PennyMac Financial Services, Inc. [PFSI] Filings

10-Q 1 pfsi-20220930x10q.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, 2022

☐

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 October 31, 2022
Common Stock, $0.0001 par value		50,081,414

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PENNYMAC FINANCIAL SERVICES, INC.

FORM 10-Q

September 30, 2022

TABLE OF CONTENTS


		Page
	Special Note Regarding Forward-Looking Statements	3

PART I. FINANCIAL INFORMATION		5

Item 1.	Financial Statements (Unaudited):	5
	Consolidated Balance Sheets	5
	Consolidated Statements of Income	6
	Consolidated Statements of Changes in Stockholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	59
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	79
Item 4.	Controls and Procedures	81

PART II. OTHER INFORMATION		82

Item 1.	Legal Proceedings	82
Item 1A.	Risk Factors	82
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	82
Item 3.	Defaults Upon Senior Securities	82
Item 4.	Mine Safety Disclosures	82
Item 5.	Other Information	82
Item 6.	Exhibits	83

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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 prepayment rates; 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, 2021, filed with the Securities and Exchange Commission on February 23, 2022.

Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:

●

interest rate changes;

●

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 corona virus (“COVID-19”);

●

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;

●

declines in real estate values or significant changes in U.S. housing prices or activity in the U.S. housing market;

●

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;

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●

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

●

changes in macroeconomic and U.S. real estate market conditions;

●

difficulties inherent in adjusting the size of our operations to reflect changes in business levels;

●

maintaining sufficient capital and liquidity and compliance with financial covenants;

●

our substantial amount of indebtedness;

●

increases in loan delinquencies and defaults;

●

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

●

our reliance on PennyMac Mortgage Investment Trust (“PMT”) as a significant contributor 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 PMT, 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 ability to effectively identify, manage and hedge our credit, interest rate, prepayment, liquidity and climate 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.

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,
	2022		2021

	(in thousands, except share amounts)
ASSETS
Cash	$	1,558,679	$	340,069
Short-term investment at fair value		36,098		6,873
Loans held for sale at fair value (includes $4,012,264 and $9,135,577 pledged to creditors)		4,149,726		9,742,483
Derivative assets		164,160		333,695
Servicing advances, net (includes valuation allowance of $63,713 and $120,940; $253,370 and $232,107 pledged to creditors)		455,083		702,160
Mortgage servicing rights at fair value (includes $5,604,447 and $3,856,791 pledged to creditors)		5,661,672		3,878,078
Operating lease right-of-use assets		72,138		89,040
Investment in PennyMac Mortgage Investment Trust at fair value		884		1,300
Receivable from PennyMac Mortgage Investment Trust		32,306		40,091
Loans eligible for repurchase		3,757,538		3,026,207
Other (includes $9,886 and $45,294 pledged to creditors)		473,527		616,616
Total assets	$	16,361,811	$	18,776,612
LIABILITIES
Assets sold under agreements to repurchase	$	3,487,335	$	7,292,735
Mortgage loan participation purchase and sale agreements		367,473		479,845
Notes payable secured by mortgage servicing assets		1,793,972		1,297,622
Unsecured senior notes		1,778,988		1,776,219
Obligations under capital lease		—		3,489
Derivative liabilities		125,487		22,606
Mortgage servicing liabilities at fair value		2,214		2,816
Accounts payable and accrued expenses		358,187		359,413
Operating lease liabilities		92,380		110,003
Payable to PennyMac Mortgage Investment Trust		87,978		228,019
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		26,675		30,530
Income taxes payable		964,307		685,262
Liability for loans eligible for repurchase		3,757,538		3,026,207
Liability for losses under representations and warranties		37,187		43,521
Total liabilities		12,879,721		15,358,287

Commitments and contingencies – Note 16

STOCKHOLDERS’ EQUITY
Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 51,011,021 and 56,867,202 shares, respectively		5		6
Additional paid-in capital		—		125,396
Retained earnings		3,482,085		3,292,923
Total stockholders' equity		3,482,090		3,418,325
Total liabilities and stockholders' equity	$	16,361,811	$	18,776,612

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,
	2022		2021		2022		2021

	(in thousands, except earnings per share)
Revenues
Net gains on loans held for sale at fair value:
From non-affiliates	$	170,342	$	639,730	$	705,772	$	2,002,515
From PennyMac Mortgage Investment Trust		(1,648)		(12,976)		(16,052)		(38,772)
		168,694		626,754		689,720		1,963,743
Loan origination fees:
From non-affiliates		31,845		88,040		134,902		274,048
From PennyMac Mortgage Investment Trust		2,192		6,541		6,938		21,861
		34,037		94,581		141,840		295,909
Fulfillment fees from PennyMac Mortgage Investment Trust		18,407		43,922		55,807		158,777
Net loan servicing fees:
Loan servicing fees:
From non-affiliates		270,336		216,592		774,483		635,620
From PennyMac Mortgage Investment Trust		20,247		20,703		61,670		59,811
Other		22,497		30,463		70,535		91,793
		313,080		267,758		906,688		787,224
Change in fair value of mortgage servicing rights and mortgage servicing liabilities		95,411		(147,669)		420,424		(260,474)
Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust		—		—		—		(1,037)
Mortgage servicing rights hedging results		(164,749)		(86,459)		(558,614)		(437,492)
		(69,338)		(234,128)		(138,190)		(699,003)
Net loan servicing fees		243,742		33,630		768,498		88,221
Net interest income (expense):
Interest income:
From non-affiliates		82,994		68,312		186,740		230,803
From PennyMac Mortgage Investment Trust		—		—		—		387
		82,994		68,312		186,740		231,190
Interest expense:
To non-affiliates		82,965		90,711		231,399		299,575
To PennyMac Mortgage Investment Trust		—		—		—		1,280
		82,965		90,711		231,399		300,855
Net interest income (expense)		29		(22,399)		(44,659)		(69,665)
Management fees from PennyMac Mortgage Investment Trust		7,731		8,520		23,758		28,882
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust		(119)		(67)		(311)		478
Results of real estate acquired in settlement of loans		528		378		1,881		1,698
Other		3,241		1,293		8,775		5,507
Total net revenues		476,290		786,612		1,645,309		2,473,550
Expenses
Compensation		157,793		249,183		601,532		773,079
Loan origination		28,356		80,932		148,620		243,999
Technology		35,647		32,406		105,054		100,314
Professional services		16,230		24,429		57,126		62,549
Marketing and advertising		7,601		11,360		43,011		28,238
Occupancy and equipment		11,299		9,389		30,139		27,456
Servicing		20,399		27,892		22,204		78,365
Other		13,493		11,472		40,105		34,478
Total expenses		290,818		447,063		1,047,791		1,348,478
Income before provision for income taxes		185,472		339,549		597,518		1,125,072
Provision for income taxes		50,338		90,239		159,628		294,665
Net income	$	135,134	$	249,310	$	437,890	$	830,407
Earnings per share
Basic	$	2.59	$	4.02	$	8.10	$	12.65
Diluted	$	2.46	$	3.80	$	7.69	$	11.98
Weighted average shares outstanding
Basic		52,170		62,085		54,043		65,671
Diluted		54,968		65,652		56,913		69,341

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, 2022
				Additional				Total
	Number of	Par		paid-in		Retained		stockholders'
	shares	value		capital		earnings		equity

	(in thousands)
Balance, June 30, 2022	52,939	$	5	$	—	$	3,461,380	$	3,461,385
Net income	—		—		—		135,134		135,134
Stock-based compensation	20		—		6,863		—		6,863
Issuance of common stock in settlement of directors' fees	1		—		52		—		52
Repurchase of common stock	(1,949)		—		(6,915)		(92,787)		(99,702)
Common stock dividend ($0.20 per share)	—		—		—		(21,642)		(21,642)
Balance, September 30, 2022	51,011	$	5	$	—	$	3,482,085	$	3,482,090