PennyMac Financial Services(PFSI) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Unaudited statements show a significant net income decline and reduced total assets due to lower loan production Consolidated Balance Sheet Highlights (Unaudited) | Account | March 31, 2022 (in millions) | December 31, 2021 (in millions) | | :--- | :--- | :--- | | Total Assets | $14,617.9 | $18,776.6 | | Loans held for sale at fair value | $5,119.2 | $9,742.5 | | Mortgage servicing rights at fair value | $4,707.0 | $3,878.1 | | Total Liabilities | $11,176.3 | $15,358.3 | | Assets sold under agreements to repurchase | $3,333.4 | $7,292.7 | | Unsecured senior notes | $1,777.1 | $1,776.2 | | Total Stockholders' Equity | $3,441.6 | $3,418.3 | Consolidated Statement of Income Highlights (Unaudited) | Account | Quarter ended March 31, 2022 (in millions) | Quarter ended March 31, 2021 (in millions) | | :--- | :--- | :--- | | Total net revenues | $657.5 | $944.7 | | Net gains on loans held for sale | $298.5 | $754.3 | | Net loan servicing fees | $286.3 | $39.7 | | Total expenses | $423.0 | $438.7 | | Net income | $173.6 | $376.9 | | Diluted Earnings Per Share | $2.94 | $5.15 | - During Q1 2022, the company repurchased 2.32 million shares of common stock for $141.4 million and paid a cash dividend of $0.20 per share, totaling $11.4 million[23] - Net cash provided by operating activities was $4.4 billion, a significant positive shift from a $1.2 billion use of cash in Q1 2021, primarily driven by the sale of loans held for sale[25] Notes to Consolidated Financial Statements Disclosures detail accounting policies, related party transactions, and the valuation of the loan servicing portfolio - Revenues from PennyMac Mortgage Investment Trust (PMT) accounted for 6% of total net revenue in Q1 2022, down from 9% in Q1 2021, and the company purchased 55% of its new loan production from PMT[35] - Mortgage Servicing Rights (MSRs), a significant Level 3 asset, had a fair value of $4.71 billion as of March 31, 2022, up from $3.88 billion at year-end 2021[88][89] - The company was in compliance with all agency capital and liquidity requirements as of March 31, 2022, maintaining levels significantly above the required minimums[218] Loan Servicing Portfolio (UPB) | Category | March 31, 2022 (in billions) | December 31, 2021 (in billions) | | :--- | :--- | :--- | | Servicing rights owned | $295.9 | $287.8 | | Subservicing for PMT | $222.9 | $221.9 | | Total Loans Serviced | $518.8 | $509.7 | Segment Pre-Tax Income | Segment | Q1 2022 (in millions) | Q1 2021 (in millions) | | :--- | :--- | :--- | | Production | $9.3 | $362.9 | | Servicing | $225.2 | $141.7 | | Investment Management | $0.1 | $1.4 | | Total | $234.5 | $506.0 | Management's Discussion and Analysis of Financial Condition and Results of Operations Pre-tax income declined due to rising interest rates impacting production, offset by strong servicing performance - Management forecasts the U.S. mortgage origination market to decline from an estimated $4.4 trillion in 2021 to a range of $2.6 trillion to $3.1 trillion for 2022[243] - Pre-tax income for Q1 2022 decreased by $271.5 million compared to Q1 2021, driven by a $455.9 million decrease in Net gains on loans held for sale[244] - The company's total loan servicing portfolio grew to $518.8 billion at the end of Q1 2022, while delinquent loans in the owned portfolio decreased to $14.7 billion[269] - Total assets and liabilities both decreased by $4.2 billion during the quarter, driven by a reduction in loans held for sale and the short-term debt used to finance them[281][282] Segment Pre-Tax Income Performance | Segment | Q1 2022 (in millions) | Q1 2021 (in millions) | | :--- | :--- | :--- | | Production | $9.8 | $362.9 | | Servicing | $224.6 | $141.7 | | Total Mortgage Banking | $234.4 | $504.6 | Quantitative and Qualitative Disclosures About Market Risk The company manages fair value, interest rate, and prepayment risks using various derivative instruments - The company's main market risks are identified as fair value risk, interest rate risk, and prepayment risk, which primarily affect its mortgage-related assets and liabilities[323] - To mitigate risk, the company uses various derivative instruments, including MBS forward contracts, options, and Treasury futures for its loan pipeline and MSRs[330] MSR Fair Value Sensitivity Analysis (as of March 31, 2022) | Change in fair value attributable to shift in: | +5% Adverse Change (in millions) | +10% Adverse Change (in millions) | +20% Adverse Change (in millions) | | :--- | :--- | :--- | :--- | | Pricing spread | $(70.1) | $(138.1) | $(268.2) | | Prepayment speed | $(77.6) | $(152.6) | $(295.1) | | Annual per-loan cost of servicing | $(36.4) | $(72.9) | $(145.7) | Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material internal control changes - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[335] - No material changes in internal control over financial reporting occurred during the quarter that are reasonably likely to materially affect internal controls[336] PART II. OTHER INFORMATION Legal Proceedings The company is defending against a breach of contract and trade secret misappropriation claim in arbitration - The company is defending against a complaint from Black Knight Servicing Technologies, LLC, which alleges breach of contract and misappropriation of trade secrets, with the matter pending in arbitration[199][200] Risk Factors No material changes to risk factors disclosed in the 2021 Annual Report on Form 10-K have occurred - The company reports no material changes from the risk factors set forth in its 2021 Annual Report on Form 10-K[339] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 2.32 million shares for $141.4 million under its authorized stock repurchase program - The company's board of directors increased the common stock repurchase program to $2 billion in August 2021, with approximately $548 million remaining available for future repurchases[340] Common Stock Repurchases (Q1 2022) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2022 | 847,780 | $66.03 | | Feb 2022 | 928,128 | $59.15 | | Mar 2022 | 543,632 | $56.15 | | Total | 2,319,540 | $60.97 |