PennyMac Financial Services(PFSI) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited consolidated financial statements and management's discussion and analysis for PennyMac Financial Services, Inc Financial Statements Unaudited consolidated financial statements for Q3 2023, including balance sheets, income, cash flows, and notes Consolidated Balance Sheets As of September 30, 2023, total assets increased to $18.95 billion, primarily driven by growth in Loans held for sale and Mortgage servicing rights Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $18,949,314 | $16,822,584 | | Cash | $1,177,304 | $1,328,536 | | Loans held for sale at fair value | $5,186,656 | $3,509,300 | | Mortgage servicing rights at fair value | $7,084,356 | $5,953,621 | | Total Liabilities | $15,376,441 | $13,351,535 | | Assets sold under agreements to repurchase | $4,411,747 | $3,001,283 | | Notes payable secured by mortgage servicing assets | $2,673,402 | $1,942,646 | | Unsecured senior notes | $1,782,689 | $1,779,920 | | Total Stockholders' Equity | $3,572,873 | $3,471,049 | Consolidated Statements of Income Net income for Q3 2023 was $92.9 million, down from $135.1 million in Q3 2022, driven by lower net gains on loans and servicing fees Financial Performance Summary (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Total net revenues | $400,308 | $476,290 | $1,039,717 | $1,645,309 | | Net gains on loans held for sale | $151,374 | $168,694 | $397,178 | $689,720 | | Net loan servicing fees | $185,374 | $243,742 | $480,289 | $768,498 | | Total expenses | $273,511 | $290,818 | $801,856 | $1,047,791 | | Net income | $92,870 | $135,134 | $181,498 | $437,890 | | Diluted EPS | $1.77 | $2.46 | $3.44 | $7.69 | Consolidated Statements of Cash Flows Net cash used in operating activities was $2.01 billion for the nine months ended September 30, 2023, a significant shift from the prior year Cash Flow Summary (Nine months ended Sep 30, in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(2,012,508) | $5,543,826 | | Net cash used in investing activities | $(377,976) | $(483,567) | | Net cash provided by (used in) financing activities | $2,239,249 | $(3,841,670) | | Net (decrease) increase in cash | $(151,235) | $1,218,589 | Notes to Consolidated Financial Statements Detailed notes cover PMT relationship, valuation methods, loan servicing, debt, and legal contingencies including Black Knight arbitration - The company has a significant business relationship with PennyMac Mortgage Investment Trust (PMT), generating revenues from management, servicing, and fulfillment fees, and purchasing a large volume of its loan production from PMT. For the nine months ended Sep 30, 2023, revenues from PMT were 11% of total net revenues, and 84% of newly originated loan production was purchased from PMT[34] - The company is involved in an arbitration with Black Knight Servicing Technologies, LLC, which alleges breach of contract and trade secret misappropriation. Black Knight seeks damages exceeding $340 million. The arbitration hearing concluded in June 2023, with a final order expected later in the year. The company believes the complaint is without merit[176][177] Total Loan Servicing Portfolio by UPB (in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Servicing rights owned | $356,478,781 | $318,099,010 | | Subservicing for PMT | $232,914,107 | $233,575,672 | | Total Loans Serviced | $589,392,888 | $551,674,682 | - Subsequent to the reporting period, the company issued a $125 million syndicated term loan secured by Ginnie Mae MSRs on October 25, 2023, and declared a cash dividend of $0.20 per share on October 26, 2023[200] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses high-interest rate impacts on origination, MSRs, and pre-tax income, alongside balance sheet expansion, increased leverage, and compliance with capital requirements Results of Operations Pre-tax income for Q3 2023 was $126.8 million, down from $185.5 million in Q3 2022, primarily due to lower servicing fees and loan gains - The decrease in Q3 2023 pre-tax income was mainly due to lower Net loan servicing fees from MSR valuation losses and reduced Net gains on loans held for sale from lower consumer direct lending volumes[216] - The decrease in nine-month 2023 pre-tax income was driven by lower Net gains on loans held for sale (due to reduced consumer direct and EBO volumes), lower fulfillment fees, and higher MSR valuation losses, partially offset by lower compensation and origination expenses[217] Income Before Provision for Income Taxes by Segment (in thousands) | Segment | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Production | $25,193 | $38,572 | $29,968 | $57,496 | | Servicing | $101,204 | $145,283 | $205,195 | $538,061 | | Investment Management | $400 | $1,617 | $2,698 | $1,961 | | Total | $126,797 | $185,472 | $237,861 | $597,518 | Balance Sheet Analysis Total assets grew by $2.1 billion to $18.9 billion, driven by increases in loans held for sale and MSRs, leading to higher leverage - The increase in total assets was primarily driven by a $1.7 billion rise in loans held for sale and a $1.1 billion increase in MSRs[262] - The increase in total liabilities was mainly due to a $2.4 billion increase in borrowings to fund the growth in loan inventory[263] Leverage Ratios | Ratio | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total debt / Stockholders' equity | 2.6 | 2.0 | | Total debt / Tangible stockholders' equity | 2.7 | 2.1 | Liquidity and Capital Resources Liquidity is maintained via cash flows and debt facilities, with compliance to financial covenants and new stringent capital requirements, and $1.8 billion utilized from the $2 billion stock repurchase program - The company is subject to revised, more stringent capital and liquidity requirements from the Agencies, which became effective September 30, 2023. Management believes the company is in compliance with these new rules[284] - The company's debt facilities contain various financial covenants, including a minimum of $100 million in unrestricted cash, a minimum tangible net worth of $1.25 billion, and a maximum total indebtedness to tangible net worth ratio of 10:1[278][281] - As of September 30, 2023, the company has repurchased approximately $1.8 billion of common shares under its $2 billion stock repurchase program[285] Quantitative and Qualitative Disclosures About Market Risk The company faces fair value, interest rate, and prepayment risks, mitigated by hedging strategies using derivatives like MBS forwards and Treasury futures - The company's primary market risks are fair value risk, interest rate risk, and prepayment risk, which affect its IRLCs, loans held for sale, and MSRs[299] - To manage risk, the company uses MBS forward sale contracts to hedge IRLCs and loans held for sale. For MSRs, it uses a combination of MBS forwards, Treasury futures, and options to mitigate exposure to interest rate shifts[307] MSR Fair Value Sensitivity as of Sep 30, 2023 (in thousands) | Change in fair value attributable to shift in: | +5% | +10% | +20% | | :--- | :--- | :--- | :--- | | Prepayment speed (adverse change) | $(89,373) | $(176,093) | $(342,038) | | Pricing spread (adverse change) | $(96,272) | $(189,990) | $(370,130) | | Annual per-loan cost of servicing (adverse change) | $(43,810) | $(87,619) | $(175,238) | Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes in internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[312] - No changes in internal control over financial reporting occurred during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, internal controls[313] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Legal Proceedings The company is involved in various ordinary course legal proceedings, which management believes will not have a material adverse effect - The company is party to ordinary course legal proceedings, which management believes will not have a material adverse effect on its financial condition. For details, see Note 16[315] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes from the risk factors disclosed in the 2022 Annual Report on Form 10-K have been reported[316] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities occurred during Q3 2023, and no common stock was repurchased under the $2 billion authorization - There were no sales of unregistered equity securities in Q3 2023[317] - The company did not repurchase any common stock during Q3 2023. The board had previously approved a $2 billion stock repurchase program[318] Defaults Upon Senior Securities None - None[319] Mine Safety Disclosures Not applicable - Not applicable[320] Other Information As of September 30, 2023, no directors or Section 16 officers adopted, modified, or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements - No directors or Section 16 officers adopted, modified, or terminated any Rule 10b5-1 trading arrangements as of September 30, 2023[321] Exhibits This section lists the exhibits filed with the Form 10-Q, including various agreements, certifications, and interactive data files - Exhibits filed include corporate governance documents, material agreements, Sarbanes-Oxley certifications, and XBRL data files[322][325]