PennyMac Financial Services(US:PFSI)2022-11-01 16:00PART I. FINANCIAL INFORMATION Item 1. Financial Statements Unaudited consolidated financial statements for Q3 2022 reflect a decrease in total assets to $16.36 billion and net income to $135.1 million, driven by lower loan sale gains offset by MSR fair value increases Consolidated Balance Sheets As of September 30, 2022, total assets decreased by 13% to $16.36 billion, primarily due to a 57% reduction in loans held for sale, while MSRs increased by 46% and total liabilities decreased by 16% Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2022 | December 31, 2021 | Change | | :--- | :--- | :--- | :--- | | Cash | $1,558,679 | $340,069 | +358% | | Loans held for sale at fair value | $4,149,726 | $9,742,483 | -57% | | Mortgage servicing rights at fair value | $5,661,672 | $3,878,078 | +46% | | Total assets | $16,361,811 | $18,776,612 | -13% | | Assets sold under agreements to repurchase | $3,487,335 | $7,292,735 | -52% | | Unsecured senior notes | $1,778,988 | $1,776,219 | +0.2% | | Total liabilities | $12,879,721 | $15,358,287 | -16% | | Total stockholders' equity | $3,482,090 | $3,418,325 | +1.9% | Consolidated Statements of Income Q3 2022 net income decreased 45.8% to $135.1 million, primarily due to a 73.1% drop in net gains on loans held for sale, partially offset by a 624.8% increase in net loan servicing fees and a 34.9% reduction in total expenses Quarterly Income Statement Summary (in thousands, except EPS) | Metric | Q3 2022 | Q3 2021 | YoY Change | | :--- | :--- | :--- | :--- | | Total net revenues | $476,290 | $786,612 | -39.5% | | Net gains on loans held for sale | $168,694 | $626,754 | -73.1% | | Net loan servicing fees | $243,742 | $33,630 | +624.8% | | Total expenses | $290,818 | $447,063 | -34.9% | | Net income | $135,134 | $249,310 | -45.8% | | Diluted EPS | $2.46 | $3.80 | -35.3% | Nine-Month Income Statement Summary (in thousands, except EPS) | Metric | Nine Months 2022 | Nine Months 2021 | YoY Change | | :--- | :--- | :--- | :--- | | Total net revenues | $1,645,309 | $2,473,550 | -33.5% | | Net gains on loans held for sale | $689,720 | $1,963,743 | -64.9% | | Net loan servicing fees | $768,498 | $88,221 | +771.1% | | Total expenses | $1,047,791 | $1,348,478 | -22.3% | | Net income | $437,890 | $830,407 | -47.3% | | Diluted EPS | $7.69 | $11.98 | -35.8% | Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity increased to $3.48 billion by September 30, 2022, driven by net income, largely offset by common stock repurchases and dividend payments Changes in Stockholders' Equity (Nine Months Ended Sep 30, 2022, in thousands) | Item | Amount | | :--- | :--- | | Balance, December 31, 2021 | $3,418,325 | | Net income | $437,890 | | Repurchase of common stock | ($354,759) | | Common stock dividends | ($44,206) | | Stock-based compensation & other | $24,840 | | Balance, September 30, 2022 | $3,482,090 | Consolidated Statements of Cash Flows Net cash from operating activities significantly increased to $5.54 billion for the nine months ended September 30, 2022, primarily due to a decrease in loans held for sale, leading to a $1.22 billion overall cash increase Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $5,543,826 | $2,770,083 | | Net cash used in investing activities | ($483,567) | ($301,458) | | Net cash used in financing activities | ($3,841,670) | ($2,524,885) | | Net increase (decrease) in cash | $1,218,589 | ($56,260) | Notes to Consolidated Financial Statements Notes detail accounting policies, significant relationships, the $539.1 billion loan servicing portfolio, fair value of Level 3 assets like MSRs, debt structure, and regulatory capital compliance - Revenues generated from PennyMac Mortgage Investment Trust (PMT) accounted for 10% of total net revenue for Q3 2022 and 8% for the first nine months of 202235 - The company's total loan servicing portfolio reached $539.1 billion as of September 30, 2022, up from $509.7 billion at the end of 2021, including $308.1 billion of owned servicing rights and $231.0 billion subserviced for PMT8386 - The company is subject to various legal and regulatory proceedings, including a complaint from Black Knight Servicing Technologies alleging breach of contract and misappropriation of trade secrets, which management believes is without merit204205 - The company's board of directors increased its common stock repurchase program to $2 billion in August 2021, with 6.7 million shares repurchased for $354.8 million during the nine months ended September 30, 2022211212 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the decline in pre-tax income to challenging mortgage market conditions and rising interest rates, which positively impacted MSRs, while actively reducing expenses and improving leverage ratios - Management highlights that rising interest rates are expected to reduce the total mortgage origination market from an estimated $4.4 trillion in 2021 to a forecast of $2.4 trillion for 2022253 - The decrease in income before taxes for Q3 2022 was primarily due to a $458.1 million decrease in Net gains on loans held for sale, partially offset by a $210.1 million increase in Net loan servicing fees and a $156.2 million decrease in total expenses255 - The company reduced its average headcount to 4,911 in Q3 2022 from 7,247 in Q3 2021, leading to a significant decrease in compensation expense292 Leverage Ratios | Ratio | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total debt / Stockholders' equity | 2.1x | 3.2x | | Total debt / Tangible stockholders' equity | 2.2x | 3.3x | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate and prepayment risks, mitigated by derivative instruments, with sensitivity analysis showing MSR fair value decreases of $286.3 million and $309.8 million for 20% adverse changes in prepayment speed and pricing spread respectively - The primary market risks identified are fair value risk, interest rate risk, and prepayment risk341 - The company uses a variety of derivatives to hedge its exposures, including MBS forward contracts for IRLCs and loans, and Treasury futures, interest rate swap futures, options, and swaptions for its MSR portfolio349 MSR Fair Value Sensitivity as of September 30, 2022 (in thousands) | Change in fair value attributable to shift in: | +5% Adverse Change | +10% Adverse Change | +20% Adverse Change | | :--- | :--- | :--- | :--- | | Prepayment speed | $(75,034) | $(147,692) | $(286,318) | | Pricing spread | $(80,798) | $(159,312) | $(309,839) | | Annual per-loan cost of servicing | $(38,133) | $(76,265) | $(152,531) | Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the reporting period354 - No material changes to internal control over financial reporting were identified during the quarter ended September 30, 2022355 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal and regulatory proceedings in the ordinary course of business, which management does not expect to have a material adverse financial effect - The company is party to various legal proceedings but does not expect them to have a material adverse financial impact357 Item 1A. Risk Factors No material changes from the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021, were reported - No material changes to risk factors were reported for the quarter358 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not have any unregistered equity sales in Q3 2022 but repurchased 1,949,025 shares for $99.7 million, with $334.6 million remaining under the $2 billion repurchase program Stock Repurchase Summary (Q3 2022) | Period | Total Shares Purchased | Average Price Paid | | :--- | :--- | :--- | | July 2022 | 477,946 | $48.21 | | August 2022 | 531,733 | $56.18 | | September 2022 | 939,346 | $49.81 | | Total | 1,949,025 | $51.15 | - As of September 30, 2022, approximately $334.6 million remained authorized for repurchase under the company's $2 billion stock repurchase program360 Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported during the period - The company reported no defaults upon senior securities during the period361 Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - This item is not applicable to the company362 Item 5. Other Information No other information was reported under this item - No other information was reported under this item362 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and interactive data files (XBRL)