PennyMac Financial Services, Inc. [PFSI] Filings

10-Q 1 pfsi-20220630x10q.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 June 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 August 2, 2022
Common Stock, $0.0001 par value		52,464,912

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

FORM 10-Q

June 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	77
Item 4.	Controls and Procedures	79

PART II. OTHER INFORMATION		80

Item 1.	Legal Proceedings	80
Item 1A.	Risk Factors	80
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	80
Item 3.	Defaults Upon Senior Securities	80
Item 4.	Mine Safety Disclosures	80
Item 5.	Other Information	80
Item 6.	Exhibits	81

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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 (“SEC”) 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:

●

changes in prevailing interest rates;

●

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;

●

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 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 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 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)


	June 30,		December 31,
	2022		2021

	(in thousands, except share amounts)
ASSETS
Cash	$	1,415,396	$	340,069
Short-term investment at fair value		4,961		6,873
Loans held for sale at fair value (includes $3,270,508 and $9,135,577 pledged to creditors)		3,586,810		9,742,483
Derivative assets		103,901		333,695
Servicing advances, net (includes valuation allowance of $66,143 and $120,940; $279,664 and $232,107 pledged to creditors)		570,822		702,160
Mortgage servicing rights at fair value (includes $5,163,544 and $3,856,791 pledged to creditors)		5,217,167		3,878,078
Operating lease right-of-use assets		82,078		89,040
Investment in PennyMac Mortgage Investment Trust at fair value		1,037		1,300
Receivable from PennyMac Mortgage Investment Trust		43,234		40,091
Loans eligible for repurchase		2,778,768		3,026,207
Other (includes $25,547 and $45,294 pledged to creditors)		468,081		616,616
Total assets	$	14,272,255	$	18,776,612
LIABILITIES
Assets sold under agreements to repurchase	$	2,441,816	$	7,292,735
Mortgage loan participation purchase and sale agreements		502,116		479,845
Obligations under capital lease		—		3,489
Notes payable secured by mortgage servicing assets		1,793,260		1,297,622
Unsecured senior notes		1,778,055		1,776,219
Derivative liabilities		42,702		22,606
Mortgage servicing liabilities at fair value		2,337		2,816
Accounts payable and accrued expenses		317,998		359,413
Operating lease liabilities		102,756		110,003
Payable to PennyMac Mortgage Investment Trust		98,991		228,019
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		27,014		30,530
Income taxes payable		885,721		685,262
Liability for loans eligible for repurchase		2,778,768		3,026,207
Liability for losses under representations and warranties		39,336		43,521
Total liabilities		10,810,870		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, 52,938,854 and 56,867,202 shares, respectively		5		6
Additional paid-in capital		—		125,396
Retained earnings		3,461,380		3,292,923
Total stockholders' equity		3,461,385		3,418,325
Total liabilities and stockholders' equity	$	14,272,255	$	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 June 30,				Six months ended June 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	$	227,319	$	594,196	$	535,430	$	1,362,785
From PennyMac Mortgage Investment Trust		(4,752)		(11,548)		(14,404)		(25,796)
		222,567		582,648		521,026		1,336,989
Loan origination fees:
From non-affiliates		37,541		90,163		103,057		186,008
From PennyMac Mortgage Investment Trust		2,404		7,128		4,746		15,320
		39,945		97,291		107,803		201,328
Fulfillment fees from PennyMac Mortgage Investment Trust		20,646		54,020		37,400		114,855
Net loan servicing fees:
Loan servicing fees:
From non-affiliates		259,338		208,275		504,147		419,028
From PennyMac Mortgage Investment Trust		20,335		20,015		41,423		39,108
Other		22,677		31,731		48,038		61,330
		302,350		260,021		593,608		519,466
Change in fair value of mortgage servicing rights and mortgage servicing liabilities		112,102		(336,268)		325,013		(112,805)
Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust		—		—		—		(1,037)
Mortgage servicing rights hedging results		(176,005)		91,118		(393,865)		(351,033)
		(63,903)		(245,150)		(68,852)		(464,875)
Net loan servicing fees		238,447		14,871		524,756		54,591
Net interest expense:
Interest income:
From non-affiliates		49,864		80,797		103,746		162,491
From PennyMac Mortgage Investment Trust		—		—		—		387
		49,864		80,797		103,746		162,878
Interest expense:
To non-affiliates		71,127		102,431		148,434		208,864
To PennyMac Mortgage Investment Trust		—		—		—		1,280
		71,127		102,431		148,434		210,144
Net interest expense		(21,263)		(21,634)		(44,688)		(47,266)
Management fees from PennyMac Mortgage Investment Trust		7,910		11,913		16,027		20,362
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust		(194)		144		(192)		545
Results of real estate acquired in settlement of loans		810		540		1,353		1,320
Other		2,647		2,459		5,534		4,214
Total net revenues		511,515		742,252		1,169,019		1,686,938
Expenses
Compensation		198,192		265,067		443,739		523,896
Loan origination		44,931		75,675		120,264		163,067
Technology		34,621		34,236		69,407		67,908
Professional services		20,793		24,834		40,896		38,120
Marketing and advertising		13,007		10,213		35,410		16,878
Occupancy and equipment		9,371		9,029		18,840		18,067
Servicing		3,051		31,290		1,805		50,473
Other		10,023		12,393		26,612		23,006
Total expenses		333,989		462,737		756,973		901,415
Income before provision for income taxes		177,526		279,515		412,046		785,523
Provision for income taxes		48,363		75,286		109,290		204,426
Net income	$	129,163	$	204,229	$	302,756	$	581,097
Earnings per share
Basic	$	2.38	$	3.10	$	5.51	$	8.61
Diluted	$	2.28	$	2.94	$	5.23	$	8.16
Weighted average shares outstanding
Basic		54,167		65,890		54,995		67,493
Diluted		56,642		69,399		57,892		71,248

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 June 30, 2022
				Additional				Total
	Number of	Par		paid-in		Retained		stockholders'
	shares	value		capital		earnings		equity

	(in thousands)
Balance, March 31, 2022	55,342	$	6	$	—	$	3,441,597	$	3,441,603
Net income	—		—		—		129,163		129,163
Stock-based compensation	23		—		15,352		—		15,352
Issuance of common stock in settlement of directors' fees	1		—		51		—		51
Repurchase of common stock	(2,427)		(1)		(15,403)		(98,241)		(113,645)
Common stock dividend ($0.20 per share)	—		—		—		(11,139)		(11,139)
Balance, June 30, 2022	52,939	$	5	$	—	$	3,461,380	$	3,461,385

Quarter ended June 30, 2021

Additional

Total

Number of

Par

paid-in