PennyMac Financial Services, Inc. [PFSI] Filings

10-Q 1 pfsi-20210930x10q.htm 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38727

PennyMac Financial Services, Inc.

(Exact name of registrant as specified in its charter)


Delaware		83-1098934
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)


3043 Townsgate Road, Westlake Village, California		91361
(Address of principal executive offices)		(Zip Code)

(818) 224-7442

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $0.0001 par value		PFSI		New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☒		Accelerated filer ☐

Non-accelerated filer ☐		Smaller reporting company ☐
		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.


Class		Outstanding at November 2, 2021
Common Stock, $0.0001 par value		59,029,210

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PENNYMAC FINANCIAL SERVICES, INC.

FORM 10-Q

September 30, 2021

TABLE OF CONTENTS


		Page
	Special Note Regarding Forward-Looking Statements	3

PART I. FINANCIAL INFORMATION		6

Item 1.	Financial Statements (Unaudited):	6
	Consolidated Balance Sheets	6
	Consolidated Statements of Income	7
	Consolidated Statements of Changes in Stockholders’ Equity	8
	Consolidated Statements of Cash Flows	9
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	62
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	81
Item 4.	Controls and Procedures	83

PART II. OTHER INFORMATION		84

Item 1.	Legal Proceedings	84
Item 1A.	Risk Factors	85
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	85
Item 3.	Defaults Upon Senior Securities	85
Item 4.	Mine Safety Disclosures	85
Item 5.	Other Information	85
Item 6.	Exhibits	86

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Report”) contains certain forward-looking statements that are subject to various risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” “continue,” “plan” or other similar words or expressions.

Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Examples of forward-looking statements include the following:

●

projections of our revenues, income, earnings per share, capital structure or other financial items;

●

descriptions of our plans or objectives for future operations, products or services;

●

forecasts of our future economic performance, interest rates, profit margins and our share of future markets; and

●

descriptions of assumptions underlying or relating to any of the foregoing expectations regarding the timing of generating any revenues.

Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. There are a number of factors, many of which are beyond our control that could cause actual results to differ significantly from management’s expectations. Some of these factors are discussed below.

You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on February 25, 2021.

Factors that 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 resulting from adverse weather conditions, man-made or natural disasters, the effect of climate change, and pandemics, such as the COVID-19 pandemic;

●

failure to modify, resell or refinance early buyout loans and or defaults of early buyout loans beyond our expectations;

●

the continually changing federal, state and local laws and regulations applicable to the highly regulated industry in which we operate;

●

lawsuits or governmental actions if we do not comply with the laws and regulations applicable to our businesses;

●

the mortgage lending and servicing-related regulations promulgated by the Consumer Financial Protection Bureau (“CFPB”) 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;

●

foreclosure delays and changes in foreclosure practices;

●

the licensing and operational requirements of states and other jurisdictions applicable to our businesses, to which our bank competitors are not subject;

●

our ability to manage third-party service providers and vendors and their compliance with laws, regulations and investor requirements;

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●

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;

●

maintaining sufficient capital and liquidity to support business growth including compliance with financial covenants;

●

changes in prevailing interest rates;

●

our substantial amount of indebtedness;

●

increases in loan delinquencies and defaults;

●

our reliance on PennyMac Mortgage Investment Trust (“PMT”) as a significant source of financing for, and revenue related to, our mortgage banking business;

●

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 exposure to counterparties that are unwilling or unable to honor contractual obligations, including their obligation to indemnify us or repurchase defective mortgage loans;

●

our ability to realize the anticipated benefit of potential future acquisitions of mortgage servicing rights;

●

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 ourselves and PMT;

●

the effect of public opinion on our reputation;

●

our recent growth;

●

our ability to effectively identify, manage, monitor and mitigate financial risks;

●

our initiation of new business activities or expansion of existing business activities;

●

our ability to detect misconduct and fraud;

●

our ability to effectively deploy new information technology applications and infrastructure;

●

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.

Other factors that could also cause results to differ from our expectations may not be described in this Report or any other document. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.

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Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	September 30,		December 31,
	2021		2020

	(in thousands, except share amounts)
ASSETS
Cash	$	476,497	$	532,716
Short-term investments at fair value		5,046		15,217
Loans held for sale at fair value (includes $9,368,106 and $11,457,678 pledged to creditors)		9,659,695		11,616,400
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors		—		80,862
Derivative assets		429,984		711,238
Servicing advances, net (includes valuation allowance of $127,453 and $181,433; $203,236 and $413,484 pledged to creditors)		522,906		579,528
Mortgage servicing rights at fair value (includes $3,600,978 and $2,577,964 pledged to creditors)		3,611,120		2,581,174
Operating lease right-of-use assets		85,266		74,934
Investment in PennyMac Mortgage Investment Trust at fair value		1,477		1,105
Receivable from PennyMac Mortgage Investment Trust		49,993		87,005
Loans eligible for repurchase		4,335,378		14,625,447
Other (includes $74,364 and $166,418 pledged to creditors)		567,776		692,169
Total assets	$	19,745,138	$	31,597,795
LIABILITIES
Assets sold under agreements to repurchase	$	6,897,157	$	9,654,797
Mortgage loan participation purchase and sale agreements		519,784		521,477
Obligations under capital lease		5,583		11,864
Notes payable secured by mortgage servicing assets		1,297,176		1,295,840
Unsecured senior notes		1,783,230		645,820
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value		—		131,750
Derivative liabilities		14,204		42,638
Mortgage servicing liabilities at fair value		47,567		45,324
Accounts payable and accrued expenses		358,944		308,398
Operating lease liabilities		105,452		94,193
Payable to PennyMac Mortgage Investment Trust		138,972		140,306
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		31,815		35,165
Income taxes payable		659,768		622,700
Liability for loans eligible for repurchase		4,335,378		14,625,447
Liability for losses under representations and warranties		45,806		32,688
Total liabilities		16,240,836		28,208,407

Commitments and contingencies – Note 16

STOCKHOLDERS’ EQUITY
Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 60,419,578 and 70,905,532 shares, respectively		6		7
Additional paid-in capital		372,198		1,047,052
Retained earnings		3,132,098		2,342,329
Total stockholders' equity		3,504,302		3,389,388
Total liabilities and stockholders’ equity	$	19,745,138	$	31,597,795

The accompanying notes are an integral part of these consolidated financial statements.

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands, except per share amounts)
Revenues
Net gains on loans held for sale at fair value:
From non-affiliates	$	639,730	$	865,044	$	2,002,515	$	1,819,175
From PennyMac Mortgage Investment Trust		(12,976)		(9,775)		(38,772)		62,549
		626,754		855,269		1,963,743		1,881,724
Loan origination fees:
From non-affiliates		88,040		69,496		274,048		177,747
From PennyMac Mortgage Investment Trust		6,541		6,076		21,861		14,344
		94,581		75,572		295,909		192,091
Fulfillment fees from PennyMac Mortgage Investment Trust		43,922		54,839		158,777		149,594
Net loan servicing fees:
Loan servicing fees:
From non-affiliates		216,592		203,696		635,620		601,527
From PennyMac Mortgage Investment Trust		20,703		18,752		59,811		48,806
Other		30,463		27,920		91,793		85,218
		267,758		250,368		787,224		735,551
Change in fair value of mortgage servicing rights and mortgage servicing liabilities		(147,669)		(127,217)		(260,474)		(1,368,219)
Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust		—		3,135		(1,037)		18,293
Mortgage servicing rights hedging results		(86,459)		6,521		(437,492)		1,027,327
		(234,128)		(117,561)		(699,003)		(322,599)
Net loan servicing fees		33,630		132,807		88,221		412,952
Net interest expense:
Interest income:
From non-affiliates		68,312		52,276		230,803		170,148
From PennyMac Mortgage Investment Trust		—		676		387		2,686
		68,312		52,952		231,190		172,834
Interest expense:
To non-affiliates		90,711		61,109		299,575		171,482
To PennyMac Mortgage Investment Trust		—		2,070		1,280		6,416
		90,711		63,179		300,855		177,898
Net interest expense		(22,399)		(10,227)		(69,665)		(5,064)
Management fees from PennyMac Mortgage Investment Trust		8,520		8,508		28,882		25,851
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust		(67)		(288)		478		(602)
Results of real estate acquired in settlement of loans		378		1,214		1,698		803
Other		1,293		2,298		5,507		6,102
Total net revenues		786,612		1,119,992		2,473,550		2,663,451
Expenses
Compensation		249,183		202,440		773,079		550,762
Loan origination		80,932		53,752		243,999		150,677
Technology		32,406		28,964		100,314		69,976
Servicing		27,892		71,110		78,365		169,779
Professional services		24,429		18,307		62,549		44,211
Occupancy and equipment		9,389		8,491		27,456		24,822
Other		22,832		8,637		62,716		29,841
Total expenses		447,063		391,701		1,348,478		1,040,068
Income before provision for income taxes		339,549		728,291		1,125,072		1,623,383
Provision for income taxes		90,239		193,131		294,665		429,303
Net income	$	249,310	$	535,160	$	830,407	$	1,194,080
Earnings per share
Basic	$	4.02	$	7.39	$	12.65	$	15.65
Diluted	$	3.80	$	7.03	$	11.98	$	15.00
Weighted average shares outstanding
Basic		62,085		72,439		65,671		76,292
Diluted		65,652		76,138		69,341		79,618

The accompanying notes are an integral part of these consolidated financial statements.

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

Quarter ended September 30, 2021