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 March 31, 2024
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 April 29, 2024
50,922,737
PENNYMAC FINANCIAL SERVICES, INC.
FORM 10-Q
March 31, 2024
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
51
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
69
Item 4.
Controls and Procedures
70
PART II. OTHER INFORMATION
71
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
72
Item 6.
Exhibits
73
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, 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, 2023, filed with the Securities and Exchange Commission (“SEC”) on February 21, 2024 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)
March 31,
December 31,
2024
2023
(in thousands, except share amounts)
ASSETS
Cash
$
927,394
938,371
Short-term investment at fair value
10,268
Principal-only stripped mortgage-backed securities at fair value pledged to creditors
524,576
—
Loans held for sale at fair value (includes $5,127,134 and $4,329,501 pledged to creditors)
5,200,350
4,420,691
Derivative assets
108,987
179,079
Servicing advances, net (includes valuation allowance of $67,327 and $73,991; $271,947 and $354,831 pledged to creditors)
499,955
694,038
Mortgage servicing rights at fair value (includes $7,406,892 and $7,033,892 pledged to creditors)
7,483,210
7,099,348
Investment in PennyMac Mortgage Investment Trust at fair value
1,101
1,121
Receivable from PennyMac Mortgage Investment Trust
30,835
29,262
Loans eligible for repurchase
4,401,896
4,889,925
Other (includes $16,175 and $15,653 pledged to creditors)
623,368
582,460
Total assets
19,801,741
18,844,563
LIABILITIES
Assets sold under agreements to repurchase
5,435,354
3,763,956
Mortgage loan participation purchase and sale agreements
363,798
446,054
Notes payable secured by mortgage servicing assets
1,972,020
1,873,415
Unsecured senior notes
2,521,031
2,519,651
Derivative liabilities
40,784
53,275
Mortgage servicing liabilities at fair value
1,732
1,805
Accounts payable and accrued expenses
263,338
449,896
Payable to PennyMac Mortgage Investment Trust
127,993
208,210
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement
26,099
Income taxes payable
1,047,337
1,042,886
Liability for loans eligible for repurchase
Liability for losses under representations and warranties
29,976
30,788
Total liabilities
16,231,358
15,305,960
Commitments and contingencies – Note 18
STOCKHOLDERS’ EQUITY
Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 50,907,865 and 50,178,963 shares, respectively
Additional paid-in capital
27,179
24,287
Retained earnings
3,543,199
3,514,311
Total stockholders' equity
3,570,383
3,538,603
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter ended March 31,
(in thousands, except earnings per share)
Revenues
Net gains on loans held for sale at fair value:
From non-affiliates
162,794
104,870
From PennyMac Mortgage Investment Trust
(353)
(485)
162,441
104,385
Loan origination fees:
36,012
29,980
359
1,410
36,371
31,390
Fulfillment fees from PennyMac Mortgage Investment Trust
4,016
11,923
Net loan servicing fees:
Loan servicing fees:
358,026
290,697
20,262
20,449
Other
45,896
26,911
424,184
338,057
Change in fair value of mortgage servicing rights and mortgage servicing liabilities
(28,585)
(236,447)
Mortgage servicing rights hedging results
(294,645)
47,227
(323,230)
(189,220)
Net loan servicing fees
100,954
148,837
Net interest expense:
Interest income
156,426
128,478
Interest expense
165,769
131,771
Net interest expense
(9,343)
(3,293)
Management fees from PennyMac Mortgage Investment Trust
7,188
7,257
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust
10
26
Results of real estate acquired in settlement of loans
406
142
3,617
2,195
Total net revenues
305,660
302,862
Expenses
Compensation
146,376
147,935
Technology
35,967
36,038
Loan origination
30,568
27,086
Servicing
16,104
12,632
Professional services
9,262
21,007
Occupancy and equipment
8,676
8,820
Marketing and advertising
3,671
3,241
11,153
7,956
Total expenses
261,777
264,715
Income before provision for income taxes
43,883
38,147
Provision for income taxes
4,575
7,769
Net income
39,308
30,378
Earnings per share
Basic
0.78
0.61
Diluted
0.74
0.57
Weighted average shares outstanding
50,547
50,154
53,100
53,352
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Quarter ended March 31, 2024
Additional
Total
Number of
Par
paid-in
Retained
stockholders'
shares
value
capital
earnings
equity
(in thousands)
Balance, December 31, 2023
50,179
Stock-based compensation
728
2,808
Issuance of common stock in settlement of directors' fees
1
84
Common stock dividend ($0.20 per share)
(10,420)
Balance, March 31, 2024
50,908
Quarter ended March 31, 2023
Balance, December 31, 2022
49,988
3,471,044
3,471,049
876
6,850
(10,777)
Repurchase of common stock
(768)
(6,901)
(38,460)
(45,361)
Balance, March 31, 2023
50,097
3,452,185
3,452,190
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cash flow from operating activities
Adjustments to reconcile net income to net cash used in operating activities:
Net gains on loans held for sale at fair value
(162,441)
(104,385)
28,585
236,447
294,645
(47,227)
Accrual of unearned discounts on mortgage-backed securities
(264)
Capitalization of interest on loans held for sale
(128)
(223)
Amortization of debt issuance costs
7,357
4,708
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust
20
Results of real estate acquired in settlement in loans
(406)
(142)
Stock-based compensation expense
4,583
11,650
Reversal of provision for servicing advance losses
(1,541)
(3,081)
Depreciation and amortization
14,164
12,705
Amortization of operating lease right-of-use assets
3,436
5,055
Purchase of loans held for sale from PennyMac Mortgage Investment Trust
(16,302,059)
(13,451,030)
Origination of loans held for sale
(3,073,792)
(2,194,780)
Purchase of loans held for sale from non-affiliates
(496,609)
(404,963)
Purchase of loans from Ginnie Mae securities and early buyout investors
(791,726)
(714,110)
Sale to non-affiliates and principal payment of loans held for sale
19,676,917
13,385,341
Repurchase of loans subject to representations and warranties
(21,395)
(10,460)
Decrease in servicing advances
168,554
138,018
(Increase) decrease in receivable from PennyMac Mortgage Investment Trust
(1,999)
1,872
Sale of real estate acquired in settlement of loans
13,165
7,533
Increase in other assets
(33,707)
(64,777)
Decrease in accounts payable and accrued expenses
(182,097)
(43,767)
Decrease in operating lease liabilities
(4,380)
(4,914)
Decrease in payable to PennyMac Mortgage Investment Trust
(80,581)
(62,927)
Increase in income taxes payable
4,451
8,184
Net cash used in operating activities
(897,940)
(3,264,891)
Statements continue on the next page
(Continued)
Cash flow from investing activities
Decrease in short-term investment
10,199
8,610
Purchase of principal-only stripped mortgage-backed securities
(524,739)
Repayment of principal-only stripped mortgage-backed securities
116
Net settlement of derivative financial instruments used for hedging of mortgage servicing rights
(224,750)
78,438
Transfer of mortgage servicing rights relating to delinquent loans to Agency
232
Acquisition of capitalized software
(3,864)
(10,590)
Purchase of furniture, fixtures, equipment and leasehold improvements
(918)
(173)
Increase in margin deposits
(38,656)
(97,450)
Net cash used in investing activities
(782,612)
(20,933)
Cash flow from financing activities
Sale of assets under agreements to repurchase
20,836,772
16,713,811
Repurchase of assets sold under agreements to repurchase
(19,165,094)
(13,949,931)
Issuance of mortgage loan participation purchase and sale certificates
5,399,717
4,170,792
Repayment of mortgage loan participation purchase and sale certificates
(5,482,145)
(3,943,198)
Issuance of notes payable secured by mortgage servicing assets
725,000
680,000
Repayment of notes payable secured by mortgage servicing assets
(625,000)
(150,000)
Payment of debt issuance costs
(7,480)
(5,345)
Issuance of common stock pursuant to exercise of stock options
7,626
4,342
Payment of withholding taxes relating to stock-based compensation
(9,401)
(9,142)
Payment of dividends to holders of common stock
Net cash provided by financing activities
1,669,575
3,455,191
Net (decrease) increase in cash and restricted cash
(10,977)
169,367
Cash and restricted cash at beginning of quarter
1,328,539
Cash and restricted cash at end of quarter
1,497,906
Cash and restricted cash at end of quarter are comprised of the following:
1,497,903
Restricted cash included in Other assets
Supplemental cash flow information:
Cash paid for interest
152,261
129,791
Cash paid (refunds received) for income taxes, net
124
(415)
Non-cash investing activities:
Mortgage servicing rights received from loan sales
412,520
286,533
Operating right-of-use assets recognized
1,727
Non-cash financing activities:
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 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 and U.S. Department of Agriculture (each of the above an “Agency” and collectively the “Agencies”).
Note 2—Basis of Presentation and Recently Issued Accounting Pronouncements
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 (“FASB”) Accounting Standards Codification for interim financial information and with the SEC’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, 2023.
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, 2024. 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.
Recently Issued Accounting Pronouncements
During 2023, the FASB issued two Accounting Standards Updates (“ASUs”) aimed at increasing the amount of detail provided to financial statement users in certain existing disclosures. The ASUs do not require changes to the Company’s accounting. The ASUs are discussed below:
Segment Disclosures
The FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), that is intended to improve disclosures about a public entity’s reportable segments and addresses requests from investors and other allocators of capital for more detailed information about a reportable segment’s expenses.
The amendments in ASU 2023-07 are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The key amendments will require that the Company supplement its existing disclosures to include disclosure of:
The Company will be required to apply the reporting specified by ASU 2023-07 in annual periods beginning with its fiscal year ending December 31, 2024 and for quarterly periods ended thereafter.
Income Tax Disclosures
The FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (“ASU 2023-09”), that is intended to enhance the level of detail and decision usefulness of income tax disclosures. ASU 2023-09 requires disclosures of:
The disclosures specified by ASU 2023-09 are required in the Company’s annual financial statements beginning with the year ended December 31, 2025, with early adoption permitted.
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 11% and 14% of total net revenues for the quarters ended March 31, 2024 and 2023, respectively. The Company also purchased 82% and 84% of its loan production from PMT during the quarters ended March 31, 2024 and 2023, respectively.
12
The Company maintains cash and short-term investment balances at financial institutions in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. Should one or more of the financial institutions at which the Company’s deposits are maintained fail, there is no guarantee as to the extent that the Company would recover the funds deposited, whether through FDIC coverage or otherwise, or the timing of any recovery.
Note 4—Variable Interest Entities
The Company entered into securitization transactions in which variable interest entities (“VIEs”) may issue variable funding notes and term debt backed by beneficial interests in Ginnie Mae and Fannie Mae mortgage servicing rights (“MSRs”). The Company acts as guarantor of the variable funding notes and term debt. The Company determined that it is the primary beneficiary of the VIEs because as the holder and guarantor of the variable funding notes, it holds the variable interest in the VIEs. Therefore, PFSI consolidates the VIEs.
For financial reporting purposes, the MSRs financed by the consolidated VIEs are included in Mortgage servicing rights at fair value, the variable funding notes are included in Assets sold under agreements to repurchase, and the term debt is included in Notes payable secured by mortgage servicing assets on the Company’s consolidated balance sheets. This financing is detailed in Note 14 – Short-Term Borrowings and Note 15 – Long Term Debt.
Note 5—Related Party Transactions
PennyMac Mortgage Investment Trust
Operating Activities
Mortgage Loan Production Activities and MSR 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%.
The mortgage loans purchase and MSR recapture agreements expire on June 30, 2025.
13
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:
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:
Mortgage servicing rights recapture incurred included in Net gains on loans held for sale at fair value
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
1,771,681
6,628,810
Sourcing fees included in cost of loans purchased from PMT
1,605
1,328
Unpaid principal balance of loans purchased from PMT:
Government guaranteed or insured
7,856,925
9,213,712
Conventional conforming
8,189,930
4,062,874
16,046,855
13,276,586
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 and loans in its prime and special servicing portfolios. 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 is also entitled to customary ancillary income and market-based fees and charges relating to loans it services for PMT.
14
Prime Servicing
Special Servicing
Following is a summary of loan servicing fees earned from PMT:
Loan type serviced
Prime servicing
20,200
20,329
Special servicing
62
120
The Servicing Agreement expires on June 30, 2025.
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:
15
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 beneficial interest of all of PMT’s public offerings, multiplied by the weighted average number of common shares of beneficial interest 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 of beneficial interest (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.
16
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
6,414
5,661
Common overhead incurred by the Company
1,944
1,821
165
8,523
7,647
Payments and settlements during the quarter (1)
30,085
32,384
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:
Allocated expenses and expenses incurred on PMT's behalf
8,194
5,612
Correspondent production fees
7,368
8,288
Management fees
7,252
Servicing fees
6,730
6,809
Fulfillment fees
1,355
1,301
Payable to PMT:
Amounts advanced by PMT to fund its servicing advances
127,992
208,154
56
17
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 March 31, 2024 and December 31, 2023. The Company did not make payments under the tax receivable agreement during the quarters ended March 31, 2024 and 2023.
Townsgate Closing Services, LLC
The Company advanced $801,000 to 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 9.75% per year as of March 31, 2024, 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 $20,000 and $21,000 of interest income related to the loan during the quarters ended March 31, 2024 and 2023, respectively.
.
Note 6—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
Servicing fees received
336,248
268,423
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.
18
The following is a summary of the allowance for losses on servicing advances:
Balance at beginning of quarter
73,991
78,992
Reversals of provision for losses
Charge-offs, net
(5,123)
(733)
Balance at end of quarter
67,327
75,178
The following table summarizes the UPB of the loans sold by the Company in transactions where it maintains continuing involvement with the loans as servicer:
Unpaid principal balance of loans outstanding
364,441,567
352,790,614
Delinquent loans:
30-89 days
12,128,892
13,775,493
90 days or more:
Not in foreclosure
6,251,718
6,754,282
In foreclosure
647,459
618,694
Foreclosed
8,441
7,565
Loans in bankruptcy
1,479,461
1,415,614
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
17,051,740
381,493,307
230,819,012
Loans held for sale
5,111,719
386,605,026
617,424,038
30 days
9,940,684
1,607,081
11,547,765
60 days
2,738,951
370,879
3,109,830
6,426,292
875,189
7,301,481
692,930
111,713
804,643
9,652
4,482
14,134
19,808,509
2,969,344
22,777,853
1,583,758
215,218
1,798,976
Custodial funds managed by the Company (1)
5,429,348
2,468,707
7,898,055
19
December 31, 2023
17,478,397
370,269,011
232,653,069
4,294,689
374,563,700
607,216,769
11,097,929
1,808,516
12,906,445
3,316,494
399,786
3,716,280
6,941,325
1,031,299
7,972,624
686,359
92,618
778,977
8,133
4,295
12,428
22,050,240
3,336,514
25,386,754
1,523,218
186,593
1,709,811
3,741,978
1,759,974
5,501,952
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
73,344,855
72,788,272
Florida
59,174,541
57,824,310
Texas
58,318,589
56,437,082
Virginia
35,562,555
35,376,266
Maryland
26,865,117
26,746,355
All other states
364,158,381
358,044,484
Note 7—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
Principal-only mortgage-backed securities
4,733,958
466,392
Derivative assets:
Interest rate lock commitments
74,545
Forward purchase contracts
21,887
Forward sales contracts
18,622
MBS put options
1,970
Put options on interest rate futures purchase contracts
25,353
Call options on interest rate futures purchase contracts
3,301
Total derivative assets before netting
28,654
42,479
145,678
Netting
(36,691)
Total derivative assets
Mortgage servicing rights
Investment in PennyMac Mortgage Investment Trust
29,824
5,301,013
8,024,147
13,318,293
Liabilities:
Derivative liabilities:
4,737
6,049
35,649
Total derivative liabilities before netting
41,698
46,435
(5,651)
Total derivative liabilities
Mortgage servicing liabilities
6,469
42,516
21
3,942,127
478,564
90,313
78,448
6,151
413
MBS call options
6,265
11,043
66,176
77,219
91,277
258,809
(79,730)
88,608
4,033,404
7,668,225
11,710,507
720
5,141
92,796
Call options on interest rate futures sales contracts
3,209
97,937
101,866
(48,591)
2,525
55,080
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 quarter presented:
Net interest
Mortgage
Loans held
rate lock
servicing
Assets
for sale
commitments (1)
rights
89,593
7,667,505
Purchases and issuances, net
905,860
100,271
1,006,131
Capitalization of interest and servicing advances
11,226
Sales and repayments
(383,999)
Mortgage servicing rights resulting from loan sales
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk
17,142
Other factors
(572)
11,524
(28,658)
(17,706)
16,570
(564)
Transfers from Level 3 to Level 2
(561,829)
Transfers to loans held for sale
(131,580)
69,808
8,019,410
Changes in fair value recognized during the quarter relating to assets still held at March 31, 2024
19,043
60,193
Quarter ended
Liabilities
Mortgage servicing liabilities:
Changes in fair value included in income
(73)
Changes in fair value recognized during the quarter relating to liabilities still outstanding at March 31, 2024
23
345,772
25,844
5,953,621
6,325,237
437,650
62,508
500,158
7,655
(122,858)
(232)
(123,090)
9,543
793
72,412
(236,532)
(163,327)
10,336
(153,784)
Transfers:
From Level 3 to Level 2
(365,714)
To real estate acquired in settlement of loans
(52)
To loans held for sale
(101,918)
312,789
58,846
6,003,390
6,375,025
Changes in fair value recognized during the quarter relating to assets still held at March 31, 2023
8,413
(169,273)
2,096
(85)
2,011
Changes in fair value recognized during the quarter relating to liabilities still outstanding at March 31, 2023
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.
24
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
Principal-only stripped mortgage-backed securities
(311)
129,329
165,947
(28,969)
100,360
(70,585)
85
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
5,162,089
5,062,370
99,719
4,378,042
4,233,764
144,278
90 days or more delinquent:
32,071
35,496
(3,425)
35,253
38,922
(3,669)
6,190
13,853
(7,663)
7,396
22,003
(14,607)
88,631
126,002
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
2,473
2,669
The following table summarizes the losses recognized on assets when they were remeasured at fair value on a nonrecurring basis:
(1,210)
(558)
25
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 and Unsecured senior notes 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 values and carrying values of these liabilities are summarized below:
Carrying value
Term notes and term loans
1,736,738
1,722,656
1,730,000
1,724,290
2,472,415
2,467,750
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 and 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:
Principal-Only Stripped Mortgage-Backed Securities
The Company categorizes principal-only stripped securities as “Level 2” fair value financial instruments. Fair values of these securities are established based on quoted market prices for these or similar securities.
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:
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 a payment deferral program 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.
27
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
6.7% – 10.2%
7.1% – 10.2%
Weighted average
7.4%
7.2%
Twelve-month projected housing price index change:
1.8% – 1.9%
0.3% – 0.5%
1.8%
0.5%
Voluntary prepayment/resale speed (2):
6.2% – 38.9%
4.0% – 36.9%
25.9%
24.8%
Total prepayment/resale speed (3):
6.3% – 47.3%
4.0% – 50.3%
29.3%
32.2%
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 components 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.
28
Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:
Fair value (in thousands) (1)
Committed amount (in thousands)
7,270,122
6,349,628
Key inputs (2):
Pull-through rate:
19.6% – 100%
10.2% – 100%
79.1%
81.1%
Mortgage servicing rights fair value expressed as:
Servicing fee multiple:
1.1 – 7.8
1.1 – 7.3
4.4
4.2
Percentage of loan commitment amount:
0.3% – 4.3%
2.1%
1.9%
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 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.
29
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
19,484,815
13,695,364
Weighted average servicing fee rate (in basis points)
44
50
Annual total prepayment speed (2):
7.9% – 15.9%
9.2% – 23.2%
11.0%
11.7%
Equivalent average life (in years):
3.5 – 9.3
3.0 – 8.4
7.5
7.3
Pricing spread (3):
5.5% – 12.6%
5.5% – 11.7%
6.3%
7.7%
Per-loan annual cost of servicing:
$71 – $127
$68 – $125
$99
$103
30
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)
$ 7,483,210
$ 7,099,348
Pool characteristics:
Unpaid principal balance of underlying mortgage loans
$ 381,470,663
$ 370,244,119
Weighted average note interest rate
4.2%
4.1%
38
6.0% – 17.6%
6.1% – 17.8%
7.9%
8.3%
3.0 – 9.0
8.2
8.1
Effect on fair value of (3):
5% adverse change
($110,071)
($107,757)
10% adverse change
($216,317)
($211,643)
20% adverse change
($418,132)
($408,638)
Pricing spread (4):
6.4%
($98,475)
($94,307)
($194,382)
($186,129)
($378,857)
($362,671)
$70 – $132
$70 – $135
$107
($45,114)
($44,572)
($90,228)
($89,145)
($180,457)
($178,289)
31
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 annual total prepayment speed, pricing spread, 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)
22,644
24,892
Servicing fee rate (in basis points)
Annual total prepayment speed (2)
15.9%
16.1%
Pricing spread (3)
8.5%
Equivalent average life (in years)
5.1
Per-loan annual cost of servicing
992
1,043
Note 8—Mortgage-Backed Securities
During the quarter ended March 31, 2024, the Company began to invest in Agency principal-only stripped MBS for the purpose of hedging the fair value of its MSRs. MBS are carried at fair value with changes in fair value recognized in current period income. Changes in fair value arising from accrual of unearned discounts are recognized using the interest method and are included in Interest income. Changes in fair value arising from other factors are included in Mortgage servicing rights hedging results. All of the principal-only stripped MBS had contractual maturities of over ten years and were pledged to secure sales of assets under agreements to repurchase.
Following is a summary of the Company’s investment in principal-only stripped MBS:
Principal balance
654,884
Unearned discounts
(129,997)
Cumulative valuation changes
32
Note 9—Loans Held for Sale at Fair Value
Loans held for sale at fair value include the following:
Loan type
Government-insured or guaranteed
2,517,566
2,099,135
2,158,242
1,821,085
Jumbo
58,150
21,907
Closed-end second lien mortgage loans
230,639
322,015
Purchased from Ginnie Mae securities serviced by the Company
222,286
146,585
Repurchased pursuant to representations and warranties
13,467
9,964
Fair value of loans pledged to secure:
4,741,330
3,858,977
385,804
470,524
5,127,134
4,329,501
Note 10—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.
33
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):
14,624,053
15,863,667
17,168,191
14,477,159
2,700,000
2,925,000
1,000,000
8,917,500
8,717,500
1,625,000
4,250,000
Treasury futures purchase contracts
8,068,300
5,986,500
Treasury futures sale contracts
9,408,000
10,677,000
Total derivatives before netting
Deposits received from derivative counterparties included in the derivative balances above, net
(31,040)
(31,139)
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
74,010
Citibank, N.A.
3,476
2,947
Goldman Sachs
8,473
Mizuho Securities
1,467
Others
2,312
1,869
34
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.
1,203,385
(1,203,385)
1,210,473
(1,210,473)
Bank of America, N.A.
1,087,182
(1,086,753)
429
875,766
(872,148)
3,618
Royal Bank of Canada
666,511
(666,511)
457,743
(457,743)
Wells Fargo Bank, N.A.
443,386
(416,035)
27,351
116,275
(114,647)
1,628
JPMorgan Chase Bank, N.A.
412,478
(412,448)
243,225
(243,225)
BNP Paribas
322,871
(322,871)
185,425
(185,425)
299,387
(299,205)
182
178,751
(178,751)
293,885
(293,885)
174,221
(174,221)
Morgan Stanley Bank, N.A.
227,757
(223,410)
4,347
195,714
(164,149)
31,565
Barclays Capital
197,489
(196,316)
1,173
128,488
(118,667)
9,821
Santander US Capital Markets LLC
195,541
(195,307)
234
Nomura Corporate Funding Americas
125,036
(125,000)
36
50,000
(50,000)
Athene Annuity & Life Assurance Company
661
2,111
Federal National Mortgage Association
189
1,337
1,415
2,475
5,481,910
(5,441,126)
3,822,724
(3,769,449)
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)
(19,786)
33,002
Hedged item:
Interest rate lock commitments and loans held for sale
52,237
(94,798)
Net loan servicing fees–Mortgage servicing rights hedging results
(294,334)
35
Note 11—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
286,301
Change in fair value due to:
Changes in inputs used in valuation model (1)
169,952
(90,279)
Other changes in fair value (2)
(198,610)
(146,253)
Total change in fair value
Unpaid principal balance of underlying loans at end of quarter
381,470,663
321,263,982
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets
7,406,892
7,033,892
Mortgage Servicing Liabilities at Fair Value
The activity in MSLs is summarized below:
Changes in fair value due to:
(27)
(15)
(46)
(70)
28,380
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
17,609
12,601
2,640
2,181
378,275
305,479
Note 12—Other Assets
Other assets are summarized below:
Margin deposits
154,321
135,645
Capitalized software, net
140,419
148,736
Operating lease right-of-use assets
46,490
49,926
Servicing fees receivable, net
34,312
37,271
Other servicing receivables
45,280
30,530
Interest receivable
39,837
35,196
Prepaid expenses
35,325
36,044
18,195
14,982
Furniture, fixtures, equipment and building improvements, net
17,951
19,016
Deposits securing Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets
16,175
15,653
75,063
59,461
37
Note 13—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 seven 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
4,031
4,949
Short-term leases
163
Sublease income
(425)
(96)
Net lease expense included in Occupancy and equipment expense
3,690
5,016
Other information:
Payments for operating leases
4,974
5,696
Operating lease right-of-use assets recognized
Quarter end weighted averages:
Remaining lease term (in years)
4.1
4.6
Discount rate
3.8%
Lease payments attributable to the Company’s operating lease liabilities are summarized below:
Twelve months ended March 31,
2025
19,540
2026
18,635
2027
13,385
2028
5,791
2029
5,009
Thereafter
Total lease payments
68,151
Less imputed interest
(6,487)
Operating lease liability included in Accounts payable and accrued expenses
61,664
Note 14—Short-Term Debt
The borrowing facilities described throughout these Notes 14 and 15 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 March 31, 2024.
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 principal-only stripped mortgage-backed securities at fair value, 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.
Assets sold under agreements to repurchase are summarized below:
Average balance of assets sold under agreements to repurchase
3,542,537
3,508,262
Weighted average interest rate (1)
7.24%
6.54%
Total interest expense
70,435
59,223
Maximum daily amount outstanding
5,442,438
5,768,570
Carrying value:
Unpaid principal balance
5,441,126
3,769,449
Unamortized debt issuance costs
(5,772)
(5,493)
Weighted average interest rate
6.92%
7.05%
Available borrowing capacity (1):
Committed
712,341
1,282,040
Uncommitted
4,838,453
5,548,511
5,550,794
6,830,551
Assets securing repurchase agreements:
Principal-only stripped MBS
Servicing advances (2)
271,947
354,831
Mortgage servicing rights (2)
6,533,305
6,284,239
Deposits (2)
39
Following is a summary of maturities of outstanding advances under asset repurchase agreements by maturity date:
Remaining maturity at March 31, 2024 (1)
Within 30 days
1,291,192
Over 30 to 90 days
3,225,500
Over 90 to 180 days
139,760
Over 180 days to one year
210,923
Over one year to two years
573,751
Total assets sold under agreements to repurchase
Weighted average maturity (in months)
3.5
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 March 31, 2024:
Loans held for sale and MSRs
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)
4,537,873
March 13, 2025
June 27, 2025
121,197
September 10, 2024
73,125
April 28, 2024
June 12, 2025
Barclays Bank PLC
30,560
August 1, 2024
March 6, 2026
29,023
February 12, 2025
JP Morgan Chase Bank, N.A.
21,732
July 20, 2024
June 9, 2025
13,954
June 15, 2024
September 30, 2025
Goldman Sachs Bank USA
12,362
July 16, 2024
December 8, 2025
11,917
June 11, 2024
May 3, 2025
11,023
June 18, 2024
February 6, 2026
7,661
June 4, 2024
Maturity
11,838
April 26, 2024
11,546
8,968
April 30, 2024
40
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 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
234,874
184,193
6.69%
6.06%
4,077
2,923
515,990
515,537
363,978
446,406
(180)
(352)
6.58%
6.60%
Fair value of loans pledged to secure mortgage loan participation purchase and sale agreements
Note 15—Long-Term Debt
Notes Payable Secured by Mortgage Servicing Assets
Term Notes and Term Loans
The Company, through its wholly-owned subsidiaries PNMAC, PLS 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 variable funding notes 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.
41
Following is a summary of the issued and outstanding Term Notes and Term Loans:
Maturity date
Issuance date
Annual interest rate spread (1)
Stated
Optional extension (2)
Term Notes:
June 3, 2022
500,000
4.25%
5/25/2027
5/25/2029
February 29, 2024
425,000
3.20%
3/26/2029
3/25/2031
Term Loans:
February 28, 2023
3.00%
2/25/2028
2/25/2029
October 25, 2023
125,000
10/25/2028
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 of 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.
Notes payable secured by mortgage servicing assets are summarized below:
1,950,330
2,092,056
8.92%
7.72%
44,006
40,778
Unpaid principal balance:
250,000
150,000
1,980,000
1,880,000
(7,980)
(6,585)
8.69%
8.82%
Assets pledged to secure notes payable (1):
Servicing advances
Deposits
42
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
5.375%
October 15, 2025
October 15, 2022
October 19, 2020
February 11, 2021
650,000
February 15, 2029
February 15, 2024
September 16, 2021
5.75%
September 15, 2031
September 15, 2026
December 11, 2023
750,000
7.875%
December 15, 2029
December 15, 2026
2,550,000
1,800,000
5.90%
5.07%
38,832
23,428
Unamortized debt issuance costs and premiums, net
(30,349)
43
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)
1,180,000
550,000
1,250,000
1,200,000
4,530,000
Note 16—Liability for Losses Under Representations and Warranties
Following is a summary of the Company’s liability for losses under representations and warranties:
32,421
Provision for losses:
Resulting from sales of loans
3,952
1,735
Resulting from change in estimate
(3,320)
(1,445)
Losses incurred
(1,444)
(1,608)
31,103
Unpaid principal balance of loans subject to representations and warranties at end of quarter
366,147,661
303,983,805
Note 17—Income Taxes
The Company’s effective income tax rates were 10.4% and 20.4% for the quarters ended March 31, 2024 and 2023, respectively. The decrease in the effective income tax rate for the quarter ended March 31, 2024 when compared to the same period for 2023 was primarily due to a decrease in the permanent adjustment related to non-deductible compensation and an increase in excess tax benefits of options exercised and equity awards vested during the quarter.
Note 18—Commitments and Contingencies
Commitments to Purchase and Fund Mortgage Loans
The Company’s commitments to purchase and fund loans totaled $7.3 billion as of March 31, 2024.
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 (“Black Knight”), now a wholly-owned subsidiary of Intercontinental Exchange, Inc. (NYSE: ICE), 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 (“PLS”), Case No. 2019-CA-007908, alleging breach of contract and misappropriation of MSP® System trade secrets. On November 6, 2019, PLS filed unlawful monopolization claims against Black Knight pursuant to the Sherman Act and Clayton Act seeking injunctive relief. On March 30, 2020, the Florida State Court granted a motion to compel arbitration filed by the Company, after which all claims of the Company and Black Knight were consolidated into a binding arbitration.
On November 28, 2023, the arbitrator issued an interim award (the “Interim Award”) granting in part and denying in part Black Knight’s breach of contract claim. The arbitrator’s Interim Award also denied in full Black Knight’s claim of trade secrets misappropriation. The Interim Award granted Black Knight monetary damages in the amount of $155.2 million, plus prejudgment interest and reasonable attorneys’ fees, and it denied in full all of Black Knight’s claims for injunctive and declaratory relief.
The Interim Award also granted PLS’ claim that Black Knight violated federal antitrust laws, specifically unlawful monopolization in violation of Section 2 of the Sherman Act, and granted PLS’ claim for injunctive relief under the Sherman Act and Clayton Act, as well as its reasonable attorneys’ fees and costs. The parties subsequently agreed not to seek attorneys’ fees or costs on any claims.
As a result of the Interim Award, PLS’ loan servicing technology, known as Servicing Systems Environment, or SSE, and all related intellectual property and software developed by or on behalf of PLS, remain the proprietary technology of PLS, free and clear of any restrictions on use. To this end, the arbitrator expressly enjoined Black Knight from claiming ownership to any portion of SSE or preventing the Company from commercializing SSE. Black Knight is also enjoined from enforcing any of its contract clauses requiring that its clients process their loans exclusively on the MSP platform.
On January 12, 2024, the arbitrator issued the final award (the “Final Award”), reducing Black Knight’s monetary damages to $150.2 million, plus interest. As a result of the Final Award, the Company reported a pretax expense accrual of $158.4 million in its financial results for the fourth quarter of fiscal year 2023 on February 1, 2024. On February 14, 2024, the Company paid in full and Black Knight accepted payment of all damages and accrued interest due under the Final Award.
On March 15, 2024, the Florida State Court confirmed the Final Award, giving the rulings and remedies therein preclusive effect.
Note 19—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
768
34,063
Cost of shares of common stock repurchased
45,361
1,788,198
45
Note 20—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:
Loans
(309,190)
(55,386)
Hedging activities
150,219
(216,138)
(158,971)
(271,524)
Non-cash gains:
Provisions for losses relating to representations and warranties:
Pursuant to loan sales
(3,952)
(1,735)
Reductions in liability due to changes in estimate
3,320
1,445
Changes in fair values of loans and derivatives held at end of quarter:
27,645
(64,191)
Hedging derivatives
(97,982)
121,340
From PennyMac Mortgage Investment Trust (1)
Note 21—Net Interest Expense
Net interest expense is summarized below:
Interest income:
Cash and short-term investments
14,582
16,245
270
Loans held for sale at fair value
65,421
60,993
Placement fees relating to custodial funds
76,133
51,219
From Townsgate Closing Services, LLC
Interest expense:
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations
6,121
3,210
Interest on mortgage loan impound deposits
1,987
1,967
311
242
46
Note 22—Stock-based Compensation
Following is a summary of the stock-based compensation activity:
Grants:
Units:
Performance-based restricted share units ("RSUs")
246
307
Stock options
188
221
Time-based RSUs
145
Grant date fair value:
Performance-based RSUs
20,915
18,611
6,935
5,492
12,333
11,041
40,183
35,144
Vestings and exercises:
Performance-based RSUs vested
309
612
Stock options exercised
331
156
Time-based RSUs vested
209
245
Note 23—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 quarter. 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
2,553
3,198
Weighted average diluted shares of common stock outstanding
Basic earnings per share
Diluted earnings per share
47
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)
681
431
Stock options (2)
66
348
Total anti-dilutive units and options
798
851
Weighted average exercise price of anti-dilutive stock options (2)
84.93
58.21
Note 24—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 and loan origination volume.
The Agencies’ capital and liquidity levels and requirements, the calculations of which are specified by each Agency, are summarized below:
Requirement/Agency
Actual (1)
Requirement (1)
Capital
Fannie Mae & Freddie Mac
6,975,317
1,245,241
6,890,144
1,211,365
Ginnie Mae (2)
6,587,372
1,375,796
6,559,001
1,314,677
HUD
2,500
Liquidity
1,147,108
564,427
1,243,927
543,913
Ginnie Mae
1,394,563
406,799
1,684,457
389,501
Adjusted net worth / Total assets ratio
%
48
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 25—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.
Financial performance and results by segment are as follows:
Mortgage Banking
Investment
Production
Management
Revenues: (1)
141,431
21,010
Loan origination fees
63,931
92,411
156,342
61,896
103,873
2,035
(11,462)
(9,427)
818
1,096
1,914
2,119
4,033
184,671
111,598
296,269
9,391
148,779
106,662
255,441
6,336
35,892
4,936
40,828
3,055
Segment assets at quarter end
5,413,277
14,373,780
19,787,057
14,684
49
74,726
29,659
56,993
71,485
54,083
77,688
2,910
(6,203)
574
351
2,012
2,363
121,523
172,070
293,593
9,269
141,163
114,623
255,786
8,929
(19,640)
57,447
37,807
340
7,543,466
12,534,419
20,077,885
25,300
20,103,185
Note 26—Subsequent Events
Management has evaluated all events and transactions through the date the Company issued these consolidated financial statements. During this period:
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, over the last few quarters, the U.S. Federal Reserve has maintained the federal funds rate at its highest level since the great financial crisis of 2007 and has continued to reduce the federal government’s overall holdings of Treasury and mortgage-backed securities. Elevated interest rates are expected to constrain growth in the size of the mortgage origination market from an estimated $1.4 trillion in 2023 to an estimated $1.8 trillion in 2024 according to mortgage lending industry economists.
The limited size of the mortgage origination market and interest rates at sustained higher levels continue to impact our mortgage production activities and gains from the redelivery of loans bought out from Ginnie Mae securities. However, market capacity has adjusted to the new environment allowing profit margins to improve from the levels seen in 2023. 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 as compared to the same period in the prior year, and have led to prepayment speeds below historical averages in our mortgage servicing portfolio. We continued our acquisition of conventional loans from PMT during the quarter ended March 31, 2024 and expect to continue to purchase conventional loans from PMT during the remainder of 2024.
Results of Operations
Our results of operations are summarized below:
(dollars in thousands, except per share amounts)
Revenues:
Loan production revenues
202,828
147,698
Expenses:
23,500
20,017
Annualized return on average stockholders' equity
4.4%
3.5%
Dividends declared per share
0.20
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)
227,728
128,967
During the quarter:
Interest rate lock commitments issued
22,585,632
18,871,512
At end of quarter:
Interest rate lock commitments outstanding
7,362,534
Unpaid principal balance of loan servicing portfolio:
Owned:
Mortgage servicing rights and liabilities
321,292,362
6,692,155
327,984,517
Subserviced for PMT
236,489,881
564,474,398
Net assets of PennyMac Mortgage Investment Trust
1,958,913
1,970,734
Book value per share
70.13
68.91
52
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:
(Increase) decrease in fair value of MSRs net of MSLs due to changes in valuation inputs used in valuation models
(169,979)
90,264
Hedging losses (gains) associated with MSRs
Stock‑based compensation
Effect of arbitration accrual
1,600
Interest expense on corporate debt or corporate revolving credit facilities and capital lease
Adjusted EBITDA
Income Before Provisions for Income Taxes
For the quarter ended March 31, 2024, income before provision for income taxes increased $5.7 million compared to the same period in 2023. The increase was primarily due to a $58.1 million increase in Net gains on loans held for sale at fair value due to higher margins across all production channels and a $2.9 million decrease in total expenses, partially offset by a $47.9 million decrease in Net loan servicing fees resulting from increases in net MSR valuation losses in excess of growth in servicing fees and a $7.9 million decrease in Fulfillment fees from PennyMac Mortgage Investment Trust.
53
Net Gains on Loans Held for Sale at Fair Value
In our production segment, revenues reflect the effects of market adjustments to higher interest rates continuing during the quarter ended March 31, 2024 compared to the same period in 2023.
During the quarter ended March 31, 2024, we recognized Net gains on loans held for sale at fair value totaling $162.4 million, an increase of $58.1 million compared to the same period in 2023. The increase was primarily due to higher margins across all production channels and an increase in production volume, partially offset by a decrease in EBO loan redelivery gains as a result of lower volumes and modifications during the quarter ended March 31, 2024 compared to the same period in 2023.
Our net gains on loans held for sale are summarized below:
Total cash losses
Changes in fair values of loans and derivative financial instruments outstanding at end of quarter:
(90,123)
90,151
Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales
Total non-cash gains
321,765
376,394
Total gains on sale from non-affiliates
Interest rate lock commitments issued:
By loan type:
Government-insured or guaranteed loans
10,794,258
12,527,083
Conventional conforming loans
11,322,087
6,124,614
Jumbo loans
128,116
67,869
341,171
151,946
By production channel:
Consumer direct
2,152,369
2,198,643
Broker direct
3,352,407
2,551,517
Correspondent
17,080,856
14,121,352
6,772,423
Commitments to fund and purchase loans
54
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 254% of our gains on sales of loans held for sale at fair value for the quarter ended March 31, 2024, as compared to 274% for the same period in 2023. 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 7 – 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 the adequacy of our recorded liability on a periodic basis.
55
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 for the quarter ended March 31, 2024, compared to $1.7 million for the same period in 2023. The increase in the provision relating to current loan sales was primarily attributable to a change in the mix between government guaranteed and conventional loans sold for the quarter ended March 31, 2024 compared to the same period in 2023.
We also recorded reductions in the liability of $3.3 million for the quarter ended March 31, 2024 compared to $1.4 million for the same period in 2023. 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 quarter
75,724
35,961
New indemnifications
7,721
9,869
Less indemnified loans sold, repaid or refinanced
1,756
1,813
Loans indemnified at end of quarter
81,689
44,017
Repurchase activity:
Total loans repurchased
21,395
11,212
Less:
Loans repurchased by correspondent lenders
10,942
4,654
Loans repaid by borrowers or resold
6,827
28,350
Net loans repurchased (resolved) with losses chargeable to liability for representations and warranties
3,626
(21,792)
Losses charged to liability for representations and warranties
1,444
1,608
Unpaid principal balance of loans subject to representations and warranties
Liability for representations and warranties
During the quarter ended March 31, 2024, we repurchased loans totaling $21.4 million. We charged losses of $1.4 million to the liability during the quarter ended March 31, 2024. 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.
Elevated interest rate levels 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 $4.9 million during the quarter ended March 31, 2024 compared to the same period in 2023 primarily due to an increase in production volume in our correspondent and broker direct channels.
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 $7.9 million during the quarter ended March 31, 2024 compared to the same period in 2023. The decrease was primarily due to a decrease in loans produced on PMT’s behalf, partially offset by a decrease in discretionary reductions in the fulfillment fee rate during the quarter ended March 31, 2024 compared to the same period in 2023.
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 net of hedging results
Loan Servicing Fees
Following is a summary of our loan servicing fees:
Other:
20,589
14,925
25,307
11,986
Average loan servicing portfolio:
MSRs and MSLs
376,091,012
318,208,097
232,112,123
234,963,140
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 5 – Transactions with Related Parties to the consolidated financial statements included in this Quarterly Report. Other loan servicing fees are comprised primarily of borrower-contracted fees such as late charges and reconveyance fees.
Loan servicing fees from non-affiliates and other fees increased during the quarter ended March 31, 2024 compared to the same period in 2023. The increase was primarily due to growth of our loan servicing portfolio. Other servicing fees increased due to growth in our MSR portfolio combined with increased other incentives received for loss mitigation activities and recovery of servicing premiums from correspondent sellers for loans that paid off within a short period after origination.
57
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
169,979
(90,264)
Hedging results
(124,666)
(43,037)
Changes in fair value attributable to realization of cash flows
(198,564)
(146,183)
Total change in fair value of mortgage servicing rights and mortgage servicing liabilities net of hedging results
Average balances:
7,326,824
5,966,264
1,767
2,054
Changes in fair value of MSRs attributable to changes in fair value inputs increased during the quarter ended March 31, 2024 compared to the same period in 2023. The increase was due to the effect of an increase in interest rates during the quarter ended March 31, 2024 compared to a decrease in interest rates during the same period in 2023. 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.
Hedging results reflect valuation losses attributable to the effects of interest rate increase on the fair value of the hedging instruments as well as increased net exposure to interest rate volatility to limit elevated hedge coasts during the quarter ended March 31, 2024 compared to the opposite circumstances and effects in the same period in 2023.
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 ended March 31, 2024, realization of cash flows increased compared to the same period in 2023, primarily due to the growth in our investment in MSRs.
58
Following is a summary of our loan servicing portfolio:
Loans serviced
Prime servicing:
230,809,585
232,643,144
Total prime servicing
617,414,611
607,206,844
Special servicing subserviced for PMT
9,427
9,925
Total loans serviced
Delinquencies:
Owned servicing:
12,679,635
14,414,423
90 days or more
7,128,874
7,635,817
Subserviced for PMT:
1,977,960
2,208,302
991,384
1,128,212
Following is a summary of characteristics of our MSR and MSL servicing portfolio as of March 31, 2024:
Average
Loan count
Note rate
Age (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):
FHA
135,396,892
667
318
203
677
93%
68%
VA
123,698,646
453
3.7%
324
273
90%
71%
USDA
20,921,264
141
310
148
699
98%
66%
4.5%
Government-sponsored entities:
Fannie Mae
44,610,394
147
4.6%
316
303
761
73%
62%
0.4%
Freddie Mac
52,959,017
170
4.9%
323
757
74%
65%
624,790
10.2%
250
76
744
17%
0.1%
Other (3)
3,282,304
6.5%
69%
1,595
320
239
717
87%
2.6%
59
Net Interest Expense
Following is a summary of net interest expense:
Short-term debt
74,512
62,146
Long-term debt
82,838
64,206
Net interest expense increased $6.1 million during the quarter ended March 31, 2024 compared to the same period in 2023. The increase was primarily due to an increase in interest expense on borrowings due to the higher interest rate environment and to growth in our balance sheet, partially offset by an increase in placement fees we receive relating to custodial funds that we manage due to increased earning rates.
Management Fees from PennyMac Mortgage Investment Trust
Management fees from PMT summarized below:
Average net assets of PMT during the quarter
1,927,401
1,962,105
Management fees decreased $69,000 during the quarter ended March 31, 2024 compared to the same period in 2023. The decrease was due to a decrease in PMT’s shareholders’ equity which is the basis for the base management fees.
60
Compensation expenses are summarized below:
Salaries and wages
92,784
92,835
Severance
643
2,856
Incentive compensation
26,165
18,988
Taxes and benefits
22,201
21,606
Stock and unit-based compensation
Head count:
3,916
4,143
Quarter end
3,907
4,168
Compensation expense decreased $1.6 million during the quarter ended March 31, 2024 compared to the same period in 2023. The decrease was primarily due to a decrease in stock-based compensation resulting from lower expectations of achieving the performance goals on performance-based RSUs and a decrease in severance expenses, partially offset by an increase in incentive compensation due to an increase in production bonuses resulting from higher production volume.
Loan Origination
Loan origination expense increased $3.5 million for the quarter ended March 31, 2024 compared to the same period in 2023. The increase was primarily due to higher correspondent and broker direct origination volumes.
Servicing expenses increased $3.5 million during the quarter ended March 31, 2024 compared to the same period in 2023. The increase was primarily due to an increase in provision for losses on servicing advances resulting from higher outstanding servicing advance balances during the quarter ended March 31, 2024 compared to the same period in 2023.
Professional Services
Professional expenses decreased $11.7 million during the quarter ended March 31, 2024 compared to the same period in 2023. The decrease was primarily due to decreased legal expenses related to the Black Knight litigation discussed in Note 18 – Commitments and Contingencies to the consolidated financial statements included in this Quarterly Report.
Provision for Income Taxes
Our effective income tax rate was 10.4% during the quarter ended March 31, 2024 compared to 20.4% during the same period in 2023. The decrease in the effective income tax rate for the quarter ended March 31, 2024 compared to the same period in 2023 was primarily due to a decrease in the permanent adjustment related to non-deductible compensation and an increase in excess tax benefits of options exercised and equity awards vested during the quarter.
61
Balance Sheet Analysis
Following is a summary of key balance sheet items as of the dates presented:
927,463
948,639
Servicing advances, net
Investments in and advances to affiliates
31,936
30,383
Mortgage servicing rights at fair value
LIABILITIES AND STOCKHOLDERS' EQUITY
5,799,152
4,210,010
4,493,051
4,393,066
10,292,203
8,603,076
489,922
770,073
Stockholders' equity
Leverage ratios:
Total debt / Stockholders' equity
2.9
2.4
Total debt / Tangible stockholders' equity (1)
3.0
2.5
Total assets increased $1.0 billion from $18.8 billion at December 31, 2023 to $19.8 billion at March 31, 2024. The increase was primarily due to an increase of $524.6 million in principal-only stripped MBS at fair value, an increase of $779.7 million in loans held for sale at fair value and an increase of $383.9 million in MSRs, partially offset by a decrease in servicing advances of $194.1 million and a decrease in loans eligible for repurchase of $488.0 million.
Total liabilities increased $0.9 billion from $15.3 billion at December 31, 2023 to $16.2 billion at March 31, 2024. The increase was primarily due to an increase of $1.7 billion in borrowings to fund our inventory of loans held for sale, MBS and MSRs, partially offset by a decrease of $488.0 million in liability for loans eligible for repurchase and $186.6 million in accounts payable and accrued expenses. As a result of our increased inventory financing requirements, our leverage ratios increased during the quarter ended March 31, 2024 from December 31, 2023.
Cash Flows
Our cash flows are summarized below:
Change
Operating
2,366,951
Investing
(761,679)
Financing
(1,785,616)
Net (decrease) increase in cash
(180,344)
The net decrease in cash of $11.0 million during the quarter ended March 31, 2024 is discussed below.
Operating activities
Net cash used in operating activities totaled $897.9 million during the quarter ended March 31, 2024 compared with net cash used in operating activities of $3.3 billion during the same period in 2023. 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:
(1,008,664)
(3,390,002)
Other operating sources
110,724
125,111
Investing activities
Net cash used in investing activities during the quarter ended March 31, 2024 totaled $782.6 million, primarily due to $524.7 million in purchase of principal-only stripped MBS, $224.8 million in net settlement of derivative financial instruments used to hedge our investment in MSRs and a $38.7 million increase in margin deposits. Net cash used in investing activities during the quarter ended March 31, 2023 totaled $20.9 million, primarily due to a $97.5 million increase in margin deposits and $10.6 million used in acquisition of capitalized software, partially offset by $78.4 million in net settlement of derivative financial instruments used to hedge our investment in MSRs.
Financing activities
Net cash provided by financing activities totaled $1.7 billion during the quarter ended March 31, 2024, primarily due to an increase of $1.7 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 provided by financing activities totaled $3.5 billion during the quarter ended March 31, 2023, primarily due to an increase of $3.5 billion in borrowings. The increase in borrowings primarily reflects the increase in inventory of loans held for sale.
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.
63
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 29, 2024, the Company through its indirect subsidiary, PNMAC GMSR ISSUER TRUST (the “Issuer Trust”), issued an aggregate principal amount of $425 million in secured term notes (the “2024-GT1 Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933. The 2024-GT1 Notes will mature on March 26, 2029 or, if extended, either March 25, 2030 or March, 25, 2031. The 2024-GT1 Notes rank pari passu with other secured term notes issued by the Issuer Trust and are secured by certain participation certificates relating to Ginnie Mae mortgage servicing rights and excess servicing spread relating to such mortgage servicing rights that are financed by PLS.
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 quarter 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 quarter ended March 31, 2024 and the fluctuations throughout the periods of our inventory as we fund and pool mortgage loans for sale in guaranteed mortgage securitizations.
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:
64
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.
Ginnie Mae has issued risk-based capital requirements that will become effective December 31, 2024. We believe that we are in compliance with the Agency’s pending requirements as of March 31, 2024.
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 March 31, 2024, 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.
65
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 March 31, 2024, 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.
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)
Loans sold under agreements to repurchase
1,086,753
1,425,000
1,028,385
2,825,000
1,025,000
325,000
600,000
268,774
300,000
263,096
1,500,000
223,410
100,000
196,316
174,205
200,000
168,885
620,000
270,000
Servicing assets sold under agreements to repurchase
175,000
380,000
280,000
February 7, 2025
350,000
August 5, 2024
Mortgage-backed securities sold under agreements to repurchase
195,307
149,352
147,261
June 12, 2024
Notes payable
GMSR 2022-GT1 Notes
May 25, 2027
GMSR 2023-GTL1 Loans
February 25, 2028
GMSR 2023-GTL2 Loans
October 25, 2028
GMSR 2024-GT1 Notes
March 26, 2029
Barclays FHLMC MSR Facility
November 13, 2024
Unsecured Notes - 5.375%
Unsecured Notes - 4.25%
Unsecured Notes - 5.75%
Unsecured Notes - 7.875%
67
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 March 31, 2024:
maturity of
advances under
repurchase agreement
All debt financing arrangements that matured between March 31, 2024 and the date of this Report have been renewed or extended and are described in Note 14—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, 2023 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 quarter ended March 31, 2024 as compared to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.
68
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, principal-only stripped MBS, 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 and an increase in the fair value of our principal-only stripped MBS.
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 and principal-only stripped MBS, 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 March 31, 2024, 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
483,182
232,507
114,114
(110,071)
(216,317)
(418,132)
Pricing spread
421,572
205,043
101,139
(98,475)
(194,382)
(378,857)
Annual per-loan cost of servicing
180,457
90,228
45,114
(45,114)
(90,228)
(180,457)
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 March 31, 2024 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 18 — 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. For a discussion of our risk factors refer to our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 21, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered equity securities during the quarter ended March 31, 2024.
Stock Repurchase Program
Total numberof sharespurchased
Average pricepaid per share
Total number of shares purchasedas part of publicly announced plans or program (1)
Approximate dollarvalue of shares thatmay yet bepurchased under the plans or program (1)
January 1, 2024 – January 31, 2024
212,338,815
February 1, 2024 – February 29, 2024
March 1, 2024 – March 31, 2024
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
(c) Trading Plans
During the quarter ended March 31, 2024, none of our directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) adopted, terminated or modified a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 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
2.1
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 2024-GT1 Indenture Supplement to Third Amended and Restated Base Indenture, dated as of February 29, 2024, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, and Atlas Securitized Products, L.P.
8-K
March 7,
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 March 31, 2024 and December 31, 2023 (ii) the Consolidated Statements of Income for the quarters ended March 31, 2024 and March 31, 2023, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended March 31, 2024 and March 31, 2023, (iv) the Consolidated Statements of Cash Flows for the quarters ended March 31, 2024 and March 31, 2023 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.
74
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: May 1, 2024
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)