million | $480.4 million | $785.5 million | $895.1 million |
| Net income | $204.2 million | $352.7 million | $581.1 million | $658.9 million |
| Diluted EPS | $2.94 | $4.39 | $8.16 | $8.11 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $1.332 billion | $365.6 million |
Q2 net revenue declined about 10% year over year and net income about 42%; first-half revenue rose about 9% while net income declined about 12%. Q2 net interest expense was $21.6 million, compared with $5.9 million of expense a year earlier. The filing does not provide a conventional net interest margin measure.
- Balance sheet at June 30: Cash was $324.2 million; cash plus short-term investments was $327.9 million. Total assets were $23.88 billion, total liabilities $20.37 billion, and stockholders’ equity $3.51 billion.
- Debt and funding: Short-term debt was $8.77 billion and long-term debt $2.59 billion. Repurchase-agreement liabilities were $8.25 billion; unsecured senior notes had $1.30 billion principal outstanding. Repo advances had a weighted-average maturity of 2.2 months. Reported available repo borrowing capacity was $7.36 billion, including committed and uncommitted capacity, and is dependent on eligible collateral and margin requirements.
- Cash flow and capital returns: First-half financing cash outflow was $1.395 billion, including $443.4 million of share repurchases, $27.9 million of dividends, and $134.6 million repayment of PMT excess-servicing-spread financing. Cash and restricted cash declined $208.6 million in the half year.
- Servicing and production scale: Servicing portfolio unpaid principal balance was $473.2 billion, up from $426.8 billion at year-end 2020. Mortgage servicing rights (MSRs) were valued at $3.41 billion. First-half loan sales to non-affiliates were $79.0 billion.
Material changes and business drivers
- Q2 pretax income fell $200.8 million year over year. Management attributed the decline mainly to lower gain-on-sale margins across production channels and $121.5 million higher expenses, partly offset by higher origination fees from greater production volume.
- Production-segment pretax income fell to $244.4 million from $538.1 million in Q2 2020. Management said gain-on-sale margins moderated as industry capacity adjusted to demand and competition increased. It cited a 2021 mortgage origination-market forecast range of $3.6 trillion to $4.2 trillion, versus an estimated $4.0 trillion in 2020; this is market context, not company guidance.
- Compensation expense rose to $265.1 million in Q2 from $179.9 million, reflecting business growth and increased staffing. Average headcount was 7,151 versus 4,937.
- Q2 net loan servicing fees were $14.9 million, down from $22.3 million. First-half fees were $54.6 million versus $280.1 million, primarily reflecting adverse MSR, mortgage servicing liability, and hedge valuation movements compared with the prior-year period. Such fair-value effects are material and volatile.
- Loans eligible for repurchase, with an equal related liability, decreased to $7.61 billion from $14.63 billion at year-end, mainly due to increased early-buyout activity and fewer delinquent loans. The filing reports these gross amounts on the balance sheet.
- In February 2021, PFSI issued $650 million of 4.25% senior notes due 2029. It repurchased $443.4 million of shares in the first half. The board subsequently increased the repurchase authorization to $2 billion on August 4, 2021 and declared a $0.20-per-share dividend payable August 26.
Outlook, risks, contingencies, and unusual items
- Outlook: No specific company earnings or revenue guidance is provided. Management describes mortgage demand as strong but moderating and notes continuing margin competition. It states that liquidity is sufficient for current needs, while emphasizing uncertainty from the pandemic and market conditions.
- COVID-19 and servicing advances: At June 30, 4.5% of the company’s predominately government-insured or guaranteed MSR portfolio was delinquent and in forbearance. Management cites higher servicing costs and required advances, partly offset by opportunities to modify and resell eligible loans. First-half early-buyout purchases totaled $10.9 billion in unpaid principal balance.
- Liquidity and rate exposure: The business depends on short-term secured funding, collateral values, lender renewals, and compliance with financial covenants. Repo lenders may make rapid margin calls if collateral values decline. Interest rates and prepayments can materially change loan, derivative, and MSR fair values; much of the MSR valuation uses Level 3 inputs. Management reports covenant compliance at June 30.
- PMT relationship: PMT accounted for 11% of Q2 net revenue and 10% for the first half. PFSI relies on PMT for financing and business activity, creating related-party and concentration exposure.
- Regulatory matter: The CFPB was considering recommending legal action over alleged RESPA and TILA violations concerning a 2015–2016 examination period. PFSI says the issues were remediated by August 2017 and affected borrowers received restitution; the NORA process remained pending, and potential remedies were uncertain.
- Litigation and loan-sale exposure: Black Knight’s trade-secret and contract dispute remained pending in arbitration; PFSI says it considers the claims without merit. The company also faces representations-and-warranties repurchase or indemnification exposure; the recorded liability was $44.3 million against $234.3 billion of loans subject to representations and warranties.
- Other subsequent events: The FHFA’s 50-basis-point adverse-market refinance fee was eliminated effective August 1, 2021. On July 30, PFSI agreed to syndicate certain Ginnie Mae servicing-related facilities, including increasing one facility’s maximum purchase price from $400 million to $500 million.
Most important facts for investors to verify
- Whether production volumes and gain-on-sale margins continue to moderate, and how quickly higher operating costs adjust.
- How MSR fair-value movements, hedge effectiveness, prepayments, and interest rates affect servicing earnings and reported net income.
- Repo facility renewals, collateral availability, margin-call exposure, near-term maturities, and actual committed liquidity available under stress.
- Forbearance, delinquency, early-buyout loan performance, servicing advances, and the risk that repurchases or loan losses exceed recorded estimates.
- Developments and potential financial consequences in the CFPB matter and Black Knight arbitration, neither of which has a quantified outcome in the filing.
- PMT-related revenues, financing, and contractual arrangements, as well as the pace and capital impact of share repurchases and dividends.