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PennyMac Financial Services, Inc. Reports First Quarter 2021 Results

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PennyMac Financial Services, Inc. (NYSE: PFSI) today reported net income of $376.9 million for the first quarter of 2021, or $5.15 per share on a diluted basis, on revenue of $944.7 million. Book value per share increased to $51.78 from $47.80 at December 31, 2020.

PFSI’s Board of Directors declared a first quarter cash dividend of $0.20 per share, payable on May 27, 2021, to common stockholders of record as of May 17, 2021.

First Quarter 2021 Highlights

  • Pretax income was $506.0 million, down 18 percent from the prior quarter and up 22 percent from the first quarter of 2020

    • Earnings reflect continued strong production and core servicing results partially offset by the performance of our hedged mortgage servicing rights

    • Repurchased approximately 4.7 million shares of PFSI’s common stock for an approximate cost of $288.4 million; repurchased an additional 270,000 shares in April for an approximate cost of $15.8 million

    • Issued $650 million of 8-year senior unsecured notes

  • Production segment pretax income of $362.9 million, down 37 percent from the prior quarter and up 51 percent from the first quarter of 2020

    • Direct lending interest rate lock commitments (IRLCs) were a record $19.1 billion in unpaid principal balance (UPB), up 3 percent from the prior quarter and 92 percent from the first quarter of 2020
      – $13.4 billion in UPB of IRLCs in the consumer direct channel; $5.7 billion in UPB of IRLCs in the broker direct channel

    • Government correspondent IRLCs totaled $17.1 billion in UPB, down 14 percent from the prior quarter and up 15 percent from the first quarter of 2020

    • Total loan acquisitions and originations were $67.0 billion in UPB, down 4 percent from the prior quarter and up 89 percent from the first quarter of 2020

    • Correspondent acquisitions of conventional loans fulfilled for PennyMac Mortgage Investment Trust (NYSE: PMT) were $33.8 billion in UPB, down 11 percent from the prior quarter and up 109 percent from the first quarter of 2020

  • Servicing segment pretax income was $141.7 million, up from $42.0 million in the prior quarter and down from $170.8 million in the first quarter of 2020

    • Pretax income excluding valuation-related items was $258.4 million, up 10 percent from the prior quarter and up 511 percent from the first quarter of 2020, driven by continued loss mitigation activities related to COVID-19

    • Valuation items included:
      – $306.1 million in MSR fair value gains driven by higher mortgage rates partially offset by valuation impacts primarily attributable to significant prepayment activity and early buyouts
      – $443.2 million in hedging and other fair value declines which included elevated hedge costs driven by increased market volatility
      – Net impact on pretax income related to these items was $(137.1) million and on earnings per share was $(1.38)
      – $20.4 million of reversals related to provisions for credit losses on active loans

    • Servicing portfolio grew to $448.8 billion in UPB, up 5 percent from December 31, 2020 and 17 percent from March 31, 2020, driven by strong production volumes which offset elevated prepayment activity

  • Investment Management segment pretax income was $1.4 million, down from $2.6 million in the prior quarter and $3.8 million in the first quarter of 2020

    • Net assets under management (AUM) were $2.4 billion, up 3 percent from December 31, 2020 and 29 percent from March 31, 2020

"PennyMac Financial again produced exceptional financial results in the first quarter with a return on equity of 43 percent," said Chairman and CEO David Spector, "in an environment characterized by rising rates and declining margins. We successfully grew our consumer direct lending channel, originating $10.7 billion and locking $13.4 billion in the quarter, both record levels. Despite elevated levels of competition in the wholesale channel, we maintained our pricing discipline and continued to gain market share, aided by 18 percent growth in our approved brokers. With $67 billion in total production across all channels, our servicing portfolio grew to nearly $450 billion in unpaid principal balance and 2 million customers. Our growing servicing portfolio continues to generate strong pretax income excluding fair value changes, which we seek to moderate through time with our hedging activity."

Mr. Spector concluded, "PennyMac Financial has built an extremely valuable mortgage banking enterprise well positioned for long-term success. We believe deeply in that value, which is why we continue to repurchase shares. Since the beginning of 2020, we have now repurchased approximately 18 percent of PFSI’s common shares. We also continue to make substantial investments in our technology and operations. I remain confident in our ability to profitably and responsibly grow our direct lending channels while maintaining our leadership position in correspondent production. Combined with our large and growing residential loan servicing portfolio, we expect to continue producing strong returns for our stockholders. For the remainder of 2021, we project PennyMac Financial to achieve a return on equity closer to our pre-COVID historical returns. Finally, we look forward to further discussing our outlook for the business at our upcoming investor day for PennyMac Financial and PennyMac Mortgage Investment Trust."

The following table presents the contributions of PennyMac Financial’s segments to pretax income:

Quarter ended March 31, 2021

Mortgage Banking

Investment
Management

Production

Servicing

Total

Total

(in thousands)

Revenue

Net gains on loans held for sale at fair value

$

515,963

$

238,378

$

754,341

$

-

$

754,341

Loan origination fees

104,037

-

104,037

-

104,037

Fulfillment fees from PMT

60,835

-

60,835

-

60,835

Net loan servicing fees

-

39,720

39,720

-

39,720

Management fees

-

-

-

8,449

8,449

Net interest expense:

Interest income

29,531

52,550

82,081

-

82,081

Interest expense

38,072

69,638

107,710

3

107,713

(8,541

)

(17,088

)

(25,629

)

(3

)

(25,632

)

Other

597

1,197

1,794

1,142

2,936

Total net revenue

672,891

262,207

935,098

9,588

944,686

Expenses

309,996

120,463

430,459

8,219

438,678

Pretax income

$

362,895

$

141,744

$

504,639

$

1,369

$

506,008

Production Segment

The Production segment includes the correspondent acquisition of newly originated government-insured mortgage loans for PennyMac Financial’s own account, fulfillment services on behalf of PMT and direct lending through the consumer direct and broker direct channels, including the underwriting and acquisition of loans from correspondent sellers on a non-delegated basis.

PennyMac Financial’s loan production activity for the quarter totaled $67.0 billion in UPB, $33.2 billion of which was for its own account, and $33.8 billion of which was fee-based fulfillment activity for PMT. Correspondent government and direct lending IRLCs totaled $36.1 billion in UPB, down 6 percent from the prior quarter and up 46 percent from the first quarter of 2020.

Production segment pretax income was $362.9 million, down 37 percent from the prior quarter and up 51 percent from the first quarter of 2020. Production revenue totaled $672.9 million, down 18 percent from the prior quarter and up 59 percent from the first quarter of 2020. The quarter-over-quarter decrease was primarily driven by a $143.9 million decrease in net gains on loans held for sale primarily as a result of lower production margins across all channels.

The components of net gains on loans held for sale are detailed in the following table:

Quarter ended

March 31,
2021

December 31,
2020

March 31,
2020

(in thousands)

Receipt of MSRs and recognition of MSLs in loan sale transactions

$

463,571

$

367,501

$

275,739

Mortgage servicing rights recapture payable to PennyMac Mortgage Investment Trust

(14,248

)

(11,868

)

(3,308

)

Provision of liability for representations and warranties, net

(6,368

)

(4,667

)

(2,036

)

Cash gain (1)

818,937

459,887

70,315

Fair value changes of pipeline, inventory and hedges

(507,551

)

48,208

3,572

Net gains on mortgage loans held for sale

$

754,341

$

859,061

$

344,282

Net gains on mortgage loans held for sale by segment:

Production

$

515,963

$

659,915

$

316,635

Servicing

$

238,378

$

199,146

$

27,647

(1) Net of cash hedging results

PennyMac Financial performs fulfillment services for conventional conforming and jumbo loans acquired by PMT from non-affiliates in its correspondent production business. These services include, but are not limited to, marketing, relationship management, correspondent seller approval and monitoring, loan file review, underwriting, pricing, hedging and activities related to the subsequent sale and securitization of loans in the secondary mortgage markets for PMT.

Fees earned from the fulfillment of correspondent loans on behalf of PMT totaled $60.8 million in the first quarter, down 16 percent from the prior quarter and up 45 percent from the first quarter of 2020. The quarter-over-quarter decrease in fulfillment fee revenue was driven primarily by an 11 percent decrease in acquisition volumes by PMT and a slight decrease in the weighted average fulfillment fee rate to 18 basis points from 19 basis points in the prior quarter.

Net interest expense totaled $8.5 million, up from net interest expense of $1.3 million in the prior quarter and net interest income of $6.4 million in the first quarter of 2020. Interest income in the first quarter totaled $29.5 million, down slightly from $29.8 million in the prior quarter. Interest expense totaled $38.1 million, up from $31.0 million in the prior quarter as a result of the increased volumes in the direct lending channels.

Production segment expenses were $310.0 million, up 23 percent from the prior quarter and 70 percent from the first quarter of 2020. The quarter-over-quarter increase resulted from record origination volumes in the direct lending channels.

Servicing Segment

The Servicing segment includes income from owned MSRs, subservicing and special servicing activities. Servicing segment pretax income was $141.7 million, versus pretax income of $42.0 million in the prior quarter and $170.8 million in the first quarter of 2020. Servicing segment net revenues totaled $262.2 million, up 26 percent from the prior quarter and down 9 percent from the first quarter of 2020. The quarter-over-quarter increase was primarily driven by a $39.2 million increase on net gains on loans held for sale.

Revenue from net loan servicing fees totaled $39.7 million, up from $26.5 million in the prior quarter, as a result of lower net valuation related declines and realization of cash flows. Revenue from net loan servicing fees included $259.4 million in servicing fees, reduced by $82.7 million from the realization of MSR cash flows. Net valuation-related losses totaled $137.1 million, and included MSR fair value gains of $306.1 million, and hedging and other declines of $443.2 million.

The following table presents a breakdown of net loan servicing fees:

Quarter ended

March 31,
2021

December 31,
2020

March 31,
2020

(in thousands)

Loan servicing fees (1)

$

259,445

$

262,740

$

241,929

Changes in fair value of MSRs and MSLs resulting from:

Realization of cash flows

(82,663

)

(89,611

)

(114,919

)

Change in fair value inputs

306,126

(44,163

)

(920,294

)

Change in fair value of excess servicing spread financing

(1,037

)

6,677

14,522

Hedging (losses) gains

(442,151

)

(109,147

)

1,036,570

Net change in fair value of MSRs and MSLs

(219,725

)

(236,244

)

15,879

Net loan servicing fees

$

39,720

$

26,496

$

257,808

(1) Includes contractually-specified servicing fees

Servicing segment revenue included $238.4 million in net gains on loans held for sale related to reperforming government-insured and guaranteed loans, up from $199.1 million in the prior quarter and $27.6 million in the first quarter of 2020 as a result of increased loss mitigation activity on loans emerging from forbearance. These previously delinquent loans were purchased out of Ginnie Mae securitizations and brought back to performing status through PennyMac Financial’s successful servicing efforts, primarily through loan modifications or FHA Partial Claims. With respect to the FHA Partial Claims, the reperforming loans must remain current for a minimum of six months to be eligible for resecuritization. Net interest expense totaled $17.1 million, versus net interest expense of $18.2 million in the prior quarter and net interest income of $4.6 million in the first quarter of 2020. Interest income was $52.6 million, up from $44.4 million in the prior quarter, driven by the increase in interest received on loans bought out in prior periods. Interest expense was $69.6 million, up from $62.6 million in the prior quarter driven by the financing of increased balances of loans purchased out of Ginnie Mae securitizations.

Servicing segment expenses totaled $120.5 million, down 27 percent from the prior quarter driven by $20.4 million of reversals related to provisions for credit losses on active loans. The prior quarter included a $45.6 million provision for credit losses on active loans.

The total servicing portfolio grew to $448.8 billion in UPB at March 31, 2021, an increase of 5 percent from December 31, 2020 and 17 percent from March 31, 2020. PennyMac Financial subservices and conducts special servicing for $188.3 billion in UPB, an increase of 8 percent from December 31, 2020 and 30 percent from March 31, 2020. PennyMac Financial’s owned MSR portfolio grew to $260.5 billion in UPB, an increase of 3 percent from December 31, 2020 and 9 percent from March 31, 2020.

The table below details PennyMac Financial’s servicing portfolio UPB:

March 31,
2021

December 31,
2020

March 31,
2020

(in thousands)

Prime servicing:

Owned

Mortgage servicing rights

Originated

$

208,189,112

$

196,873,590

$

173,171,678

Acquisitions

36,178,818

41,537,219

58,312,483

244,367,930

238,410,809

231,484,161

Mortgage servicing liabilities

3,173,793

2,857,492

2,635,734

Loans held for sale

12,959,016

11,063,938

5,276,688

260,500,739

252,332,239

239,396,583

Subserviced for PMT

188,279,019

174,360,317

144,734,874

Total prime servicing

448,779,758

426,692,556

384,131,457

Special servicing - subserviced for PMT

45,143

58,274

95,169

Total loans serviced

$

448,824,901

$

426,750,830

$

384,226,626

Loans serviced:

Owned

Mortgage servicing rights

$

244,367,930

$

238,410,809

$

231,484,161

Mortgage servicing liabilities

3,173,793

2,857,492

2,635,734

Loans held for sale

12,959,016

11,063,938

5,276,688

260,500,739

252,332,239

239,396,583

Subserviced

188,324,162

174,418,591

144,830,043

Total loans serviced

$

448,824,901

$

426,750,830

$

384,226,626

Investment Management Segment

PennyMac Financial manages PMT for which it earns base management fees and may earn incentive compensation. Net AUM were $2.4 billion as of March 31, 2021, up 3 percent from December 31, 2020.

Pretax income for the Investment Management segment was $1.4 million, down from $2.6 million in the prior quarter and $3.8 million in the first quarter of 2020. Management fees, which include base management and performance incentive fees from PMT were $8.4 million, down from $8.7 million in the prior quarter and $9.1 million in the first quarter of 2020. Base management fees were $8.4 million, down from $8.7 million in the prior quarter and $9.1 million in the first quarter of 2020. Performance-based incentive fees were not earned in the first quarter of 2021 due to the impact of PMT’s loss in the first quarter of 2020.

The following table presents a breakdown of management fees:

Quarter ended

March 31,
2021

December 31,
2020

March 31,
2020

(in thousands)

Management fees:

PennyMac Mortgage Investment Trust

Base

$

8,449

$

8,687

$

9,055

Performance incentive

-

-

-

Total management fees

$

8,449

$

8,687

$

9,055

Net assets of PennyMac Mortgage Investment Trust

$

2,357,143

$

2,296,859

$

1,823,368

Investment Management segment expenses totaled $8.2 million, up 16 percent from the prior quarter and 35 percent from the first quarter of 2020.

Consolidated Expenses

Total expenses were $438.7 million, up 3 percent from the prior quarter and 43 percent from the first quarter of 2020. The quarter-over-quarter increase was driven by increased levels of activity in the direct lending channels and was largely offset by the lower servicing expenses described above.

Management’s slide presentation will be available in the Investor Relations section of the Company’s website at ir.pennymacfinancial.com beginning at 1:30 p.m. (Pacific Time) on Thursday, May 6, 2021.

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.

Founded in 2008, the company is recognized as a leader in the U.S. residential mortgage industry and employs approximately 6,500 people across the country. For the twelve months ended March 31, 2021, PennyMac Financial’s production of newly originated loans totaled $228 billion in unpaid principal balance, making it the second largest mortgage lender in the nation. As of March 31, 2021, PennyMac Financial serviced loans totaling $449 billion in unpaid principal balance, making it a top ten mortgage servicer in the nation.

Additional information about PennyMac Financial Services, Inc. is available at ir.pennymacfinancial.com.

Forward-Looking Statements

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," "project," "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: our exposure to risks of loss and disruptions in operations resulting from adverse weather conditions, man-made or natural disasters, climate change and pandemics such as COVID-19; failure to modify, resell or refinance early buyout loans; 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; 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; our substantial amount of indebtedness; expected discontinuation of LIBOR; 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; maintaining sufficient capital and liquidity to support business growth including compliance with financial covenants; 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 if our 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 or expansion of new business activities or strategies; our ability to detect misconduct and fraud; our ability to mitigate cybersecurity risks and cyber incidents; our ability to pay dividends to our stockholders; and our organizational structure and certain requirements in our charter documents. 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.

This press release contains financial information calculated other than in accordance with U.S. generally accepted accounting principles ("GAAP"), such as pretax income excluding valuation items that provide a meaningful perspective on the Company’s business results since the Company utilizes this information to evaluate and manage the business. Non-GAAP disclosure has limitations as an analytical tool and should not be viewed as a substitute for financial information determined in accordance with GAAP.

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

March 31,
2021

December 31,
2020

March 31,
2020

(in thousands, except share amounts)

ASSETS

Cash

$

441,870

$

532,716

$

878,826

Short-term investments at fair value

24,850

15,217

1,884

Loans held for sale at fair value

13,385,789

11,616,400

5,541,987

Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors

-

80,862

99,766

Derivative assets

530,852

711,238

433,211

Servicing advances, net

550,150

579,528

299,550

Mortgage servicing rights

3,268,910

2,581,174

2,193,697

Operating lease right-of-use assets

74,795

74,934

71,639

Investment in PennyMac Mortgage Investment Trust at fair value

1,470

1,105

797

Receivable from PennyMac Mortgage Investment Trust

68,644

87,005

56,223

Loans eligible for repurchase

12,312,393

14,625,447

980,618

Other

638,257

692,169

332,935

Total assets

$

31,297,980

$

31,597,795

$

10,891,133

LIABILITIES

Assets sold under agreements to repurchase

$

10,848,477

$

9,654,797

$

4,444,545

Mortgage loan participation and sale agreements

518,747

521,477

528,750

Obligations under capital lease

10,468

11,864

18,145

Notes payable secured by mortgage servicing assets

1,296,285

1,295,840

1,294,514

Unsecured senior notes

1,288,198

645,820

-

Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value

-

131,750

157,109

Derivative liabilities

68,557

42,638

43,152

Mortgage servicing liabilities at fair value

46,026

45,324

29,761

Operating lease liabilities

96,069

94,193

89,829

Accounts payable and accrued expenses

355,429

308,398

198,897

Payable to PennyMac Mortgage Investment Trust

164,469

140,306

59,281

Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement

35,165

35,165

46,158

Income taxes payable

751,855

622,700

613,043

Liability for loans eligible for repurchase

12,312,393

14,625,447

980,618

Liability for losses under representations and warranties

38,428

32,688

23,202

Total liabilities

27,830,566

28,208,407

8,527,004

STOCKHOLDERS' EQUITY

Common stock -- authorized 200,000,000 shares of $0.0001 par value; issued and outstanding 66,961,401, 70,905,532, and 79,190,245 shares, respectively

7

7

8

Additional paid-in capital

762,585

1,047,052

1,341,219

Retained earnings

2,704,822

2,342,329

1,022,902

Total stockholders' equity

3,467,414

3,389,388

2,364,129

Total liabilities and stockholders’ equity

$

31,297,980

$

31,597,795

$

10,891,133

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Quarter ended

March 31,
2021

December 31,
2020

March 31,
2020

(in thousands, except earnings per share)

Revenue

Net gains on loans held for sale at fair value

$

754,341

$

859,061

$

344,282

Loan origination fees

104,037

93,460

57,571

Fulfillment fees from PennyMac Mortgage Investment Trust

60,835

72,606

41,940

Net loan servicing fees:

Loan servicing fees

259,445

262,740

241,929

Change in fair value of mortgage servicing rights, mortgage
servicing liabilities and excess servicing spread financing

222,426

(127,097

)

(1,020,691

)

Hedging results

(442,151

)

(109,147

)

1,036,570

Net loan servicing fees

39,720

26,496

257,808

Net interest (expense) income:

Interest income

82,081

74,192

72,564

Interest expense

107,713

93,653

61,512

(25,632

)

(19,461

)

11,052

Management fees from PennyMac Mortgage Investment Trust

8,449

8,687

9,055

Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust

401

149

(857

)

Results of real estate acquired in settlement of loans

780

233

(707

)

Revaluation of payable to exchange Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement

-

280

-

Other

1,755

635

1,681

Total net revenue

944,686

1,042,146

721,825

Expenses

Compensation

258,829

187,807

168,436

Loan origination

87,392

69,069

46,004

Technology

33,672

42,594

19,107

Servicing

19,183

87,155

42,166

Professional services

13,286

19,853

13,404

Occupancy and equipment

9,038

8,535

8,038

Other

17,278

9,907

9,940

Total expenses

438,678

424,920

307,095

Income before provision for income taxes

506,008

617,226

414,730

Provision for income taxes

129,140

164,422

108,487

Net income

$

376,868

$

452,804

$

306,243

Earnings per share

Basic

$

5.45

$

6.31

$

3.89

Diluted

$

5.15

$

5.97

$

3.73

Weighted-average common shares outstanding

Basic

69,113

71,793

78,689

Diluted

73,117

75,898

82,008

Dividend declared per share

$

0.20

$

0.15

$

0.12

View source version on businesswire.com: https://www.businesswire.com/news/home/20210506006208/en/

Contacts

Media
Janis Allen
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(805) 330-4899

Investors
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Isaac Garden
(818) 224-7028