Table of Contents
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, 2023
or
☐
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 27, 2023
49,925,752
PENNYMAC FINANCIAL SERVICES, INC.
FORM 10-Q
September 30, 2023
TABLE OF CONTENTS
Page
Special Note Regarding Forward-Looking Statements
3
PART I. FINANCIAL INFORMATION
6
Item 1.
Financial Statements (Unaudited):
Consolidated Balance Sheets
Consolidated Statements of Income
7
Consolidated Statements of Changes in Stockholders’ Equity
8
Consolidated Statements of Cash Flows
9
Notes to Consolidated Financial Statements
11
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
55
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
74
Item 4.
Controls and Procedures
76
PART II. OTHER INFORMATION
77
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
78
2
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, but are not limited to, the following:
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 several 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 Quarterly Report on Form 10-Q (this “report”), the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (“SEC”) on February 22, 2023 and in our other SEC filings.
Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:
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.
4
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.
5
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30,
December 31,
2023
2022
(in thousands, except share amounts)
ASSETS
Cash
$
1,177,304
1,328,536
Short-term investment at fair value
5,553
12,194
Loans held for sale at fair value (includes $5,026,818 and $3,442,847 pledged to creditors)
5,186,656
3,509,300
Derivative assets
103,366
99,003
Servicing advances, net (includes valuation allowance of $65,644 and $78,992; $268,987 and $381,379 pledged to creditors)
399,281
696,753
Mortgage servicing rights at fair value (includes $7,018,069 and $5,897,613 pledged to creditors)
7,084,356
5,953,621
Operating lease right-of-use assets
53,419
65,866
Investment in PennyMac Mortgage Investment Trust at fair value
930
929
Receivable from PennyMac Mortgage Investment Trust
27,613
36,372
Loans eligible for repurchase
4,445,814
4,702,103
Other (includes $30,021 and $12,277 pledged to creditors)
465,022
417,907
Total assets
18,949,314
16,822,584
LIABILITIES
Assets sold under agreements to repurchase
4,411,747
3,001,283
Mortgage loan participation purchase and sale agreements
498,392
287,592
Notes payable secured by mortgage servicing assets
2,673,402
1,942,646
Unsecured senior notes
1,782,689
1,779,920
Derivative liabilities
41,200
21,712
Mortgage servicing liabilities at fair value
1,818
2,096
Accounts payable and accrued expenses
236,611
262,358
Operating lease liabilities
70,210
85,550
Payable to PennyMac Mortgage Investment Trust
97,975
205,011
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement
26,099
Income taxes payable
1,059,993
1,002,744
Liability for loans eligible for repurchase
Liability for losses under representations and warranties
30,491
32,421
Total liabilities
15,376,441
13,351,535
Commitments and contingencies – Note 16
STOCKHOLDERS’ EQUITY
Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 49,925,752 and 49,988,492 shares, respectively
Additional paid-in capital
11,475
—
Retained earnings
3,561,393
3,471,044
Total stockholders' equity
3,572,873
3,471,049
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter ended September 30,
Nine months ended September 30,
(in thousands, except earnings per share)
Revenues
Net gains on loans held for sale at fair value:
From non-affiliates
151,874
170,342
398,672
705,772
From PennyMac Mortgage Investment Trust
(500)
(1,648)
(1,494)
(16,052)
151,374
168,694
397,178
689,720
Loan origination fees:
37,122
31,845
105,369
134,902
579
2,192
2,690
6,938
37,701
34,037
108,059
141,840
Fulfillment fees from PennyMac Mortgage Investment Trust
5,531
18,407
22,895
55,807
Net loan servicing fees:
Loan servicing fees:
328,049
270,336
925,865
774,483
20,257
20,247
61,023
61,670
Other
39,628
22,497
95,574
70,535
387,934
313,080
1,082,462
906,688
Change in fair value of mortgage servicing rights and mortgage servicing liabilities
221,096
95,411
(70,608)
420,424
Mortgage servicing rights hedging results
(423,656)
(164,749)
(531,565)
(558,614)
(202,560)
(69,338)
(602,173)
(138,190)
Net loan servicing fees
185,374
243,742
480,289
768,498
Net interest income (expense):
Interest income
166,552
82,994
467,982
186,740
Interest expense
156,863
82,965
467,276
231,399
Net interest income (expense)
9,689
29
706
(44,659)
Management fees from PennyMac Mortgage Investment Trust
7,175
7,731
21,510
23,758
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust
(51)
(119)
91
(311)
Results of real estate acquired in settlement of loans
637
528
978
1,881
2,878
3,241
8,011
8,775
Total net revenues
400,308
476,290
1,039,717
1,645,309
Expenses
Compensation
156,909
157,793
441,826
601,532
Technology
39,000
35,647
110,282
105,054
Loan origination
28,889
28,356
87,621
148,620
Professional services
11,942
16,230
50,837
57,126
Servicing
13,242
20,399
40,526
22,204
Occupancy and equipment
8,900
11,299
27,786
30,139
Marketing and advertising
4,632
7,601
13,451
43,011
9,997
13,493
29,527
40,105
Total expenses
273,511
290,818
801,856
1,047,791
Income before provision for income taxes
126,797
185,472
237,861
597,518
Provision for income taxes
33,927
50,338
56,363
159,628
Net income
92,870
135,134
181,498
437,890
Earnings per share
Basic
1.86
2.59
3.63
8.10
Diluted
1.77
2.46
3.44
7.69
Weighted average shares outstanding
49,902
52,170
49,975
54,043
52,561
54,968
52,735
56,913
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Quarter ended September 30, 2023
Additional
Total
Number of
Par
paid-in
Retained
stockholders'
shares
value
capital
earnings
equity
(in thousands)
Balance, June 30, 2023
49,858
3,478,755
3,478,760
Stock-based compensation
68
Common stock dividend ($0.20 per share)
(10,232)
Balance, September 30, 2023
49,926
Quarter ended September 30, 2022
Balance, June 30, 2022
52,939
3,461,380
3,461,385
20
6,863
Issuance of common stock in settlement of directors' fees
1
52
Repurchase of common stock
(1,949)
(6,915)
(92,787)
(99,702)
(21,642)
Balance, September 30, 2022
51,011
3,482,085
3,482,090
Nine months ended September 30, 2023
Balance, December 31, 2022
49,988
1,137
23,005
102
(1,201)
(11,632)
(59,943)
(71,575)
Common stock dividends ($0.60 per share)
(31,206)
Nine months ended September 30, 2022
Balance, December 31, 2021
56,867
125,396
3,292,923
3,418,325
837
24,686
154
(6,696)
(1)
(150,236)
(204,522)
(354,759)
(44,206)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cash flow from operating activities
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Net gains on loans held for sale at fair value
(397,178)
(689,720)
70,608
(420,424)
531,565
558,614
Capitalization of interest on loans held for sale
(678)
(3,122)
Amortization of debt issuance costs
14,925
14,560
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust
416
Results of real estate acquired in settlement in loans
(978)
(1,881)
Stock-based compensation expense
20,839
30,689
Reversal of provision for servicing advance losses
(7,603)
(52,113)
Depreciation and amortization
39,122
23,809
Amortization of operating lease right-of-use assets
13,311
11,796
Purchase of loans held for sale from PennyMac Mortgage Investment Trust
(50,812,386)
(36,544,166)
Origination of loans held for sale
(8,277,117)
(18,343,547)
Purchase of loans held for sale from non-affiliates
(1,507,346)
(1,564,173)
Purchase of loans from Ginnie Mae securities and early buyout investors
(2,045,156)
(5,620,437)
Sale to non-affiliates and principal payment of loans held for sale
60,061,205
67,056,886
Sale of loans held for sale to PennyMac Mortgage Investment Trust
298,862
Repurchase of loans subject to representations and warranties
(38,943)
(76,865)
Decrease in servicing advances
248,115
234,529
Decrease in receivable from PennyMac Mortgage Investment Trust
8,229
6,941
Sale of real estate acquired in settlement of loans
25,039
15,419
(Increase) decrease in other assets
(47,226)
74,433
Decrease in accounts payable and accrued expenses
(24,641)
(13,922)
Decrease in operating lease liabilities
(16,992)
(12,562)
Decrease in payable to PennyMac Mortgage Investment Trust
(107,968)
(153,276)
Payments to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement
(3,855)
Increase in income taxes payable
57,249
279,045
Net cash (used in) provided by operating activities
(2,012,508)
5,543,826
Statements continue on the next page
(Continued) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cash flow from investing activities
Decrease (increase) in short-term investment
6,641
(29,225)
Sale of interest-only stripped securities
98,066
Net settlement of derivative financial instruments used for hedging of mortgage servicing rights
(450,193)
(810,749)
Purchase of mortgage servicing rights
(3,927)
Transfer of mortgage servicing rights relating to delinquent loans to Agency
305
Acquisition of capitalized software
(27,650)
(59,631)
Purchase of furniture, fixtures, equipment and leasehold improvements
(891)
(5,604)
(Increase) decrease in margin deposits
(4,254)
425,569
Net cash used in investing activities
(377,976)
(483,567)
Cash flow from financing activities
Sale of assets under agreements to repurchase
61,277,758
58,606,620
Repurchase of assets sold under agreements to repurchase
(59,864,151)
(62,413,898)
Issuance of mortgage loan participation purchase and sale certificates
16,137,040
14,947,597
Repayment of mortgage loan participation purchase and sale certificates
(15,926,067)
(15,059,445)
Issuance of notes payable secured by mortgage servicing assets
880,000
500,000
Repayment of notes payable secured by mortgage servicing assets
(150,000)
Repayment of obligations under capital lease
(3,489)
Payment of debt issuance costs
(14,716)
(14,087)
Issuance of common stock pursuant to exercise of stock options
11,308
1,777
Payment of withholding taxes relating to stock-based compensation
(9,142)
(7,780)
Payment of dividends to holders of common stock
Net cash provided by (used in) financing activities
2,239,249
(3,841,670)
Net (decrease) increase in cash and restricted cash
(151,235)
1,218,589
Cash and restricted cash at beginning of period
1,328,539
340,093
Cash and restricted cash at end of period
1,558,682
Cash and restricted cash at end of period are comprised of the following:
1,558,679
Restricted cash included in Other assets
Supplemental cash flow information:
Cash paid for interest
463,567
236,504
Cash refunds received for income taxes, net
886
119,417
Non-cash investing activities:
Mortgage servicing rights resulting from loan sales
1,299,992
1,359,632
Exchange of mortgage servicing spread for interest-only stripped securities
Operating right-of-use assets recognized
2,893
1,364
Unsettled portion of MSR acquisitions
213
Non-cash financing activities:
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1—Organization
PennyMac Financial Services, Inc. (together, with its consolidated subsidiaries, unless the context indicates otherwise, “PFSI” or the “Company”) is a holding corporation and its primary assets are equity interests in Private National Mortgage Acceptance Company, LLC (“PNMAC”). The Company is the managing member of PNMAC, and it operates and controls all of the businesses and consolidates the financial results of PNMAC and its subsidiaries.
PNMAC is a Delaware limited liability company which, through its subsidiaries, engages in mortgage banking and investment management activities. PNMAC’s mortgage banking activities consist of residential mortgage loan production and servicing. PNMAC’s investment management activities and a portion of its mortgage banking activities are conducted on behalf of PennyMac Mortgage Investment Trust, a real estate investment trust that invests in residential mortgage-related assets and is separately listed on the New York Stock Exchange under the ticker symbol “PMT”. PNMAC’s primary wholly owned subsidiaries are:
PLS is approved as a seller/servicer of mortgage loans by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and as an issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”). PLS is a licensed Federal Housing Administration (“FHA”) Nonsupervised Title II Lender with the U.S. Department of Housing and Urban Development (“HUD”) and a lender/servicer with the U.S. Department of Veterans Affairs (“VA”) and U.S. Department of Agriculture (“USDA”) (each of the above an “Agency” and collectively the “Agencies”).
Note 2—Basis of Presentation
The accompanying consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s Accounting Standards Codification for interim financial information and with the Securities and Exchange Commission’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these consolidated financial statements and notes do not include all of the information required by GAAP for complete financial statements. This interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
The accompanying consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, income, and cash flows for the interim periods presented, but are not necessarily indicative of income that may be expected for the full year ending December 31, 2023. Intercompany accounts and transactions have been eliminated.
Preparation of financial statements in compliance with GAAP requires management to make judgments and estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results will likely differ from those estimates.
Note 3—Concentration of Risk
A portion of the Company’s activities relate to PMT. Revenues generated from PMT (generally comprised of gains on loans held for sale, loan origination and fulfillment fees, loan servicing fees, management fees, change in fair value of investment in and dividends received from PMT, and expense allocations charged to PMT) totaled 9% and 10% of total net revenues for the quarters ended September 30, 2023 and 2022, respectively, and 11% and 8% for the nine months ended September 30, 2023 and 2022, respectively. The Company also purchased 84% and 78% of its newly originated loan production from PMT during the quarters ended September 30, 2023 and 2022, respectively, and 84% and 65% during the nine months ended September 30, 2023 and 2022, respectively.
Note 4—Related Party Transactions
PennyMac Mortgage Investment Trust
Operating Activities
Mortgage Loan Production Activities and Mortgage Servicing Rights (“MSRs”) Recapture
Loan Sales
The Company sells newly originated loans to PMT under a mortgage loan purchase agreement. The Company has typically utilized the mortgage loan purchase agreement for the purpose of selling to PMT conforming balance non-government insured or guaranteed loans, as well as prime jumbo residential mortgage loans.
MSR Recapture
Pursuant to the terms of an MSR recapture agreement by and between the Company and PMT, if the Company refinances (recaptures) mortgage loans for which PMT holds the MSRs, the Company is generally required to transfer and convey to PMT cash in an amount equal to:
The “recapture rate” means, during each month, the ratio of (i) the aggregate unpaid principal balance of all recaptured mortgage loans, to (ii) the aggregate unpaid principal balance of all mortgage loans for which the Company held the MSRs and that were refinanced or otherwise paid off in such month. The Company has agreed to allocate sufficient resources to target a recapture rate of at least 15%.
Fulfillment Services
The Company provides PMT with certain mortgage banking services, including fulfillment and disposition-related services, for which it receives a monthly fulfillment fee. Pursuant to the terms of a mortgage banking services agreement, the fulfillment fees shall not exceed the following:
12
Sourcing Fees
PMT does not hold the Ginnie Mae approval required to issue Ginnie Mae mortgage-backed securities (“MBS”) and act as a servicer. Accordingly, under the mortgage banking services agreement, the Company purchases mortgage loans underwritten in accordance with the Ginnie Mae MBS Guide “as is” and without recourse of any kind from PMT at PMT’s cost less any administrative fees paid by the correspondent to PMT plus accrued interest and a sourcing fee ranging from one to two basis points of the unpaid principal balance (“UPB”) of the loan, generally based on the average number of calendar days the loans are held by PMT before being purchased by the Company. The Company may also acquire conventional loans from PMT on the same terms upon mutual agreement between PMT and the Company.
While the Company purchases these mortgage loans “as is” and without recourse of any kind from PMT, where the Company has a claim for repurchase, indemnity or otherwise against a correspondent seller, it is entitled, at its sole expense, to pursue any such claim through or in the name of PMT.
Following is a summary of loan production and MSR recapture activities, between the Company and PMT:
Net losses on loans held for sale at fair value:
Net losses on loans sold to PMT (primarily cash)
(2,820)
Mortgage servicing rights recapture incurred
(13,232)
Sales of loans held for sale to PMT
Tax service fees earned from PMT included in Loan origination fees
Fulfillment fee revenue
Unpaid principal balance of loans fulfilled for PMT subject to fulfillment fees
2,760,000
10,226,513
12,418,084
30,319,475
Sourcing fees included in cost of loans purchased from PMT
1,854
1,203
5,014
3,562
Unpaid principal balance of loans purchased from PMT:
Government guaranteed or insured
8,606,835
12,261,222
29,127,889
35,643,210
Conventional conforming
9,932,593
21,013,357
18,539,428
50,141,246
Loan Servicing
The Company and PMT have entered into a loan servicing agreement (the “Servicing Agreement”), pursuant to which the Company provides subservicing for PMT’s MSRs, loans at fair value held in consolidated variable interest entities and loans held for sale (prime servicing) and its portfolio of residential mortgage loans purchased with credit deterioration (special servicing). The Servicing Agreement provides for servicing fees of per-loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced loan or the real estate acquired in settlement of loans (“REO”). The Company also remains entitled to customary ancillary income and market-based fees and charges relating to loans it services for PMT.
13
Prime Servicing
Special Servicing
Following is a summary of loan servicing fees earned from PMT:
Loan type serviced
Prime servicing
20,224
20,136
60,839
61,243
Special servicing
33
111
184
427
Investment Management Activities
The Company has a management agreement with PMT (the “Management Agreement”), pursuant to which the Company oversees PMT’s business affairs in conformity with PMT’s investment policies for which PFSI collects a base management fee and may collect a performance incentive fee. The Management Agreement provides that:
14
The performance incentive fee is equal to the sum of: (a) 10% of the amount by which PMT’s “net income” for the quarter exceeds (i) an 8% return on “equity” plus the “high watermark,” up to (ii) a 12% return on PMT’s “equity”; plus (b) 15% of the amount by which PMT’s “net income” for the quarter exceeds (i) a 12% return on PMT’s “equity” plus the “high watermark,” up to (ii) a 16% return on PMT’s “equity”; plus (c) 20% of the amount by which PMT’s “net income” for the quarter exceeds a 16% return on “equity” plus the “high watermark.”
For the purpose of determining the amount of the performance incentive fee:
“Net income” is defined as net income or loss attributable to PMT’s common shares of beneficial interest computed in accordance with GAAP adjusted for certain other non-cash charges determined after discussions between the Company and PMT’s independent trustees and approval by a majority of PMT’s independent trustees.
“Equity” is the weighted average of the issue price per common share of all of PMT’s public offerings, multiplied by the weighted average number of common shares outstanding (including restricted share units) in the rolling four-quarter period.
“High watermark” is the quarterly adjustment that reflects the amount by which the “net income” (stated as a percentage of return on “equity”) in that quarter exceeds or falls short of the lesser of 8% and the average Fannie Mae 30-year MBS yield (the “Target Yield”) for the four quarters then ended. If the “net income” is lower than the Target Yield, the high watermark is increased by the difference. If the “net income” is higher than the Target Yield, the high watermark is reduced by the difference. Each time a performance incentive fee is earned, the high watermark returns to zero. As a result, the threshold amounts required for the Company to earn a performance incentive fee are adjusted cumulatively based on the performance of PMT’s “net income” over (or under) the Target Yield, until the “net income” in excess of the Target Yield exceeds the then-current cumulative high watermark amount, and a performance incentive fee is earned.
The base management fee and the performance incentive fee are both receivable quarterly in arrears. The performance incentive fee may be paid in cash or a combination of cash and PMT’s common shares (subject to a limit of no more than 50% paid in common shares), at PMT’s option.
In the event of termination of the Management Agreement between PMT and the Company, the Company may be entitled to a termination fee in certain circumstances. The termination fee is equal to three times the sum of (a) the average annual base management fee, and (b) the average annual performance incentive fee earned by the Company, in each case during the 24-month period immediately preceding the date of termination.
Following is a summary of the base management and performance incentive fees earned from PMT:
Base management
Performance incentive
Expense Reimbursement
Under the Management Agreement, PMT reimburses the Company for its organizational and operating expenses, including third-party expenses, incurred on PMT’s behalf, it being understood that the Company and its affiliates shall allocate a portion of their personnel’s time to provide certain legal, tax and investor relations services for the direct benefit of PMT. With respect to the allocation of the Company’s and its affiliates’ personnel compensation, the Company is reimbursed $165,000 per fiscal quarter, such amount to be reviewed annually and not preclude reimbursement for any other services performed by the Company or its affiliates.
15
PMT is also required to pay its pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Company and its affiliates required for PMT’s and its subsidiaries’ operations. These expenses are allocated based on the ratio of PMT’s proportion of gross assets compared to all remaining gross assets owned or managed by the Company as calculated at each fiscal quarter end.
The Company received reimbursements from PMT for expenses as follows:
Reimbursement of:
Expenses incurred on PMT's behalf, net
5,893
705
15,532
8,896
Common overhead incurred by the Company
1,489
2,574
5,450
6,247
165
495
7,547
3,444
21,477
15,638
Payments and settlements during the period (1)
9,190
41,509
72,446
110,835
Investing Activities
The Company owns 75,000 common shares of beneficial interest of PMT.
Following is a summary of investing activities between the Company and PMT:
Common shares of beneficial interest of PennyMac Mortgage Investment Trust:
Fair value
Number of shares
75
Receivable from and Payable to PMT
Amounts receivable from and payable to PMT are summarized below:
Receivable from PMT:
Correspondent production fees
9,183
6,835
Management fees
7,307
Servicing fees
6,760
6,740
Allocated expenses and expenses incurred on PMT's behalf
2,672
11,447
Fulfillment fees
1,823
4,043
Payable to PMT:
Amounts advanced by PMT to fund its servicing advances
95,723
201,451
2,252
3,560
16
Exchanged Private National Mortgage Acceptance Company, LLC Unitholders
The Company entered into a tax receivable agreement with certain former owners of PNMAC that provides for the payment from time to time by the Company to PNMAC’s exchanged unitholders of an amount equal to 85% of the amount of the net tax benefits, if any, that the Company is deemed to realize as a result of (i) increases in tax basis of PNMAC’s assets resulting from exchanges of ownership interests in PNMAC and (ii) certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.
The Company has recorded a $26.1 million Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement as of September 30, 2023 and December 31, 2022. The Company did not make payments under the tax receivable agreement during the quarter and nine months ended September 30, 2023 and made $340,000 and $3.9 million of payments during the quarter and nine months ended September 30, 2022, respectively.
Townsgate Closing Services, LLC
On December 27, 2022, the Company advanced $801,000 to one of its joint ventures, Townsgate Closing Services, LLC, under a revolving loan agreement. The revolving loan agreement has a maximum commitment amount of $1.5 million, matures on December 27, 2027, and earns interest, at 10.13% per year as of September 30, 2023, subject to semi-annual adjustment indexed to the 10+ year USD High Yield Corporate Bond Index as determined by Tradeweb/Bloomberg. The outstanding balance is included in Other assets on the Company’s consolidated balance sheets. The Company recorded $21,000 and $63,000 of interest income related to the loan during the quarter and nine months ended September 30, 2023, respectively.
.
Note 5—Loan Sales and Servicing Activities
The Company originates or purchases and sells loans in the secondary mortgage market without recourse for credit losses. However, the Company maintains continuing involvement with the loans in the form of servicing arrangements and the liability under representations and warranties it makes to purchasers and insurers of the loans.
The following table summarizes cash flows between the Company and transferees as a result of the sale of loans in transactions where the Company maintains continuing involvement with the loans as servicer:
Cash flows:
Sales proceeds
21,651,096
16,215,098
Servicing fees received
303,224
242,622
853,962
676,384
The Company is contractually responsible for making the payments required to protect its beneficial interest holders’ interests in the properties collateralizing their loans and may, therefore, be required to advance amounts in excess of insurer or guarantor reimbursement limits. Therefore, the Company provides a valuation allowance on the servicing advances for these amounts in excess of amounts that are expected to ultimately be recovered from the loans’ insurers, guarantors, or beneficial interest holders.
The servicing advance valuation allowance is estimated based on relevant qualitative and quantitative information about past events, including historical collection and loss experience, current conditions, and reasonable and supportable forecasts that affect collectable amounts. The provision for losses on servicing advances is included in Servicing expense in the consolidated statements of income. Servicing advances are written off when they are deemed unrecoverable.
17
The following is a summary of the allowance for losses on servicing advances:
Balance at beginning of period
70,070
66,143
78,992
120,940
Reversals of provision for losses
(2,554)
(820)
Charge-offs, net
(1,872)
(1,610)
(5,745)
(5,114)
Balance at end of period
65,644
63,713
The following table summarizes the UPB of the loans sold by the Company in transactions when it maintains continuing involvement with the loans as servicer:
Unpaid principal balance of loans outstanding
333,372,910
295,032,674
Delinquent loans:
30-89 days
12,534,532
11,019,194
90 days or more:
Not in foreclosure
6,176,470
6,548,849
In foreclosure
748,004
834,155
Foreclosed
8,172
12,905
Loans in bankruptcy
1,319,689
1,143,484
The following tables summarize the Company’s loan servicing portfolio as measured by UPB:
rights owned
Subservicing
loans serviced
Investor:
Non-affiliated entities:
Originated
Purchased
17,924,005
351,296,915
232,914,107
Loans held for sale
5,181,866
356,478,781
589,392,888
30 days
10,279,914
1,634,924
11,914,838
60 days
2,891,309
377,754
3,269,063
6,390,779
946,456
7,337,235
804,958
76,663
881,621
9,180
5,136
14,316
20,376,140
3,040,933
23,417,073
1,441,034
171,598
1,612,632
Custodial funds managed by the Company (1)
5,310,846
2,760,857
8,071,703
18
December 31, 2022
19,568,122
314,600,796
233,575,672
3,498,214
318,099,010
551,674,682
8,903,829
1,576,414
10,480,243
2,855,176
337,081
3,192,257
6,829,985
888,057
7,718,042
914,213
75,012
989,225
13,835
7,979
21,814
19,517,038
2,884,543
22,401,581
1,291,038
125,719
1,416,757
3,329,709
1,783,157
5,112,866
Following is a summary of the geographical distribution of loans included in the Company’s loan servicing portfolio for the top five and all other states as measured by UPB:
State
California
70,097,836
68,542,279
Florida
55,873,979
50,873,961
Texas
54,118,039
47,911,696
Virginia
34,798,867
33,478,151
Maryland
26,367,206
25,473,417
All other states
348,136,961
325,395,178
19
Note 6—Fair Value
Most of the Company’s assets and certain of its liabilities are measured at or based on their fair values. The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the significant inputs used to determine fair value. These levels are:
As a result of the difficulty in observing certain significant valuation inputs affecting “Level 3” fair value assets and liabilities, the Company is required to make judgments regarding these items’ fair values. Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs to be applied in valuing these assets and liabilities and their fair values. Such differences may result in significantly different fair value measurements. Likewise, due to the general illiquidity of some of these assets and liabilities, subsequent transactions may be at values significantly different from those reported.
Fair Value Accounting Elections
The Company identified its MSRs, its mortgage servicing liabilities (“MSLs”) and all of its non-cash financial assets to be accounted for at fair value so changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Following is a summary of assets and liabilities that are measured at fair value on a recurring basis:
Level 1
Level 2
Level 3
Assets:
Short-term investment
Loans held for sale at fair value
4,787,472
399,184
Derivative assets:
Interest rate lock commitments
42,385
Forward purchase contracts
7,227
Forward sales contracts
115,778
MBS put options
4,408
Put options on interest rate futures purchase contracts
36,391
Call options on interest rate futures purchase contracts
2,324
Total derivative assets before netting
38,715
127,413
208,513
Netting
(105,147)
Total derivative assets
Mortgage servicing rights at fair value
Investment in PennyMac Mortgage Investment Trust
45,198
4,914,885
7,525,925
12,380,861
Liabilities:
Derivative liabilities:
21,611
41,538
14,808
4,301
Put options on interest rate futures sales contracts
4,945
Total derivative liabilities before netting
60,647
87,203
(46,003)
Total derivative liabilities
23,429
43,018
21
3,163,528
345,772
36,728
2,433
80,754
6,057
29,203
2,820
32,023
89,244
157,995
(58,992)
45,146
3,252,772
6,336,121
9,575,047
10,884
48,670
20,684
3,008
69,354
83,246
(61,534)
12,980
23,808
22
As shown above, certain of the Company’s loans held for sale, Interest Rate Lock Commitments (“IRLCs”), MSRs and MSLs are measured using Level 3 fair value inputs. Following are roll forwards of assets and liabilities measured at fair value using “Level 3” inputs at either the beginning or the end of the period presented:
Net interest
Mortgage
Loans held
rate lock
servicing
Assets
for sale
commitments (1)
rights
392,758
30,636
6,510,585
6,933,979
Purchases and issuances, net
681,022
46,991
728,013
Capitalization of interest and servicing advances
10,770
Sales and repayments
(202,892)
(73)
(202,965)
450,936
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk
15,520
Other factors
(1,831)
(32,161)
220,974
186,982
13,689
202,502
Transfers from Level 3 to Level 2
(496,019)
Transfers to real estate acquired in settlement of loans
(144)
Transfers to loans held for sale
(24,692)
(98,066)
20,774
7,504,314
Changes in fair value recognized during the quarter relating to assets still held at September 30, 2023
6,519
248,267
Quarter ended
Liabilities
Mortgage servicing liabilities:
1,940
Changes in fair value included in income
(122)
Changes in fair value recognized during the quarter relating to liabilities still outstanding at September 30, 2023
23
503,553
65,151
5,217,167
5,785,871
260,721
38,481
4,140
303,342
6,361
(71,078)
345,077
(9,217)
(4,801)
(127,835)
95,288
(37,348)
(14,018)
(46,565)
(340,903)
(32,000)
344,636
(56,203)
5,661,672
5,950,105
Changes in fair value recognized during the quarter relating to assets still held at September 30, 2022
(16,166)
22,919
Mortgage servicing liabilities
2,337
(123)
2,214
Changes in fair value recognized during the quarter relating to liabilities still outstanding at September 30, 2022
24
25,844
6,325,237
1,733,158
177,377
1,910,535
31,608
(472,039)
(305)
(472,344)
36,014
(1,967)
18,559
(70,886)
(54,294)
34,047
(18,280)
(1,272,912)
(450)
(201,006)
Changes in fair value recognized during the period relating to assets still held at September 30, 2023
10,465
(39,647)
Nine months ended
(278)
Changes in fair value recognized during the period relating to liabilities still outstanding at September 30, 2023
1,128,876
322,193
3,878,078
5,329,147
2,994,447
345,770
3,344,357
54,080
(1,335,966)
(39,427)
(26,119)
(694,318)
419,822
(300,615)
(65,546)
(340,042)
(2,430,869)
(386)
(29,848)
Changes in fair value recognized during the period relating to assets still held at September 30, 2022
(31,587)
332,032
25
September 30, 2022
2,816
(602)
Changes in fair value recognized during the period relating to liabilities still outstanding at September 30, 2022
The Company had transfers among the fair value levels arising from the return to salability in the active secondary market of certain loans held for sale and from transfers of IRLCs to loans held for sale at fair value upon purchase or funding.
Assets and Liabilities Measured at Fair Value under the Fair Value Option
Net changes in fair values included in income for assets and liabilities carried at fair value as a result of management’s election of the fair value option by income statement line item are summarized below:
Net gains on
Net
loans held
loan
for sale at
fair value
fees
762
(69,358)
Mortgage servicing rights
221,736
25,930
122
123
187,462
(273,701)
116,576
146,121
278
602
26
Following are the fair value and related principal amounts due upon maturity of loans held for sale:
Principal
amount
Fair
due upon
maturity
Difference
Current through 89 days delinquent
5,142,606
5,118,234
24,372
3,450,578
3,428,052
22,526
90 days or more delinquent:
38,422
44,694
(6,272)
47,252
53,351
(6,099)
5,628
18,938
(13,310)
11,470
16,811
(5,341)
4,790
11,086
Assets Measured at Fair Value on a Nonrecurring Basis
Following is a summary of assets that were measured at fair value on a nonrecurring basis:
Real estate acquired in settlement of loans
3,178
1,850
The following table summarizes the losses recognized on assets when they were remeasured at fair value on a nonrecurring basis:
(494)
(131)
(791)
(838)
Fair Value of Financial Instruments Carried at Amortized Cost
The Company’s Assets sold under agreements to repurchase, Mortgage loan participation purchase and sale agreements, Notes payable secured by mortgage servicing assets, Unsecured senior notes and Obligations under capital lease are carried at amortized cost.
These liabilities are classified as “Level 3” fair value items due to the Company’s reliance on unobservable inputs to estimate their fair values. The Company has concluded that the fair values of these liabilities other than term notes and term loans included in Notes payable secured by mortgage servicing assets and the Unsecured senior notes approximate their carrying values due to their short terms and/or variable interest rates.
The Company estimates the fair value of the term notes, term loans and the Unsecured senior notes using indications of fair value provided by non-affiliate brokers, pricing services and internal estimates of fair value. The fair value and carrying value of these liabilities are summarized below:
Carrying value
Term notes and term loans
2,479,425
2,474,515
1,677,476
1,794,475
1,553,962
1,550,750
27
Valuation Governance
Most of the Company’s financial assets, and all of its derivatives, MSRs and MSLs, are carried at fair value with changes in fair value recognized in current period income. Certain of the Company’s financial assets and derivatives and all of its MSRs and MSLs are “Level 3” fair value assets and liabilities which require use of unobservable inputs that are significant to the estimation of the items’ fair values. Unobservable inputs reflect the Company’s own judgments about the factors that market participants use in pricing an asset or liability, and are based on the best information available under the circumstances.
Due to the difficulty in estimating the fair values of “Level 3” fair value assets and liabilities, the Company has assigned responsibility for estimating the fair values of these assets and liabilities to specialized staff within its capital markets group and subjects the valuation process to significant senior management oversight.
With respect to “Level 3” valuations other than IRLCs, the capital markets valuation staff group reports to the Company’s senior management valuation committee, which oversees the valuations. Capital markets valuation staff monitors the models used for valuation of the Company’s “Level 3” fair value assets and liabilities, including the models’ performance versus actual results, and reports those results as well as changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the valuations and any changes in model methods and inputs, to PFSI’s senior management valuation committee. The Company’s senior management valuation committee includes the Company’s chief financial, risk, and capital markets officers as well as other senior members of the Company’s finance, capital markets and risk management staffs.
To assess the reasonableness of its valuations, the capital markets valuation staff presents an analysis of the effect on the valuations of changes to the significant inputs to the models and, for MSRs, comparisons of its estimates of fair value of key inputs to those procured from nonaffiliated brokers and published surveys.
The fair value of the Company’s IRLCs is developed by its capital markets risk management staff and is reviewed by its capital markets operations staff.
Valuation Techniques and Inputs
Following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” fair value assets and liabilities:
Loans Held for Sale
Most of the Company’s loans held for sale at fair value are saleable into active markets and are therefore categorized as “Level 2” fair value assets. The fair values of “Level 2” fair value loans are determined using their contracted selling prices or quoted market prices or market price equivalents.
Certain of the Company’s loans held for sale are not saleable into active markets and are therefore categorized as “Level 3” fair value assets. Loans held for sale categorized as “Level 3” fair value assets include:
28
A loan becomes eligible for resale into a new Ginnie Mae security when the loan becomes current either through completion of a modification of the loan’s terms or after three months of timely payments following either the completion of certain types of payment deferral programs or borrower reperformance and when the issuance date of the new security is at least 120 days after the date the loan was last delinquent.
The Company uses a discounted cash flow model to estimate the fair value of its “Level 3” fair value loans held for sale. The significant unobservable inputs used in the fair value measurement of the Company’s “Level 3” fair value loans held for sale are discount rates, home price projections, voluntary prepayment/resale and total prepayment/resale speeds. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment speeds.
Following is a quantitative summary of key “Level 3” fair value inputs used in the valuation of loans held for sale:
Fair value (in thousands)
Key inputs (1):
Discount rate:
Range
7.9% – 10.2%
5.5% – 10.2%
Weighted average
7.9%
5.7%
Twelve-month projected housing price index change:
0.2% – 0.3%
(1.9)% – (1.7)%
0.2%
(1.8)%
Voluntary prepayment/resale speed (2):
4.0% – 43.0%
4.7% – 25.6%
28.0%
21.6%
Total prepayment/resale speed (3):
4.1% – 55.4%
4.8% – 36.1%
35.2%
29.4%
Changes in fair value of loans held for sale attributable to changes in the loan’s instrument-specific credit risk are measured with reference to the change in the respective loan’s delinquency status and performance history at period end from the later of the beginning of the period or acquisition date. Changes in fair value of loans held for sale are included in Net gains on loans held for sale at fair value in the Company’s consolidated statements of income.
Derivative Financial Instruments
Interest Rate Lock Commitments
The Company categorizes IRLCs as “Level 3” fair value assets or liabilities. The Company estimates the fair values of IRLCs based on quoted Agency MBS prices, its estimate of the fair value of the MSRs it expects to receive in the sale of the loans and the probability that the loans will be funded or purchased (the “pull-through rate”).
The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the estimated fair values of MSRs attributable to the mortgage loans it has committed to originate or purchase. Significant changes in the pull-through rate or the MSR component of the IRLCs, in isolation, could result in significant changes in the IRLCs’ fair value measurements. The financial effects of changes in these inputs are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of IRLC fair value, but increase the pull-through rate for the loan principal and interest payment cash flow component, which has decreased in fair value. Changes in fair value of IRLCs are included in Net gains on loans held for sale at fair value in the Company’s consolidated statements of income.
Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:
Fair value (in thousands) (1)
Committed amount
7,527,726
7,009,119
Key inputs (2):
Pull-through rate:
14.7% – 100%
10.3% – 100%
86.9%
82.8%
Mortgage servicing rights fair value expressed as:
Servicing fee multiple:
1.1 – 8.2
(1.3) – 7.7
5.0
4.3
Percentage of loan commitment amount:
0.3% – 4.5%
(0.2)% – 3.8%
2.1%
2.0%
Hedging Derivatives
Fair values of derivative financial instruments actively traded on exchanges are categorized by the Company as “Level 1” fair value assets and liabilities; fair values of derivative financial instruments based on observable interest rates, volatilities and prices in the MBS or other markets are categorized by the Company as “Level 2” fair value assets and liabilities.
Changes in the fair values of hedging derivatives are included in Net gains on loans held for sale at fair value, or Net loan servicing fees – Mortgage servicing rights hedging results, as applicable, in the Company’s consolidated statements of income.
Mortgage Servicing Rights
MSRs are categorized as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the estimation of the fair value of MSRs include the applicable prepayment rate (prepayment speed), pricing spread (discount rate), and annual per-loan cost to service the underlying loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key inputs are not directly related. Changes in the fair
30
value of MSRs are included in Net loan servicing fees—Change in fair value of mortgage servicing rights and mortgage servicing liabilities in the Company’s consolidated statements of income.
Following are the key inputs used in determining the fair value of MSRs received by the Company when it retains the obligation to service the mortgage loans it sells:
(Amount recognized and unpaid principal balance of underlying loans in thousands)
MSR and pool characteristics:
Amount recognized
Unpaid principal balance of underlying loans
21,861,437
16,003,556
60,549,919
65,956,748
Weighted average servicing fee rate (in basis points)
42
49
47
44
Annual total prepayment speed (2):
7.5% – 20.4%
6.8% – 19.1%
7.5% – 23.2%
5.7% – 23.4%
10.3%
11.1%
10.9%
9.0%
Equivalent average life (in years):
3.6 – 9.4
4.0 – 8.1
3.0 – 9.4
3.7 – 9.2
7.7
7.4
7.6
8.1
Pricing spread (3):
5.5% – 12.6%
5.5% – 11.4%
5.5% – 16.1%
6.1%
8.1%
7.0%
7.8%
Per-loan annual cost of servicing:
$68 – $127
$79 – $116
$79 – $177
$97
$105
$99
$104
31
Following is a quantitative summary of key inputs used in the valuation of the Company’s MSRs and the effect on the fair value from adverse changes in those inputs:
(Fair value, unpaid principal balance of underlying
loans and effect on fair value amounts in thousands)
$ 7,084,356
$ 5,953,621
Pool characteristics:
$ 351,269,905
$ 314,567,639
Weighted average note interest rate
3.9%
3.4%
38
36
5.4% – 16.4%
5.0% – 17.7%
6.7%
7.5%
3.2 – 9.4
3.7 – 9.3
8.8
8.4
Effect on fair value of (3):
5% adverse change
($89,373)
($77,346)
10% adverse change
($176,093)
($152,192)
20% adverse change
($342,038)
($294,872)
Pricing spread (4):
5.6% – 12.6%
4.9% – 14.3%
6.5%
($96,272)
($81,021)
($189,990)
($159,863)
($370,130)
($311,329)
$68 – $135
$68 – $144
$107
$109
($43,810)
($41,263)
($87,619)
($82,527)
($175,238)
($165,053)
32
Mortgage Servicing Liabilities
MSLs are categorized as “Level 3” fair value liabilities. The Company uses a discounted cash flow approach to estimate the fair value of MSLs. The key inputs used in the estimation of the fair value of MSLs include the applicable pricing spread, annual total prepayment speed, and the per-loan annual cost of servicing the underlying loans. Changes in the fair value of MSLs are included in Net servicing fees—Change in fair value of mortgage servicing rights and mortgage servicing liabilities in the Company’s consolidated statements of income.
Following are the key inputs used in determining the fair value of MSLs:
Unpaid principal balance of underlying loans (in thousands)
27,010
33,157
Servicing fee rate (in basis points)
Pricing spread (2)
8.4%
Annual total prepayment speed (3)
15.9%
17.2%
Equivalent average life (in years)
5.2
4.9
Per-loan annual cost of servicing
1,040
1,177
Note 7—Loans Held for Sale at Fair Value
Loans held for sale at fair value include the following:
Loan type
Government-insured or guaranteed
2,589,859
2,006,157
2,181,524
1,145,053
Jumbo
16,089
12,318
Closed-end second lien mortgage loans
217,251
46,589
Purchased from Ginnie Mae securities serviced by the Company
170,347
257,175
Repurchased pursuant to representations and warranties
11,586
42,008
Fair value of loans pledged to secure:
4,500,588
3,139,870
526,230
302,977
5,026,818
3,442,847
Note 8—Derivative Financial Instruments
The Company holds and issues derivative financial instruments in connection with its operating and investing activities. Derivative financial instruments are created in the Company’s loan production activities and when the Company enters into derivative transactions as part of its interest rate risk management activities. Derivative financial instruments created in the Company’s loan production activities are IRLCs that are created when the Company commits to purchase or originate a loan for sale.
The Company engages in interest rate risk management activities in an effort to moderate the effect of changes in market interest rates on the fair value of certain of the its assets. To manage this fair value risk resulting from interest rate risk, the Company uses derivative financial instruments acquired with the intention of reducing the risk that changes in market interest rates will result in unfavorable changes in the fair value of the Company’s IRLCs, inventory of loans held for sale and its MSRs.
The Company does not designate and qualify any of its derivatives for hedge accounting. The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.
Derivative Notional Amounts, Fair Value of Derivatives and Netting of Financial Instruments
The Company has elected to present net derivative asset and liability positions, and cash collateral obtained from or posted to its counterparties when subject to a master netting arrangement that is legally enforceable on all counterparties in the event of default. The derivatives that are not subject to a master netting arrangement are IRLCs.
The Company had the following derivative financial instruments recorded on its consolidated balance sheets:
Notional
Derivative
Derivative instrument
amount (1)
assets
liabilities
Not subject to master netting arrangements:
Subject to master netting arrangements (2):
10,768,362
8,320,849
16,995,313
12,487,760
400,000
1,750,000
3,775,000
6,800,000
2,125,000
1,350,000
Put options on interest rate futures sale contracts
325,000
250,000
Treasury futures purchase contracts
3,559,500
3,709,200
Treasury futures sale contracts
7,036,000
3,456,900
Total derivatives before netting
Deposits (received from) placed with derivative counterparties included in the derivative balances above, net
(59,144)
2,542
34
Derivative Assets, Financial Instruments, and Cash Collateral Held by Counterparty
The following table summarizes by significant counterparty the amount of derivative asset positions after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance to qualify for setoff accounting.
Gross amount not
offset in the
consolidated
Net amount
balance sheet
of assets in the
Financial
collateral
instruments
received
RJ O'Brien
33,770
29,016
Morgan Stanley Bank, N.A.
17,820
18,501
Bank of America, N.A.
2,170
1,519
Athene Annuity & Life Assurance Company
1,449
Federal National Mortgage Association
1,338
Barclays Capital
1,129
Goldman Sachs
5,757
Citibank, N.A.
5,098
Others
3,305
2,384
35
Derivative Liabilities, Financial Instruments and Collateral Held by Counterparty
The following table summarizes by significant counterparty the amount of derivative liabilities and assets sold under agreements to repurchase after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance to qualify for setoff accounting. All assets sold under agreements to repurchase are secured by sufficient collateral or have fair values that exceed the liability amounts recorded on the consolidated balance sheets.
Gross amounts
not offset in the
of liabilities
in the
instruments (1)
pledged
Atlas Securitized Products, L.P.
1,213,620
(1,213,620)
Credit Suisse First Boston Mortgage Capital LLC
970,725
(968,804)
1,921
912,887
(912,887)
567,745
(567,745)
JPMorgan Chase Bank, N.A.
426,244
(423,721)
2,523
211,713
(211,713)
BNP Paribas
405,501
(405,498)
300,280
(300,280)
Royal Bank of Canada
330,880
(330,880)
381,893
(381,893)
Wells Fargo Bank, N.A.
305,603
(304,986)
617
228,181
(221,986)
6,195
280,160
(280,160)
80,276
(79,295)
981
248,656
(243,891)
4,765
94,211
(94,211)
138,954
(134,542)
4,412
64,486
(64,486)
120,735
(118,112)
2,623
114,277
(114,277)
Nomura Corporate Funding Americas
50,165
(50,000)
Bank of Oklahoma
2,738
1,743
1,731
4,459,497
(4,418,297)
3,026,402
(3,004,690)
Following are the gains (losses) recognized by the Company on derivative financial instruments and the income statement lines where such gains and losses are included:
Derivative activity
Consolidated income statement line
Net gains on loans held for sale at fair value (1)
(9,862)
(121,353)
(5,069)
(378,396)
Hedged item:
Interest rate lock commitments and loans held for sale
162,006
363,272
217,968
1,360,341
Net loan servicing fees–Mortgage servicing rights hedging results
Note 9—Mortgage Servicing Rights and Mortgage Servicing Liabilities
Mortgage Servicing Rights at Fair Value
The activity in MSRs is as follows:
Additions (deductions):
MSRs resulting from loan sales
Purchases
Sales
352,797
349,217
1,201,621
1,363,772
Change in fair value due to:
Changes in inputs used in valuation model (1)
398,807
237,154
427,426
794,779
Other changes in fair value (2)
(177,833)
(141,866)
(498,312)
(374,957)
Total change in fair value
Unpaid principal balance of underlying loans at end of period
351,269,905
303,800,226
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets
7,018,069
5,897,613
37
Mortgage Servicing Liabilities at Fair Value
The activity in MSLs is summarized below:
Changes in fair value due to:
Changes in inputs used in valuation model
(64)
(38)
(86)
Other changes in fair value (1)
(58)
(85)
(192)
(297)
35,143
Contractual servicing fees relating to MSRs and MSLs are recorded in Net loan servicing fees—Loan servicing fees—From non-affiliates on the Company’s consolidated statements of income; other fees relating to MSRs and MSLs are recorded in Net loan servicing fees—Loan servicing fees—Other on the Company’s consolidated statements of income. Such amounts are summarized below:
Contractual servicing fees
Other fees:
Late charges
14,486
10,533
39,984
30,177
2,708
2,952
7,664
11,487
345,243
283,821
973,513
816,147
Note 10—Leases
The Company has operating lease agreements relating to its facilities. The Company’s operating lease agreements have remaining terms ranging from less than one year to eight years. Some of the operating lease agreements include options to extend the term for up to five years. None of the Company’s operating lease agreements require the Company to make variable lease payments.
The Company’s lease agreements are summarized below:
(dollars in thousands)
Lease expense:
Operating leases
4,862
5,046
14,665
15,008
Short-term leases
114
235
351
695
Sublease income
(315)
(584)
Net lease expense included in Occupancy and equipment
4,661
5,281
14,432
15,703
Other information:
Payments for operating leases
7,617
5,544
19,217
15,801
Operating lease right-of-use assets recognized
1,166
571
Period end weighted averages:
Remaining lease term (in years)
4.4
Discount rate
3.8%
Lease payments attributable to the Company’s operating lease liabilities are summarized below:
Twelve months ended September 30,
2024
21,926
2025
19,376
2026
16,037
2027
9,246
2028
5,123
Thereafter
8,320
Total lease payments
80,028
Less imputed interest
(9,818)
Operating lease liability
39
Note 11—Other Assets
Other assets are summarized below:
Capitalized software, net
153,501
157,460
Margin deposits
64,242
55,968
Interest receivable
39,784
24,110
Prepaid expenses
36,165
38,780
Servicing fees receivable, net
34,654
31,356
Other servicing receivables
30,572
24,854
Deposits securing Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets
30,021
12,277
Furniture, fixtures, equipment and building improvements, net
20,760
28,382
13,850
11,497
41,473
33,223
Deposits securing Assets sold under agreements to repurchase and/or Notes payable secured by mortgage servicing assets
Note 12—Short-Term Debt
The borrowing facilities described throughout these Notes 12 and 13 contain various covenants, including financial covenants governing the Company’s net worth, debt-to-equity ratio and liquidity. Management believes that the Company was in compliance with these covenants as of September 30, 2023.
Assets Sold Under Agreements to Repurchase
The Company has multiple borrowing facilities in the form of asset sales under agreements to repurchase. These borrowing facilities are secured by loans held for sale at fair value or participation certificates backed by mortgage servicing assets. Eligible assets are sold at advance rates based on the fair value (as determined by the lender) of the assets sold. Interest is charged at a rate based on the Secured Overnight Financing Rate (“SOFR”). Loans and participation certificates financed under these agreements may be re-pledged by the lenders.
40
Assets sold under agreements to repurchase are summarized below:
Average balance of assets sold under agreements to repurchase
3,208,434
1,949,452
3,800,502
2,622,581
Weighted average interest rate (1)
7.19%
4.34%
7.01%
2.90%
Total interest expense
62,758
24,329
209,461
67,048
Maximum daily amount outstanding
4,418,359
3,490,082
6,358,007
7,289,147
Carrying value:
Unpaid principal balance
4,418,297
3,004,690
Unamortized debt issuance costs
(6,550)
(3,407)
Weighted average interest rate
6.94%
6.00%
Available borrowing capacity (2):
Committed
771,567
1,078,927
Uncommitted
5,235,136
5,391,383
6,006,703
6,470,310
Assets securing repurchase agreements:
Servicing advances (3)
268,987
381,379
Mortgage servicing rights (3)
6,293,514
5,339,513
Deposits (3)
Following is a summary of maturities of outstanding advances under asset repurchase agreements by maturity date:
Remaining maturity at September 30, 2023 (1)
Within 30 days
700,101
Over 30 to 90 days
3,248,232
Over 90 to 180 days
57,266
Over one year to two years
412,698
Total assets sold under agreements to repurchase
Weighted average maturity (in months)
3.6
41
The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and interest payable) relating to the Company’s assets sold under agreements to repurchase is summarized by counterparty below as of September 30, 2023:
Counterparty
Amount at risk
maturity of advances
Facility maturity
Atlas Securitized Products, L.P. & Citibank, N.A. & Goldman Sachs Bank USA & Nomura Corporate Funding Americas (1)
3,223,281
March 2, 2025
June 27, 2025
89,951
March 2, 2024
60,451
October 30, 2023
June 12, 2025
Barclays Bank PLC
34,571
December 28, 2023
November 13, 2024
JP Morgan Chase Bank, N.A.
29,343
December 1, 2023
June 16, 2025
16,378
December 17, 2023
September 30, 2025
Goldman Sachs Bank USA
12,769
December 23, 2023
12,753
October 21, 2023
August 9, 2024
8,819
December 6, 2023
December 16, 2023
May 3, 2025
5,368
January 27, 2025
JP Morgan Chase Bank, N.A. (EBO facility)
4,056
June 9, 2025
Mortgage Loan Participation Purchase and Sale Agreements
Two of the borrowing facilities secured by loans held for sale are in the form of mortgage loan participation purchase and sale agreements. Participation certificates, each of which represents an undivided beneficial ownership interest in mortgage loans that have been pooled with Fannie Mae, Freddie Mac or Ginnie Mae, are sold to a lender pending the securitization of the mortgage loans and sale of the resulting securities. A commitment to sell the securities resulting from the pending securitization between the Company and a non-affiliate is also assigned to the lender at the time a participation certificate is sold.
The purchase price paid by the lender for each participation certificate is based on the trade price of the security, plus an amount of interest expected to accrue on the security to its anticipated delivery date, minus a present value adjustment, any related hedging costs and a holdback amount that is based on a percentage of the purchase price. The holdback amount is not required to be paid to the Company until the settlement of the security and its delivery to the lender.
The mortgage loan participation purchase and sale agreements are summarized below:
Average balance
251,904
210,639
234,583
216,167
6.63%
3.65%
6.41%
2.53%
4,383
2,073
11,768
4,570
508,062
507,297
515,537
515,043
498,916
287,943
(524)
(351)
6.57%
5.71%
Fair value of loans pledged to secure mortgage loan participation purchase and sale agreements
Note 13—Long-Term Debt
Notes Payable Secured by Mortgage Servicing Assets
Term Notes and Term Loans
The Company, through its wholly-owned subsidiaries PLS, PNMAC, and the PNMAC GMSR ISSUER TRUST (“Issuer Trust”) has entered into a structured finance transaction, in which PLS pledges and/or sells to the Issuer Trust participation certificates representing beneficial interests in Ginnie Mae mortgage servicing assets pursuant to a repurchase agreement. The Issuer Trust has issued a variable funding note to PLS, has issued secured term notes (the “Term Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”), and has entered into a series of syndicated term loans with various lenders (the “Term Loans”). The Term Notes and Term Loans are secured by participation certificates relating to Ginnie Mae mortgage servicing assets financed pursuant to the servicing asset repurchase facilities, and rank pari passu with the mortgage servicing assets variable funding notes.
Following is a summary of the issued and outstanding Term Notes and Term Loans:
Maturity date
Issuance date
Principal balance
Annual interest rate spread (1)
Stated
Optional extension (2)
Term Notes:
February 28, 2018
650,000
3.85%
2/25/2025
(3)
August 10, 2018
3.40%
8/25/2025
June 3, 2022
4.25%
5/25/2027
5/25/2029
Term Loans:
February 28, 2023
680,000
3.00%
2/25/2028
2/25/2029
2,480,000
Freddie Mac MSR Note Payable
On December 16, 2022, the Company issued a note payable to a lender that is secured by Freddie Mac MSRs. Interest is charged at a rate based on SOFR plus a spread as defined in the agreement. The facility expires on November 13, 2024. The maximum amount that the Company may borrow under the note payable is $400 million, $350 million of which is committed and which may be reduced by other debt outstanding with the counterparty.
43
Notes payable secured by mortgage servicing assets are summarized below:
2,484,348
1,800,000
2,353,572
1,510,623
8.78%
5.31%
8.40%
4.13%
55,676
24,795
150,271
48,360
Unpaid principal balance:
200,000
150,000
2,680,000
1,950,000
(6,598)
(7,354)
8.73%
7.46%
Assets pledged to secure notes payable (1):
Servicing advances
Deposits
22,236
Unsecured Senior Notes
The Company has issued unsecured senior notes (the “Unsecured Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The Unsecured Notes are senior unsecured obligations of the Company and will rank senior in right of payment to any future subordinate indebtedness of the Company, equally in right of payment with all existing and future senior indebtedness of the Company and effectively subordinate to any existing and future secured indebtedness of the Company to the extent of the fair value of collateral securing such indebtedness.
The Unsecured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by PFSI’s existing and future wholly-owned domestic subsidiaries (other than certain excluded subsidiaries defined in the indenture under which the Unsecured Notes were issued). The guarantees are senior unsecured obligations of the guarantors and will rank senior in right of payment to any future subordinate indebtedness of the guarantors, equally in right of payment with all existing and future senior indebtedness of the guarantors and effectively subordinate to any existing and future secured indebtedness of the guarantors to the extent of the fair value of collateral securing such indebtedness. The Unsecured Notes and the guarantees are structurally subordinate to the indebtedness and liabilities of the Company’s subsidiaries that do not guarantee the Unsecured Notes.
Following is a summary of the Company’s outstanding Unsecured Notes issued:
Coupon interest rate
Optional redemption date (1)
(annual)
September 29, 2020
5.38%
October 15, 2025
October 15, 2022
October 19, 2020
February 11, 2021
February 15, 2029
February 15, 2024
September 16, 2021
5.75%
September 15, 2031
September 15, 2026
5.07%
23,949
71,065
Unamortized debt issuance costs and premiums, net
(17,311)
(20,080)
Maturities of Long-Term Debt
Maturities of long-term debt (based on stated maturity dates) are as follows:
Notes payable secured by mortgage servicing assets (1)
1,500,000
1,150,000
4,480,000
45
Obligation Under Capital Lease
The Company had a capital lease transaction secured by certain fixed assets and capitalized software. The outstanding amount under the capital lease was repaid on June 13, 2022 and bore interest at a spread over one-month LIBOR.
Obligations under capital lease are summarized below:
1,130
2.18%
3,489
Note 14—Liability for Losses Under Representations and Warranties
Following is a summary of the Company’s liability for losses under representations and warranties:
30,146
39,336
43,521
Provision for losses:
Resulting from sales of loans
4,011
1,651
8,885
7,887
Resulting from change in estimate
(2,552)
(1,769)
(6,005)
(7,165)
Losses incurred
(1,114)
(2,031)
(4,810)
(7,056)
37,187
Unpaid principal balance of loans subject to representations and warranties at end of period
335,044,546
285,532,190
Note 15—Income Taxes
The Company’s effective income tax rates were 26.8% and 27.1% for the quarters ended September 30, 2023 and 2022, respectively, and 23.7% and 26.7% for the nine months ended September 30, 2023 and 2022, respectively. The decrease in the effective income tax rates for the quarter and nine months ended September 30, 2023 when compared to the same periods for 2022 results from an increase in favorable permanent tax adjustments and a decrease in income before income taxes in 2023. The Company has favorable permanent tax adjustments of $0.1 million and $7.5 million with corresponding income before income taxes of $126.8 million and $237.9 million in the quarter and nine months ended September 30, 2023, respectively. For the quarter and nine months ended September 30, 2022, the Company reported unfavorable permanent tax adjustments of $1.2 million and $1.3 million with corresponding income before income taxes of $185.5 million and $597.5 million, respectively.
46
Note 16—Commitments and Contingencies
Commitments to Purchase and Fund Mortgage Loans
The Company’s commitments to purchase and fund loans totaled $7.5 billion as of September 30, 2023.
Legal and Regulatory Proceedings
From time to time, the Company may be a party to legal proceedings, lawsuits and other claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on the financial condition, income, or cash flows of the Company.
Litigation
On November 5, 2019, Black Knight Servicing Technologies, LLC, a wholly-owned indirect subsidiary of Black Knight, Inc. (“BKI”), filed a Complaint and Demand for Jury Trial in the Fourth Judicial Circuit Court in and for Duval County, Florida (the “Florida State Court”), captioned Black Knight Servicing Technologies, LLC v. PennyMac Loan Services, LLC, Case No. 2019-CA-007908 (the “BKI Complaint”). Allegations contained within the BKI Complaint include breach of contract and misappropriation of MSP® System trade secrets in order to develop an imitation mortgage-processing system intended to replace the MSP® System.
The BKI Complaint seeks damages for breach of contract and misappropriation of trade secrets in excess of $340 million, injunctive relief under the Florida Uniform Trade Secrets Act and declaratory judgment of ownership of all intellectual property and software developed by or on behalf of PLS as a result of its wrongful use of and access to the MSP® System and related trade secret and confidential information. No assurance can be provided as to the ultimate outcome of these claims or the amount of any losses to the Company, and any such amount could be material. However, the Company believes the BKI Complaint is without merit and is vigorously defending the matter, which is currently in arbitration. The arbitration hearing concluded on June 16, 2023, and a final order is expected later this year.
Regulatory Matters
The Company and/or its subsidiaries are subject to various state and federal regulations related to its loan production and servicing operations by the various states it operates in as well as federal agencies such as the Consumer Financial Protection Bureau (“CFPB”), HUD, and the FHA and is subject to the requirements of the Agencies to which it sells loans and for which it performs loan servicing activities. As a result, the Company may become involved in information-gathering requests, reviews, investigations and proceedings (both formal and informal) by such various federal, state and local regulatory bodies.
As previously disclosed, on January 7, 2021, PLS received a letter from the CFPB notifying PLS that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, the CFPB’s Office of Enforcement was considering recommending that the CFPB take legal action against PLS for alleged violations of the Real Estate Settlement Procedures Act and Truth in Lending Act. PLS responded to the NORA letter on February 8, 2021 and thereafter engaged in discussions with the CFPB. On July 13, 2023, PLS received a closing letter from the Bureau stating that it had completed its investigation, that it did not intend to take enforcement action, and that PLS was relieved from the document-retention obligations required by the Bureau’s investigation.
Note 17—Stockholders’ Equity
The Company’s board of directors previously approved the Company’s common stock repurchase program in the revised amount of $2 billion before transaction costs and excise tax.
Following is a summary of activity under the stock repurchase program:
Cumulative
total (1)
Shares of common stock repurchased
1,949
1,201
6,696
34,063
Cost of shares of common stock repurchased
99,702
71,575
354,759
1,788,282
Note 18—Net Gains on Loans Held for Sale
Net gains on loans held for sale at fair value are summarized below:
From non-affiliates:
Cash (losses) gains:
Loans
(471,830)
(587,659)
(1,136,101)
(1,983,051)
Hedging activities
220,585
570,864
305,133
1,543,568
(251,245)
(16,795)
(830,968)
(439,483)
Non-cash gains:
Provisions for losses relating to representations and warranties:
Pursuant to loan sales
(4,011)
(1,651)
(8,885)
(7,887)
Reductions in liability due to changes in estimate
2,552
1,769
6,005
7,165
Changes in fair values of loans and derivatives held at period end:
22,083
170,887
24,762
347,968
Hedging derivatives
(58,579)
(207,592)
(87,165)
(183,227)
From PennyMac Mortgage Investment Trust (1)
48
Note 19—Net Interest Income (Expense)
Net interest income (expense) is summarized below:
Interest income:
Cash and short-term investments
15,814
7,759
53,186
8,736
65,641
38,945
205,414
124,835
Placement fees relating to custodial funds
85,076
36,290
209,319
53,169
From Townsgate Closing Services, LLC
63
Interest expense:
Obligations under capital lease
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations
6,857
5,620
16,781
35,385
Interest on mortgage loan impound deposits
2,888
2,199
7,080
4,951
352
850
Note 20—Stock-based Compensation
On May 24, 2022, PFSI’s stockholders approved and adopted the 2022 Equity Incentive Plan and no additional equity awards were issued from the Company’s 2013 Equity Incentive Plan.
Following is a summary of the stock-based compensation activity:
Grants:
Units:
Performance-based restricted share units ("RSUs")
307
342
Stock options
221
574
Time-based RSUs
187
331
Grant date fair value:
Performance-based RSUs
18,611
19,522
5,492
12,138
11,341
18,903
35,444
50,563
Vestings and exercises:
Performance-based RSUs vested
612
643
Stock options exercised
61
412
83
Time-based RSUs vested
246
8,814
6,466
Note 21—Earnings Per Share
Basic earnings per share is determined by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is determined by dividing net income by the weighted average number of shares of common stock outstanding, assuming all dilutive securities were issued.
The Company’s potentially dilutive securities are stock-based compensation awards. The Company applies the treasury stock method to determine the diluted weighted average number of shares of common stock outstanding based on the outstanding stock-based compensation awards.
The following table summarizes the basic and diluted earnings per share calculations:
(in thousands, except per share amounts)
Weighted average shares of common stock outstanding
Effect of dilutive securities - shares issuable under stock-based compensation plan
2,659
2,798
2,760
2,870
Weighted average diluted shares of common stock outstanding
Basic earnings per share
Diluted earnings per share
Calculations of diluted earnings per share require certain potentially dilutive shares to be excluded when their inclusion in the diluted earnings per share calculation would be anti-dilutive. The following table summarizes the weighted-average number of anti-dilutive outstanding RSUs and stock options excluded from the calculation of diluted earnings per share:
(in thousands except for weighted average exercise price)
Performance-based RSUs (1)
604
325
548
268
116
Stock options (2)
219
1,423
287
1,312
Total anti-dilutive units and options
823
1,748
881
1,696
Weighted average exercise price of anti-dilutive stock options (2)
60.69
58.49
59.31
58.61
Note 22—Regulatory Capital and Liquidity Requirements
The Company, through PLS, is required to maintain specified levels of capital and liquidity to remain a seller/servicer in good standing with the Agencies. Such capital and liquidity requirements generally are tied to the size of the PLS’s loan servicing portfolio, loan origination volume and delinquency rates.
50
The Agencies’ capital and liquidity levels and requirements, the calculations of which are specified by each Agency, are summarized below:
September 30, 2023 (1)
Requirement/Agency
Actual (2)
Requirement (2)
Capital
Fannie Mae & Freddie Mac
6,227,418
1,157,832
6,632,627
797,748
Ginnie Mae
5,968,665
1,251,726
5,899,892
923,202
HUD
2,500
Liquidity
1,383,986
472,121
1,265,569
107,768
1,583,911
323,892
246,953
Adjusted net worth / Total assets ratio
%
Tangible net worth / Total assets ratio
Noncompliance with an Agency’s requirements can result in such Agency taking various remedial actions up to and including terminating the Company’s ability to sell loans to and service loans on behalf of the respective Agency.
Note 23—Segments
The Company conducts its business in three segments: production, servicing (together, production and servicing comprise its mortgage banking activities) and investment management:
The Company’s reportable segments are identified based on their unique activities. The following disclosures about the Company’s business segments are presented consistent with the way the Company’s chief operating decision maker organizes and evaluates financial information for making operating decisions and assessing performance. The Company’s chief operating decision maker is its chief executive officer.
51
Financial performance and results by segment are as follows:
Mortgage Banking
Investment
Production
Management
Revenues: (1)
127,821
23,553
Loan origination fees
Net interest expense:
62,150
104,402
59,614
97,249
2,536
7,153
1,037
1,860
1,604
3,464
174,412
217,117
391,529
8,779
149,219
115,913
265,132
8,379
25,193
101,204
126,397
400
Segment assets at quarter end
5,485,039
13,441,925
18,926,964
22,350
140,683
28,011
30,825
52,169
24,970
57,995
5,855
(5,826)
474
556
1,030
2,620
3,650
199,456
266,483
465,939
10,351
160,884
121,200
282,084
8,734
38,572
145,283
183,855
1,617
4,708,512
11,626,311
16,334,823
26,988
16,361,811
328,796
68,382
194,566
273,416
189,691
277,585
4,875
(4,169)
1,925
1,118
3,043
6,037
9,080
Total net revenue
466,550
545,620
1,012,170
27,547
436,582
340,425
777,007
24,849
29,968
205,195
235,163
2,698
Segment assets at period end
515,188
174,532
90,145
96,595
71,236
160,163
18,909
(63,568)
1,842
2,072
3,914
6,431
10,345
733,586
881,534
1,615,120
30,189
676,090
343,473
1,019,563
28,228
57,496
538,061
595,557
1,961
53
Note 24—Subsequent Events
Management has evaluated all events and transactions through the date the Company issued these consolidated financial statements. During this period:
54
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to the words “we,” “us,” “our” and the “Company” refer to PFSI and its subsidiaries.
Our Company
We are a specialty financial services firm primarily focused on the production and servicing of U.S. residential mortgage loans (activities which we refer to as mortgage banking) and the management of investments related to the U.S. mortgage market. We believe that our operating capabilities, specialized expertise, access to long-term investment capital, and the experience of our management team across all aspects of the mortgage business will allow us to profitably engage in these activities and capitalize on other related opportunities as they arise in the future.
Our primary assets are equity interests in Private National Mortgage Acceptance Company, LLC (“PNMAC”). We are the managing member of PNMAC, and we operate and control all of the businesses and affairs of PNMAC, and consolidate the financial results of PNMAC and its subsidiaries. We conduct our business in three segments: production, servicing (together, production and servicing comprise our mortgage banking activities) and investment management:
Our principal mortgage banking subsidiary, PennyMac Loan Services, LLC (“PLS”), is a non-bank producer and servicer of mortgage loans in the United States. PLS is a seller/servicer for the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), each of which is a government-sponsored entity. PLS is also an approved issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”), a lender of the Federal Housing Administration (“FHA”), and a lender/servicer of the U.S. Department of Veterans Affairs (“VA”) and the U.S. Department of Agriculture (“USDA”). We refer to each of Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA and USDA as an “Agency” and collectively as the “Agencies.” PLS is able to service loans in all 50 states, the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands, and originate loans in all 50 states and the District of Columbia, either because PLS is properly licensed in a particular jurisdiction or exempt or otherwise not required to be licensed in that jurisdiction.
Our investment management subsidiary is PNMAC Capital Management, LLC (“PCM”), a Delaware limited liability company registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended. PCM has an investment management contract with PMT.
Business Trends
Due to ongoing inflationary pressures, the U.S. Federal Reserve continued to raise the federal funds rate during the nine months ended September 30, 2023 and continued to reduce the federal government’s overall holdings of Treasury and mortgage-backed securities. Higher interest rates and a slowing economy and housing market are expected to continue to reduce the size of the mortgage origination market from an estimated $2.3 trillion in 2022 to a projected range of $1.6 trillion to $1.8 trillion for 2023 according to mortgage lending industry economists.
Lower mortgage transaction volumes and higher interest rates have decreased our mortgage production activities, reduced gains from the redelivery of loans bought out from Ginnie Mae securities, increased competition and lowered profit margins as compared to the same time period in the prior year. Higher interest rates have also increased the costs of floating rate borrowings, increased interest income from placement fees we receive relating to custodial funds that we manage on deposits and loans held for sale and reduced prepayment speeds in our mortgage servicing portfolio as compared to the same time period in the prior year. We have also increased our acquisition of conventional loans from PMT during the nine months ended September 30, 2023 and expect the current level of these purchases to continue in the fourth quarter of 2023.
Results of Operations
Our results of operations are summarized below:
(dollars in thousands, except per share amounts)
Revenues:
Expenses:
30,839
41,022
108,150
127,370
Annualized return on average stockholders' equity
10.6%
15.6%
16.9%
Dividends declared per share
0.20
0.60
Income before provision for income taxes by segment:
Mortgage banking:
Total mortgage banking
Investment management
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") (1)
197,528
152,878
472,940
486,631
During the period:
Interest rate lock commitments issued
25,091,322
18,019,364
67,208,603
61,017,443
At end of period:
Interest rate lock commitments outstanding
7,070,065
Unpaid principal balance of loan servicing portfolio:
Owned:
Mortgage servicing rights and liabilities
303,835,369
4,287,585
308,122,954
Subserviced for PMT
230,978,819
539,101,773
Net assets of PennyMac Mortgage Investment Trust
1,949,078
2,017,331
Book value per share
71.56
68.26
56
We define “Adjusted EBITDA” as net income plus provision for income taxes, depreciation and amortization, excluding decrease (increase) in fair value of mortgage servicing rights (“MSRs”) net of mortgage servicing liabilities (“MSLs”), due to changes in the valuation inputs we use in our valuation models, hedging losses (gains) associated with MSRs, stock-based compensation and interest expense on corporate debt or corporate revolving credit facilities and capital lease.
We believe that the presentation of Adjusted EBITDA provides useful information to investors regarding our results of operations because each measure assists both investors and management in analyzing and benchmarking the performance and value of our business. However, other companies may define Adjusted EBITDA differently, and as a result, our measures of Adjusted EBITDA may not be directly comparable to those of other companies.
Adjusted EBITDA measures have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
Because of these limitations, Adjusted EBITDA measures are not intended as alternatives to net income as an indicator of our operating performance and should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations.
The following table presents a reconciliation of Adjusted EBITDA to our net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, for each of the periods indicated:
13,183
9,434
Increase in fair value of MSRs net of MSLs due to changes in valuation inputs used in valuation models
(398,871)
(237,192)
(427,512)
(795,084)
Hedging losses associated with MSRs
423,656
164,749
Stock‑based compensation
Interest expense on corporate debt or corporate revolving credit facilities and capital lease
71,085
Adjusted EBITDA
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Income Before Provisions for Income Taxes
For the quarter ended September 30, 2023, income before provision for income taxes decreased $58.7 million compared to the same period in 2022. The decrease was primarily due to a $58.4 million decrease in Net loan servicing fees resulting from increases in net MSR valuation losses in excess of growth in servicing fees and a $17.3 million decrease in Net gains on loans held for sale at fair value due to reduced consumer direct lending volumes, partially offset by a $17.3 million decrease in total expenses primarily due to reductions in servicing and marketing and advertising expenses.
For the nine months ended September 30, 2023, income before provision for income taxes decreased $359.7 million compared to the same period in 2022.The decrease was primarily due to a $292.5 million decrease in Net gains on loans held for sale at fair value due to lower consumer direct lending and early buyout (“EBO”) volumes, a $33.8 million decrease in Loan origination fees due to lower volumes in our consumer direct lending channel, a $32.9 million decrease in Fulfillment fees from PennyMac Mortgage Investment Trust and a $288.2 million decrease in Net loan servicing fees resulting from increases in net MSR valuation losses in excess of growth in servicing fees, partially offset by a $245.9 million decrease in total expenses primarily due to reductions in compensation and origination expenses and a $45.4 million increase in net interest income.
Net Gains on Loans Held for Sale at Fair Value
In our production segment, revenues reflect the effects of higher interest rates on the overall demand for mortgage loans and the change in the proportion of loans sourced from our different production channels during the quarter and nine months ended September 30, 2023 compared to the same periods in 2022.
During the quarter and nine months ended September 30, 2023, we recognized Net gains on loans held for sale at fair value totaling $151.4 million and $397.2 million, respectively, a decrease of $17.3 million and $292.5 million, respectively, compared to the same periods in 2022. The decreases were primarily due to reduced consumer direct lending volume as well as a decrease in EBO loan redelivery gains as a result of lower volumes and modifications during the quarter and nine months ended September 30, 2023 compared to the same periods in 2022.
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Our net gains on loans held for sale are summarized below:
Cash losses:
Total cash losses
Non-cash gains (losses):
Changes in fair values of loans and derivative financial instruments outstanding at end of period:
(46,358)
(158,058)
(67,472)
(213,655)
Total non-cash gains
403,119
187,137
1,229,640
1,145,255
Total gains on sale from non-affiliates
From PennyMac Mortgage Investment Trust (primarily cash)
Interest rate lock commitments issued:
By loan type:
Government-insured or guaranteed loans
11,707,900
14,861,276
37,274,005
45,660,671
Conventional conforming loans
13,038,041
3,128,087
29,130,619
15,276,045
Jumbo loans
19,715
20,483
121,271
71,209
325,666
9,518
682,708
By production channel:
Consumer direct
1,706,504
3,803,865
6,070,685
17,241,831
Broker direct
2,988,907
1,864,659
8,362,226
7,611,018
Correspondent
20,395,911
12,350,840
52,775,692
36,164,594
4,149,726
Commitments to fund and purchase loans
59
Non-Cash Elements of Gain on Sale of Loans Held for Sale
Our gains on loans held for sale include both cash and non-cash elements. We recognize a significant portion of our gains on loans held for sale when we make commitments to purchase or fund mortgage loans. We recognize this gain in the form of interest rate lock commitment (“IRLC”) derivatives. We adjust our initial gain amount as the loan purchase or origination process progresses until the loan is either funded or cancelled.
We also receive non-cash proceeds on sale that include our estimate of the fair value of MSRs and we incur mortgage servicing liabilities (which represent the fair value of the costs we expect to incur in excess of the fees we receive for EBO loans we have resold to third party investors) and for the fair value of our estimate of the losses we expect to incur relating to the representations and warranties we provide in our loan sale transactions.
The MSRs, MSLs, and liabilities for representations and warranties we recognize represent our estimate of the fair value of future benefits and costs we will realize for years in the future. These estimates represented approximately 297% and 327% of our gains on sales of loans held for sale at fair value for the quarter and nine months ended September 30, 2023, respectively, as compared to 205% and 197% for the same periods in 2022. These estimates change as circumstances change and changes in these estimates are recognized in income in subsequent periods. Subsequent changes in the fair value of our MSRs significantly affect our results of operations.
Interest Rate Lock Commitments, Mortgage Servicing Rights and Mortgage Servicing Liabilities
The methods and key inputs we use to measure and update our measurements of IRLCs, MSRs and MSLs are detailed in Note 6 – Fair Value – Valuation Techniques and Inputs to the consolidated financial statements included in this Quarterly Report.
Representations and Warranties
Our agreements with the purchasers and insurers of our loans include representations and warranties related to the loans. The representations and warranties require adherence to purchaser and insurer origination and underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.
In the event of a breach of our representations and warranties, we may be required to either repurchase the loans with the identified defects or indemnify the purchaser or insurer. In such cases, we bear any subsequent credit losses on the loans. Our credit losses may be reduced by any recourse we have to correspondent originators that sold such loans to us and breached similar or other representations and warranties. In such event, we have the right to seek a recovery of related repurchase losses from that correspondent seller.
Our representations and warranties are generally not subject to stated limits of exposure. However, we believe that the current unpaid principal balance (“UPB”) of loans sold by us and subject to representation and warranty liability to date represents our maximum representations and warranties exposure.
The level of the liability for losses under representations and warranties is difficult to estimate and requires considerable judgment. The level of loan repurchase losses is dependent on economic factors, purchaser or insurer loss mitigation strategies, and other external conditions that may change over the lives of the underlying loans. Our estimate of the liability for representations and warranties is developed by our credit administration staff and approved by our senior management credit committee which includes senior management in our loan production, loan servicing and credit risk management areas.
The method we use to estimate our losses on representations and warranties is a function of our estimate of future defaults, loan repurchase rates, the severity of loss in the event of default, if applicable, and the probability of reimbursement by the correspondent loan seller. We establish a liability at our estimate of its fair value at the time loans are sold and review our liability estimate on a periodic basis.
60
We recorded provisions for losses under representations and warranties relating to current loan sales as a component of Net gains on loans held for sale at fair value totaling $4.0 million and $8.9 million for the quarter and nine months ended September 30, 2023, respectively, compared to $1.7 million and $7.9 million for the same periods in 2022. The increases in the provision relating to current loan sales were primarily attributable to a change in the mix between government guaranteed and conventional loans sold for the quarter and nine months ended September 30, 2023 compared to the same periods in 2022.
We also recorded reductions in the liability of $2.6 million and $6.0 million for the quarter and nine months ended September 30, 2023, respectively, compared to $1.8 million and $7.2 million for the same periods in 2022. The reductions in the liability resulted from previously sold loans meeting performance criteria established by the Agencies which significantly limit the likelihood of certain repurchase or indemnification claims.
Following is a summary of loan repurchase activity and the UPB of loans subject to representations and warranties:
Indemnification activity:
Loans indemnified at beginning of period
53,866
25,061
35,961
15,079
New indemnifications
11,681
7,441
31,509
18,807
Less indemnified loans sold, repaid or refinanced
593
870
2,516
2,254
Loans indemnified at end of period
64,954
31,632
Repurchase activity:
Total loans repurchased
14,598
31,666
39,695
77,215
Less:
Loans repurchased by correspondent lenders
7,488
4,192
16,400
20,041
Loans repaid by borrowers or resold with defects resolved
9,483
39,652
66,899
53,312
Net loans (resolved) repurchased with losses chargeable to liability for representations and warranties
(2,373)
(12,178)
(43,604)
3,862
Losses charged to liability for representations and warranties
1,114
2,031
4,810
7,056
Unpaid principal balance of loans subject to representations and warranties
Liability for representations and warranties
During the quarter and nine months ended September 30, 2023, we repurchased loans totaling $14.6 million and $39.7 million, respectively. We charged losses of $1.1 million and $4.8 million to the liability during the quarter and nine months ended September 30, 2023, respectively. Our losses arising from representations and warranties have historically been minimized by our ability to either recover most of the losses from our correspondent sellers or from our ability to profitably refinance and resell repurchased loans.
The recent increases in interest rates may affect certain of our correspondent sellers’ ability to honor their obligations to repurchase defective loans, may increase the level of borrower defaults and may increase the level of repurchases we are required to make, thereby making it more difficult to minimize losses on repurchased loans. We expect these developments may increase the losses we incur in relation to our recorded liability for representations and warranties compared to our historical experience. However, we believe our recorded liability is presently adequate to absorb such losses.
Loan Origination Fees
Loan origination fees increased $3.7 million during the quarter ended September 30, 2023 compared to the same period in 2022 primarily due to an increase in production volume in our correspondent channel. Loan origination fees decreased $33.8 million during the nine months ended September 30, 2023 compared to the same period in 2022 due to a decrease in the volume of consumer direct loans we produced.
Fulfillment Fees from PennyMac Mortgage Investment Trust
Fulfillment fees from PMT represent fees we collect for services we perform on behalf of PMT in connection with the acquisition, packaging and sale of loans. The fulfillment fees are calculated based on the number of loans we fulfill for PMT.
Fulfillment fees decreased $12.9 million and $32.9 million during the quarter and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. The decreases were primarily due to decreases in loans produced on PMT’s behalf.
Net Loan Servicing Fees
Our net loan servicing fee income has two primary components: fees earned for servicing the loans and the effects of MSR and MSL valuation changes, net of hedging results as summarized below:
Loan servicing fees
Effects of MSRs and MSLs
Loan Servicing Fees
Following is a summary of our loan servicing fees:
Other:
17,114
12,518
47,350
35,830
22,514
9,979
48,224
34,705
Average loan servicing portfolio:
MSRs and MSLs
344,043,773
300,421,134
330,589,519
293,092,214
233,625,351
228,697,367
234,581,041
225,042,046
Loan servicing fees from non-affiliates generally relate to our MSRs which are primarily related to servicing we provide for loans included in Agency securitizations. These fees are contractually established at an annualized percentage of the UPB of the loan serviced and we collect these fees from borrower payments. Loan servicing fees from PMT are primarily related to PMT’s MSRs and are established at monthly per-loan amounts based on whether the loan is a fixed-rate or adjustable-rate loan and the loan’s delinquency or foreclosure status as detailed in Note 4 – Transactions with Related Parties to the consolidated financial statements included in this Report. Other loan servicing fees are comprised primarily of borrower-contracted fees such as late charges and reconveyance fees.
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Loan servicing fees from non-affiliates and other fees increased during the quarter and nine months ended September 30, 2023 compared to the same periods in 2022. The increases were primarily due to growth of our loan servicing portfolio.
Effects of Mortgage Servicing Rights and Mortgage Servicing Liabilities
We have elected to carry our servicing assets and liabilities at fair value. Changes in fair value have two components: changes due to realization of the contractual servicing fees and changes due to changes in market inputs used to estimate the fair value of MSRs and MSLs. We endeavor to moderate the effects of changes in fair value by entering into derivatives transactions.
Change in fair value of MSRs and MSLs and the related hedging results are summarized below:
MSR and MSL valuation changes and hedging results:
Changes in fair value attributable to changes in fair value inputs
398,871
237,192
427,512
795,084
Hedging results
(24,785)
72,443
(104,053)
236,470
Changes in fair value attributable to realization of cash flows
(177,775)
(141,781)
(498,120)
(374,660)
Total change in fair value of mortgage servicing rights and mortgage servicing liabilities net of hedging results
Average balances:
6,787,100
5,370,855
6,342,508
4,889,181
1,890
2,285
1,976
2,472
Changes in fair value of MSRs attributable to changes in fair value inputs increased during the quarter ended September 30, 2023 compared to the same period in 2022 and decreased during the nine months ended September 30, 2023 compared to the same period in 2022. The increase was due to the effect of a more significant increase in interest rates on a larger MSR asset during the quarter ended September 30, 2023 compared to 2022, and the decrease was due to a less significant increase in interest rates during the nine months ended September 30, 2023 compared to the same period in 2022. Increasing interest rates reduce the rate of prepayments of the underlying loans, which increases the cash flows expected from the servicing rights, while decreasing interest rates have the opposite effect.
Changes in realization of cash flows are influenced by changes in the level of servicing assets and liabilities and changes in estimates of the remaining cash flows to be realized. During the quarter and nine months ended September 30, 2023, realization of cash flows increased compared to the same periods in 2022, primarily due to the growth in our investment in MSRs.
Hedging results reflect valuation losses attributable to the effects of interest rate increases on the fair value of the hedging instruments during the quarter and nine months ended September 30, 2023 and in the same periods in 2022 as well as the cost of the hedges utilized in each period.
Following is a summary of our loan servicing portfolio:
Loans serviced
Prime servicing:
232,903,327
233,554,875
Total prime servicing
589,382,108
551,653,885
Special servicing subserviced for PMT
10,780
20,797
Total loans serviced
Delinquencies:
Owned servicing:
13,171,223
11,759,005
90 days or more
7,204,917
7,758,033
Subserviced for PMT:
2,012,678
1,913,495
1,028,255
971,048
Following is a summary of characteristics of our MSR and MSL servicing portfolio as of September 30, 2023:
Average
UPB
Loan count
Note rate
Seasoning (months)
Remainingmaturity (months)
Loan size
FICO credit score at origination
Original LTV (1)
Current LTV (1)
60+ Delinquency (by UPB)
(Dollars and loan count in thousands)
Government (2):
64
FHA
126,894,417
641
4.0%
319
198
675
93%
67%
4.9%
VA
120,637,438
442
3.5%
328
273
726
90%
71%
USDA
21,039,773
142
3.7%
314
148
698
98%
66%
4.8%
Agency:
Fannie Mae
38,652,060
131
4.2%
295
760
72%
59%
0.4%
Freddie Mac
42,153,114
141
4.3%
320
298
755
73%
63%
0.5%
226,931
10.1%
261
73
748
17%
16%
0.1%
Other (3)
1,693,182
5.8%
346
343
767
1,505
321
233
714
87%
2.9%
Net Interest Income (Expense)
Following is a summary of net interest income (expense):
To non-affiliates:
Short-term debt
67,141
26,402
221,229
71,618
Long-term debt
79,625
48,744
221,336
119,445
Net interest income increased $9.7 million and $45.4 million during the quarter and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. The increases were primarily due to:
65
Management Fees from PennyMac Mortgage Investment Trust
Management fees from PMT summarized below:
Net assets of PMT at end of period
Management fees decreased $556,000 and $2.2 million during the quarter and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. The decrease was due to a decrease in PMT’s shareholders’ equity which is the basis for the base management fees.
Compensation expenses are summarized below:
Salaries and wages
93,788
97,992
279,263
356,060
Severance
1,105
3,326
13,696
Incentive compensation
36,447
31,471
80,178
125,014
Taxes and benefits
17,850
20,759
58,220
76,073
Stock and unit-based compensation
Head count:
4,176
4,911
4,162
5,877
Period end
4,129
4,732
Compensation expense decreased $884,000 and $159.7 million during the quarter and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. The decreases were primarily due to work force reductions necessitated by reductions in loan production and decreased incentive compensation accruals due to reduced staffing levels and lower achievement of profitability targets for the nine month period.
Loan Origination
Loan origination expense increased $533,000 for the quarter ended September 30, 2023 compared to the same period in 2022 and decreased $61.0 million during the nine months ended September 30, 2023 compared to the same period in 2022. The decrease was primarily due to lower consumer direct origination volume.
66
Servicing expenses decreased $7.2 million during the quarter ended September 30, 2023 compared to the same period in 2022. The decrease was primarily due to a decrease in provision for losses on servicing advances resulting from lower outstanding servicing advance balances during the quarter ended September 30, 2023 compared to the same period in 2022. Servicing expenses increased $18.3 million during the nine months ended September 30, 2023 compared to the same period in 2022. The increase was primarily due to the non-recurrence in 2023 of the reversal of the provision for estimated servicing advance losses that was recognized during 2022 as COVID-19 related delinquencies decreased significantly.
Marketing and Advertising
Marketing and advertising expense decreased $3.0 million and $29.6 million during the quarter and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. The decreases were primarily due to decreased marketing expenses for consumer direct lending and brand marketing during the quarter and nine months ended September 30, 2023 compared to the same periods in 2022.
Provision for Income Taxes
Our effective income tax rates were 26.8% and 23.7% during the quarter and nine months ended September 30, 2023, respectively, compared to 27.1% and 26.7% during the same periods in 2022. The decrease in the effective income tax rates for the quarter and nine months ended September 30, 2023 when compared to the same periods for 2022 results from an increase in favorable permanent tax adjustments and a decrease in income before income taxes in 2023. We have favorable permanent tax adjustments of $0.1 million and $7.5 million with corresponding income before income taxes of $126.8 million and $237.9 million in the quarter and nine months ended September 30, 2023, respectively. For the quarter and nine months ended September 30, 2022, we reported unfavorable permanent tax adjustments of $1.2 million and $1.3 million with corresponding income before income taxes of $185.5 million and $597.5 million, respectively.
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Balance Sheet Analysis
Following is a summary of key balance sheet items as of the dates presented:
1,182,857
1,340,730
Servicing advances, net
Investments in and advances to affiliates
28,543
37,301
518,441
483,773
LIABILITIES AND STOCKHOLDERS' EQUITY
4,910,139
3,288,875
4,456,091
3,722,566
9,366,230
7,011,441
504,404
635,247
Stockholders' equity
Leverage ratios:
Total debt / Stockholders' equity
2.6
2.0
Total debt / Tangible stockholders' equity (1)
2.7
2.1
Total assets increased $2.1 billion from $16.8 billion at December 31, 2022 to $18.9 billion at September 30, 2023. The increase was driven by an increase of $1.7 billion in loans held for sale at fair value, primarily due to higher production volume during the quarter ended September 30, 2023, and an increase of $1.1 billion in MSRs, partially offset by a decrease in servicing advances of $297.5 million, a decrease in loans eligible for repurchase of $256.3 million and a decrease of cash and short-term investment of $157.9 million.
Total liabilities increased $2.0 billion from $13.4 billion at December 31, 2022 to $15.4 billion at September 30, 2023. The increase was primarily due to an increase of $2.4 billion in borrowings to fund our inventory of loans held for sale, partially offset by a decrease of $256.3 million in liability for loans eligible for repurchase. As a result of our increased inventory financing requirements, our leverage ratios increased during the nine months ended September 30, 2023.
Cash Flows
Our cash flows are summarized below:
Change
Operating
(7,556,334)
Investing
105,591
Financing
6,080,919
(1,369,824)
The net decrease in cash and restricted cash of $151.2 million during the nine months ended September 30, 2023 is discussed below.
Operating activities
Net cash used in operating activities totaled $2.0 billion during the nine months ended September 30, 2023 compared with net cash provided by operating activities of $5.5 billion during the same period in 2022. Our cash flows from operating activities are primarily influenced by changes in the levels of our inventory of mortgage loans held for sale as shown below:
Cash flows from:
(2,619,743)
5,206,560
Other operating sources
607,235
337,266
Investing activities
Net cash used in investing activities during the nine months ended September 30, 2023 totaled $378.0 million, primarily due to $450.2 million in net settlement of derivative financial instruments used to hedge our investment in MSRs and $27.7 million used in acquisition of capitalized software, partially offset by $98.1 million received from the sale of interest-only stripped securities. Net cash used in investing activities during the nine months ended September 30, 2022, totaled $483.6 million, primarily due to $810.7 million in net settlement of derivative financial instruments used to hedge our investment in MSRs and $59.6 million used in acquisition of capitalized software, partially offset by a $425.6 million decrease in margin deposits.
Financing activities
Net cash provided by financing activities totaled $2.2 billion during the nine months ended September 30, 2023, primarily due to an increase of $2.4 billion in borrowings. The increase in borrowings primarily reflects the increase in inventory of loans held for sale and our investment in MSRs. Net cash used in financing activities totaled $3.8 billion during the nine months ended September 30, 2022, primarily due to a decrease of $3.9 billion in short-term borrowings and $354.8 million of common stock repurchases, partially offset by the issuance of a $500 million term note.
Liquidity and Capital Resources
Our liquidity reflects our ability to meet our current obligations (including our operating expenses and, when applicable, the retirement of, and margin calls relating to, our debt, and margin calls relating to hedges on our commitments to purchase or originate mortgage loans and on our MSR investments), fund new originations and purchases, and make investments as we identify them. We expect our primary sources of liquidity to be through cash flows from business activities, proceeds from bank borrowings and proceeds from and issuance of equity or debt offerings. We believe that our liquidity is sufficient to meet our current liquidity needs.
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Our current borrowing strategy is to finance our assets where we believe such borrowing is prudent, appropriate and available. Our primary borrowing activities are in the form of sales of assets under agreements to repurchase, sales of mortgage loan participation purchase and sale certificates, notes payable secured by mortgage servicing rights and unsecured senior notes. A significant amount of our borrowings have short-term maturities and provide for advances with terms ranging from 30 days to 364 days. Because a significant portion of our current debt facilities consist of short-term debt, we expect to renew these facilities in advance of maturity in order to ensure our ongoing liquidity and access to capital or otherwise allow ourselves sufficient time to replace any necessary financing.
Secured debt facilities for MSRs and servicing advances take various forms. Fannie Mae MSRs, Ginnie Mae MSRs and servicing advances are pledged to special purpose entities, each of which issues variable funding notes (“VFNs”) and may issue term notes and term loans that are secured by such Ginnie Mae or Fannie Mae assets. Term notes are issued to qualified institutional buyers under Rule 144A of Securities Act and term loans are syndicated to banking entities, while the VFNs are sold to bank partners under agreements to repurchase. Freddie Mac MSR’s are pledged to a single lender under a bi-lateral loan and security agreement.
On February 7, 2023, the Company, the Issuer Trust, PLS and PNMAC entered into two VFN repurchase agreements as part of the structured finance transaction that PLS uses to finance Ginnie Mae mortgage servicing rights and related excess servicing spread and servicing advance receivables: a Series 2023-MSRVF1 Master Repurchase Agreement by and among PLS, as seller, Goldman Sachs Bank USA, as administrative agent and as a buyer, and PNMAC, as a guarantor, related to the excess servicing spread, and a Series 2020-SPIADVF1 Master Repurchase Agreement by and among PLS, as seller, and Goldman Sachs Bank USA, as administrative agent and buyer, related to the servicing advance receivables. The maximum purchase under each repurchase agreement is $300 million and each agreement is set to expire on February 7, 2025.
On February 28, 2023, the Company, the Issuer Trust and PLS entered into a syndicated series of term loans (the “Series 2023-GTL1 Loan”) as part of the structured finance transaction that PLS uses to finance Ginnie Mae mortgage servicing rights and related excess servicing spread and servicing advance receivables. The initial 5-year term of the Series 2023-GTL1 Loan is set to expire on February 28, 2028, unless the Company exercises a one-year optional extension. The initial loan balance of the Series 2023-GTL1 Loan was $680 million.
On August 4, 2023, the Company, the Issuer Trust and PLS entered into two VFN repurchase agreements, as part of the structured finance transaction that PLS uses to finance Ginnie Mae mortgage servicing rights and related excess servicing spread and servicing advance receivables. The Series 2023-MSRVF2 Master Repurchase Agreement by and between PLS, as seller, and Nomura Corporate Funding Americas, LLC (“Nomura”), as administrative agent and as a buyer, is related to the servicing spread. The Series 2020-SPIADVF1 Master Repurchase Agreement by and between PLS, as seller, and Nomura, as administrative agent and buyer, is related to the servicing advance receivables. The maximum amount outstanding under both repurchase agreements is $350 million and each agreement is set to expire on August 5, 2024.
Our repurchase agreements represent the sales of assets together with agreements for us to buy back the respective assets at a later date. The table below presents the average, maximum daily and ending balances:
Maximum daily balance
Balance at period end
The differences between the average and maximum daily balances on our repurchase agreements reflect both the effect of increasing loan inventory levels during the nine months ended September 30, 2023 and the fluctuations throughout the periods of our inventory as we fund and pool mortgage loans for sale in guaranteed mortgage securitizations.
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Our repurchase agreements also contain margin call provisions that, upon notice from the applicable lender at its option, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. A margin deficit will generally result from any decrease in the market value (as determined by the applicable lender) of the assets subject to the related financing agreement. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.
Our secured financing agreements at PLS require us to comply with various financial and other restrictive covenants. The most significant financial covenants currently include the following:
With respect to servicing performed for PMT, PLS is also subject to certain covenants under PMT’s debt agreements. Covenants in PMT’s debt agreements are equally, or sometimes less, restrictive than the covenants described above.
PFSI issued unsecured senior notes (the “Unsecured Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. The Unsecured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the Company’s existing and future wholly-owned domestic subsidiaries (other than certain excluded subsidiaries defined in the indentures under which the Unsecured Notes were issued).
Our Unsecured Notes’ indentures contain financial and other restrictive covenants that limit the Company and our restricted subsidiaries’ ability to engage in specified types of transactions, including, but not limited to the following:
Although financial and other covenants limit the amount of indebtedness that we may incur and affect our liquidity through minimum cash reserve requirements, we believe that these covenants currently provide us with sufficient flexibility to successfully operate our business and obtain the financing necessary to achieve that purpose.
We are also subject to liquidity and net worth requirements established by the Federal Housing Finance Agency (“FHFA”) for Agency seller/servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established minimum liquidity and net worth requirements for their approved non-depository single-family sellers/servicers in the case of Fannie Mae, Freddie Mac, and Ginnie Mae for its approved single-family issuers.
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In August 2022, the Agencies issued revised capital and liquidity requirements. Most of the requirements became effective on September 30, 2023, for issuers of securities guaranteed by Ginnie Mae and seller/servicers of mortgage loans to Fannie Mae and Freddie Mac. We believe that we are in compliance with Agencies’ revised requirements. The origination liquidity requirements issued by the Agencies will be effective on December 31, 2023 and risk-based capital requirements issued by Ginnie Mae will be effective on December 31, 2024. We believe that we are in compliance with those pending requirements as of September 30, 2023.
On August 4, 2021, our Board of Directors increased our common stock repurchase program from $1 billion to $2 billion. Share repurchases may be effected through open market purchases or privately negotiated transactions in accordance with applicable rules and regulations. The stock repurchase program does not have an expiration date and the authorization does not obligate us to acquire any particular amount of common stock. From inception through September 30, 2023, we have repurchased approximately $1.8 billion of common shares under our stock repurchase program.
We continue to explore a variety of means of financing our business, including debt financing through bank warehouse lines of credit, bank loans, repurchase agreements, securitization transactions and corporate debt. However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing will take or whether such efforts will be successful.
Debt Obligations
As described further above in “Liquidity and Capital Resources,” we currently finance certain of our assets through short-term borrowings with major financial institutions in the form of sales of assets under agreements to repurchase and mortgage loan participation purchase and sale agreements. We access the capital market for long-term debt through the issuance of secured term notes, term loans and unsecured senior notes. The issuer under our secured term note facilities is PLS or a wholly-owned issuer trust guaranteed by PNMAC. In addition, PFSI has issued unsecured senior notes guaranteed by certain of its restricted wholly-owned domestic subsidiaries.
PLS is required to comply with financial and other restrictive covenants in certain financing agreements, as described further above in “Liquidity and Capital Resources”. As of September 30, 2023, we believe PLS was in compliance in all material respects with these covenants.
Many of our debt financing agreements contain a condition precedent to obtaining additional funding that requires PLS to maintain positive net income for at least one of the previous two consecutive quarters, or other similar measures. PLS is compliant with all such conditions.
The financing agreements also contain margin call provisions that, upon notice from the applicable lender, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.
In addition, the financing agreements contain events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, servicer termination events and defaults, material adverse changes, bankruptcy or insolvency proceedings and other events of default customary for these types of transactions. The remedies for such events of default are also customary for these types of transactions and include the acceleration of the principal amount outstanding under the agreements and the liquidation by our lenders of the mortgage loans or other collateral then subject to the agreements.
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Our debt obligations have the following sizes and maturities:
Outstanding
Facility
Lender
indebtedness (1)
facility size (2)
facility (2)
Maturity date (2)
(dollar amounts in thousands)
Atlas Securitized Products, L.P. (warehouse facility)
1,163,620
2,620,000
1,425,000
405,498
600,000
JP Morgan Chase Bank, N.A. (warehouse facility)
375,262
1,000,000
50,000
304,986
300,000
Citibank, N.A. (warehouse facility)
193,891
620,000
270,000
118,112
100,000
Goldman Sachs Bank USA (warehouse facility)
84,542
Goldman Sachs Bank USA (Ginnie Mae servicing asset facility)
February 7, 2025
Citibank, N.A. (Ginnie Mae servicing asset facility)
380,000
280,000
Atlas Securitized Products, L.P. (Ginnie Mae servicing asset facility)
Nomura Corporate Funding Americas (Ginnie Mae servicing asset facility)
350,000
August 5, 2024
48,459
550,000
June 12, 2024
Notes payable
GMSR 2018-GT1 Notes
February 25, 2025
GMSR 2018-GT2 Notes
August 25, 2025
GMSR 2022-GT1 Notes
May 25, 2027
GMSR 2023-GTL1 Loans
February 25, 2028
Barclays FHLMC MSR Facility
Unsecured Senior Notes - 5.375%
Unsecured Senior Notes - 4.25%
Unsecured Senior Notes - 5.75%
The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to our assets sold under agreements to repurchase is summarized by counterparty below as of September 30, 2023:
maturity of
advances under
repurchase agreement
On March 16, 2023, the Company, PNMAC, the Issuer Trust, and PLS, consented to assignments of all of the credit facilities provided to the Company by Credit Suisse First Boston Mortgage Capital LLC, as administrative agent and Credit Suisse AG, Cayman Islands Branch, as a buyer or purchaser, and Alpine Securitization LTD, as a buyer or purchaser. All of the credit facilities were assigned to Atlas Securitized Products, L.P. (“Atlas SP”), Atlas Securitized Products Investments 3, L.P., Atlas Securitized Products Funding 2, L.P., and Nexera Holding LLC.
All debt financing arrangements that matured between September 30, 2023 and the date of this Report have been renewed or extended and are described in Note 12—Short-Term Debt to the accompanying consolidated financial statements.
Critical Accounting Estimates
Preparation of financial statements in compliance with GAAP requires us to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Certain of these estimates significantly influence the portrayal of our financial condition and results, and they require us to make difficult, subjective or complex judgments. Our critical accounting policies primarily relate to our fair value estimates.
Our Annual Report on Form 10-K for the year ended December 31, 2022 contains a discussion of our critical accounting policies, which utilize relevant critical accounting estimates. There have been no significant changes in our critical accounting policies and estimates during the three months ended September 30, 2023 as compared to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, real estate values and other market-based risks. The primary market risks that we are exposed to are fair value risk, interest rate risk and prepayment risk.
Fair Value Risk
Our IRLCs, mortgage loans held for sale, MSRs and MSLs are reported at their fair values. The fair value of these assets fluctuates primarily due to changes in interest rates. The fair value risk we face is primarily attributable to interest rate risk and prepayment risk.
Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. Changes in interest rates affect both the fair value of, and interest income we earn from, our mortgage-related investments and our derivative financial instruments. This effect is most pronounced with fixed-rate mortgage assets.
In general, rising interest rates negatively affect the fair value of our IRLCs and inventory of mortgage loans held for sale and positively affect the fair value of our MSRs. Changes in interest rates significantly influence the prepayment speeds of the loans underlying our investments in MSRs, which can have a significant effect on their fair values. Changes in interest rate are most prominently reflected in the prepayment speeds of the loans underlying our investments in MSRs and the discount rate used in their valuation.
Our operating results will depend, in part, on differences between the income from our investments and our financing costs. Presently much of our debt financing is based on a floating rate of interest calculated on a fixed spread over the relevant index, as determined by the particular financing arrangement.
Prepayment Risk
To the extent that the actual prepayment rate on the mortgage loans underlying our MSRs differs from what we projected when we initially recognized these assets and liabilities when we measure fair value as of the end of each reporting period, the carrying value of these assets and liabilities will be affected. In general, a decrease in the principal balances of the mortgage loans underlying our MSRs or an increase in prepayment expectations will decrease our estimates of the fair value of the MSRs, thereby reducing net servicing income, partially offset by the beneficial effect on net servicing income of a corresponding reduction in the fair value of our MSLs.
Risk Management Activities
We engage in risk management activities primarily in an effort to mitigate the effect of changes in interest rates on the fair value of our assets. To manage this price risk, we use derivative financial instruments acquired with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the fair value of our assets, primarily prepayment exposure on our MSR investments as well as IRLCs and our inventory of loans held for sale. Our objective is to minimize our hedging expense and maximize our loss coverage based on a given hedge expense target. We do not use derivative financial instruments other than IRLCs for purposes other than in support of our risk management activities.
Our strategies are reviewed daily within a disciplined risk management framework. We use a variety of interest rate and spread shifts and scenarios and define target limits for market value and liquidity loss in those scenarios. With respect to our IRLCs and inventory of loans held for sale, we use MBS forward sale contracts to lock in the price at which we will sell the mortgage loans or resulting MBS, and further use MBS put options to mitigate the risk of our IRLCs not closing at the rate we expect. With respect to our MSRs, we seek to mitigate mortgage-based loss exposure utilizing MBS forward purchase and sale contracts, address exposures to smaller interest rate shifts with Treasury and interest rate swap futures, and use options and swaptions to achieve target coverage levels for larger interest rate shocks.
Fair Value Sensitivities
The following sensitivity analyses are limited in that they were performed at a particular point in time; only contemplate the movements in the indicated variables; do not incorporate changes to other variables; are subject to the accuracy of various models and inputs used; and do not incorporate other factors that would affect our overall financial performance in such scenarios, including operational adjustments made by management to account for changing circumstances. For these reasons, the following estimates should not be viewed as earnings forecasts.
The following tables summarize the estimated change in fair value of MSRs as of September 30, 2023, given several shifts in pricing spreads, prepayment speed and annual per loan cost of servicing:
Change in fair value attributable to shift in:
-20%
-10%
-5%
+5%
+10%
+20%
Prepayment speed
386,670
187,217
92,152
(89,373)
(176,093)
(342,038)
Pricing spread
412,636
200,599
98,923
(96,272)
(189,990)
(370,130)
Annual per-loan cost of servicing
175,238
87,619
43,810
(43,810)
(87,619)
(175,238)
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. However, no matter how well a control system is designed and operated, it can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports.
Our management has conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report as required by paragraph (b) of Rule 13a-15 under the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this Report, to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings
From time to time, the Company may be involved in various legal and regulatory proceedings, lawsuits and other claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on the financial condition, results of operations, or cash flows of the Company. See Note 16 — Commitments and Contingencies, to the financial statements contained in this report for a discussion of legal and regulatory proceedings that are incorporated by reference into this Item 1.
Item 1A. Risk Factors
There have been no material changes from the risk factors set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 22, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered equity securities during the quarter ended September 30, 2023.
Stock Repurchase Program
In August 2021, the Company’s board of directors approved an increase to the Company’s common stock repurchase program from $1 billion to $2 billion. The stock repurchase program does not require the Company to purchase a specific number of shares, and the timing and amount of any shares repurchased are based on market conditions and other factors, including price, regulatory requirements and capital availability. Stock repurchases may be affected through privately negotiated transactions or open market purchases, including pursuant to a trading plan implemented pursuant to Rule 10b5-1 of the Exchange Act. The stock repurchase program does not have an expiration date but may be suspended, modified or discontinued at any time without prior notice. We did not repurchase our common stock during the quarter ended September 30, 2023.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
(c) Trading Plans
As of September 30, 2023, none of the Company’s directors or Section 16 officers adopted, modified or terminated any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements (in each case, as defined in Item 408(a) of Regulation S- K).
Item 6. Exhibits
Incorporated by Referencefrom the Below-Listed Form(Each Filed under SEC FileNumber 001-35916 or001-38727)
Exhibit No.
Exhibit Description
Form
Filing Date
Contribution Agreement and Plan of Merger, dated as of August 2, 2018, by and among PennyMac Financial Services, Inc., New PennyMac Financial Services, Inc., New PennyMac Merger Sub, LLC, Private National Mortgage Acceptance Company, LLC, and the Contributors.
8-K12B
November 1, 2018
3.1
Amended and Restated Certificate of Incorporation of New PennyMac Financial Services, Inc.
3.1.1
Certificate of Amendment to Amended and Restated Certificate of Incorporation of New PennyMac Financial Services, Inc.
3.2
Amended and Restated Bylaws of New PennyMac Financial Services, Inc.
3.2.1
Amendment to Amended and Restated Bylaws of PennyMac Financial Services, Inc. (formerly known as New PennyMac Financial Services, Inc.).
10-Q
November 4, 2019
10.1
Series 2023-MSRVF2 Master Repurchase Agreement, dated as of August 4, 2023, by and among PennyMac Loan Services, LLC and Nomura Corporate Funding Americas, LLC.
8-K
August 10, 2023
10.2
Series 2020-SPIADVF1 Master Repurchase Agreement, dated as of August 4, 2023, by and among PennyMac Loan Services, LLC and Nomura Corporate Funding Americas, LLC.
10.3
Guaranty, by Private National Mortgage Acceptance Company, LLC, as guarantor, in favor of Nomura Corporate Funding Americas, LLC, dated as of August 4, 2023.
31.1
Certification of David A. Spector pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*
31.2
Certification of Daniel S. Perotti pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of David A. Spector pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**
32.2
Certification of Daniel S. Perotti pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 (ii) the Consolidated Statements of Income for the quarter and nine months ended September 30, 2023 and September 30, 2022, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarter and nine months ended September 30, 2023 and September 30, 2022, (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and September 30, 2022 and (v) the Notes to the Consolidated Financial Statements.
101.INS
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101).
*Filed herewith
**The certifications attached hereto as Exhibits 32.1 and 32.2 are furnished to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: October 31, 2023
By:
/s/ DAVID A. SPECTOR
David A. Spector
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ DANIEL S. PEROTTI
Daniel S. Perotti
Senior Managing Director and
Chief Financial Officer
(Principal Financial Officer)
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