PennyMac Financial Services, Inc. — Q1 2021 Form 10-Q
Reporting period: Quarter ended March 31, 2021. Unaudited results are compared with the quarter ended March 31, 2020; balance-sheet comparisons are with December 31, 2020. PFSI conducts mortgage loan production and servicing and investment management, including services for affiliated mortgage REIT PennyMac Mortgage Investment Trust (PMT).
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total net revenue | $944.7 million | $721.8 million |
| Income before income taxes | $506.0 million | $414.7 million |
| Net income | $376.9 million | $306.2 million |
| Diluted earnings per share | $5.15 | $3.73 |
| Net cash used in operating activities | $1.25 billion | $730.3 million |
| Net decrease in cash and restricted cash | $90.8 million | Net increase of $690.5 million |
- Net gains on loans held for sale were $754.3 million, up from $344.3 million. Management attributed the increase to higher production volume and gain-on-sale margins versus the prior-year quarter.
- Net loan servicing fees were $39.7 million, down from $257.8 million. Fair-value changes in mortgage servicing rights (MSRs), servicing liabilities and excess servicing spread, net of hedging, were a $219.7 million loss versus $15.9 million of income in Q1 2020. Management cited substantially different interest-rate and hedging effects between periods.
- Net interest expense was $25.6 million, compared with net interest income of $11.1 million. Drivers included lower custodial-fund placement fees, increased interest shortfall on loan payoffs, and interest on senior notes issued since 2020.
- Total expenses rose to $438.7 million from $307.1 million, mainly reflecting higher compensation, loan origination and technology costs as the business expanded. Servicing expense declined, partly due to a $20.5 million reversal of prior servicing-advance loss provisions.
- Adjusted EBITDA was $674.3 million versus $302.3 million. This is a company-defined non-GAAP measure; the filing cautions it is not a substitute for GAAP results or a measure of cash available to meet obligations.
Financial position, debt and liquidity
- At March 31, 2021, total assets were $31.30 billion, total liabilities $27.83 billion, and stockholders’ equity $3.47 billion. Cash was $441.9 million and short-term investments were $24.9 million.
- Loans held for sale were $13.39 billion, and MSRs were $3.27 billion. The servicing portfolio totaled $448.8 billion of unpaid principal balance, up from $426.8 billion at year-end 2020.
- Short-term debt was $11.37 billion and long-term debt was $2.59 billion. Repurchase-agreement liabilities were $10.85 billion. Unsecured senior notes had $1.30 billion principal outstanding, including $650 million issued in February 2021 at 4.25%, due in 2029. The company also had $1.30 billion of MSR-secured term notes.
- Operating cash flow was negative, largely reflecting mortgage-loan inventory and production activity. Financing cash flow was positive $1.38 billion, including increased borrowings to fund loan inventory; investing cash flow was negative $223.5 million, including derivative settlements used to hedge MSRs.
- Management said liquidity was sufficient for current needs and reported compliance with applicable financial and Agency capital and liquidity requirements. PLS reported Agency liquidity of $445.0 million against requirements of $86.6 million for Fannie Mae/Freddie Mac and $215.2 million for Ginnie Mae. Repo facilities remain subject to collateral valuations, margin calls and renewal risk.
Material changes and management commentary
- Production pretax income increased to $362.9 million from $240.1 million; servicing pretax income declined to $141.7 million from $170.8 million. Investment management pretax income was $1.4 million versus $3.8 million.
- The servicing portfolio grew, while management described mortgage demand as strong but moderating. It said industry origination capacity had adjusted and recent interest-rate increases had moderated demand and gain-on-sale margins from 2020 levels.
- COVID-19 continued to affect servicing. As of March 31, 2021, 5.7% of the company’s predominantly government-insured or guaranteed MSR portfolio was delinquent and in forbearance. PFSI repurchased $4.1 billion UPB of early-buyout loans during the quarter; curing, modifying or resolving these loans can require extended holding periods and servicing advances.
- The company repurchased 4.65 million shares for $288.5 million during the quarter. Its board increased the repurchase authorization to $1 billion; $359.1 million remained available at March 31. The declared quarterly dividend was $0.20 per share. A further $0.20 dividend was declared May 6, payable May 27, 2021.
- Management estimated the 2021 mortgage origination market at $3.3 trillion to $4.0 trillion, versus an estimated $4.0 trillion in 2020. This is market commentary, not company earnings or production guidance; the filing provides no specific PFSI financial guidance.
Risks, contingencies and unusual items
- Interest-rate and prepayment changes can materially affect MSR and loan fair values, hedging results and earnings. Significant balances use Level 3 fair-value inputs and depend on management estimates. The quarter’s servicing and loan-sale results included substantial fair-value and hedge effects.
- Short-term repurchase financing carries refinancing, collateral and margin-call risks. The filing notes that many facilities have short maturities; facilities maturing before the report date were extended or renewed. Management reported covenant compliance.
- The CFPB was considering recommending legal action concerning alleged RESPA and TILA violations from a 2015–2016 examination. PFSI said the issues were remediated by August 2017 and affected borrowers received restitution; the process remained pending, and the potential outcome was uncertain.
- A shareholder litigation settlement of $6.85 million was approved in February 2021; the company said its portion would be paid entirely by an insurer. A separate Black Knight trade-secret and contract dispute remained pending in arbitration; PFSI said it intended to defend the matter.
- The liability for loan representations and warranties was $38.4 million, against $220.9 billion UPB of loans subject to those representations and warranties. Repurchase and indemnification losses could increase if defaults rise or counterparties cannot reimburse PFSI.
Key facts for investors to verify
- Whether production volume and gain-on-sale margins remain resilient as mortgage demand moderates.
- How much reported earnings depend on fair-value estimates and hedge performance, and how those items reconcile to cash generation.
- Trends in forbearance, delinquencies, early-buyout loans, servicing advances and related financing capacity.
- Repurchase-facility renewals, available committed liquidity, margin-call exposure and compliance with financing and Agency requirements.
- Developments in the CFPB matter, the Black Knight arbitration, and representations-and-warranties claims.