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, 2025
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 25, 2025
51,663,586
PENNYMAC FINANCIAL SERVICES, INC.
FORM 10-Q
March 31, 2025
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
56
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
74
Item 4.
Controls and Procedures
76
PART II. OTHER INFORMATION
77
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
78
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Report”) contains certain forward-looking statements that are subject to various risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” “continue,” “plan” or other similar words or expressions.
Forward-looking statements are based on certain assumptions, discuss future expectations, 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, 2024, filed with the Securities and Exchange Commission (“SEC”) on February 19, 2025 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:
4
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.
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,
2025
2024
(in thousands, except share amounts)
ASSETS
Cash
$
211,093
238,482
Short-term investment at fair value
443,393
420,553
Principal-only stripped mortgage-backed securities at fair value pledged to creditors
817,596
825,865
Loans held for sale at fair value (includes $7,027,759 and $8,140,834 pledged to creditors)
7,095,270
8,217,468
Derivative assets
171,931
113,076
Servicing advances, net (includes valuation allowance of $82,155 and $85,788; $303,106 and $357,939 pledged to creditors)
496,917
568,512
Mortgage servicing rights at fair value (includes $8,802,948 and $8,609,388 pledged to creditors)
8,963,889
8,744,528
Investment in PennyMac Mortgage Investment Trust at fair value
1,099
944
Receivable from PennyMac Mortgage Investment Trust
29,198
30,206
Loans eligible for repurchase
4,979,127
6,157,172
Other (includes $13,768 and $16,697 pledged to creditors)
663,363
770,081
Total assets
23,872,876
26,086,887
LIABILITIES
Assets sold under agreements to repurchase
7,058,053
8,685,207
Mortgage loan participation purchase and sale agreements
510,141
496,512
Notes payable secured by mortgage servicing assets
1,724,608
2,048,972
Unsecured senior notes
3,998,702
3,164,032
Derivative liabilities
14,552
40,900
Derivative liability to PMT
741
—
Mortgage servicing liabilities at fair value
1,651
1,683
Accounts payable and accrued expenses
365,056
354,414
Payable to PennyMac Mortgage Investment Trust
101,175
122,317
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement
25,898
Income taxes payable
1,158,642
1,131,000
Liability for loans eligible for repurchase
Liability for losses under representations and warranties
30,774
29,129
Total liabilities
19,969,120
22,257,236
Commitments and contingencies – Note 18
STOCKHOLDERS’ EQUITY
Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 51,658,984 and 51,376,616 shares, respectively
Additional paid-in capital
68,902
56,072
Retained earnings
3,834,849
3,773,574
Total stockholders' equity
3,903,756
3,829,651
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
216,199
162,794
From PennyMac Mortgage Investment Trust
4,838
(353)
221,037
162,441
Loan origination fees:
46,134
36,012
477
359
46,611
36,371
Fulfillment fees from PennyMac Mortgage Investment Trust
5,290
4,016
Net loan servicing fees:
Loan servicing fees:
417,687
358,026
21,729
20,262
Other
49,052
45,896
488,468
424,184
Change in fair value of mortgage servicing rights and mortgage servicing liabilities
(430,956)
(28,585)
Mortgage servicing rights hedging results
106,774
(294,645)
(324,182)
(323,230)
Net loan servicing fees
164,286
100,954
Management fees from PennyMac Mortgage Investment Trust
7,012
7,188
Net interest expense:
Interest income
189,871
156,426
Interest expense
208,082
165,769
Net interest expense
(18,211)
(9,343)
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust
185
10
Results of real estate acquired in settlement of loans
(225)
406
4,918
3,617
Total net revenues
430,903
305,660
Expenses
Compensation
181,988
146,376
Loan origination
44,096
30,568
Technology
40,197
35,967
Servicing
21,875
16,104
Marketing and advertising
9,432
3,671
Professional services
9,037
9,262
Occupancy and equipment
8,382
8,676
11,700
11,153
Total expenses
326,707
261,777
Income before provision for income taxes
104,196
43,883
Provision for income taxes
27,916
4,575
Net income
76,280
39,308
Earnings per share
Basic
1.48
0.78
Diluted
1.42
0.74
Weighted average shares outstanding
51,506
50,547
53,624
53,100
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Quarter ended March 31, 2025
Additional
Total
Number of
Par
paid-in
Retained
stockholders'
shares
value
capital
earnings
equity
(in thousands)
Balance, December 31, 2024
51,377
Stock-based compensation
281
12,773
Issuance of common stock in settlement of directors' fees
1
57
Common stock dividend ($0.30 per share)
(15,005)
Balance, March 31, 2025
51,659
Quarter ended March 31, 2024
Balance, December 31, 2023
50,179
24,287
3,514,311
3,538,603
728
2,808
84
Common stock dividend ($0.20 per share)
(10,420)
Balance, March 31, 2024
50,908
27,179
3,543,199
3,570,383
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cash flow from operating activities
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Net gains on loans held for sale at fair value
(221,037)
(162,441)
430,956
28,585
(106,774)
294,645
Accrual of unearned discounts on principal-only stripped mortgage-backed securities
(11,335)
(264)
Capitalization of interest on loans held for sale
(210)
(128)
Amortization of debt issuance costs
7,072
7,357
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust
(155)
20
Results of real estate acquired in settlement in loans
225
(406)
Stock-based compensation expense
11,084
4,583
Provision (reversal of provision) for servicing advance losses
4,184
(1,541)
Depreciation and amortization
13,896
14,164
Amortization of operating lease right-of-use assets
3,405
3,436
Purchase of loans held for sale from PennyMac Mortgage Investment Trust
(20,437,666)
(16,302,059)
Origination of loans held for sale
(5,084,079)
(3,073,792)
Purchase of loans held for sale from non-affiliates
(815,720)
(496,609)
Purchase of loans from Ginnie Mae securities and early buyout investors
(1,079,557)
(791,726)
Sale to non-affiliates and principal payment of loans held for sale
27,587,429
19,676,917
Sale of loans held for sale to PennyMac Mortgage Investment Trust
654,808
Repurchase of loans subject to representations and warranties
(19,942)
(21,395)
Decrease in servicing advances
25,134
168,554
Increase in receivable from PennyMac Mortgage Investment Trust
(229)
(1,999)
Sale of real estate acquired in settlement of loans
19,992
13,165
Increase in other assets
(9,458)
(33,707)
Increase(decrease) in accounts payable and accrued expenses
14,769
(182,097)
Decrease in operating lease liabilities
(4,630)
(4,380)
Decrease in payable to PennyMac Mortgage Investment Trust
(20,126)
(80,581)
Increase in income taxes payable
27,641
4,451
Net cash provided by (used in) operating activities
1,065,957
(897,940)
Statements continue on the next page
(Continued)
Cash flow from investing activities
(Increase) decrease in short-term investment
(22,840)
10,199
Purchase of principal-only stripped mortgage-backed securities
(524,739)
Repayment of principal-only stripped mortgage-backed securities
37,738
116
Net settlement of derivative financial instruments used for hedging of mortgage servicing rights
74,572
(224,750)
Acquisition of capitalized software
(7,137)
(3,864)
Purchase of furniture, fixtures, equipment and leasehold improvements
(371)
(918)
Increase in margin deposits
(51,578)
(38,656)
Net cash provided by (used in) investing activities
30,384
(782,612)
Cash flow from financing activities
Sale of assets under agreements to repurchase
27,533,478
20,836,772
Repurchase of assets sold under agreements to repurchase
(29,161,286)
(19,165,094)
Issuance of mortgage loan participation purchase and sale certificates
5,807,294
5,399,717
Repayment of mortgage loan participation purchase and sale certificates
(5,793,836)
(5,482,145)
Issuance of notes payable secured by mortgage servicing assets
725,000
Repayment of notes payable secured by mortgage servicing assets
(325,000)
(625,000)
Issuance of unsecured senior notes
850,000
Payment of debt issuance costs
(21,064)
(7,480)
Issuance of common stock by exercise of stock options
5,452
7,626
Payment of withholding taxes relating to stock-based compensation
(3,763)
(9,401)
Payment of dividends to holders of common stock
Net cash (used in) provided by financing activities
(1,123,730)
1,669,575
Net decrease in cash
(27,389)
(10,977)
Cash at beginning of quarter
938,371
Cash at end of quarter
927,394
Supplemental cash flow information:
Cash paid for interest
205,446
152,261
Cash paid for income taxes, net
274
124
Non-cash investing activities:
Mortgage servicing rights received from loan sales
650,349
412,520
Operating right-of-use assets recognized
561
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, 2024.
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, 2025. Intercompany accounts and transactions have been eliminated.
Preparation of financial statements in compliance with GAAP requires the Company 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 Pronouncement
Income Tax Disclosures
The FASB issued Accounting Standards Update 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. The Company is evaluating the effect of ASU 2023-09 on its future disclosures.
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 10% and 11% of total net revenues for the quarters ended March 31, 2025 and 2024, respectively. The Company also purchased 78% and 82% of its loan production from PMT during the quarters ended March 31, 2025 and 2024, respectively.
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 PLS transfers participation certificates in its Ginnie Mae and Fannie Mae MSRs to variable interest entities (“VIEs”) that issue variable funding notes (“VFNs”) to PLS and term debt backed by the participation certificates. PLS finances the VFNs by selling them under agreements to repurchase. The Company acts as guarantor of the VFNs and term debt. The Company determined that it is the primary beneficiary of the VIEs because as the holder of the VFNs and guarantor of the VFNs and term debt, it holds the variable interests 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 financing of VFNs is 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 Debt and Note 15 – Long Term Debt.
12
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 Agreement
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 refinance mortgage loans originated in such month, plus the aggregate unpaid principal balance of all “preserved mortgage loans” relating to closed end second lien loans originated in such month, to (ii) the aggregate unpaid principal balance of all mortgage loans from the portfolio that PLS has determined in good faith were refinanced in such month, plus the aggregate unpaid principal balance of all “preserved mortgage loans” relating to closed end second loans originated in such month. For purposes of such calculation, “preserved mortgage loan” means a mortgage loan in PMT’s portfolio as to which PLS or its affiliates originated a new closed end second lien loan in a subordinate position to such mortgage loan. The company has further agreed to allocate such resources sufficient to target a recapture rate of at least 30%.
Through 2024, the MSR recapture agreement required the Company to transfer cash to PMT in an amount equal to:
13
The “recapture rate” meant, 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 MSR recapture agreement expires on December 31, 2029, subject to automatic renewal for an additional 18-month period unless terminated in accordance with the terms of the agreement.
Mortgage Banking Services Agreement
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:
Through 2024, the mortgage banking services agreement provided for a quarterly fulfillment fee not to exceed the following:
14
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 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 an administrative fee plus accrued interest and 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 purchase 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.
In December 2024, the mortgage banking services agreement was renewed and amended to provide for the Company to assume the role of initial correspondent loan purchaser in place of PMT effective July 1, 2025. Under this agreement, PMT retains the right to purchase up to 100% of the non-government insured or guaranteed loans purchased by the Company through its correspondent operations at the Company’s cost plus accrued interest, less any loan administrative fees paid to the Company by the correspondent sellers and subject to quarterly fulfillment fee charges as previously described. The Company may hold or otherwise sell correspondent lending loans to other investors if PMT chooses not to purchase such loans. Accordingly, the sourcing fee arrangement will no longer have any effect beginning July 1, 2025.
The mortgage banking services agreement expires on December 31, 2029, subject to automatic renewal for an additional 18-month period unless terminated in accordance with the terms of the agreement.
Following is a summary of loan production and MSR recapture activities, between the Company and PMT:
Net gains (losses) on loans held for sale at fair value:
Net gains on loans sold and forward sale to PMT (primarily cash)
6,046
Mortgage servicing rights recapture incurred
(1,208)
Sale of loans held for sale to PMT
UPB of loans recaptured
159,472
62,073
Tax service fees earned from PMT included in Loan origination fees
Fulfillment fee revenue
Unpaid principal balance of loans fulfilled for PMT subject to fulfillment fees
2,781,722
1,771,681
Sourcing fees included in cost of loans purchased from PMT
2,015
1,605
Unpaid principal balance of loans purchased from PMT:
Government guaranteed or insured
11,191,880
7,856,925
Conventional conforming
8,960,796
8,189,930
20,152,676
16,046,855
15
Servicing Agreement
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 servicing for its portfolio of residential mortgage loans.
Following is a summary of loan servicing fees earned from PMT:
Servicing fees
Through 2024, the following fees were provided for by the Servicing Agreement:
Prime Servicing
Special Servicing
The Servicing Agreement expires on December 31, 2029, subject to automatic renewal for an additional 18-month period unless terminated in accordance with the terms of the agreement.
16
Management Agreement
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 the Company collects a base management fee and may collect a performance incentive fee. The Management Agreement provides that:
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.
“Common shareholders’ equity” is defined as “shareholder’s equity” less the average GAAP accounting value of the Company’s preferred equity.
“High watermark” is the annual adjustment that reflects the amount by which the “net income” (stated as a percentage of return on “equity”) in that year exceeds or falls short of the lesser of 8% and the average Fannie Mae 30-year MBS Yield (the “Target Yield”) for the year 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 amount required for the Company to earn a performance incentive fee is 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 high watermark is calculated based on the two years preceding the fiscal year for which the incentive fee is calculated, and will never be less than zero after including all high watermark increases and high watermark decreases over any such rolling two fiscal year period.
The base management fee is paid quarterly and in arrears, and the performance incentive fee is paid annually and 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 of beneficial interest), at PMT’s option.
17
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 fees
Performance incentive fees
Average PMT's shareholders' equity used to calculate base management and incentive fees
1,895,785
1,927,401
Through 2024, under the Management Agreement, both base management and performance incentive fees were paid quarterly and the high watermark was assessed and calculated on a cumulative basis since inception.
The Management Agreement expires on December 31, 2029, subject to automatic renewal for an additional 18-month period unless terminated in accordance with the terms of the agreement.
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, accounting, internal audit and investor relations services for the direct benefit of PMT. PMT is also required to pay its pro rata portion of the 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 based on the resources the Company dedicates to investment management activities for PMT, as determined by the Company in its sole discretion.
Through 2024, PMT reimbursed 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 would 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 was reimbursed $165,000 per fiscal quarter. Overhead expenses were previously 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
4,601
6,414
Common overhead incurred by the Company
981
1,944
1,629
165
7,211
8,523
Payments and settlements during the quarter (1)
28,048
30,085
18
Investing Activities
The Company owns 75,000 common shares of beneficial interest of PMT.
Following is a summary of investing activities between the Company and PMT:
Common shares of beneficial interest of PennyMac Mortgage Investment Trust:
Fair value
Number of shares
75
Receivable from and Payable to PMT
Amounts receivable from and payable to PMT are summarized below:
Receivable from PMT:
Correspondent production fees
9,097
11,122
7,266
6,822
Management fees
7,149
Allocated expenses and expenses incurred on PMT's behalf
5,823
3,508
Fulfillment fees
Payable to PMT:
Amounts advanced by PMT to fund its servicing advances
86,020
106,302
15,155
16,015
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 $25.9 million Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement as of March 31, 2025 and December 31, 2024. The Company did not make payments under the tax receivable agreement during the quarters ended March 31, 2025 and 2024.
.
19
Note 6—Loan Sales and Servicing Activities
The Company originates, 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
396,232
336,248
The Company is contractually responsible for making the payments required to protect the loans’ 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 to adjust their carrying values to 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.
The following is a summary of the allowance for losses on servicing advances:
Balance at beginning of quarter
85,788
73,991
Provision (reversals of provision) for losses
Charge-offs, net
(7,817)
(5,123)
Balance at end of quarter
82,155
67,327
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
426,951,027
410,393,342
Delinquent loans:
30-89 days
15,120,416
17,301,961
90 days or more:
Not in foreclosure
6,878,669
8,104,348
In foreclosure
1,230,939
693,934
Foreclosed
3,262
2,928
Loans in bankruptcy
1,815,360
1,762,324
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
15,276,140
Subserviced
1,148,070
442,227,167
443,375,237
229,907,855
Loans held for sale
6,911,473
449,138,640
231,055,925
680,194,565
30 days
11,631,622
1,954,743
13,586,365
60 days
4,026,422
614,354
4,640,776
7,035,395
1,240,979
8,276,374
1,279,420
124,997
1,404,417
4,104
2,689
6,793
23,976,963
3,937,762
27,914,725
1,899,730
307,272
2,207,002
Custodial funds managed by the Company (1)
7,079,846
2,643,740
9,723,586
21
December 31, 2024
15,681,406
806,584
426,074,748
426,881,332
230,753,581
8,128,914
434,203,662
231,560,165
665,763,827
13,095,250
1,996,821
15,092,071
4,838,550
676,508
5,515,058
8,289,129
1,210,270
9,499,399
730,372
106,188
836,560
3,716
2,732
6,448
26,957,017
3,992,519
30,949,536
1,852,396
286,093
2,138,489
6,171,157
2,391,875
8,563,032
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
77,470,559
76,364,993
Texas
67,407,963
65,317,775
Florida
65,493,205
63,850,638
Virginia
36,818,071
36,428,575
Georgia
28,976,027
28,499,141
All other states
404,028,740
395,302,705
22
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 the fair values. 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.
The Company reclassifies its assets and liabilities between levels of the fair value hierarchy when the inputs required to establish fair value at a level of the fair value hierarchy are no longer readily available, requiring the use of lower-level inputs, or when the inputs required to establish fair value at a higher level of the hierarchy become available.
23
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 stripped mortgage-backed securities
6,653,649
441,621
Derivative assets:
Interest rate lock commitments
111,722
Forward purchase contracts
18,531
Forward sales contracts
7,339
MBS put options
Put options on interest rate futures purchase contracts
15,308
Call options on interest rate futures purchase contracts
25,711
Total derivative assets before netting
41,019
25,871
178,612
Netting
(6,681)
Total derivative assets
Mortgage servicing rights
Investment in PennyMac Mortgage Investment Trust
485,511
7,497,116
9,517,232
17,493,178
Liabilities:
Derivative liabilities:
1,780
1,748
69,129
Put options on interest rate futures sale contracts
1,523
Call options on interest rate futures sale contracts
5,125
Total derivative liabilities before netting
6,648
70,877
79,305
(64,753)
Total derivative liabilities
Mortgage servicing liabilities
71,618
3,431
16,944
24
7,783,415
434,053
56,946
3,701
152,526
3,278
12,592
3,250
15,842
159,505
232,293
(119,217)
437,339
8,768,785
9,235,527
18,322,434
23,381
66,646
12,854
79,500
102,881
(61,981)
25,064
42,583
25
As shown above, certain of the Company’s loans held for sale, interest rate lock commitments (“IRLCs”), MSRs and MSLs are measured using Level 3 fair value inputs. Following are roll forwards of assets and liabilities measured at fair value using “Level 3” inputs at either the beginning or the end of the period presented:
Interest
Mortgage
Loans held
rate lock
servicing
Assets
for sale
commitments, net (1)
rights
33,565
9,212,146
Purchases and issuances, net
1,383,885
182,543
1,566,428
Capitalization of interest and servicing advances
10,632
Sales and repayments
(514,646)
Mortgage servicing rights resulting from loan sales
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk
1,986
Other factors
36,948
116,113
(430,988)
(277,927)
38,934
(275,941)
Transfers:
From Level 3 to Level 2
(911,237)
To loans held for sale
(222,279)
109,942
9,515,452
Changes in fair value recognized during the quarter relating to assets still held at March 31, 2025
23,715
(297,331)
Quarter ended
Liabilities
Mortgage servicing liabilities:
Changes in fair value included in income
(32)
Changes in fair value recognized during the quarter relating to liabilities still outstanding at March 31, 2025
26
478,564
89,593
7,099,348
7,667,505
905,860
100,271
1,006,131
11,226
(383,999)
17,142
(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)
466,392
69,808
7,483,210
8,019,410
Changes in fair value recognized during the quarter relating to assets still held at March 31, 2024
19,043
60,193
1,805
(73)
1,732
Changes in fair value recognized during the quarter relating to liabilities still outstanding at March 31, 2024
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
18,134
(311)
292,143
129,329
(412,854)
(120,711)
(28,969)
100,360
32
73
27
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
7,065,679
6,868,687
196,992
8,187,561
8,089,532
98,029
90 days or more delinquent:
24,169
26,577
(2,408)
24,663
27,901
(3,238)
5,422
16,209
(10,787)
5,244
11,481
(6,237)
183,797
88,554
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
5,365
5,238
The following table summarizes the losses recognized on assets when they were remeasured at fair value on a nonrecurring basis:
(562)
(1,210)
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 the 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
1,742,152
1,742,421
1,724,120
4,042,296
3,172,983
28
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 reports to the Company’s senior management valuation subcommittee, which oversees the valuations. The 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 the Company’s senior management valuation subcommittee. The Company’s senior management valuation subcommittee includes the Company’s chief financial, credit, and capital markets officers as well as other senior members of the Company’s finance, risk management and capital markets 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 non-affiliate 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:
29
A loan becomes eligible for resale into a new Ginnie Mae guaranteed 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.
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
6.1% – 9.3%
6.5% – 9.3%
Weighted average
6.7%
7.0%
Twelve-month projected housing price index change:
2.5% – 3.1%
2.2% – 2.8%
2.7%
2.3%
Voluntary prepayment/resale speed (2):
6.4% – 42.9%
6.4% – 34.4%
26.1%
22.0%
Total prepayment/resale speed (3):
6.5% – 48.4%
6.5% – 41.3%
28.5%
23.9%
Changes in fair value of loans held for sale attributable to changes in a 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.
30
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.
Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:
Fair value (in thousands) (1)
Committed amount (in thousands)
9,890,968
7,801,677
Key inputs (2):
Pull-through rate:
23.5% – 100%
29.8% – 100%
86.2%
88.2%
Mortgage servicing rights fair value expressed as:
Servicing fee multiple:
1.0 – 8.7
1.0 – 8.6
5.3
5.4
Percentage of loan commitment amount:
0.3% – 4.6%
2.4%
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.
31
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 (a component of 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.
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 underlying loan characteristics:
Amount recognized
Unpaid principal balance
27,664,977
19,484,815
Weighted average servicing fee rate (in basis points)
43
44
Annual total prepayment speed (2):
6.6% – 15.0%
7.9% – 15.9%
8.8%
11.0%
Equivalent average life (in years):
3.8 – 10.2
3.5 – 9.3
8.7
7.5
Pricing spread (3):
4.9% – 12.6%
5.5% – 12.6%
5.5%
6.3%
Per-loan annual cost of servicing:
$70 – $127
$71 – $127
$101
$99
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)
$ 8,963,889
$ 8,744,528
Underlying loan characteristics:
$ 442,208,097
$ 426,055,220
Weighted average note interest rate
4.6%
4.5%
38
6.2% – 18.6%
5.9% – 17.7%
7.8%
2.7 – 8.8
2.7 – 9.1
8.1
8.4
Effect on fair value of (3):
5% adverse change
($143,098)
($126,224)
10% adverse change
($281,233)
($248,349)
20% adverse change
($543,632)
($481,100)
Pricing spread (4):
4.9% – 11.4%
5.0% – 11.3%
6.1%
6.2%
($114,388)
($113,419)
($225,908)
($223,960)
($440,737)
($436,805)
$68 – $127
$68 – $130
$105
($49,754)
($48,830)
($99,509)
($97,661)
($199,018)
($195,321)
33
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)
19,070
19,528
Servicing fee rate (in basis points)
Annual total prepayment speed (2)
15.4%
15.7%
Equivalent average life (in years)
5.2
5.1
Pricing spread (3)
8.6%
Per-loan annual cost of servicing
935
969
Note 8— Principal-Only Stripped Mortgage-Backed Securities
Following is a summary of activity in the Company’s investment in principal-only stripped MBS:
Purchases
524,739
Repayments
(37,738)
(116)
Accrual of purchase discounts
11,335
264
Valuation adjustments
29,469
(47)
524,576
Following is a summary of the Company’s investment in principal-only stripped MBS:
Principal balance
1,023,745
1,061,484
Unearned discounts
(186,083)
(197,418)
Cumulative valuation changes
(20,066)
(38,201)
Fair value of principal-only stripped mortgage-backed securities to secure Assets sold under agreements to repurchase
34
All of the Company’s principal-only stripped MBS had contractual maturities of over ten years.
Note 9—Loans Held for Sale at Fair Value
Loans held for sale at fair value include the following:
Mortgage type
Government-insured or guaranteed
4,575,020
4,154,069
1,644,181
3,127,082
Jumbo
434,448
502,264
Closed-end second lien
231,692
272,285
Purchased from Ginnie Mae securities serviced by the Company
196,295
145,026
Repurchased pursuant to representations and warranties
13,634
16,742
Fair value of loans pledged to secure:
6,485,146
7,612,832
542,613
528,002
7,027,759
8,140,834
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 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.
35
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):
12,030,348
12,760,764
20,823,643
23,440,334
500,000
450,000
13,325,000
4,270,000
9,550,000
7,600,000
3,250,000
800,000
Treasury futures purchase contracts
7,951,000
7,467,000
Treasury futures sale contracts
9,380,000
10,521,000
Total derivatives before netting
Forward sale contract with PennyMac Mortgage Investment Trust
59,541
Deposits placed with (received from) derivative counterparties included in the derivative balances above, net
58,072
(57,236)
36
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
Counterparty
instruments
received
RJ O' Brien
34,371
Morgan Stanley Bank, N.A.
10,396
15,260
Bank of Montreal
4,061
3,781
JPMorgan Chase Bank, N.A.
2,935
Mizuho Bank, Ltd.
2,093
Bank of America, N.A.
8,221
Athene Annuity & Life Assurance Company
2,352
BNP Paribas
2,260
Others
6,353
6,731
37
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 with 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.
1,618,676
(1,618,676)
1,938,756
(1,938,756)
1,218,402
(1,211,436)
6,966
1,294,213
(1,294,213)
895,111
(894,816)
295
1,220,822
(1,214,559)
6,263
Royal Bank of Canada
792,680
(792,680)
785,597
(785,597)
Wells Fargo Bank, N.A.
624,073
(622,836)
1,237
795,119
(789,305)
5,814
Citibank, N.A.
557,694
(557,694)
455,426
(455,426)
408,559
(408,559)
568,790
(568,790)
Santander US Capital Markets LLC
244,651
(243,706)
945
282,077
(282,077)
Goldman Sachs
232,012
(232,012)
336,894
(336,624)
270
166,669
(166,669)
472,659
(472,659)
Barclays Capital
140,864
(140,864)
258,559
(254,750)
3,809
Nomura Corporate Funding Americas
125,000
(125,000)
175,000
(175,000)
50,000
(50,000)
Federal National Mortgage Association
1,126
2,203
1,363
7,080,241
(7,064,948)
15,293
8,733,656
(8,692,756)
Following are the gains (losses) recognized by the Company on derivative financial instruments and the consolidated statement of income lines where such gains and losses are included:
Derivative activity
Consolidated statement of income line
Net gains on loans held for sale at fair value (1)
76,377
(19,786)
Hedged item:
Interest rate lock commitments and loans held for sale
(145,046)
52,237
Net loan servicing fees–Mortgage servicing rights hedging results
88,640
(294,334)
Note 11—Mortgage Servicing Rights and Mortgage Servicing Liabilities
Mortgage Servicing Rights at Fair Value
The activity in MSRs is as follows:
MSRs resulting from loan sales
Change in fair value due to:
Changes in inputs used in valuation model (1)
(205,489)
169,952
Other changes in fair value (2)
(225,499)
(198,610)
Total change in fair value
Unpaid principal balance of underlying loans at end of quarter
442,208,097
381,470,663
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets
8,802,948
8,609,388
Mortgage Servicing Liabilities at Fair Value
The activity in MSLs is summarized below:
Changes in fair value due to:
(27)
(37)
(46)
22,644
39
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
20,051
17,609
3,479
2,640
441,217
378,275
Note 12—Other Assets
Other assets are summarized below:
Margin deposits
183,678
288,153
Capitalized software, net
115,958
120,802
Servicing fees receivable, net
44,566
38,676
Other servicing receivables
47,255
54,058
Prepaid expenses
42,546
45,762
Interest receivable
37,791
41,286
Operating lease right-of-use assets
33,728
36,572
26,582
14,976
Deposits securing Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets
13,768
16,697
Furniture, fixtures, equipment and building improvements, net
11,371
12,916
106,120
100,183
Deposits securing Assets sold under agreements to repurchase or Notes payable secured by mortgage servicing assets
40
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 eight years. Some of the operating lease agreements include options to extend the term for up to five years. None of the Company’s operating lease agreements require the Company to make variable lease payments.
The Company’s lease agreements are summarized below:
(dollars in thousands)
Lease expense:
Operating leases
4,002
4,031
Short-term leases
66
Sublease income
(377)
(425)
Net lease expense included in Occupancy and equipment expense
3,691
3,690
Other information:
Payments for operating leases
5,077
4,974
Operating lease right-of-use assets recognized
Quarter end weighted averages:
Remaining lease term (in years)
3.4
4.1
Discount rate
3.9%
3.8%
Lease payment obligations attributable to the Company’s operating lease liabilities are summarized below:
Twelve months ended March 31,
2026
19,109
2027
13,352
2028
5,765
2029
5,009
2030
3,506
Thereafter
2,284
Total lease payments
49,025
Less imputed interest
(4,653)
Operating lease liability included in Accounts payable and accrued expenses
44,372
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, 2025.
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, loans held for sale 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”). Principal-only stripped mortgage-backed securities, participation certificates and loans financed under these agreements may be re-pledged by the lenders.
41
Assets sold under agreements to repurchase are summarized below:
Average balance of assets sold under agreements to repurchase
6,109,683
3,542,537
Weighted average interest rate (1)
5.94%
7.24%
Total interest expense
94,229
70,435
Maximum daily amount outstanding
8,589,915
5,442,438
Carrying value:
7,064,948
8,692,756
Unamortized debt issuance costs
(6,895)
(7,549)
Weighted average interest rate
5.80%
5.89%
Available borrowing capacity (1):
Committed
1,117,467
460,000
Uncommitted
4,613,856
3,104,026
5,731,323
3,564,026
Assets securing repurchase agreements:
Servicing advances (2)
303,106
357,939
Mortgage servicing rights (2)
7,636,201
7,488,539
Deposits (2)
42
Following is a summary of maturities of outstanding advances under asset repurchase agreements by maturity date:
Remaining maturity at March 31, 2025 (1)
Within 30 days
1,498,129
Over 30 to 90 days
4,863,578
Over 90 to 180 days
184,880
Over 180 days to one year
55,015
Over one year to two years
463,346
Total assets sold under agreements to repurchase
Weighted average maturity (in months)
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 asset type and counterparty below as of March 31, 2025:
Loans held for sale and MSRs
Amount at risk
maturity of advances
Facility maturity
Atlas Securitized Products, L.P., Goldman Sachs Bank USA, Nomura Corporate Funding Americas and Mizuho Bank, Ltd. (1)
5,919,844
March 18, 2026
156,111
August 21, 2025
June 26, 2026
88,190
May 3, 2025
June 10, 2026
JP Morgan Chase Bank, N.A.
52,021
May 31, 2025
June 28, 2026
47,349
May 1, 2025
February 12, 2026
39,446
June 1, 2025
June 11, 2026
24,716
June 16, 2025
September 30, 2026
Barclays Bank PLC
24,258
August 17, 2025
March 6, 2026
21,106
June 9, 2025
May 22, 2026
16,838
June 14, 2025
October 15, 2025
Goldman Sachs Bank USA
8,653
February 13, 2027
Principal-only stripped MBS
Maturity
2,300
April 24, 2025
19,294
April 7, 2025
20,178
April 23, 2025
16,711
April 15, 2025
Mortgage Loan Participation Purchase and Sale Agreements
Two of the borrowing facilities secured by loans held for sale are in the form of mortgage loan participation purchase and sale agreements. Participation certificates, each of which represents an undivided beneficial ownership interest in mortgage loans that have been pooled with Fannie Mae, Freddie Mac or Ginnie Mae, are sold to a lender pending 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
261,045
234,874
5.64%
6.69%
3,804
4,077
511,846
515,990
510,313
496,856
(172)
(344)
5.58%
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 VFNs 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 the 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 asset VFNs.
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
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
680,000
3.00%
2/25/2028
2/25/2029
October 25, 2023
10/25/2028
1,730,000
Freddie Mac MSR Notes Payable
The Company has notes payable facilities with two lenders that are secured by Freddie Mac MSRs. Interest is charged at a rate of SOFR plus a spread as defined in the agreements. The facilities expire on March 6 and June 11, 2026. The maximum amount that the Company may borrow under the notes payable is $900 million, $850 million of which is committed, and may be reduced by other debt outstanding with the counterparties.
Notes payable secured by mortgage servicing assets are summarized below:
1,863,611
1,950,330
7.85%
8.92%
36,578
44,006
Unpaid principal balance:
325,000
2,055,000
(5,392)
(6,028)
7.86%
7.81%
Assets pledged to secure notes payable (1):
Servicing advances
Deposits
45
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 the Company’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:
Note interest rate
Optional redemption date (1)
(annual)
September 29, 2020
5.375%
October 15, 2022
October 19, 2020
150,000
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
May 23, 2024
7.125%
November 15, 2030
November 15, 2026
February 6, 2025
6.875%
February 15, 2033
February 15, 2028
4,050,000
3,710,000
2,550,000
6.26%
5.90%
60,137
38,832
3,200,000
Unamortized debt issuance costs and premiums, net
(51,298)
(35,968)
6.30%
6.15%
46
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
2,000,000
1,200,000
5,780,000
Note 16—Liability for Losses Under Representations and Warranties
Following is a summary of the Company’s liability for losses under representations and warranties:
30,788
Provision for losses:
Resulting from sales of loans
3,547
3,952
Resulting from change in estimate
(1,415)
(3,320)
Losses incurred
(487)
(1,444)
29,976
Unpaid principal balance of loans subject to representations and warranties at end of quarter
430,898,425
366,147,661
Note 17—Income Taxes
The Company’s effective income tax rates were 26.8% and 10.4% for the quarters ended March 31, 2025 and 2024, respectively. The increase in the effective income tax rate for the quarter ended March 31, 2025 compared to the same period in 2024 is primarily due to a reduction in the tax deduction related to equity compensation and greater pre-tax income earned in the quarter ended March 31, 2025.
Note 18—Commitments and Contingencies
Commitments to Purchase and Fund Mortgage Loans
The Company’s commitments to purchase and fund loans totaled $9.9 billion as of March 31, 2025.
Legal and Regulatory Proceedings
From time to time, the Company may be a party to 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, income, or cash flows of the Company.
47
Note 19—Stockholders’ Equity
The Company’s stock repurchase program provides for the repurchase of up to $2 billion of its common stock, before transaction costs and excise tax. From inception through March 31, 2025, the Company repurchased $1.8 billion of common stock, including $537,000 in transaction fees. No common stock was repurchased during the quarters ended March 31, 2025 and 2024.
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
(276,310)
(309,190)
Hedging activities
(310,699)
150,219
(587,009)
(158,971)
Non-cash gains:
Provisions for losses relating to representations and warranties:
Pursuant to loan sales
(3,547)
(3,952)
Reductions in liability due to changes in estimate
1,415
3,320
Changes in fair values of loans and derivatives held at end of quarter:
(87,039)
27,645
Hedging derivatives
165,653
(97,982)
From PennyMac Mortgage Investment Trust (1)
48
Note 21—Net Interest Expense
Net interest expense is summarized below:
Interest income:
Cash and short-term investments
10,007
14,582
11,595
87,394
65,421
Placement fees relating to custodial funds
79,795
76,133
1,080
Interest expense:
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations
9,774
6,121
Interest on mortgage loan impound deposits
2,581
1,987
979
311
Note 22—Stock-based Compensation
Following is a summary of the stock-based compensation activity:
Grants:
Units:
Performance-based restricted share units ("RSUs")
246
Stock options
187
188
Time-based RSUs
260
145
Grant date fair value:
Performance-based RSUs
18,788
20,915
8,138
6,935
26,484
12,333
53,410
40,183
Vesting and exercise:
Performance-based RSUs vested
309
Stock options exercised
126
331
Time-based RSUs vested
209
49
Note 23—Disaggregation of Certain Expense Captions
Following are the disaggregation of certain expense captions:
Expense line
Amortization of capitalized software
11,981
12,181
Other (1)
28,216
23,786
Total technology expense
Depreciation
1,915
1,983
Operating lease cost
3,625
Short-term lease cost
Other (2)
2,776
2,578
Total occupancy and equipment expense
Note 24—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
2,118
2,553
Weighted average diluted shares of common stock outstanding
Basic earnings per share
Diluted earnings per share
50
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)
597
681
132
51
Stock options (2)
147
Total anti-dilutive units and options
876
798
Weighted average exercise price of anti-dilutive stock options (2)
95.84
84.93
Note 25—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
7,609,126
1,424,117
7,457,748
1,380,100
Ginnie Mae
7,507,021
1,561,002
6,952,347
1,526,074
HUD
2,500
Risk-based capital
%
Liquidity
939,389
649,270
870,243
630,698
1,136,306
474,056
1,208,755
460,200
Adjusted net worth / Total assets ratio
Tangible net worth / Total assets ratio
Noncompliance with an Agency’s requirements can result in such Agency taking various remedial actions up to and including terminating the Company’s ability to sell loans to and service loans on behalf of the respective Agency.
Note 26—Segments
The Company’s reportable segments are identified based on their unique business 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 reportable segments are evaluated based on income or loss before provision for income taxes. The chief operating decision maker uses pre-tax segment results to assess segment performance and allocate operating and capital resources among the two reportable segments. The segments are separately evaluated because they represent different services. The Company’s chief operating decision maker is its chief executive officer.
During the year ended December 31, 2024, the Company adopted ASU 2023-07. Concurrent with the adoption of ASU 2023-07 management reassessed its segment definitions to those shown below. Prior quarter amounts have been recast to conform the prior quarter presentation to the current quarter presentation.
The Company conducts its business in two operating and reportable segments, “production” and “servicing”:
52
Financial performance and results by segment are as follows:
Production
Reportable segment total
Corporate and other
Consolidated Total
Revenues: (1)
187,145
33,892
Loan origination fees
Net interest income (expense):
85,288
104,134
189,422
449
76,526
131,556
8,762
(27,422)
(18,660)
131
(173)
(42)
4,920
4,878
247,939
170,583
418,522
12,381
Expenses:
98,869
52,970
151,839
30,149
25,100
10,385
35,485
4,712
8,023
373
8,396
1,036
3,134
1,681
4,815
4,222
4,128
2,729
6,857
1,525
2,646
4,569
7,215
4,485
185,996
94,582
280,578
46,129
61,943
76,001
137,944
(33,748)
Segment assets at end of quarter
7,346,079
16,461,624
23,807,703
65,173
Acquisition of:
Capitalized software
5,409
1,728
7,137
Furniture, fixtures, equipment and building improvements
216
155
371
10,221
1,666
11,887
94
Depreciation and amortization of furniture, fixtures, equipment and building improvements
968
645
1,613
302
53
141,431
21,010
63,371
92,541
155,912
514
61,896
103,873
1,475
(11,332)
(9,857)
507
623
3,410
4,033
183,409
111,139
294,548
11,112
70,193
52,400
122,593
23,783
22,768
9,763
32,531
2,062
1,348
5,852
4,138
2,905
7,043
1,633
3,596
1,406
4,936
6,342
4,811
134,731
87,485
222,216
39,561
48,678
23,654
72,332
(28,449)
5,376,570
14,332,919
19,709,489
92,252
19,801,741
3,441
310
3,751
113
3,864
252
609
861
918
9,486
11,689
492
959
697
1,656
327
54
Note 27—Subsequent Events
Management has evaluated all events and transactions through the date the Company issued these consolidated financial statements. During this period:
55
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 two segments: production and servicing:
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 Securities Exchange Commission (“SEC”) as an investment adviser under the Investment Advisers Act of 1940, as amended. PCM has an investment management contract with PMT.
Business Trends
Recent actions by the U.S. government administration with respect to trade, tariffs and government cost reduction initiatives have led to significant volatility in financial markets and uncertainty regarding the economic outlook, including inflation and interest rates. Elevated interest rates in recent years have constrained growth in the size of the mortgage origination market, which is currently projected to rise from $1.7 trillion in 2024 to $2.0 trillion in 2025 according to mortgage industry economists.
The opportunity for refinancing has increased in recent periods, driven by interest rate volatility and a greater proportion of outstanding mortgages with note rates near current market rates. If such interest rate volatility continues, it may drive greater mortgage production activity and higher prepayment speeds than we have experienced in recent years. Additionally, recent reductions to the federal funds rate put into place by the Federal Reserve have led to a decline in the costs of floating rate borrowings and a reduction of placement fees we receive relating to custodial funds that we manage as compared to the same quarter in the prior year. The current period of economic uncertainty and market volatility may also lead to a reduction in economic activity and slowing home price growth or depreciation, which could lead to increasing mortgage delinquencies or defaults and increase losses from our representations and warranties.
We continued our acquisition of conventional loans from PMT in the first quarter of 2025 and expect to purchase more of such loans from PMT through the second quarter of 2025.
Results of Operations
Our results of operations are summarized below:
(dollars in thousands, except per share amounts)
Revenues:
Loan production revenues (1)
272,938
202,828
11,890
11,221
29,119
29,091
Return on average stockholders' equity
7.9%
4.4%
Dividends declared per share
0.30
0.20
Income before provision for income taxes by reportable segment and corporate and other:
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") (2)
288,033
227,728
During the quarter:
Interest rate lock commitments issued
31,456,820
22,585,632
Unpaid principal balance of loans produced or fulfilled for PMT
28,852,746
21,409,065
At end of quarter:
Interest rate lock commitments outstanding
7,270,122
Unpaid principal balance of loan servicing portfolio:
Owned:
Mortgage servicing rights and liabilities
381,493,307
5,111,719
386,605,026
Subserviced for:
PMT
230,819,012
U.S. Department of Veterans Affairs
1,072,760
Other non-affiliates
75,310
617,424,038
Book value per share
75.57
70.13
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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 (gains) losses 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 the quarters indicated:
Decrease (increase) in fair value of MSRs net of MSLs due to changes in valuation inputs used in valuation models
205,494
(169,979)
Hedging (gains) losses associated with MSRs
Stock‑based compensation
Interest expense on corporate debt or corporate revolving credit facilities and capital lease
Effect of arbitration accrual
1,600
Adjusted EBITDA
Income Before Provisions for Income Taxes
For the quarter ended March 31, 2025, income before provision for income taxes increased $60.3 million compared to the same quarter in 2024. The increase was primarily due to a $70.1 million increase in loan production revenue due to higher volume across all production channels and a $63.3 million increase in Net loan servicing fees primarily due to growth in our servicing portfolio, partially offset by an $8.9 million increase in Net interest expense and a $64.9 million increase in total expenses.
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Net Gains on Loans Held for Sale at Fair Value
In our production segment, revenues reflect the effects of a reduction in market interest rates and mortgage rates during the quarter ended March 31, 2025 compared to an increase in market interest rates in the same quarter in 2024. During the quarter ended March 31, 2025, we recognized Net gains on loans held for sale at fair value totaling $221.0 million, an increase of $58.6 million compared to the same quarter in 2024.
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:
154,991
(90,123)
Total non-cash gains
803,208
321,765
Total gains on sale from non-affiliates
Interest rate lock commitments issued:
By loan type:
Government-insured or guaranteed loans
16,115,573
10,794,258
Conventional conforming loans
13,573,765
11,322,087
Jumbo loans
1,219,104
128,116
Closed-end second lien mortgage loans
548,378
341,171
By production channel:
Correspondent
22,095,354
17,080,856
Broker direct
5,478,369
3,352,407
Consumer direct
3,883,097
2,152,369
Loans held for sale at fair value
5,200,350
Commitments to fund and purchase loans
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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 MSLs (which represent the fair value of the costs we expect to incur in excess of the fees we receive for delinquent loans we have bought out of Ginnie Mae guaranteed securities and have resold to and service for investors) and we recognize 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 293% of our gains on sales of loans held for sale at fair value for the quarter ended March 31, 2025, as compared to 254% for the same quarter in 2024. 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 may significantly affect our income.
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 purchasers and insurers include representations and warranties related to the loans we sell. 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 loss on the loans. Our credit loss 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 the maximum exposure to repurchases related to representations and warranties.
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 risk administration staff and reviewed by our Management Risk Committee that includes our senior executives and senior management in our loan production, loan servicing, and credit risk management areas.
The method used 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 the time loans are sold and periodically assess the adequacy of our recorded liability.
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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 $3.5 million for the quarter ended March 31, 2025 compared to $4.0 million for the same quarter in 2024. The decrease in the provision relating to current loan sales was primarily attributable to a lower expectation of repurchase risk due to improved collateral quality for the quarter ended March 31, 2025 compared to the same quarter in 2024.
We also recorded reductions in the liability of $1.4 million for the quarter ended March 31, 2025 compared to $3.3 million for the same quarter in 2024. 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
101,867
75,724
New indemnifications
12,036
7,721
Less indemnified loans sold, repaid or refinanced
1,356
1,756
Loans indemnified at end of quarter
112,547
81,689
Repurchase activity:
Total loans repurchased
19,942
21,395
Less:
Loans repurchased by correspondent lenders
15,492
10,942
Loans repaid by borrowers or resold
7,701
6,827
Net loans (resolved) repurchased with losses chargeable to liability for representations and warranties
(3,251)
3,626
Losses charged to liability for representations and warranties
487
1,444
Unpaid principal balance of loans subject to representations and warranties
Liability for representations and warranties
During the quarter ended March 31, 2025, we repurchased loans totaling $19.9 million. We charged losses of $487,000 against the liability during the quarter ended March 31, 2025. 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 $10.2 million during the quarter ended March 31, 2025, compared to the same quarter in 2024 primarily due to an increase in production volume.
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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 increased $1.3 million during the quarter ended March 31, 2025, compared to the same quarter in 2024; the increase was primarily due to an increase in the number of loans we fulfilled for PMT during the quarter ended March 31, 2025 compared to the same quarter in 2024.
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:
23,067
20,589
25,985
25,307
Average UPB of loans serviced:
MSRs and MSLs
435,069,264
376,091,012
231,251,849
232,112,123
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, 2025 compared to the same quarter in 2024. 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 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.
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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 and holding principal-only stripped mortgage-backed securities.
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
(205,494)
169,979
Hedging results
(98,720)
(124,666)
Changes in fair value attributable to realization of cash flows
(225,462)
(198,564)
Total change in fair value of mortgage servicing rights and mortgage servicing liabilities net of hedging results
Average balances:
8,859,846
7,326,824
1,668
1,767
Changes in fair value of MSRs attributable to changes in fair value inputs decreased during the quarter ended March 31, 2025 compared to the same quarter in 2024 due to decreases in interest rates during the quarter ended March 31, 2025 compared to increasing interest rates during the same quarter in 2024. 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 gains attributable to the effects of interest rate decreases on the fair value of the hedging instruments during the quarter ended March 31, 2025 compared to the opposite circumstances and effects in the same quarter in 2024.
Changes in fair value attributable to 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, 2025, realization of cash flows increased compared to the same quarter in 2024, primarily due to the growth in our investment in MSRs.
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Following is a summary of our loan servicing portfolio:
Purchased and assumed
U.S. Department of Veterans Affairs (1)
Total loans serviced
Delinquencies:
Owned servicing:
15,658,044
17,933,800
90 days or more
8,318,919
9,023,217
Subservicing:
2,569,097
2,673,329
1,368,665
1,319,190
Following is a summary of characteristics of our MSR and MSL servicing portfolio as of March 31, 2025:
Average
Loan type
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 insured or guaranteed (2):
FHA
154,553,614
730
316
212
682
93%
70%
5.2%
VA
126,675,498
459
318
276
90%
1.9%
USDA
20,757,230
140
4.1%
303
148
700
98%
65%
5.1%
Government-sponsored entities:
Fannie Mae
55,839,619
176
317
763
75%
63%
0.6%
Freddie Mac
73,304,664
222
5.4%
325
330
759
76%
67%
0.7%
1,714,163
9.6%
250
81
744
19%
18%
0.2%
Other (3)
9,382,379
6.8%
348
398
774
74%
71%
1,772
249
722
87%
68%
2.8%
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Net Interest Expense
Following is a summary of net interest expense:
Cash and short-term investment
Short-term debt
98,033
74,512
Long-term debt
96,715
82,838
Net interest expense increased $8.9 million during the quarter ended March 31, 2025 compared to the same quarter in 2024. The increase was primarily due to an increase in interest expense on borrowings due to the Company financing a larger inventory of loans held for sale and principal-only stripped MBS during 2025 as compared to 2024 and a decrease in interest income from cash and short-term investment due to a decrease in average cash balances, partially offset by increases in interest income from principal-only stripped MBS and loans held for sale.
Management Fees from PennyMac Mortgage Investment Trust
Management fees decreased $176,000 during the quarter ended March 31, 2025 compared to the same quarter in 2024, due to decreases in PMT’s average shareholders’ equity which is the basis for the base management fees.
Compensation expenses are summarized below:
Salaries and wages
108,648
92,784
Severance
643
Incentive compensation
38,071
26,165
Taxes and benefits
23,860
22,201
Stock and unit-based compensation
Head count:
4,442
3,916
Quarter end
4,457
3,907
Compensation expenses increased $35.6 million during the quarter ended March 31, 2025 compared to the same quarter in 2024. The increase was primarily due to an increase in head count and increased incentive compensation during the quarter ended March 31, 2025, reflecting higher loan production volume.
Loan Origination
Loan origination expenses increased $13.5 million for the quarter ended March 31, 2025 compared to the same quarter in 2024. The increase was primarily due to higher origination volumes.
Technology expenses increased $4.2 million during the quarter ended March 31, 2025 compared to the same quarter in 2024. The increase was primarily due to increases in virtual desktop and cloud-related expenses.
Servicing expenses increased $5.8 million during the quarter ended March 31, 2025 compared to the same quarter in 2024. The increase was primarily due to an increase in provision for losses on servicing advances resulting from higher delinquent loan balances during the quarter ended March 31, 2025 compared to the same quarter in 2024.
Marketing and advertising expenses increased $5.8 million during the quarter ended March 31, 2025 compared to the same quarter in 2024. The increase was primarily due to additional marketing expenses incurred as an Official Supporter of Team USA and increased marketing expenses for consumer direct lending.
Provision for Income Taxes
Our effective income tax rate was 26.8% during the quarter ended March 31, 2025 compared to 10.4% during the same quarter in 2024. The increase in the effective income tax rate for the quarter ended March 31, 2025 compared to the same quarter in 2024 is attributable to a reduction in the tax deduction related to equity compensation and an increased amount of pre-tax income in the quarter ended March 31, 2025.
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Balance Sheet Analysis
Following is a summary of key balance sheet items as of the dates presented:
654,486
659,035
Servicing advances, net
Investments in and advances to affiliates
30,297
31,150
Mortgage servicing rights at fair value
LIABILITIES AND STOCKHOLDERS' EQUITY
7,568,194
9,181,719
5,723,310
5,213,004
13,291,504
14,394,723
539,847
574,341
Stockholders' equity
Leverage ratios:
Total debt / Stockholders' equity
3.8
Total debt / Tangible stockholders' equity (1)
3.5
3.9
Total assets decreased $2.2 billion from $26.1 billion at December 31, 2024 to $23.9 billion at March 31, 2025. The decrease was primarily due to a decrease of $1.1 billion in loans held for sale at fair value and a decrease of $1.2 billion of loans eligible for repurchase.
Total liabilities decreased $2.3 billion from $22.3 billion at December 31, 2024 to $20.0 billion at March 31, 2025. The decrease was primarily due to a decrease of $1.1 billion in borrowings and a decrease of $1.2 billion in liability for loans eligible for repurchase. As a result of our decreased inventory financing requirements, our leverage ratios decreased during the quarter ended March 31, 2025 from December 31, 2024.
Cash Flows
Our cash flows are summarized below:
Change
Operating
1,963,897
Investing
812,996
Financing
(2,793,305)
(16,412)
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The net decrease in cash of $27.4 million during the quarter ended March 31, 2025 is discussed below.
Operating activities
Net cash provided by operating activities totaled $1.1 billion during quarter ended March 31, 2025 compared with net cash used in operating activities of $897.9 million during the same quarter in 2024. 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:
805,273
(1,008,664)
Other operating sources
260,684
110,724
Investing activities
Net cash provided by investing activities during the quarter ended March 31, 2025 totaled $30.4 million, primarily due to $74.6 million in net settlement of derivative financial instruments used to hedge our investment in MSRs and $37.8 million in repayment of principal-only stripped mortgage-backed securities, partially offset by increases in $22.8 million in short-term investment and $51.6 million in margin deposits. 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.
Financing activities
Net cash used in financing activities totaled $1.1 billion during the quarter ended March 31, 2025, primarily due to a decrease of $1.1 billion in borrowings. The decrease in borrowings primarily reflects the decrease in inventory of loans held for sale. 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.
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.
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.
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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 may issue variable funding notes (“VFNs”) and 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 MSRs are pledged to lenders under a bi-lateral loan and security agreement.
On February 6, 2025, PFSI issued $850 million in 6.875% unsecured senior notes due in 2033 in a private placement to “qualified institutional buyers” under Rule 144A of the Securities Act.
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
5,441,126
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, 2025 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:
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 has issued unsecured senior notes (the “Unsecured Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. 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).
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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, and Ginnie Mae has issued risk-based capital requirements. We believe that we are in compliance with the Agency’s pending requirements as of March 31, 2025.
We have a common stock repurchase program which allows us to repurchase common shares of up 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, 2025, we have repurchased approximately $1.8 billion of common shares under our stock repurchase program.
We continue to explore a variety of means of financing our business, including debt financing through bank warehouse lines of credit, bank loans, repurchase agreements, securitization transactions and corporate debt. However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing will take or whether such efforts will be successful.
Debt Obligations
As described further above in “Liquidity and Capital Resources,” we currently finance certain of our assets through short-term borrowings with major financial institutions in the form of sales of assets under agreements to repurchase and mortgage loan participation purchase and sale agreements. We access the capital market for long-term debt through the issuance of secured term notes, term loans and Unsecured 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 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, 2025, we believe PLS was in compliance in all material respects with these covenants.
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Many of our debt financing agreements contain a condition precedent to obtaining additional funding that requires PLS to maintain positive net income for at least one of the previous two consecutive quarters, or other similar measures. PLS is compliant with all such conditions.
The financing agreements also contain margin call provisions that, upon notice from the applicable lender, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.
In addition, the financing agreements contain events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, servicer termination events and defaults, material adverse changes, bankruptcy or insolvency proceedings and other events of default customary for these types of transactions. The remedies for such events of default are also customary for these types of transactions and include the acceleration of the principal amount outstanding under the agreements and the liquidation by our lenders of the mortgage loans or other collateral then subject to the agreements.
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Our debt obligations have the following sizes and maturities:
Outstanding
Facility
Lender
indebtedness (1)
facility size (2)
facility (2)
Maturity date (2)
(dollar amounts in thousands)
Loans sold under agreements to repurchase
1,568,676
300,000
1,179,255
1,425,000
700,000
1,000,000
602,293
600,000
250,000
398,420
157,012
200,000
100,000
JP Morgan Chase Bank, N.A. (EBO facility)
21,555
March 14, 2026
Servicing assets sold under agreements to repurchase
August 4, 2025
75,000
October 25, 2026
1,431,324
June 29, 2026
350,000
July 25, 2026
Mortgage-backed securities sold under agreements to repurchase
270,968
243,706
224,416
32,181
June 11, 2025
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
Citibank, N.A. FHLMC MSR Facility
Unsecured Notes - 5.375%
Unsecured Notes - 4.25%
Unsecured Notes - 5.75%
Unsecured Notes - 7.875%
Unsecured Notes - 7.125%
Unsecured Notes - 6.875%
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, 2025:
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, 2024 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, 2025 as compared to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2024.
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, inventory of mortgage loans held for sale, and principal-only stripped MBS 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 most of our secured 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, 2025, 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
627,960
302,224
148,340
(143,098)
(281,233)
(543,632)
Pricing spread
488,359
237,795
117,358
(114,388)
(225,908)
(440,737)
Annual per-loan cost of servicing
199,018
99,509
49,754
(49,754)
(99,509)
(199,018)
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, 2025 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.
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, 2024, filed with the SEC on February 19, 2025.
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, 2025.
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, 2025 – January 31, 2025
212,338,815
February 1, 2025 – February 28, 2025
March 1, 2025 – March 31, 2025
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, 2025, none of our directors or our officers (as defined in Rule 16a-1(f) of the Exchange Act) 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
3.3
Amendment to the Amended and Restated Bylaws of PennyMac Financial Services, Inc.
8-K
September 6, 2024
Third Amendment to the Amended and Restated Bylaws of PennyMac Financial Services, Inc.
January 3,
Indenture, dated as of February 6, 2025, among PennyMac Financial Services, Inc., the guarantors party thereto and U.S. Bank Trust Company, National Association, as trustee, relating to the 6.875% Senior Notes due 2033.
February 6,
4.2
Form of Global Note for 6.875% Senior Notes due 2033 (included in Exhibit 4.1).
10.1
Fourth Amended and Restated Stockholder Agreement.
10.2†
PennyMac Financial Services, Inc. 2022 Equity Incentive Plan Form of Stock Option Award Agreement (2025).
*
10.3†
PennyMac Financial Services, Inc. 2022 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement (2025).
10.4†
PennyMac Financial Services, Inc. 2022 Equity Incentive Plan Form of Performance Based Restricted Stock Unit Award Agreement (2025).
10.5†
PennyMac Financial Services, Inc. 2022 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement (Non-Employee Directors) (2025).
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, 2025 and December 31, 2024, (ii) the Consolidated Statements of Income for the quarter ended March 31, 2025 and March 31, 2024, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarter ended March 31, 2025 and March 31, 2024, (iv) the Consolidated Statements of Cash Flows for the quarter ended March 31, 2025 and March 31, 2024, 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
† Indicates management contract or compensatory plan or arrangement.
**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.
79
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: April 29, 2025
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)
80