PennyMac Financial Services, Inc. - Quarter Report: 2021 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

☐

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 November 2, 2021
Common Stock, $0.0001 par value		59,029,210

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

FORM 10-Q

September 30, 2021

TABLE OF CONTENTS


		Page
	Special Note Regarding Forward-Looking Statements	3

PART I. FINANCIAL INFORMATION		6

Item 1.	Financial Statements (Unaudited):	6
	Consolidated Balance Sheets	6
	Consolidated Statements of Income	7
	Consolidated Statements of Changes in Stockholders’ Equity	8
	Consolidated Statements of Cash Flows	9
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	62
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	81
Item 4.	Controls and Procedures	83

PART II. OTHER INFORMATION		84

Item 1.	Legal Proceedings	84
Item 1A.	Risk Factors	85
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	85
Item 3.	Defaults Upon Senior Securities	85
Item 4.	Mine Safety Disclosures	85
Item 5.	Other Information	85
Item 6.	Exhibits	86

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Report”) contains certain forward-looking statements that are subject to various risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” “continue,” “plan” or other similar words or expressions.

Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Examples of forward-looking statements include the following:

●

projections of our revenues, income, earnings per share, capital structure or other financial items;

●

descriptions of our plans or objectives for future operations, products or services;

●

forecasts of our future economic performance, interest rates, profit margins and our share of future markets; and

●

descriptions of assumptions underlying or relating to any of the foregoing expectations regarding the timing of generating any revenues.

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 a number of 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 Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on February 25, 2021.

Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:

●

our exposure to risks of loss resulting from adverse weather conditions, man-made or natural disasters, the effect of climate change, and pandemics, such as the COVID-19 pandemic;

●

failure to modify, resell or refinance early buyout loans and or defaults of early buyout loans beyond our expectations;

●

the continually changing federal, state and local laws and regulations applicable to the highly regulated industry in which we operate;

●

lawsuits or governmental actions if we do not comply with the laws and regulations applicable to our businesses;

●

the mortgage lending and servicing-related regulations promulgated by the Consumer Financial Protection Bureau (“CFPB”) and its enforcement of these regulations;

●

our dependence on U.S. government-sponsored entities and changes in their current roles or their guarantees or guidelines;

●

changes to government mortgage modification programs;

●

foreclosure delays and changes in foreclosure practices;

●

the licensing and operational requirements of states and other jurisdictions applicable to our businesses, to which our bank competitors are not subject;

●

our ability to manage third-party service providers and vendors and their compliance with laws, regulations and investor requirements;

Table of Contents

●

changes in macroeconomic and U.S. real estate market conditions;

●

difficulties inherent in growing loan production volume;

●

difficulties inherent in adjusting the size of our operations to reflect changes in business levels;

●

maintaining sufficient capital and liquidity to support business growth including compliance with financial covenants;

●

changes in prevailing interest rates;

●

our substantial amount of indebtedness;

●

increases in loan delinquencies and defaults;

●

our reliance on PennyMac Mortgage Investment Trust (“PMT”) as a significant source of financing for, and revenue related to, our mortgage banking business;

●

our obligation to indemnify third-party purchasers or repurchase loans if loans that we originate, acquire, service or assist in the fulfillment of, fail to meet certain criteria or characteristics or under other circumstances;

●

our exposure to counterparties that are unwilling or unable to honor contractual obligations, including their obligation to indemnify us or repurchase defective mortgage loans;

●

our ability to realize the anticipated benefit of potential future acquisitions of mortgage servicing rights;

●

our obligation to indemnify PMT if our services fail to meet certain criteria or characteristics or under other circumstances;

●

decreases in the returns on the assets that we select and manage for our clients, and our resulting management and incentive fees;

●

the extensive amount of regulation applicable to our investment management segment;

●

conflicts of interest in allocating our services and investment opportunities among ourselves and PMT;

●

the effect of public opinion on our reputation;

●

our recent growth;

●

our ability to effectively identify, manage, monitor and mitigate financial risks;

●

our initiation of new business activities or expansion of existing business activities;

●

our ability to detect misconduct and fraud;

●

our ability to effectively deploy new information technology applications and infrastructure;

●

our ability to mitigate cybersecurity risks and cyber incidents;

●

our ability to pay dividends to our stockholders; and

●

our organizational structure and certain requirements in our charter documents.

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.

Table of Contents

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.

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	September 30,		December 31,
	2021		2020

	(in thousands, except share amounts)
ASSETS
Cash	$	476,497	$	532,716
Short-term investments at fair value		5,046		15,217
Loans held for sale at fair value (includes $9,368,106 and $11,457,678 pledged to creditors)		9,659,695		11,616,400
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors		—		80,862
Derivative assets		429,984		711,238
Servicing advances, net (includes valuation allowance of $127,453 and $181,433; $203,236 and $413,484 pledged to creditors)		522,906		579,528
Mortgage servicing rights at fair value (includes $3,600,978 and $2,577,964 pledged to creditors)		3,611,120		2,581,174
Operating lease right-of-use assets		85,266		74,934
Investment in PennyMac Mortgage Investment Trust at fair value		1,477		1,105
Receivable from PennyMac Mortgage Investment Trust		49,993		87,005
Loans eligible for repurchase		4,335,378		14,625,447
Other (includes $74,364 and $166,418 pledged to creditors)		567,776		692,169
Total assets	$	19,745,138	$	31,597,795
LIABILITIES
Assets sold under agreements to repurchase	$	6,897,157	$	9,654,797
Mortgage loan participation purchase and sale agreements		519,784		521,477
Obligations under capital lease		5,583		11,864
Notes payable secured by mortgage servicing assets		1,297,176		1,295,840
Unsecured senior notes		1,783,230		645,820
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value		—		131,750
Derivative liabilities		14,204		42,638
Mortgage servicing liabilities at fair value		47,567		45,324
Accounts payable and accrued expenses		358,944		308,398
Operating lease liabilities		105,452		94,193
Payable to PennyMac Mortgage Investment Trust		138,972		140,306
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		31,815		35,165
Income taxes payable		659,768		622,700
Liability for loans eligible for repurchase		4,335,378		14,625,447
Liability for losses under representations and warranties		45,806		32,688
Total liabilities		16,240,836		28,208,407

Commitments and contingencies – Note 16

STOCKHOLDERS’ EQUITY
Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 60,419,578 and 70,905,532 shares, respectively		6		7
Additional paid-in capital		372,198		1,047,052
Retained earnings		3,132,098		2,342,329
Total stockholders' equity		3,504,302		3,389,388
Total liabilities and stockholders’ equity	$	19,745,138	$	31,597,795

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands, except per share amounts)
Revenues
Net gains on loans held for sale at fair value:
From non-affiliates	$	639,730	$	865,044	$	2,002,515	$	1,819,175
From PennyMac Mortgage Investment Trust		(12,976)		(9,775)		(38,772)		62,549
		626,754		855,269		1,963,743		1,881,724
Loan origination fees:
From non-affiliates		88,040		69,496		274,048		177,747
From PennyMac Mortgage Investment Trust		6,541		6,076		21,861		14,344
		94,581		75,572		295,909		192,091
Fulfillment fees from PennyMac Mortgage Investment Trust		43,922		54,839		158,777		149,594
Net loan servicing fees:
Loan servicing fees:
From non-affiliates		216,592		203,696		635,620		601,527
From PennyMac Mortgage Investment Trust		20,703		18,752		59,811		48,806
Other		30,463		27,920		91,793		85,218
		267,758		250,368		787,224		735,551
Change in fair value of mortgage servicing rights and mortgage servicing liabilities		(147,669)		(127,217)		(260,474)		(1,368,219)
Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust		—		3,135		(1,037)		18,293
Mortgage servicing rights hedging results		(86,459)		6,521		(437,492)		1,027,327
		(234,128)		(117,561)		(699,003)		(322,599)
Net loan servicing fees		33,630		132,807		88,221		412,952
Net interest expense:
Interest income:
From non-affiliates		68,312		52,276		230,803		170,148
From PennyMac Mortgage Investment Trust		—		676		387		2,686
		68,312		52,952		231,190		172,834
Interest expense:
To non-affiliates		90,711		61,109		299,575		171,482
To PennyMac Mortgage Investment Trust		—		2,070		1,280		6,416
		90,711		63,179		300,855		177,898
Net interest expense		(22,399)		(10,227)		(69,665)		(5,064)
Management fees from PennyMac Mortgage Investment Trust		8,520		8,508		28,882		25,851
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust		(67)		(288)		478		(602)
Results of real estate acquired in settlement of loans		378		1,214		1,698		803
Other		1,293		2,298		5,507		6,102
Total net revenues		786,612		1,119,992		2,473,550		2,663,451
Expenses
Compensation		249,183		202,440		773,079		550,762
Loan origination		80,932		53,752		243,999		150,677
Technology		32,406		28,964		100,314		69,976
Servicing		27,892		71,110		78,365		169,779
Professional services		24,429		18,307		62,549		44,211
Occupancy and equipment		9,389		8,491		27,456		24,822
Other		22,832		8,637		62,716		29,841
Total expenses		447,063		391,701		1,348,478		1,040,068
Income before provision for income taxes		339,549		728,291		1,125,072		1,623,383
Provision for income taxes		90,239		193,131		294,665		429,303
Net income	$	249,310	$	535,160	$	830,407	$	1,194,080
Earnings per share
Basic	$	4.02	$	7.39	$	12.65	$	15.65
Diluted	$	3.80	$	7.03	$	11.98	$	15.00
Weighted average shares outstanding
Basic		62,085		72,439		65,671		76,292
Diluted		65,652		76,138		69,341		79,618

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)


	Quarter ended September 30, 2021
				Additional				Total
	Number of	Par		paid-in		Retained		stockholders'
	shares	value		capital		earnings		equity

	(in thousands)
Balance, June 30, 2021	64,484	$	6	$	618,337	$	2,895,486	$	3,513,829
Net income	—		—		—		249,310		249,310
Stock-based compensation	130		—		11,165		—		11,165
Issuance of common stock in settlement of directors' fees	1		—		50		—		50
Repurchase of common stock	(4,195)		—		(257,354)		—		(257,354)
Common stock dividend ($0.20 per share)	—		—		—		(12,698)		(12,698)
Balance, September 30, 2021	60,420	$	6	$	372,198	$	3,132,098	$	3,504,302


	Quarter ended September 30, 2020
				Additional				Total
	Number of	Par		paid-in		Retained		stockholders'
	shares	value		capital		earnings		equity

	(in thousands)
Balance, June 30, 2020	72,358	$	7	$	1,113,412	$	1,365,774	$	2,479,193
Net income	—		—		—		535,160		535,160
Stock-based compensation	159		—		9,895		—		9,895
Issuance of common stock in settlement of directors' fees	1		—		48		—		48
Repurchase of common stock	(118)		—		(6,927)		—		(6,927)
Common stock dividend ($0.15 per share)	—		—		—		(292)		(292)
Balance, September 30, 2020	72,400	$	7	$	1,116,428	$	1,900,642	$	3,017,077


	Nine months ended September 30, 2021
				Additional				Total
	Number of	Par		paid-in		Retained		stockholders'
	shares	value		capital		earnings		equity

	(in thousands)
Balance, December 31, 2020	70,906	$	7	$	1,047,052	$	2,342,329	$	3,389,388
Net income	—		—		—		830,407		830,407
Stock-based compensation	933		—		25,787		—		25,787
Issuance of common stock in settlement of directors' fees	3		—		151		—		151
Repurchase of common stock	(11,422)		(1)		(700,792)		—		(700,793)
Common stock dividends ($0.60 per share)	—		—		—		(40,638)		(40,638)
Balance, September 30, 2021	60,420	$	6	$	372,198	$	3,132,098	$	3,504,302


	Nine months ended September 30, 2020
				Additional				Total
	Number of	Par		paid-in		Retained		stockholders'
	shares	value		capital		earnings		equity

	(in thousands)
Balance, December 31, 2019	78,515	$	8	$	1,335,107	$	726,392	$	2,061,507
Net income	—		—		—		1,194,080		1,194,080
Stock-based compensation	1,212		—		29,386		—		29,386
Issuance of common stock in settlement of directors' fees	4		—		144		—		144
Repurchase of common stock	(7,331)		(1)		(248,209)		—		(248,210)
Common stock dividends ($0.39 per share)	—		—		—		(19,830)		(19,830)
Balance, September 30, 2020	72,400	$	7	$	1,116,428	$	1,900,642	$	3,017,077

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine months ended September 30,
	2021		2020

	(in thousands)
Cash flow from operating activities
Net income	$	830,407	$	1,194,080
Adjustments to reconcile net income to net cash used in operating activities:
Net gains on loans held for sale at fair value		(1,963,743)		(1,881,724)
Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread		261,511		1,349,926
Mortgage servicing rights hedging results		437,492		(1,027,327)
Capitalization of interest and advances on loans held for sale		(4,573)		(55,920)
Accrual of interest on excess servicing spread financing payable to PennyMac Mortgage Investment Trust		1,280		6,416
Amortization debt issuance costs		19,154		12,163
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust		(372)		681
Results of real estate acquired in settlement in loans		(1,698)		(803)
Stock-based compensation expense		28,595		26,220
(Reversal of) Provision for servicing advance losses		(44,535)		79,402
Impairment of capitalized software		728		—
Depreciation and amortization		21,729		17,126
Amortization of right-of-use assets		10,539		9,176
Purchase of loans held for sale from PennyMac Mortgage Investment Trust		(51,471,399)		(43,721,458)
Origination of loans held for sale		(41,634,531)		(20,580,388)
Purchase of loans held for sale from non-affiliates		(3,867,782)		(2,515,624)
Purchase of loans from Ginnie Mae securities and early buyout investors		(17,969,911)		(5,980,081)
Sale to non-affiliates and principal payments of loans held for sale		118,048,768		67,209,239
Sale to PennyMac Mortgage Investment Trust of loans held for sale		—		2,248,896
Repurchase of loans subject to representations and warranties		(75,023)		(43,664)
Settlement of repurchase agreement derivatives		—		8,270
Sale of real estate acquired in settlement of loans		11,712		27,842
Increase in servicing advances		(18,718)		(156,964)
Decrease (increase) in receivable from PennyMac Mortgage Investment Trust		27,404		(80,531)
Decrease (increase) in other assets		95,836		(305,100)
Increase in accounts payable and accrued expenses		45,707		102,789
Decrease in operating lease liabilities		(12,457)		(10,378)
Decrease in payable to PennyMac Mortgage Investment Trust		(39,755)		(14,001)
Payments to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		(3,350)		(10,374)
Increase in income taxes payable		37,068		168,580
Net cash provided by (used in) operating activities		2,770,083		(3,923,531)
Cash flow from investing activities
Decrease (increase) in short-term investments		10,171		(27,525)
Net change in assets purchased from PMT under agreement to resell		80,862		20,554
Net settlement of derivative financial instruments used for hedging of mortgage servicing rights		(471,322)		1,000,865
Purchase of mortgage servicing rights		—		(25,473)
Purchase of furniture, fixtures, equipment and leasehold improvements		(5,999)		(5,584)
Acquisition of capitalized software		(32,276)		(38,443)
Decrease in margin deposits		117,106		205
Net cash (used in) provided by investing activities		(301,458)		924,599
Cash flow from financing activities
Sale of assets under agreements to repurchase		100,929,294		68,122,809
Repurchase of assets sold under agreements to repurchase		(103,689,987)		(64,997,443)
Issuance of mortgage loan participation purchase and sale certificates		17,990,980		17,814,845
Repayment of mortgage loan participation purchase and sale certificates		(17,992,673)		(17,777,414)
Repayment of obligations under capital lease		(6,281)		(6,853)
Issuance of unsecured senior notes		1,150,000		500,000
Repayment of excess servicing spread financing		(134,624)		(25,112)
Payment of debt issuance costs		(27,355)		(26,362)
Issuance of common stock pursuant to exercise of stock options		5,770		8,431
Payment of withholding taxes relating to stock-based compensation		(8,578)		(5,265)
Payment of dividend to holders of common stock		(40,638)		(19,830)
Repurchase of common stock		(700,793)		(248,210)
Net cash (used in) provided by financing activities		(2,524,885)		3,339,596
Net (decrease) increase in cash and restricted cash		(56,260)		340,664
Cash and restricted cash at beginning of period		532,781		188,578
Cash and restricted cash at end of period	$	476,521	$	529,242
Cash and restricted cash at end of period are comprised of the following:
Cash	$	476,497	$	529,166
Restricted cash included in Other assets		24		76
	$	476,521	$	529,242

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1—Organization

PennyMac Financial Services, Inc. (“PFSI” or the “Company”) is a holding corporation and its primary assets are direct and indirect equity interests in Private National Mortgage Acceptance Company, LLC (“PennyMac”). The Company is the managing member of PennyMac, and it operates and controls all of the businesses and affairs of PennyMac, and consolidates the financial results of PennyMac and its subsidiaries.

PennyMac is a Delaware limited liability company which, through its subsidiaries, engages in mortgage banking and investment management activities. PennyMac’s mortgage banking activities consist of residential mortgage loan production and servicing. PennyMac’s investment management activities and a portion of its loan servicing activities are conducted on behalf of PennyMac Mortgage Investment Trust (“PMT”), a publicly-traded real estate mortgage investment trust that invests primarily in mortgage-related assets. PennyMac’s primary wholly owned subsidiaries are:

●

PennyMac Loan Services, LLC (“PLS”) — a Delaware limited liability company that services portfolios of residential mortgage loans on behalf of non-affiliates and PMT, purchases, originates and sells new prime credit quality residential mortgage loans and engages in other mortgage banking activities for its own account and the account of PMT.

PLS is approved as a seller/servicer of mortgage loans by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and as an issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”). PLS is a licensed Federal Housing Administration (“FHA”) Nonsupervised Title II Lender with the U.S. Department of Housing and Urban Development (“HUD”) and a lender/servicer with the Veterans Administration (“VA”) and U.S. Department of Agriculture (“USDA”) (each of the above an “Agency” and collectively the “Agencies”).

●

PNMAC Capital Management, LLC (“PCM”)— a Delaware limited liability company registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended. PCM has an investment management agreement with PMT.

Note 2—Basis of Presentation and Recently Adopted Accounting Pronouncement

Basis of Presentation

The accompanying consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s Accounting Standards Codification for interim financial information and with the Securities and Exchange Commission’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these 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, 2020.

The accompanying unaudited 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 to be anticipated for the full year ending December 31, 2021. Intercompany accounts and transactions have been eliminated.

Preparation of financial statements in compliance with GAAP requires management to make judgments and estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results will likely differ from those estimates.

Table of Contents

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, change in fair value of excess servicing spread financing (“ESS”), net interest, management fees, and change in fair value of investment in and dividends received from PMT) totaled 9% and 7% of total net revenue for the quarters ended September 30, 2021 and 2020, respectively, and 9% and 12% for the nine months ended September 30, 2021 and 2020, respectively.

Note 4—Related Party Transactions

Transactions with PMT

Operating Activities

Mortgage Loan Production Activities and MSR Recapture

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

Through June 30, 2020, pursuant to the terms of an MSR recapture agreement by and between the Company and PMT, if the Company refinanced mortgage loans for which PMT previously held the MSRs, the Company was generally required to transfer and convey to PMT cash in an amount equal to 30% of the fair market value of the MSRs related to all such mortgage loans. On June 30, 2020, the MSR recapture agreement was amended and restated for a term of five years (the “2020 MSR Recapture Agreement”).

Effective July 1, 2020, the 2020 MSR Recapture Agreement changes the recapture fee payable by the Company to a tiered amount equal to:

●

40% of the fair market value of the MSRs relating to the recaptured loans subject to the first 15% of the “recapture rate”

●

35% of the fair market value of the MSRs relating to the recaptured loans subject to the “recapture rate” in excess of 15% and up to 30%; and

●

30% of the fair market value of the MSRs relating to the recaptured loans subject to the “recapture rate” in excess of 30%.

The “recapture rate” means, during each month, the ratio of (i) the aggregate unpaid principal balance of all recaptured loans, to (ii) the aggregate unpaid principal balance of all mortgage loans for which the Company held the MSRs and that were refinanced or otherwise paid off in such month. The Company has also agreed to allocate sufficient resources to target a recapture rate of 15%.

Fulfillment Services

The Company provides PMT with certain mortgage banking services, including fulfillment and disposition-related services, for which it receives a monthly fulfillment fee.

Table of Contents

Through June 30, 2020, pursuant to the terms of a mortgage banking services agreement, the monthly fulfillment fee was an amount equal to:

no greater than the product of (i) 0.35% and (ii) the aggregate initial unpaid principal balance (the “Initial UPB”) of all mortgage loans purchased in such month, plus

in the case of all mortgage loans other than mortgage loans sold to or securitized through Fannie Mae or Freddie Mac, no greater than the product of (i) 0.50% and (ii) the aggregate Initial UPB of all such mortgage loans sold and securitized in such month; provided, however, that no fulfillment fee was due or payable to the Company with respect to any mortgage loans underwritten to the Ginnie Mae Mortgage-Backed Securities (“MBS”) Guide.

Effective July 1, 2020, the fulfillment fees and sourcing fees were revised as follows:

Fulfillment fees shall not exceed the following:

(a)

the number of loan commitments multiplied by a pull-through factor of either .99 or .80 depending on whether the loan commitments are subject to a “mandatory trade confirmation” or a “best efforts lock confirmation”, respectively, and then multiplied by $585 for each pull-through adjusted loan commitment up to and including 16,500 per quarter and $355 for each pull-through adjusted loan commitment in excess of 16,500 per quarter, plus

(b)

$315 multiplied by the number of purchased loans that are sold to Fannie Mae and Freddie Mac up to the and including 16,500 per quarter and $195 multiplied by the number of such purchased loans in excess of 16,500 per quarter, plus

(c)

$750 multiplied by the number of all purchased loans that are sold or securitized to parties other than Fannie Mae and Freddie Mac; provided however, that no fulfillment fee shall be due or payable to PLS with respect to any Ginnie Mae loans.

Sourcing Fees

PMT does not hold the Ginnie Mae approval required to issue Ginnie Mae 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, through June 30, 2020, a sourcing fee ranging from two to three and one-half basis points, generally based on the average number of calendar days mortgage loans are held by PMT before being purchased by the Company. Effective July 1, 2020, sourcing fee rates were revised to range from one to two basis points, generally based on the average number of calendar days the loans are held by PMT before purchase by PLS.

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.

Table of Contents

Following is a summary of loan production activities, including MSR recapture between the Company and PMT:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Net gains on loans held for sale at fair value:
Net gains on loans held for sale to PMT (primarily cash)	$	—	$	1	$	—	$	81,295
Mortgage servicing rights and excess servicing spread recapture incurred		(12,976)		(9,776)		(38,772)		(18,746)
	$	(12,976)	$	(9,775)	$	(38,772)	$	62,549
Sale of loans held for sale to PMT	$	—	$	27	$	—	$	2,248,896

Tax service fees earned from PMT included in Loan origination fees	$	6,541	$	6,076	$	21,861	$	14,344

Fulfillment fee revenue	$	43,922	$	54,839	$	158,777	$	149,594
Unpaid principal balance ("UPB") of loans fulfilled for PMT subject to fulfillment fees	$	28,605,098	$	27,351,435	$	92,846,231	$	62,403,674

Sourcing fees included in cost of loans purchased from PMT	$	1,537	$	1,658	$	4,905	$	9,143
Unpaid principal balance of loans purchased from PMT	$	15,249,441	$	16,690,482	$	49,106,232	$	41,641,327

Loan Servicing

The Company and PMT have entered into a loan servicing agreement (the “Servicing Agreement”), pursuant to which the Company provides servicing for PMT’s portfolio of distressed loans and subservicing for its portfolio of MSRs (prime servicing). The Servicing Agreement provides for servicing fees of per-loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced loan or the real estate acquired in settlement of loans (“REO”). The Company also remains entitled to customary ancillary income and market-based fees and charges relating to loans it services for PMT. These include boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and a percentage of late charges.

Prime Servicing

●

The base servicing fees for prime loans are calculated through a monthly per-loan dollar amount, with the actual dollar amount for each loan based on whether the loan is a fixed-rate or adjustable-rate loan. The base servicing fee rates are $7.50 per month for fixed-rate loans and $8.50 per month for adjustable-rate loans.

●

To the extent that prime loans become delinquent, the Company is entitled to an additional servicing fee per loan ranging from $10 to $55 per month based on the delinquency, bankruptcy and foreclosure status of the loan or $75 per month if the underlying mortgaged property becomes REO. The Company is also entitled to customary ancillary income and certain market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees.

●

Effective July 1, 2020, the Company also receives certain fees for COVID-19-related forbearance and modification activities provided for under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

Table of Contents

Special Servicing (Distressed loans)

●

The base servicing fee rates for distressed loans range from $30 per month for current loans up to $95 per month for loans in foreclosure proceedings. The base servicing fee rate for REO is $75 per month. The Company also receives a supplemental servicing fee of $25 per month for each distressed loan.

●

The Company receives activity-based fees for modifications, foreclosures and liquidations that it facilitates with respect to distressed loans, as well as other market-based refinancing and loan disposition fees. The Company may also receive REO rental fees, property lease renewal fees, property management fees, tenant paid application fees, late rent fees, and third-party vendor fees associated with its management of REO.

Following is a summary of loan servicing fees earned from PMT:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Loan type serviced:
Loans acquired for sale	$	698	$	452	$	1,871	$	1,595
Distressed loans		89		187		306		675
Mortgage servicing rights		19,916		18,113		57,634		46,536
	$	20,703	$	18,752	$	59,811	$	48,806

On June 30, 2020, the Servicing Agreement was amended and restated for a term of five years (the “2020 Servicing Agreement”). The terms of the 2020 Servicing Agreement are substantially similar to those in the prior servicing agreement except that they now include fees relating to COVID-19 related forbearance and modification activities provided for under the CARES Act.

Investment Management Activities

The Company has a management agreement with PMT ( the “Management Agreement”), pursuant to which the Company oversees PMT’s business affairs in conformity with the investment policies that are approved and monitored by its board of trustees, for which PFSI collects a base management fee and may collect a performance incentive fee. The Management Agreement provides that:

●

The base management fee is calculated quarterly and is equal to the sum of (i) 1.5% per year of PMT’s average shareholders’ equity up to $2 billion, (ii) 1.375% per year of PMT’s average shareholders’ equity in excess of $2 billion and up to $5 billion, and (iii) 1.25% per year of PMT’s average shareholders’ equity in excess of $5 billion.

●

The performance incentive fee is calculated quarterly at a defined annualized percentage of the amount by which PMT’s “net income,” on a rolling four-quarter basis and before deducting the incentive fee, exceeds certain levels of return on “equity.”

The performance incentive fee is equal to the sum of: (a) 10% of the amount by which PMT’s “net income” for the quarter exceeds (i) an 8% return on “equity” plus the “high watermark,” up to (ii) a 12% return on PMT’s “equity” plus (b) 15% of the amount by which PMT’s “net income” for the quarter exceeds (i) a 12% return on PMT’s “equity” plus the “high watermark,” up to (ii) a 16% return on PMT’s “equity” plus (c) 20% of the amount by which PMT’s “net income” for the quarter exceeds a 16% return on “equity” plus the “high watermark.”

Table of Contents

For the purpose of determining the amount of the performance incentive fee:

“Net income” is defined as net income or loss attributable to PMT’s common shares of beneficial interest computed in accordance with GAAP adjusted for certain other non-cash charges determined after discussions between the Company and PMT’s independent trustees and approval by a majority of PMT’s independent trustees.

“Equity” is the weighted average of the issue price per common share of all of PMT’s public offerings, multiplied by the weighted average number of common shares outstanding (including restricted share units) in the rolling four-quarter period.

The “high watermark” is the quarterly adjustment that reflects the amount by which the “net income” (stated as a percentage of return on “equity”) in that quarter exceeds or falls short of the lesser of 8% and the average Fannie Mae 30-year MBS yield (the “Target Yield”) for the four quarters then ended. If the “net income” is lower than the Target Yield, the high watermark is increased by the difference. If the “net income” is higher than the Target Yield, the high watermark is reduced by the difference. Each time a performance incentive fee is earned, the high watermark returns to zero. As a result, the threshold amounts required for the Company to earn a performance incentive fee are adjusted cumulatively based on the performance of PMT’s “net income” over (or under) the Target Yield, until the “net income” in excess of the Target Yield exceeds the then-current cumulative high watermark amount, and a performance incentive fee is earned.

The base management fee and the performance incentive fee are both receivable quarterly in arrears. The performance incentive fee may be paid in cash or a combination of cash and PMT’s common shares (subject to a limit of no more than 50% paid in common shares), at PMT’s option.

In the event of termination of the Management Agreement between PMT and the Company, the Company may be entitled to a termination fee in certain circumstances. The termination fee is equal to three times the sum of (a) the average annual base management fee, and (b) the average annual performance incentive fee earned by the Company, in each case during the 24-month period immediately preceding the date of termination.

Following is a summary of the base management and performance incentive fees earned from PMT:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Base management	$	8,778	$	8,508	$	25,875	$	25,851
Performance incentive (adjustment)		(258)		—		3,007		—
	$	8,520	$	8,508	$	28,882	$	25,851

Expense Reimbursement

Under the Management Agreement, PMT reimburses the Company for its organizational and operating expenses, including third-party expenses, incurred on PMT’s behalf, it being understood that the Company and its affiliates shall allocate a portion of their personnel’s time to provide certain legal, tax and investor relations services for the direct benefit of PMT. With respect to the allocation of the Company’s and its affiliates’ personnel compensation, the Company was reimbursed $120,000 per fiscal quarter through June 30, 2020.

PMT is also required to pay its pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Company and its affiliates required for PMT’s and its subsidiaries’ operations. These expenses are allocated based on the ratio of PMT’s proportion of gross assets compared to all remaining gross assets managed by the Company as calculated at each fiscal quarter end.

Table of Contents

On June 30, 2020, the Management Agreement was amended and restated for a term of five years (the “2020 Management Agreement”). The terms of the 2020 Management Agreement are materially consistent with those of the prior management agreement, except that, effective July 1, 2020, PMT’s reimbursement of PCM’s and its affiliates’ compensation expenses was increased from $120,000 to $165,000 per fiscal quarter, such amount to be reviewed annually and not preclude reimbursement for any other services performed by the Company or its affiliates.

The Company received reimbursements from PMT for expenses as follows:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Reimbursement of:
Common overhead incurred by the Company	$	1,548	$	1,389	$	3,387	$	4,514
Compensation		165		165		495		405
Expenses incurred on PMT's behalf, net		4,396		2,852		13,536		5,561
	$	6,109	$	4,406	$	17,418	$	10,480
Payments and settlements during the period (1)	$	51,020	$	58,479	$	238,202	$	228,514

(1)	Payments and settlements include payments for management fees and correspondent production activities itemized in the preceding tables and netting settlements made pursuant to master netting agreements between the Company and PMT.

Investing Activities

Master Repurchase Agreement

On December 19, 2016, the Company, through PLS, entered into a master repurchase agreement with one of PMT’s wholly-owned subsidiaries, PennyMac Holdings, LLC (“PMH”) (the “PMH Repurchase Agreement”), pursuant to which PMH may borrow from the Company for the purpose of financing PMH’s participation certificates representing beneficial ownership in ESS. PLS then re-pledges such participation certificates to PNMAC GMSR ISSUER TRUST (the “Issuer Trust”) under a master repurchase agreement by and among PLS, the Issuer Trust and PennyMac, as guarantor (the “PC Repurchase Agreement”). The Issuer Trust was formed for the purpose of allowing PLS to finance MSRs and ESS relating to such MSRs (the “GNMA MSR Facility”).

In the first quarter of 2021, PLS repurchased the ESS from PMH at fair market value, effectively terminating the borrowing arrangements allowing PMH to finance its participation certificates representing beneficial ownership in ESS. Such ESS is now included in PLS's participation certificates representing beneficial ownership in ESS and MSRs, which PLS pledges in connection with the GNMA MSR Facility.

The Company holds an investment in PMT in the form of 75,000 common shares of beneficial interest.

Following is a summary of investing activities between the Company and PMT:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Interest income relating to Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell	$	—	$	676	$	387	$	2,686
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust	$	(67)	$	(288)	$	478	$	(602)

Table of Contents


	September 30,		December 31,
	2021		2020

	(in thousands)
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell	$	—	$	80,862
Common shares of beneficial interest of PennyMac Mortgage Investment Trust:
Fair value	$	1,477	$	1,105
Number of shares		75		75

Financing Activities

Spread Acquisition and MSR Servicing Agreements

The Company has a master spread acquisition and MSR servicing agreement with PMT (the “Spread Acquisition Agreement”) which was amended and restated effective December 19, 2016, pursuant to which the Company may sell to PMT, from time to time, the right to receive participation certificates representing beneficial ownership in ESS arising from Ginnie Mae MSRs acquired by the Company, in which case the Company generally would be required to service or subservice the related mortgage loans for Ginnie Mae. The primary purpose of the amendment and restatement was to facilitate the continued financing of the ESS owned by PMT in connection with the parties’ participation in the GNMA MSR Facility.

To the extent the Company refinances any of the mortgage loans relating to the ESS it has issued, the Spread Acquisition Agreement also contains recapture provisions requiring that the Company transfer to PMT, at no cost, the ESS relating to a certain percentage of the unpaid principal balance of the newly originated mortgage loans. However, under the Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae mortgage loans is not equal to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the refinanced mortgage loans, the Company is also required to transfer additional ESS or cash in the amount of such shortfall. Similarly, in any month where the transferred ESS relating to modified Ginnie Mae mortgage loans is not equal to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the modified mortgage loans, the Spread Acquisition Agreement contains provisions that require the Company to transfer additional ESS or cash in the amount of such shortfall. To the extent the fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, the Company may, at its option, settle its obligation to PMT in cash in an amount equal to such fair market value in lieu of transferring such ESS.

During the quarter ended March 31, 2021, the Company repaid its outstanding ESS financing through the repurchase of the ESS from PMT.

Following is a summary of financing activities between the Company and PMT:


	Quarter ended		Nine months ended September 30,
	September 30, 2020		2021		2020

	(in thousands)
Excess servicing spread financing:
Balance at beginning of period	$	151,206	$	131,750	$	178,586
Issuance pursuant to recapture agreement		531		557		1,393
Accrual of interest		2,070		1,280		6,416
Repayment		(7,682)		(134,624)		(25,112)
Change in fair value		(3,135)		1,037		(18,293)
Balance at end of period	$	142,990	$	—	$	142,990
Recapture incurred pursuant to refinancings by the Company of mortgage loans subject to excess servicing spread financing included in Net gains on loans held for sale at fair value	$	525	$	614	$	1,441

Table of Contents

Receivable from and Payable to PMT

Amounts receivable from and payable to PMT are summarized below:


	September 30,		December 31,
	2021		2020

	(in thousands)
Receivable from PMT:
Allocated expenses and expenses incurred on PMT's behalf	$	12,493	$	38,142
Correspondent production fees		10,867		13,065
Fulfillment fees		10,709		20,873
Management fees		8,778		8,686
Servicing fees		7,146		6,213
Interest on assets purchased under agreements to resell		—		26
	$	49,993	$	87,005
Payable to PMT:
Amounts advanced by PMT to fund its servicing advances	$	119,810	$	132,154
Other		19,162		8,152
	$	138,972	$	140,306

Exchanged Private National Mortgage Acceptance Company, LLC Unitholders

On May 8, 2013, the Company entered into a tax receivable agreement with certain former owners of PennyMac that provides for the payment from time to time by the Company to PennyMac’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 PennyMac’s assets resulting from exchanges of ownership interests in PennyMac 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.

Although a reorganization in November 2018 eliminated the potential for unitholders to exchange any additional units subject to this tax receivable agreement, the Company continues to be subject to the agreement and will be required to make payments, to the extent any of the tax benefits specified above are deemed to be realized, under the tax receivable agreement to those certain prior owners of PennyMac who effected exchanges of ownership interests in PennyMac for the Company’s common stock before the closing of the reorganization.

The Company has recorded $31.8 million and $35.2 million, Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement as of September 30, 2021 and December 31, 2020, respectively. The Company made $3.4 million of payments under the tax receivable agreement during the nine months ended September 30, 2021 and $10.4 million during the nine months ended September 30, 2020.

Table of Contents

Note 5—Loan Sales and Servicing Activities

The Company, through PLS, originates or purchases and sells loans in the secondary mortgage market without recourse for credit losses. However, the Company maintains continuing involvement with the loans in the form of servicing arrangements and the liability under representations and warranties it makes to purchasers and insurers of the loans.

The following table summarizes cash flows between the Company and transferees as a result of the sale of loans in transactions where the Company maintains continuing involvement with the loans as servicer:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Cash flows:
Sales proceeds	$	39,040,868	$	26,683,234	$	118,048,768	$	67,209,239
Servicing fees received (1)	$	178,684	$	166,316	$	576,332	$	491,743

(1)	Net of guarantee fees paid to the Agencies.

The following table summarizes the UPB of the loans sold by the Company in which it maintains continuing involvement in the form of owned servicing obligations:


	September 30,		December 31,
	2021		2020

	(in thousands)
UPB of loans outstanding	$	241,193,601	$	199,655,361
Delinquencies (1):
30-89 days	$	5,630,358	$	6,041,366
90 days or more:
Not in foreclosure	$	11,538,275	$	17,799,621
In foreclosure	$	453,155	$	581,683
Foreclosed	$	5,949	$	10,893
Bankruptcy	$	1,183,564	$	1,230,696
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days	$	1,464,126	$	2,626,617
90 days or more		5,441,170		12,181,174
	$	6,905,296	$	14,807,791

(1)	Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act.

Table of Contents

The following tables summarize the UPB of the Company’s loan servicing portfolio:


	September 30, 2021
			Contract
	Servicing		servicing and		Total
	rights owned		subservicing		loans serviced

	(in thousands)
Investor:
Non-affiliated entities:
Originated	$	241,193,601	$	—	$	241,193,601
Purchased		26,913,132		—		26,913,132
		268,106,733		—		268,106,733
PennyMac Mortgage Investment Trust		—		218,013,788		218,013,788
Loans held for sale		9,295,126		—		9,295,126
	$	277,401,859	$	218,013,788	$	495,415,647
Delinquent loans (1):
30 days	$	4,979,570	$	894,634	$	5,874,204
60 days		1,622,154		203,932		1,826,086
90 days or more:
Not in foreclosure		12,728,881		2,228,664		14,957,545
In foreclosure		586,596		29,219		615,815
Foreclosed		6,978		17,483		24,461
	$	19,924,179	$	3,373,932	$	23,298,111
Bankruptcy	$	1,474,614	$	150,716	$	1,625,330
Delinquent loans in COVID-19 pandemic-related forbearance:
30 days	$	852,327	$	134,253	$	986,580
60 days		790,683		123,813		914,496
90 days or more		5,922,433		1,408,078		7,330,511
	$	7,565,443	$	1,666,144	$	9,231,587
Custodial funds managed by the Company (2)	$	9,930,772	$	5,373,992	$	15,304,764

(1)	Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act.

(2)

Custodial funds include cash accounts holding funds on behalf of borrowers and investors relating to loans serviced under servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns placement fees on certain of the custodial funds it manages on behalf of the loans’ borrowers and investors, which are included in Interest income in the Company’s consolidated statements of income.

Table of Contents


	December 31, 2020
			Contract
	Servicing		servicing and		Total
	rights owned		subservicing		loans serviced

	(in thousands)
Investor:
Non-affiliated entities:
Originated	$	199,655,361	$	—	$	199,655,361
Purchased		41,612,940		—		41,612,940
		241,268,301		—		241,268,301
PennyMac Mortgage Investment Trust		—		174,418,591		174,418,591
Loans held for sale		11,063,938		—		11,063,938
	$	252,332,239	$	174,418,591	$	426,750,830
Delinquent loans (1):
30 days	$	5,217,949	$	901,965	$	6,119,914
60 days		2,393,267		348,416		2,741,683
90 days or more:
Not in foreclosure		21,781,226		4,473,217		26,254,443
In foreclosure		751,586		33,312		784,898
Foreclosed		12,938		37,131		50,069
	$	30,156,966	$	5,794,041	$	35,951,007
Bankruptcy	$	1,698,418	$	153,179	$	1,851,597
Delinquent loans in COVID-19 pandemic-related forbearance:
30 days	$	1,745,257	$	334,498	$	2,079,755
60 days		1,479,753		259,019		1,738,772
90 days or more		14,904,052		3,690,505		18,594,557
	$	18,129,062	$	4,284,022	$	22,413,084
Custodial funds managed by the Company (2)	$	10,660,517	$	6,086,725	$	16,747,242

(1)	Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act.

(2)

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:


	September 30,		December 31,
State	2021		2020

	(in thousands)
California	$	66,810,277	$	60,591,363
Florida		42,858,332		35,360,190
Texas		40,794,499		34,591,419
Virginia		30,720,994		26,209,701
Maryland		23,338,554		19,974,809
All other states		290,892,991		250,023,348
	$	495,415,647	$	426,750,830

Table of Contents

Note 6—Fair Value

Most of the Company’s assets and certain of its liabilities are measured at or based on their fair values. The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the significant inputs used to determine fair value. These levels are:

●

Level 1—Quoted prices in active markets for identical assets or liabilities.

●

Level 2—Prices determined or determinable using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of the Company.

●

Level 3— Prices determined using significant unobservable inputs. In situations where observable inputs are unavailable, unobservable inputs may be used. 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 in the circumstances.

As a result of the difficulty in observing certain significant valuation inputs affecting “Level 3” fair value assets and liabilities, the Company is required to make judgments regarding these items’ fair values. Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs to be applied in valuing these assets and liabilities and their fair values. Such differences may result in significantly different fair value measurements. Likewise, due to the general illiquidity of some of these assets and liabilities, subsequent transactions may be at values significantly different from those reported.

Fair Value Accounting Elections

The Company identified its MSRs, its mortgage servicing liabilities (“MSLs”) and all of its non-cash financial assets other than Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors, 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. The Company has also identified its ESS financing to be accounted for at fair value as a means of hedging the related MSRs’ fair value risk.

Table of Contents

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:


	September 30, 2021
	Level 1		Level 2		Level 3		Total

	(in thousands)
Assets:
Short-term investments	$	5,046	$	—	$	—	$	5,046
Loans held for sale at fair value		—		7,544,350		2,115,345		9,659,695
Derivative assets:
Interest rate lock commitments		—		—		367,851		367,851
Forward purchase contracts		—		6,730		—		6,730
Forward sales contracts		—		97,720		—		97,720
MBS put options		—		42,067		—		42,067
MBS call options		—		263		—		263
Swaption purchase contracts		—		42,069		—		42,069
Put options on interest rate futures purchase contracts		8,664		—		—		8,664
Call options on interest rate futures purchase contracts		328		—		—		328
Total derivative assets before netting		8,992		188,849		367,851		565,692
Netting		—		—		—		(135,708)
Total derivative assets		8,992		188,849		367,851		429,984
Mortgage servicing rights at fair value		—		—		3,611,120		3,611,120
Investment in PennyMac Mortgage Investment Trust		1,477		—		—		1,477
	$	15,515	$	7,733,199	$	6,094,316	$	13,707,322
Liabilities:
Derivative liabilities:
Interest rate lock commitments	$	—	$	—	$	6,928	$	6,928
Forward purchase contracts		—		86,766		—		86,766
Forward sales contracts		—		22,648		—		22,648
Total derivative liabilities before netting		—		109,414		6,928		116,342
Netting		—		—		—		(102,138)
Total derivative liabilities		—		109,414		6,928		14,204
Mortgage servicing liabilities at fair value		—		—		47,567		47,567
	$	—	$	109,414	$	54,495	$	61,771

Table of Contents


	December 31, 2020
	Level 1		Level 2		Level 3		Total

	(in thousands)
Assets:
Short-term investments	$	15,217	$	—	$	—	$	15,217
Loans held for sale at fair value		—		6,941,231		4,675,169		11,616,400
Derivative assets:
Interest rate lock commitments		—		—		679,961		679,961
Forward purchase contracts		—		133,267		—		133,267
Forward sales contracts		—		1,451		—		1,451
MBS put options		—		14,302		—		14,302
Swaption purchase contracts		—		11,939		—		11,939
Put options on interest rate futures purchase contracts		5,520		—		—		5,520
Call options on interest rate futures purchase contracts		1,391		—		—		1,391
Total derivative assets before netting		6,911		160,959		679,961		847,831
Netting		—		—		—		(136,593)
Total derivative assets		6,911		160,959		679,961		711,238
Mortgage servicing rights at fair value		—		—		2,581,174		2,581,174
Investment in PennyMac Mortgage Investment Trust		1,105		—		—		1,105
	$	23,233	$	7,102,190	$	7,936,304	$	14,925,134
Liabilities:
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value	$	—	$	—	$	131,750	$	131,750
Derivative liabilities:
Interest rate lock commitments		—		—		2,935		2,935
Forward purchase contracts		—		1,276		—		1,276
Forward sales contracts		—		251,149		—		251,149
Total derivative liabilities before netting		—		252,425		2,935		255,360
Netting		—		—		—		(212,722)
Total derivative liabilities		—		252,425		2,935		42,638
Mortgage servicing liabilities at fair value		—		—		45,324		45,324
	$	—	$	252,425	$	180,009	$	219,712

Table of Contents

As shown above, all or a portion of the Company’s loans held for sale, Interest Rate Lock Commitments (“IRLCs”), MSRs, ESS 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:


	Quarter ended September 30, 2021
			Net interest		Mortgage
	Loans held		rate lock		servicing
Assets	for sale		commitments (1)		rights		Total

	(in thousands)
Balance, June 30, 2021	$	3,818,261	$	343,610	$	3,412,648	$	7,574,519
Purchases and issuances, net		5,573,766		449,834		—		6,023,600
Capitalization of interest and advances		40,035		—		—		40,035
Sales and repayments		(4,286,574)		—		—		(4,286,574)
Mortgage servicing rights resulting from loan sales		—		—		432,429		432,429
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		38,698		—		—		38,698
Other factors		—		236,316		(233,957)		2,359
		38,698		236,316		(233,957)		41,057
Transfers from Level 3 to Level 2		(3,068,841)		—		—		(3,068,841)
Transfers to loans held for sale		—		(668,837)		—		(668,837)
Balance, September 30, 2021	$	2,115,345	$	360,923	$	3,611,120	$	6,087,388
Changes in fair value recognized during the quarter relating to assets still held at September 30, 2021	$	16,415	$	360,923	$	(233,957)	$	143,381

(1)	For the purpose of this table, the IRLC asset and liability positions are shown net.


	Quarter ended
Liabilities	September 30, 2021
	(in thousands)
Mortgage servicing liabilities:
Balance, June 30, 2021	$	100,091
Mortgage servicing liabilities resulting from loan sales		33,764
Changes in fair value included in income		(86,288)
Balance, September 30, 2021	$	47,567
Changes in fair value recognized during the quarter relating to liabilities still outstanding at September 30, 2021	$	(86,288)

Table of Contents


	Quarter ended September 30, 2020
			Net interest		Repurchase		Mortgage
	Loans held		rate lock		agreement		servicing
Assets	for sale		commitments (1)		derivatives		rights			Total

	(in thousands)
Balance, June 30, 2020	$	661,719	$	368,064	$	8,187	$	2,213,539	$	3,251,509
Purchases (purchase adjustment) and issuances, net		2,734,321		593,065		—		(287)		3,327,099
Capitalization of interest and advances		22,262		—		—		—		22,262
Sales and repayments		(88,955)		—		(8,270)		—		(97,225)
Mortgage servicing rights resulting from loan sales		—		—		—		245,946		245,946
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		42,029		—		—		—		42,029
Other factors		—		311,790		83		(125,377)		186,496
		42,029		311,790		83		(125,377)		228,525
Transfers from Level 3 to Level 2		(597,134)		—		—		—		(597,134)
Reinstatement from real estate acquired in settlement of loans		755		—		—		—		755
Transfers to loans held for sale		—		(731,474)		—		—		(731,474)
Balance, September 30, 2020	$	2,774,997	$	541,445	$	—	$	2,333,821	$	5,650,263
Changes in fair value recognized during the quarter relating to assets still held at September 30, 2020	$	38,217	$	541,445	$	—	$	(125,377)	$	454,285

(1)	For the purpose of this table, the IRLC asset and liability positions are shown net.


	Quarter ended September 30, 2020
	Excess
	servicing		Mortgage
	spread		servicing
Liabilities	financing		liabilities		Total

	(in thousands)
Balance, June 30, 2020	$	151,206	$	29,858	$	181,064
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		531		—		531
Accrual of interest		2,070		—		2,070
Repayments		(7,682)		—		(7,682)
Changes in fair value included in income		(3,135)		1,840		(1,295)
Balance, September 30, 2020	$	142,990	$	31,698	$	174,688
Changes in fair value recognized during the quarter relating to liabilities still outstanding at September 30, 2020	$	(3,135)	$	1,840	$	(1,295)

Table of Contents


	Nine months ended September 30, 2021
			Net interest		Mortgage
	Loans held		rate lock		servicing
Assets	for sale		commitments (1)		rights		Total

	(in thousands)
Balance, December 31, 2020	$	4,675,169	$	677,026	$	2,581,174	$	7,933,369
Purchases and issuances, net		16,630,301		1,279,701		—		17,910,002
Capitalization of interest and advances		118,879		—		—		118,879
Sales and repayments		(9,081,815)		—		—		(9,081,815)
Mortgage servicing rights resulting from loan sales		—		—		1,386,324		1,386,324
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		266,644		—		—		266,644
Other factors		—		389,138		(356,378)		32,760
		266,644		389,138		(356,378)		299,404
Transfers from Level 3 to Level 2		(10,493,751)		—		—		(10,493,751)
Transfers to real estate acquired in settlement of loans		(82)		—		—		(82)
Transfers to loans held for sale		—		(1,984,942)		—		(1,984,942)
Balance, September 30, 2021	$	2,115,345	$	360,923	$	3,611,120	$	6,087,388
Changes in fair value recognized during the period relating to assets still held at September 30, 2021	$	79,529	$	360,923	$	(356,378)	$	84,074

(1)	For the purpose of this table, the IRLC asset and liability positions are shown net.


	Nine months ended September 30, 2021
	Excess
	servicing		Mortgage
	spread		servicing
Liabilities	financing		liabilities		Total

	(in thousands)
Balance, December 31, 2020	$	131,750	$	45,324	$	177,074
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		557		—		557
Accrual of interest		1,280		—		1,280
Repayments		(134,624)		—		(134,624)
Mortgage servicing liabilities resulting from loan sales		—		98,147		98,147
Changes in fair value included in income		1,037		(95,904)		(94,867)
Balance, September 30, 2021	$	—	$	47,567	$	47,567
Changes in fair value recognized during the period relating to liabilities still outstanding at September 30, 2021	$	—	$	(95,904)	$	(95,904)

Table of Contents


	Nine months ended September 30, 2020
			Net interest		Repurchase		Mortgage
	Loans held		rate lock		agreement		servicing
Assets	for sale		commitments (1)		derivatives		rights		Total

	(in thousands)
Balance, December 31, 2019	$	383,878	$	136,650	$	8,187	$	2,926,790	$	3,455,505
Purchases and issuances, net		4,664,408		1,431,194		—		25,473		6,121,075
Capitalization of interest and advances		55,283		—		—		—		55,283
Sales and repayments		(888,247)		—		(8,270)		—		(896,517)
Mortgage servicing rights resulting from loan sales		—		—		—		753,795		753,795
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		35,638		—		—		—		35,638
Other factors		—		808,906		83		(1,372,237)		(563,248)
		35,638		808,906		83		(1,372,237)		(527,610)
Transfers from Level 3 to Level 2		(1,476,027)		—		—		—		(1,476,027)
Transfers to real estate acquired in settlement of loans		(691)		—		—		—		(691)
Reinstatement from real estate acquired in settlement of loans		755		—		—		—		755
Transfers of interest rate lock commitments to loans held for sale		—		(1,835,305)		—		—		(1,835,305)
Balance, September 30, 2020	$	2,774,997	$	541,445	$	—	$	2,333,821	$	5,650,263
Changes in fair value recognized during the period relating to assets still held at September 30, 2020	$	31,389	$	541,445	$	—	$	(1,372,237)	$	(799,403)

(1)	For the purpose of this table, the IRLC asset and liability positions are shown net.


	Nine months ended September 30, 2020
	Excess
	servicing		Mortgage
	spread		servicing
Liabilities	financing		liabilities		Total

	(in thousands)
Balance, December 31, 2019	$	178,586	$	29,140	$	207,726
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust		1,393		—		1,393
Accrual of interest		6,416		—		6,416
Repayments		(25,112)		—		(25,112)
Mortgage servicing liabilities resulting from loan sales		—		6,576		6,576
Changes in fair value included in income		(18,293)		(4,018)		(22,311)
Balance, September 30, 2020	$	142,990	$	31,698	$	174,688
Changes in fair value recognized during the period relating to liabilities still outstanding at September 30, 2020	$	(18,293)	$	(4,018)	$	(22,311)

The Company had transfers among the fair value levels arising from the return to salability in the active secondary market of certain loans held for sale and from transfers of IRLCs to loans held for sale at fair value upon purchase or funding.

Table of Contents

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:


	Quarter ended September 30,
	2021						2020
	Net gains on		Net				Net gains on		Net
	loans held		loan				loans held		loan
	for sale at		servicing				for sale at		servicing
	fair value		fees		Total		fair value		fees		Total

	(in thousands)
Assets:
Loans held for sale	$	645,536	$	—	$	645,536	$	773,313	$	—	$	773,313
Mortgage servicing rights		—		(233,957)		(233,957)		—		(125,377)		(125,377)
	$	645,536	$	(233,957)	$	411,579	$	773,313	$	(125,377)	$	647,936
Liabilities:
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust	$	—	$	—	$	—	$	—	$	3,135	$	3,135
Mortgage servicing liabilities		—		86,288		86,288		—		(1,840)		(1,840)
	$	—	$	86,288	$	86,288	$	—	$	1,295	$	1,295


	Nine months ended September 30,
	2021						2020
	Net gains on		Net				Net gains on		Net
	loans held		loan				loans held		loan
	for sale at		servicing				for sale at		servicing
	fair value		fees		Total		fair value		fees		Total

	(in thousands)
Assets:
Loans held for sale	$	2,057,496	$	—	$	2,057,496	$	1,911,828	$	—	$	1,911,828
Mortgage servicing rights		—		(356,378)		(356,378)		—		(1,372,237)		(1,372,237)
	$	2,057,496	$	(356,378)	$	1,701,118	$	1,911,828	$	(1,372,237)	$	539,591
Liabilities:
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust	$	—	$	(1,037)	$	(1,037)	$	—	$	18,293	$	18,293
Mortgage servicing liabilities		—		95,904		95,904		—		4,018		4,018
	$	—	$	94,867	$	94,867	$	—	$	22,311	$	22,311

Following are the fair value and related principal amounts due upon maturity of loans held for sale:


	September 30, 2021						December 31, 2020
			Principal						Principal
			amount						amount
	Fair		due upon				Fair		due upon
Loans held for sale	value		maturity		Difference		value		maturity		Difference

	(in thousands)
Current through 89 days delinquent	$	9,418,521	$	9,054,408	$	364,113	$	11,304,308	$	10,743,814	$	560,494
90 days or more delinquent:
Not in foreclosure		220,072		218,659		1,413		275,419		280,595		(5,176)
In foreclosure		21,102		22,059		(957)		36,673		39,529		(2,856)
	$	9,659,695	$	9,295,126	$	364,569	$	11,616,400	$	11,063,938	$	552,462

Table of Contents

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	Level 1		Level 2		Level 3		Total

	(in thousands)
September 30, 2021	$	—	$	—	$	2,948	$	2,948
December 31, 2020	$	—	$	—	$	1,450	$	1,450

The following table summarizes the (losses) gains recognized on assets when they were remeasured at fair value on a nonrecurring basis:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Real estate acquired in settlement of loans	$	(284)	$	(825)	$	(912)	$	(2,059)

Fair Value of Financial Instruments Carried at Amortized Cost

The Company’s Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors, Assets sold under agreements to repurchase, Mortgage loan participation purchase and sale agreements, Obligations under capital lease, Notes payable secured by mortgage servicing assets and Unsecured senior notes are carried at amortized cost.

These assets and 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 assets and liabilities other than the GMSR 2018-GT1 Term Notes and GMSR 2018-GT2 Term Notes 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 Notes payable secured by mortgage servicing assets and the Unsecured senior notes using non-affiliate broker indications of fair value. The fair value and carrying value of these notes are summarized below:


	September 30, 2021				December 31, 2020
	Fair value		Carrying value		Fair value		Carrying value

	(in thousands)
Notes payable secured by mortgage servicing assets	$	1,302,642	$	1,297,176	$	1,268,304	$	1,295,840
Unsecured senior notes	$	1,781,250	$	1,783,230	$	685,750	$	645,820

Valuation Governance

Most of the Company’s financial assets, and all of its MSRs, ESS, derivative liabilities 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, ESS, 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 the responsibility for estimating the fair value of these items to specialized staff and subjects the valuation process to significant senior management oversight. The Company’s Financial Analysis and Valuation group (the “FAV group”) is the Company’s specialized staff responsible for estimating the fair values of “Level 3” fair value assets and liabilities other than IRLCs.

Table of Contents

With respect to the non-IRLC “Level 3” valuations, the FAV group reports to the Company’s senior management valuation committee, which oversees the valuations. The FAV group 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 to the Company’s senior management valuation committee. The Company’s senior management valuation committee includes the Company’s chief operating, financial, investment and risk officers as well as other senior members of the Company’s finance, capital markets and risk management staffs.

The FAV group is responsible for reporting to the Company’s senior management valuation committee on the changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the valuation and any changes in model methods and inputs. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation of changes to the significant inputs to the models.

The Company has assigned responsibility for developing the fair values of IRLCs to its Capital Markets Risk Management staff. The fair values developed by the Capital Markets Risk Management staff are reviewed by the Company’s Capital Markets Operations group.

Valuation Techniques and Inputs

Following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” fair value assets and liabilities:

Loans Held for Sale

Most of the Company’s loans held for sale at fair value are saleable into active markets and are therefore categorized as “Level 2” fair value assets. The fair values of “Level 2” fair value loans are determined using their contracted selling price or quoted market price or market price equivalent.

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:

●

Government guaranteed or insured loans purchased by the Company from Ginnie Mae guaranteed pools in its loan servicing portfolio. The Company’s right to purchase government guaranteed or insured loans arises as the result of the loan being at least three months delinquent on the date of purchase by the Company and provides an alternative to the Company’s obligation to continue advancing principal and interest at the coupon rate of the related Ginnie Mae security. Such loans may be resold to investors and thereafter may be repurchased to the extent eligible for resale into a new Ginnie Mae guaranteed security.

Loans become eligible for resale into a new Ginnie Mae security when the loans become current either through completion of a modification of the loan’s terms or after six months of timely payments following either the completion of certain types of payment deferral programs or borrower reperformance and when the issuance date of the new security is at least 210 days after the date the loan was last delinquent.

●

Loans that are not saleable into active markets due to identification of a defect by the Company or to the repurchase by the Company of a loan with an identified defect.

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 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.

Table of Contents

Following is a quantitative summary of key “Level 3” fair value inputs used in the valuation of loans held for sale:



	September 30, 2021		December 31, 2020
Fair value (in thousands)	$	2,115,345	$	4,675,169
Key inputs (1):
Discount rate:
Range		2.1% – 9.2%		2.8% – 9.2%
Weighted average		2.2%		2.8%
Twelve-month projected housing price index change:
Range		5.9% – 6.8%		2.7% – 3.5%
Weighted average		6.4%		3.0%
Voluntary prepayment/resale speed (2):
Range		0.4% – 33.9%		0.4% – 31.3%
Weighted average		22.7%		21.9%
Total prepayment speed (3):
Range		0.4% – 42.9%		0.5% – 42.9%
Weighted average		28.5%		29.2%

(1)	Weighted average inputs are based on the fair value of the “Level 3” loans.

(2)	Voluntary prepayment/resale speed is measured using Life Voluntary Conditional Prepayment Rate (“CPR”).

(3)	Total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayment and resale rates.

Changes in fair value of loans held for sale attributable to changes in the loan’s instrument-specific credit risk are measured with reference to the change in the respective loan’s delinquency status and performance history at period end from the later of the beginning of the period or acquisition date. Changes in fair value of loans held for sale are included in Net gains on loans held for sale at fair value in the Company’s consolidated statements of income.

Derivative Financial Instruments

Interest Rate Lock Commitments

The Company categorizes IRLCs as “Level 3” fair value assets or liabilities. The Company estimates the fair value 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 loan 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 estimated fair value of MSRs attributable to the mortgage loans it has committed to purchase and the pull-through rate. Significant changes in the pull-through rate or the MSR component of the IRLCs, in isolation, could result in significant changes in the IRLCs’ fair value measurement. 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 consolidated statements of income.

Table of Contents

Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:



	September 30, 2021		December 31, 2020
Fair value (in thousands) (1)	$	360,923	$	677,026
Key inputs (2):
Pull-through rate:
Range		8.0% – 100%		10.1% – 100%
Weighted average		80.3%		82.7%
Mortgage servicing rights value expressed as:
Servicing fee multiple:
Range		(9.7) – 6.5		0.7 – 5.3
Weighted average		4.1		3.6
Percentage of loan commitment amount
Range		(2.1)% – 3.0%		0.1% – 2.6%
Weighted average		1.4%		1.2%

(1)	For purpose of this table, IRLC asset and liability positions are shown net.

(2)	Weighted average inputs are based on the committed amounts.

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 value of hedging derivatives are included in Net gains on loans held for sale at fair value, or Net loan servicing fees – Hedging results, as applicable, in the consolidated statements of income.

Mortgage Servicing Rights

MSRs are categorized as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the estimation of the fair value of MSRs include the applicable pricing spread (discount rate), prepayment rate (prepayment speed), 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 consolidated statements of income.

Table of Contents

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:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(Amount recognized and unpaid principal balance of underlying loans in thousands)
MSR and pool characteristics:
Amount recognized	$	432,429	$	245,946	$	1,386,324	$	753,795
Unpaid principal balance of underlying loans	$	33,697,228	$	25,369,941	$	105,470,580	$	63,766,627
Weighted average servicing fee rate (in basis points)		34		32		33		36
Key inputs (1):
Pricing spread (2):
Range		6.0% – 16.9%		8.0% – 17.6%		6.0% – 16.9%		6.8% – 18.1%
Weighted average		8.5%		9.6%		9.0%		9.3%
Annual total prepayment speed (3):
Range		7.2% – 31.0%		7.2% – 41.0%		6.2% – 31.0%		7.2% – 49.8%
Weighted average		9.2%		10.4%		8.5%		12.4%
Equivalent average life (in years):
Range		3.0 – 8.4		2.3 – 9.1		3.0 – 9.0		1.5 – 9.1
Weighted average		7.7		7.3		8.1		6.6
Per-loan annual cost of servicing:
Range		$80 – $117		$80 – $110		$80 – $117		$77 – $110
Weighted average		$102		$102		$104		$100

(1)	Weighted average inputs are based on the UPB of the underlying loans.

(2)

Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar London Interbank Offered Rate (“LIBOR”)/swap curve for purposes of discounting cash flows relating to MSRs.

(3)	Annual total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided as supplementary information.

Table of Contents

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:


	September 30, 2021	December 31, 2020

	(Fair value, unpaid principal balance of underlying
	loans and effect on fair value amounts in thousands)
Fair value	$ 3,611,120	$ 2,581,174
Pool characteristics:
Unpaid principal balance of underlying loans	$ 259,220,948	$ 238,410,809
Weighted average note interest rate	3.2%	3.6%
Weighted average servicing fee rate (in basis points)	34	35
Key inputs (1):
Pricing spread (2):
Range	5.3% – 16.0%	8.0% – 17.6%
Weighted average	8.1%	10.1%
Effect on fair value of:
5% adverse change	($59,086)	($46,356)
10% adverse change	($116,282)	($90,936)
20% adverse change	($225,331)	($175,137)
Annual total prepayment speed (3):
Range	7.9% – 28.2%	10.1% – 32.9%
Weighted average	10.3%	13.7%
Equivalent average life (in years):
Range	3.0 – 7.8	2.3 – 7.7
Weighted average	6.9	6.0
Effect on fair value of:
5% adverse change	($76,847)	($66,536)
10% adverse change	($150,928)	($130,253)
20% adverse change	($291,339)	($249,843)
Per-loan annual cost of servicing:
Range	$79 – $117	$79 – $117
Weighted average	$106	$107
Effect on fair value of:
5% adverse change	($31,700)	($25,482)
10% adverse change	($63,399)	($50,964)
20% adverse change	($126,799)	($101,929)

(1)	Weighted average inputs are based on the UPB of the underlying loans.

(2)	The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to MSRs.

(3)	Annual total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided as supplementary information.

The preceding sensitivity analyses are limited in that they were performed as of a particular date; only contemplate the movements in the indicated inputs; do not incorporate changes to other inputs; are subject to the accuracy of the models and inputs used; and do not incorporate other factors that would affect the Company’s overall financial performance in such events, including operational adjustments made by management to account for changing circumstances. For these reasons, the preceding estimates should not be viewed as earnings forecasts.

Table of Contents

Excess Servicing Spread Financing at Fair Value

ESS is categorized as a “Level 3” fair value liability. Because ESS is a claim to a portion of the cash flows from MSRs, the fair value measurement of the ESS is similar to that of MSRs. The Company uses the same discounted cash flow approach to measuring the ESS as it uses to measure MSRs except that certain inputs relating to the cost to service the mortgage loans underlying the MSRs and certain ancillary income are not included as these cash flows do not accrue to the holder of the ESS.

The key inputs used in the estimation of ESS fair value include pricing spread and prepayment speed. Significant changes to either of those inputs in isolation could result in a significant change in the fair value of ESS. Changes in these key inputs are not directly related.

ESS is generally subject to fair value increases when mortgage interest rates increase. Increasing mortgage interest rates normally discourage mortgage refinancing activity. Decreased refinancing activity increases the life of the mortgage loans underlying the ESS, thereby increasing the fair value of this financing. Changes in the fair value of ESS are included in Net loan servicing fees—Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust. During the quarter ended March 31, 2021, the Company repaid its outstanding ESS financing payable to PMT.

Following are the key inputs used in determining the fair value of ESS financing:


		December 31,
		2020
Fair value (in thousands)		$ 131,750
Pool characteristics:
Unpaid principal balance of underlying loans (in thousands)		$ 15,833,050
Average servicing fee rate (in basis points)		34
Average excess servicing spread (in basis points)		19
Key inputs (1):
Pricing spread (2):
Range		4.9% – 5.3%
Weighted average		5.1%
Annual total prepayment speed (3):
Range		9.6% – 18.3%
Weighted average		11.7%
Equivalent average life (in years):
Range		2.3 – 6.6
Weighted average		5.8

(1)	Weighted average inputs are based on the UPB of the underlying loans.

(2)	The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to ESS.

(3)	Annual total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided as supplementary information.

Mortgage Servicing Liabilities

MSLs are categorized as “Level 3” fair value liabilities. The Company uses a discounted cash flow approach to estimate the fair value of MSLs. The key inputs used in the estimation of the fair value of MSLs include the applicable pricing spread, annual total prepayment speed, and the per-loan annual cost of servicing the underlying loans. Changes in the fair value of MSLs are included in Net servicing fees—Change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.

Table of Contents

Following are the key inputs used in determining the fair value of MSLs:


		September 30,		December 31,
		2021		2020
Fair value (in thousands)	$	47,567	$	45,324
Pool characteristics:
Unpaid principal balance of underlying loans (in thousands)	$	8,885,785	$	2,857,492
Servicing fee rate (in basis points)		24		25
Key inputs (1):
Pricing spread (2)		8.3%		7.6%
Annual total prepayment speed (3)		29.1%		33.3%
Equivalent average life (in years)		4.0		3.2
Per-loan annual cost of servicing	$	258	$	305

(1)

During the quarter ended September 30, 2021, significant changes were made to valuation inputs used to estimate the fair value of MSLs in recognition of the observed increase in the proportion of performing government loans and reduced expected costs and losses from defaulted government insured or guaranteed loans underlying the Company’s MSLs.

(2)	The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to MSLs.

(3)	Annual total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided as supplementary information.

Note 7—Loans Held for Sale at Fair Value

Loans held for sale at fair value include the following:


	September 30,		December 31,
Loan type	2021		2020

	(in thousands)
Government-insured or guaranteed	$	5,588,553	$	5,683,786
Conventional conforming		1,955,797		1,257,445
Purchased from Ginnie Mae pools serviced by the Company		2,069,120		4,661,378
Repurchased pursuant to representations and warranties		46,225		13,791
	$	9,659,695	$	11,616,400
Fair value of loans pledged to secure:
Assets sold under agreements to repurchase	$	8,826,793	$	10,912,178
Mortgage loan participation purchase and sale agreements		541,313		545,500
	$	9,368,106	$	11,457,678

Note 8—Derivative Financial Instruments

The Company holds and issues derivative financial instruments in connection with its operating activities. Derivative financial instruments are created as a result of 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 as a result of the Company’s loan production activities are IRLCs that are created when the Company commits to purchase or originate a loan for sale.

The Company engages in interest rate risk management activities in an effort to moderate the effect of changes in market interest rates on the fair value of certain of the its assets. To manage this fair value risk resulting from interest rate risk, the Company uses derivative financial instruments acquired with the intention of reducing the risk that changes in market interest rates will result in unfavorable changes in the fair value of the Company’s IRLCs, inventory of loans held for sale and its MSRs.

The Company does not designate and qualify any of its derivatives for hedge accounting. The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.

Table of Contents

Derivative Notional Amounts and Fair Value of Derivatives

The Company had the following derivative financial instruments recorded on its consolidated balance sheets:


	September 30, 2021					December 31, 2020
		Fair value					Fair value
	Notional	Derivative		Derivative		Notional	Derivative		Derivative
Instrument	amount (1)	assets		liabilities		amount (1)	assets		liabilities

	(in thousands)
Not subject to master netting arrangements:
Interest rate lock commitments	15,804,462	$	367,851	$	6,928	20,624,535	$	679,961	$	2,935
Used for hedging purposes (2):
Forward purchase contracts	23,912,210		6,730		86,766	31,689,543		133,267		1,276
Forward sales contracts	35,679,195		97,720		22,648	50,438,967		1,451		251,149
MBS put options	10,000,000		42,067		—	12,025,000		14,302		—
MBS call options	2,200,000		263		—	—		—		—
Swaption purchase contracts	8,150,000		42,069		—	3,375,000		11,939		—
Put options on interest rate futures purchase contracts	800,000		8,664		—	4,750,000		5,520		—
Call options on interest rate futures purchase contracts	1,450,000		328		—	850,000		1,391		—
Treasury futures purchase contracts	755,000		—		—	1,065,000		—		—
Treasury futures sale contracts	2,215,000		—		—	1,555,000		—		—
Interest rate swap futures purchase contracts	5,225,000		—		—	4,801,700		—		—
Interest rate swap futures sale contracts	1,800,000		—		—	711,700		—		—
Total derivatives before netting			565,692		116,342			847,831		255,360
Netting			(135,708)		(102,138)			(136,593)		(212,722)
		$	429,984	$	14,204		$	711,238	$	42,638
Deposits (received from) placed with derivative counterparties, net		$	(33,570)				$	76,129

(1)	Notional amounts provide an indication of the volume of the Company’s derivative activity.

(2)	All of the derivatives used for hedging purposes are interest rate derivatives and are used as economic hedges.

Table of Contents

Derivative Balances 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.

Offsetting of Derivative Assets

Following are summaries of derivative assets and related netting amounts:


	September 30, 2021						December 31, 2020
	Gross		Gross amount		Net amount		Gross		Gross amount		Net amount
	amount of		offset in the		of assets in the		amount of		offset in the		of assets in the
	recognized		consolidated		consolidated		recognized		consolidated		consolidated
	assets		balance sheet		balance sheet		assets		balance sheet		balance sheet

	(in thousands)
Derivatives not subject to master netting arrangements - IRLCs	$	367,851	$	—	$	367,851	$	679,961	$	—	$	679,961
Derivatives subject to master netting arrangements:
Forward purchase contracts		6,730		—		6,730		133,267		—		133,267
Forward sale contracts		97,720		—		97,720		1,451		—		1,451
MBS put options		42,067		—		42,067		14,302		—		14,302
MBS call options		263		—		263		—		—		—
Swaption purchase contracts		42,069		—		42,069		11,939		—		11,939
Put options on interest rate futures purchase contracts		8,664		—		8,664		5,520		—		5,520
Call options on interest rate futures purchase contracts		328		—		328		1,391		—		1,391
Netting		—		(135,708)		(135,708)		—		(136,593)		(136,593)
		197,841		(135,708)		62,133		167,870		(136,593)		31,277
	$	565,692	$	(135,708)	$	429,984	$	847,831	$	(136,593)	$	711,238

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 qualifying for netting.


	September 30, 2021								December 31, 2020
			Gross amount not								Gross amount not
			offset in the								offset in the
			consolidated								consolidated
	Net amount		balance sheet						Net amount		balance sheet
	of assets in the				Cash				of assets in the				Cash
	consolidated		Financial		collateral		Net		consolidated		Financial		collateral		Net
	balance sheet		instruments		received		amount		balance sheet		instruments		received		amount

	(in thousands)
Interest rate lock commitments	$	367,851	$	—	$	—	$	367,851	$	679,961	$	—	$	—	$	679,961
Citibank, N.A.		17,481		—		—		17,481		2,026		—		—		2,026
Wells Fargo Bank, N.A.		9,995		—		—		9,995		—		—		—		—
RJ O'Brien		8,992		—		—		8,992		6,910		—		—		6,910
Morgan Stanley Bank, N.A.		7,773		—		—		7,773		2,443		—		—		2,443
JPMorgan Chase Bank, N.A.		6,985		—		—		6,985		17,149		—		—		17,149
Bank of America, N.A.		6,963		—		—		6,963		—		—		—		—
Others		3,944		—		—		3,944		2,749		—		—		2,749
	$	429,984	$	—	$	—	$	429,984	$	711,238	$	—	$	—	$	711,238

Table of Contents

Offsetting of Derivative Liabilities and Financial Liabilities

Following is a summary of net derivative liabilities and assets sold under agreements to repurchase and related netting amounts. Assets sold under agreements to repurchase do not qualify for netting.


	September 30, 2021						December 31, 2020
					Net						Net
					amount						amount
	Gross		Gross amount		of liabilities		Gross		Gross amount		of liabilities
	amount of		offset in the		in the		amount of		offset in the		in the
	recognized		consolidated		consolidated		recognized		consolidated		consolidated
	liabilities		balance sheet		balance sheet		liabilities		balance sheet		balance sheet

	(in thousands)
Derivatives not subject to master netting arrangements – Interest rate lock commitments	$	6,928	$	—	$	6,928	$	2,935	$	—	$	2,935
Derivatives subject to a master netting arrangement:
Forward purchase contracts		86,766		—		86,766		1,276		—		1,276
Forward sale contracts		22,648		—		22,648		251,149		—		251,149
Netting		—		(102,138)		(102,138)		—		(212,722)		(212,722)
		109,414		(102,138)		7,276		252,425		(212,722)		39,703
Total derivatives		116,342		(102,138)		14,204		255,360		(212,722)		42,638
Assets sold under agreements to repurchase:
Amount outstanding		6,903,302		—		6,903,302		9,663,995		—		9,663,995
Unamortized debt issuance cost		(6,145)		—		(6,145)		(9,198)		—		(9,198)
		6,897,157		—		6,897,157		9,654,797		—		9,654,797
	$	7,013,499	$	(102,138)	$	6,911,361	$	9,910,157	$	(212,722)	$	9,697,435

Table of Contents

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 qualify under the accounting guidance for netting. All assets sold under agreements to repurchase are secured by sufficient collateral or have fair value that exceeds the liability amount recorded on the consolidated balance sheets.


	September 30, 2021								December 31, 2020
			Gross amounts								Gross amounts
			not offset in the								not offset in the
	Net amount		consolidated						Net amount		consolidated
	of liabilities		balance sheet						of liabilities		balance sheet
	in the				Cash				in the				Cash
	consolidated		Financial		collateral		Net		consolidated		Financial		collateral		Net
	balance sheet		instruments		pledged		amount		balance sheet		instruments		pledged		amount

	(in thousands)
Interest rate lock commitments	$	6,928	$	—	$	—	$	6,928	$	2,935	$	—	$	—	$	2,935
Credit Suisse First Boston Mortgage Capital LLC		2,016,825		(2,016,825)		—		—		3,947,752		(3,943,149)		—		4,603
Bank of America, N.A.		1,374,800		(1,374,800)		—		—		634,523		(626,550)		—		7,973
Royal Bank of Canada		881,805		(881,805)		—		—		406,348		(406,348)		—		—
JPMorgan Chase Bank, N.A.		754,120		(754,120)		—		—		2,752,279		(2,752,279)		—		—
Barclays Capital		658,392		(657,729)		—		663		596,729		(596,729)		—		—
Goldman Sachs		299,560		(297,957)		—		1,603		—		—		—		—
BNP Paribas		298,357		(297,821)		—		536		337,823		(336,545)		—		1,278
Morgan Stanley Bank, N.A.		247,579		(247,579)		—		—		331,546		(331,546)		—		—
Wells Fargo Bank, N.A.		223,713		(223,713)		—		—		169,085		(165,224)		—		3,861
Citibank, N.A.		150,953		(150,953)		—		—		505,625		(505,625)		—		—
Mizuho Securities		2,772		—		—		2,772		6,491		—		—		6,491
Federal Home Loan Mortgage Corporation		—		—		—		—		12,928		—		—		12,928
Others		1,702		—		—		1,702		2,569		—		—		2,569
	$	6,917,506	$	(6,903,302)	$	—	$	14,204	$	9,706,633	$	(9,663,995)	$	—	$	42,638

Following are the gains (losses) recognized by the Company on derivative financial instruments and the income statement lines where such gains and losses are included:


		Quarter ended September 30,				Nine months ended September 30,
Derivative activity	Income statement line	2021		2020		2021		2020

		(in thousands)
Interest rate lock commitments	Net gains on loans held for sale at fair value (1)	$	17,313	$	173,381	$	(316,103)	$	404,795
Repurchase agreement derivatives	Interest expense	$	—	$	83	$	—	$	83
Hedged item:
Interest rate lock commitments and loans held for sale	Net gains on loans held for sale at fair value	$	(19,294)	$	(77,320)	$	275,510	$	(403,992)
Mortgage servicing rights	Net loan servicing fees–Hedging results	$	(86,459)	$	6,521	$	(437,492)	$	1,027,327

(1)

Represents net increase (decrease) in fair value of IRLCs from the beginning to the end of the period. Amounts recognized at the date of commitment and fair value changes recognized during the period until purchase of the underlying loans or the cancellation of the commitment are shown in the rollforward of IRLCs for the period in Note 6 – Fair Value – Assets and Liabilities Measured at Fair Value on a Recurring Basis.

Table of Contents

Note 9—Mortgage Servicing Rights and Mortgage Servicing Liabilities

Mortgage Servicing Rights at Fair Value

The activity in MSRs is as follows:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Balance at beginning of period	$	3,412,648	$	2,213,539	$	2,581,174	$	2,926,790
Additions:
Resulting from loan sales		432,429		245,946		1,386,324		753,795
Purchases (purchase adjustments), net		—		(287)		—		25,473
		432,429		245,659		1,386,324		779,268
Change in fair value due to:
Changes in valuation inputs used in valuation model (1)		(119,674)		(26,208)		(46,298)		(1,040,751)
Other changes in fair value (2)		(114,283)		(99,169)		(310,080)		(331,486)
Total change in fair value		(233,957)		(125,377)		(356,378)		(1,372,237)
Balance at end of period	$	3,611,120	$	2,333,821	$	3,611,120	$	2,333,821

					September 30,		December 31,
					2021		2020

					(in thousands)
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets					$	3,600,978	$	2,577,964

(1)	Principally reflects changes in pricing spread, annual total prepayment speed, per loan annual cost of servicing and UPB of underlying loan inputs.

(2)	Represents changes due to realization of cash flows.

Mortgage Servicing Liabilities at Fair Value

The activity in MSLs is summarized below:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Balance at beginning of period	$	100,091	$	29,858	$	45,324	$	29,140
Mortgage servicing liabilities resulting from loan sales		33,764		—		98,147		6,576
Changes in fair value due to (1):
Changes in valuation inputs used in valuation model		(54,222)		10,822		(36,375)		24,927
Other changes in fair value (2)		(32,066)		(8,982)		(59,529)		(28,945)
Total change in fair value		(86,288)		1,840		(95,904)		(4,018)
Balance at end of period	$	47,567	$	31,698	$	47,567	$	31,698

(1)

Principally reflects changes in expected borrower performance and servicer losses given default. During the quarter and nine months ended September 30, 2021, significant changes were made to valuation inputs used to estimate the fair value of MSLs in recognition of the observed increase in the proportion of performing government insured or guaranteed loans and reduced expected costs and losses from defaulted government insured or guaranteed loans underlying the Company’s MSLs.

(2)	Represents changes due to realization of cash flows.

Table of Contents

Contractual servicing fees relating to MSRs and MSLs are recorded in Net loan servicing fees—Loan servicing fees—From non-affiliates on the 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:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Contractual servicing fees	$	216,592	$	203,696	$	635,620	$	601,527
Other fees:
Late charges		7,480		7,615		22,076		28,718
Other		7,457		6,960		23,079		17,781
	$	231,529	$	218,271	$	680,775	$	648,026

Note 10—Leases

The Company has operating lease agreements relating to its facilities. The Company’s operating lease agreements have remaining terms ranging from less than one year to ten 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:



	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(dollars in thousands)
Lease expense:
Operating leases	$	4,671	$	4,144	$	13,545	$	12,110
Short-term leases		196		457		666		937
Net lease expense included in Occupancy and equipment	$	4,867	$	4,601	$	14,211	$	13,047

Other information:
Payments for operating leases	$	5,210	$	4,418	$	15,395	$	13,212
Operating lease right-of-use assets recognized	$	13,058	$	1,721	$	20,871	$	8,219
Period end weighted averages:
Remaining lease term (in years)						6.0		6.4
Discount rate						4.0%		4.2%

Lease payments of the Company’s operating lease liabilities are summarized below:


Twelve months ending September 30,	Operating leases
	(in thousands)
2022	$	21,207
2023		21,875
2024		21,917
2025		21,529
2026		17,806
Thereafter		23,421
Total lease payments		127,755
Less imputed interest		(22,303)
Operating lease liability	$	105,452

Table of Contents

Note 11—Other Assets

Other assets are summarized below:


		September 30,		December 31,
	2021		2020

	(in thousands)
Capitalized software, net	$	97,627	$	81,434
Margin deposits		93,318		116,881
Prepaid expenses		67,308		53,975
Deposits securing Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets		64,583		153,054
Furniture, fixture, equipment and building improvements, net		31,842		32,217
Servicing fees receivable, net		20,590		42,282
Real estate acquired in settlement of loans		7,643		12,158
Other		184,865		200,168
	$	567,776	$	692,169
Deposits pledged to secure Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets	$	64,583	$	153,054
Assets pledged to secure Obligations under capital lease:
Capitalized software, net		5,277		7,675
Furniture, fixture, equipment and building improvements, net		4,504		5,689
	$	74,364	$	166,418

Note 12—Short-Term Borrowings

The borrowing facilities described throughout these Notes 12 and 13 contain various covenants, including financial covenants governing the Company’s net worth, debt-to-equity ratio, profitability and liquidity. Management believes that the Company was in compliance with these covenants as of September 30, 2021.

Assets Sold Under Agreements to Repurchase

The Company has multiple borrowing facilities in the form of asset sales under agreements to repurchase. These borrowing facilities are secured by loans held for sale at fair value or participation certificates backed by mortgage servicing assets. Eligible assets are sold at advance rates based on the fair value (as determined by the lender) of the assets sold. Interest is charged at a rate based on LIBOR. Loans and participation certificates financed under these agreements may be re-pledged by the lenders.

Fannie Mae MSR Facility

On April 28, 2021, the Company, through PLS, PennyMac, and PFSI Issuer Trust - FMSR, entered into a structured finance transaction, allowing PLS to finance Fannie Mae MSRs and ESS (the “Fannie Mae MSR Facility”). In connection with the Fannie Mae MSR Facility, PLS pledges and/or sells to PFSI Issuer Trust - FMSR participation certificates representing beneficial interests in MSRs and ESS pursuant to the terms of a master repurchase agreement, dated as of April 28, 2021, by and between PLS, PFSI Issuer Trust - FMSR and PennyMac (the “PC Repurchase Agreement”). In return, PFSI Issuer Trust - FMSR (a) has issued to PLS the Series 2021-MSRVF1 Note, dated April 28, 2021, known as the “PFSI ISSUER TRUST - FMSR Collateralized Notes, Series 2021-MSRVF1” (the “FMSR VFN”), and (b) may, from time to time, issue to institutional investors term notes, in each case secured on a pari passu basis by the participation certificates relating to the MSRs and ESS. The maximum principal balance of the FMSR VFN is $1 billion.

Table of Contents

Under the PC Repurchase Agreement, PLS grants to PFSI Issuer Trust – FMSR a security interest in all of its right, title and interest in, to and under participation certificates representing beneficial interests in MSRs and ESS, including all of its rights and interests in any MSRs and ESS it thereafter owns or acquires. The principal amount paid by PFSI Issuer Trust - FMSR for the participation certificates under the PC Repurchase Agreement is based upon a percentage of the market value of the underlying MSRs (inclusive of the ESS). Upon PLS’s repurchase of the participation certificates, PLS is required to repay PFSI Issuer Trust - FMSR the principal amount relating thereto plus accrued interest (at a rate reflective of the current market and consistent with the weighted average note rate of the FMSR VFN and any outstanding term notes) to the date of such repurchase.

PLS also entered into a master repurchase agreement on April 28, 2021 (the “FMSR VFN Repurchase Agreement”) with Credit Cuisse First Boston Mortgage Capital LLC (“CSFB”), as administrative agent, and Credit Suisse AG, Cayman Islands Branch (“CSCIB”), as purchaser, pursuant to which PLS sold the FMSR VFN to CSCIB with an agreement to repurchase such FMSR VFN at a later date. The FMSR VFN Repurchase Agreement has an initial term extending through March 31, 2023. The FMSR VFN Repurchase Agreement provides for a maximum purchase price of $250 million, all of which is committed.

The principal amount paid by CSCIB for the FMSR VFN is based upon a percentage of the market value of such FMSR VFN. Upon PLS’s repurchase of the FMSR VFN, PLS is required to repay CSCIB the principal amount relating thereto plus accrued interest (at a rate reflective of the current market based on a spread above LIBOR with index replacement provisions related to the transition from LIBOR) to the date of such repurchase.

Under the FMSR VFN Repurchase Agreement, in the event any such transactions are deemed to be loans and not sales and purchases, PLS granted to CSCIB a security interest in all of its right, title and interest in, to and under the FMSR VFN and all rights to reimbursement or payment of the FMSR VFN and/or amounts due in respect thereof.

Ginnie Mae MSR Facility

In connection with the GNMA MSR Facility, PLS pledges and/or sells to the Issuer Trust participation certificates representing beneficial interests in MSRs and ESS pursuant to the terms of the PC Repurchase Agreement. In return, the Issuer Trust (a) has issued to PLS, pursuant to the terms of an indenture, the Series 2016-MSRVF1 Variable Funding Note, dated December 19, 2016, known as the “PNMAC GMSR ISSUER TRUST MSR Collateralized Notes, Series 2016-MSRVF1” (the “VFN”), and (b) has issued and may, from time to time pursuant to the terms of any supplemental indenture, issue to institutional investors additional term notes, in each case secured on a pari passu basis by the participation certificates relating to the MSRs and ESS. The maximum principal balance of the VFN is $1 billion.

On July 30, 2021, the Company through two of its indirect, wholly owned subsidiaries, Issuer Trust and PLS, and its direct wholly owned subsidiary, PennyMac, entered into agreements to syndicate two existing variable funding note repurchase agreements, as part of the structured finance transaction that PLS uses to finance Ginnie Mae mortgage servicing rights and related excess servicing spread and servicing advance receivables. The Company entered into (i) an Amended and Restated Series 2016-MSRVF1 Master Repurchase Agreement by and among PLS, as seller, CSFB, as administrative agent to the buyers, CSCIB, as a buyer, Citibank, N.A., as a buyer, and PennyMac, as a guarantor (the “Syndicated GMSR Servicing Spread Agreement”), related to the servicing spread; and (ii) an Amended and Restated Series 2020-SPIADVF1 Master Repurchase Agreement by and among PLS, as seller, CSFB, as administrative agent to the buyers, CSCIB, as a buyer, Citibank, as a buyer, and PennyMac, as a guarantor (the “Syndicated GMSR SAR Agreement”), related to the servicing advance receivables.

The purposes of the Syndicated GMSR Servicing Spread Agreement are to (1) add Citibank as a syndicate buyer, and (2) increase the maximum purchase price from $400 to $500 million, all of which is committed on a 50-50 pro rata basis between CSCIB and Citibank. The purpose of the Syndicated GMSR SAR Agreement is to add Citibank as a syndicate buyer, with the maximum purchase price of $600 million unchanged, all of which is committed on a 50-50 pro rata basis between CSCIB and Citibank.

Table of Contents

Ginnie Mae Servicing Advances

On April 1, 2020, the Company issued a series of variable funding notes, the Series 2020-SPIADVF1 Notes (“GMSR Servicing Advance Notes”), to be sold under agreement to repurchase pursuant to a Master Repurchase Agreement, dated as of April 1, 2020, with Credit Suisse First Boston Mortgage Capital LLC, acting as administrative agent on behalf of Credit Suisse AG, Cayman Islands Branch, as buyer (the “GMSR Servicing Advances Repurchase Agreement”).

The GMSR Servicing Advances Repurchase Agreement provides the Company with financing secured by its servicing advances to pay, in accordance with the Ginnie Mae requirements, in the event borrowers are delinquent: (i) regularly scheduled monthly principal and interest to mortgage-backed securities holders; (ii) taxes, homeowner’s insurance, and other escrowed items; and (iii) other expenses related to servicing delinquent loans as specified by (A) state and federal laws and (B) government agencies, including the FHA, the VA, and the USDA.

The borrowing capacity under the GMSR Servicing Advances Repurchase Agreement, shared with VFN financing capacity, is $600 million, all of which is committed and may be used to finance the servicing advances related to delinquent FHA, VA, and USDA loans, including delinquencies caused by forbearance provided to the borrower in accordance with the CARES Act.

Assets sold under agreements to repurchase are summarized below:


	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020

	(dollars in thousands)
Average balance of assets sold under agreements to repurchase	$	6,031,491		$	3,363,140		$	7,336,341		$	2,669,336
Weighted average interest rate (1)		2.11	%		2.68	%		2.12	%		3.06	%
Total interest expense	$	35,783		$	27,322		$	132,585		$	70,493
Maximum daily amount outstanding	$	8,044,148		$	7,267,046		$	10,969,029		$	7,267,046


		September 30,			December 31,
	2021			2020

	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	6,903,302		$	9,663,995
Unamortized debt issuance costs		(6,145)			(9,198)
	$	6,897,157		$	9,654,797
Weighted average interest rate		1.82	%		1.90	%
Available borrowing capacity (2):
Committed	$	766,389		$	372,803
Uncommitted		8,180,309			2,163,202
	$	8,946,698		$	2,536,005
Fair value of assets securing repurchase agreements:
Loans held for sale	$	8,826,793		$	10,912,178
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell	$	—		$	80,862
Servicing advances (3)	$	203,236		$	413,484
Mortgage servicing rights (3)	$	3,349,503		$	2,490,267
Deposits (3)	$	64,583		$	153,054
Margin deposits placed with counterparties (4)	$	10,875		$	5,625

(1)	Excludes the effect of amortization of net issuance costs and utilization fees of $3.7 million and $4.8 million for the quarters ended September 30, 2021 and 2020, respectively, and $15.5 million and $9.2 million for the nine months ended September 30, 2021 and 2020, respectively.

Table of Contents

(2)	The amount the Company is able to borrow under asset repurchase agreements is tied to the fair value of unencumbered assets eligible to secure those agreements and the Company’s ability to fund the agreements’ margin requirements relating to the assets financed.

(3)

Beneficial interests in the Ginnie Mae MSRs, servicing advances and deposits are pledged to the Issuer Trust and together serve as the collateral backing the VFN, GMSR Servicing Advance Notes, and the Term Notes described in Note 13 – Long-Term Debt- Notes payable secured by mortgage servicing assets. The VFN financing and the GMSR Servicing Advance Notes are included in Assets sold under agreements to repurchase and the Term Notes are included in Notes payable secured by mortgage servicing assets on the Company's consolidated balance sheets.

(4)	Margin deposits are included in Other assets on the Company’s consolidated balance sheets.

Following is a summary of maturities of outstanding advances under repurchase agreements by maturity date:


Remaining maturity at September 30, 2021	Unpaid principal balance
	(dollars in thousands)
Within 30 days	$	1,791,971
Over 30 to 90 days		4,073,983
Over 90 to 180 days		824,526
Over 180 days to one year		112,822
Over one year to two years		100,000
Total assets sold under agreements to repurchase	$	6,903,302
Weighted average maturity (in months)		2.6

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and interest payable) relating to the Company’s assets sold under agreements to repurchase is summarized by counterparty below as of September 30, 2021:



			Weighted average
Counterparties	Amount at risk		maturity of advances	Facility maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC & Citibank, N.A. (1)	$	2,403,804	March 31, 2023	March 31, 2023
Credit Suisse First Boston Mortgage Capital LLC	$	255,253	November 18, 2021	March 31, 2023
Bank of America, N.A.	$	753,370	December 21, 2021	June 7, 2023
JP Morgan Chase Bank, N.A.	$	372,221	November 21, 2021	September 29, 2023
JP Morgan Chase Bank, N.A.	$	54,487	December 7, 2021	June 6, 2023
Goldman Sachs	$	246,809	November 11, 2021	December 23, 2022
BNP Paribas	$	152,152	December 21, 2021	July 31, 2023
Barclays Bank PLC	$	78,565	November 30, 2021	November 3, 2022
Royal Bank of Canada	$	78,230	January 3, 2022	September 14, 2022
Morgan Stanley Bank, N.A.	$	20,794	November 26, 2021	November 2, 2022
Wells Fargo Bank, N.A.	$	10,636	December 19, 2021	October 6, 2022
Citibank, N.A.	$	5,401	December 2, 2021	August 10, 2023

(1)

The calculation of the amount at risk includes the VFN and the Term Notes because beneficial interests in the Ginnie Mae MSRs, Fannie Mae MSRs and servicing advances are pledged to the Issuer Trust and together serve as the collateral backing the VFN, and the Term Notes described in Notes payable secured by mortgage servicing assets below. The VFN financing is included in Assets sold under agreements to repurchase and the Term Notes are included in Notes payable secured by mortgage servicing assets on the Company's consolidated balance sheets.

The Company is subject to margin calls during the period the repurchase agreements are outstanding and therefore may be required to repay a portion of the borrowings before the respective agreements mature if the fair value (as determined by the applicable lender) of the assets securing those agreements decreases.

Table of Contents

Mortgage Loan Participation Purchase and Sale Agreements

One of the borrowing facilities secured by loans held for sale is in the form of mortgage loan participation purchase and sale agreements. Participation certificates, each of which represents an undivided beneficial ownership interest in mortgage loans that have been pooled with Fannie Mae, Freddie Mac or Ginnie Mae, are sold to a lender pending the securitization of the mortgage loans and sale of the resulting securities. A commitment to sell the securities resulting from the pending securitization between the Company and a non-affiliate is also assigned to the lender at the time a participation certificate is sold.

The purchase price paid by the lender for each participation certificate is based on the trade price of the security, plus an amount of interest expected to accrue on the security to its anticipated delivery date, minus a present value adjustment, any related hedging costs and a holdback amount that is based on a percentage of the purchase price. The holdback amount is not required to be paid to the Company until the settlement of the security and its delivery to the lender.

The mortgage loan participation purchase and sale agreements are summarized below:


	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020

	(dollars in thousands)
Average balance	$	237,849		$	235,713		$	256,109		$	227,460
Weighted average interest rate (1)		1.44	%		1.40	%		1.38	%		1.98	%
Total interest expense	$	1,026		$	999		$	3,160		$	3,870
Maximum daily amount outstanding	$	532,819		$	538,074		$	532,819		$	540,977

(1)	Excludes the effect of amortization of debt issuance costs totaling $172,000 and $172,000 for the quarters ended September 30, 2021 and 2020, respectively, and $516,000 and $490,000 for the nine months ended September 30, 2021 and 2020, respectively.


	September 30,			December 31,
	2021			2020

	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	519,784		$	521,477
Unamortized debt issuance costs		—			—
	$	519,784		$	521,477
Weighted average interest rate		1.46	%		1.39	%
Fair value of loans pledged to secure mortgage loan participation purchase and sale agreements	$	541,313		$	545,500

Corporate Revolving Line of Credit

The Company, through its subsidiary PennyMac, entered into an amended and restated credit agreement on November 18, 2016, as amended (the “Credit Agreement”) under which PennyMac established a revolving line of credit in an amount not to exceed $150 million. PennyMac did not borrow under the revolving line of credit during the periods presented and terminated the Credit Agreement on September 29, 2020 concurrent with the issuance the Unsecured Senior Notes described below.

Table of Contents

Note 13—Long-Term Debt

Obligations Under Capital Lease

The Company has a capital lease transaction secured by certain fixed assets and capitalized software. The capital lease matures on June 13, 2022 and bears interest at a spread over one-month LIBOR.

Obligations under capital lease are summarized below:


	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020

	(dollars in thousands)
Average balance	$	6,804		$	15,179		$	9,072		$	17,253
Weighted average interest rate		2.09	%		2.16	%		2.11	%		2.69	%
Total interest expense	$	36		$	83		$	143		$	354
Maximum daily amount outstanding	$	7,677		$	16,749		$	11,864		$	20,810


	September 30,			December 31,
	2021			2020

	(dollars in thousands)
Unpaid principal balance	$	5,583		$	11,864
Weighted average interest rate		2.08	%		2.15	%
Assets pledged to secure obligations under capital lease:
Capitalized software	$	5,277		$	7,675
Furniture, fixtures and equipment	$	4,504		$	5,689

Notes Payable Secured by Mortgage Servicing Assets

Term Notes

The Company, through the Issuer Trust described in Note 4 – Related Party Transactions—Transactions with PMT—Investing Activities and Note 12—Short-Term Borrowings—Assets Sold Under Agreements to Repurchase, issued term notes (the “Term Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”). The Term Notes rank pari passu with each other and with the VFN issued by the Issuer Trust to PLS and are secured by certain participation certificates relating to Ginnie Mae mortgage servicing assets that are financed pursuant to the GNMA MSR Facility.

Following is a summary of the issued and outstanding Term Notes:


Issuance date	Principal balance		Stated interest rate (1)	Stated maturity date (2)
	(in thousands)		(Annual)
February 28, 2018 (the "GMSR GT1 Notes")	$	650,000	2.85%	2/25/2023
August 10, 2018 (the "GMSR GT2 Notes")		650,000	2.65%	8/25/2023
	$	1,300,000

(1)	Spread over one-month LIBOR.

(2)	The Term Notes’ indentures provide the Company with the option to extend the maturity of the Term Notes by two years after the stated maturity.

Table of Contents

MSR Note Payable

On February 1, 2018, the Company issued a note payable that is secured by Freddie Mac MSRs. Interest is charged at a rate based on LIBOR plus the applicable contract margin. The facility expires on November 19, 2021. The maximum amount that the Company may borrow under the note payable is $400 million, less any amount outstanding under the agreement to repurchase pursuant to which the Company finances the Ginnie Mae MSRs and servicing advances and the Fannie Mae MSRs. The Company did not borrow under this note payable during the periods presented.

Notes payable secured by mortgage servicing assets are summarized below:


	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020

	(dollars in thousands)
Average balance	$	1,300,000		$	1,300,000		$	1,300,000		$	1,300,000
Weighted average interest rate (1)		2.87	%		2.99	%		2.89	%		3.57	%
Total interest expense	$	9,896		$	10,177		$	29,888		$	36,131

(1)	Excludes the effect of amortization of debt issuance costs totaling $570,000 and $459,000 for the quarters ended September 30, 2021 and 2020, respectively, and $1.7 million and $1.4 million for the nine months ended September 30, 2021 and 2020, respectively.


	September 30,			December 31,
	2021			2020

	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	1,300,000		$	1,300,000
Unamortized debt issuance costs		(2,824)			(4,160)
	$	1,297,176		$	1,295,840
Weighted average interest rate		2.83	%		2.93	%
Assets pledged to secure notes payable (1) (2):
Servicing advances	$	203,236		$	413,484
Mortgage servicing rights	$	3,600,978		$	2,421,326
Deposits	$	64,583		$	153,054

(1)

Beneficial interests in the Ginnie Mae MSRs, servicing advances and deposits are pledged to the Issuer Trust and together serve as the collateral backing the VFN, GMSR Servicing Advance Notes and the Term Notes. The VFN financing and the GMSR Servicing Advance Notes are included in Assets sold under agreements to repurchase and the Term Notes are included in Notes payable secured by mortgage servicing assets on the Company's consolidated balance sheets.

(2)

Beneficial interests in the Fannie Mae MSRs are pledged to the PFSI Issuer Trust - FMSR and serve as the collateral backing the FMSR VFN and any FMSR Term Notes. The FMSR VFN financing is included in Assets sold under agreements to repurchase and the FMSR Term Note is included in Notes payable secured by mortgage servicing assets on the Company's consolidated balance sheets.

Unsecured Senior Notes

The Company 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 subordinated indebtedness of the Company, equally in right of payment with all existing and future senior indebtedness of the Company and effectively subordinated to any future secured indebtedness of the Company to the extent of the fair value of collateral securing such indebtedness.

Table of Contents

The Unsecured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by PFSI’s existing and future wholly-owned domestic subsidiaries (other than certain excluded subsidiaries defined in the indenture under which the Unsecured Notes were issued). The guarantees are senior unsecured obligations of the guarantors and will rank senior in right of payment to any future subordinated indebtedness of the guarantors, equally in right of payment with all existing and future senior indebtedness of the guarantors and effectively subordinated to any 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 subordinated to the indebtedness and liabilities of the Company’s subsidiaries that do not guarantee the Unsecured Notes.

On September 16, 2021, the Company issued $500 million aggregate principal amount of 5.75% unsecured senior notes due on September 15, 2031.

On October 7, 2021, the Company amended the indentures governing its 5.38% unsecured senior notes due 2025 and 4.25% unsecured senior notes due 2029 to conform the restricted payments covenant and the “permitted investments” definition to the terms contained in the indenture governing the 5.75% unsecured senior notes due 2031.

Following is a summary of the Company’s outstanding Unsecured Notes issued:


Issuance date	Principal balance		Coupon interest rate	Maturity date	Optional redemption date (1)
	(in thousands)		(Annual)
September 29, 2020	$	500,000	5.38%	October 15, 2025	October 15, 2022
October 19, 2020		150,000	5.38%	October 15, 2025	October 15, 2022
February 11, 2021		650,000	4.25%	February 15, 2029	February 15, 2024
September 16, 2021		500,000	5.75%	September 15, 2031	September 15, 2026
	$	1,800,000

(1)

Before the optional redemption date, the Company may redeem some or all of the Unsecured Notes for that issuance at a price equal to 100% of the principal amount, plus accrued and unpaid interest and a make-whole premium or the Company may redeem up to 40% of the Unsecured Notes for that issuance with an amount equal to or less than the net proceeds from certain equity offerings at the redemption price set forth in the indenture, plus accrued and unpaid interest. On or after the optional redemption date, the Company may redeem some or all of the Unsecured Notes for that issuance at the redemption prices set forth in the indenture, plus accrued and unpaid interest.


	Quarter ended			Nine months ended
	September 30, 2021			September 30, 2021

	(dollars in thousands)
Average balance	$	1,381,522		$	1,229,853
Weighted average interest rate (1)		4.91	%		4.86	%
Total interest expense	$	17,442		$	46,281

(1)	Excludes the effect of amortization of debt issuance costs of $492,000 and $1.4 million for the quarter and nine months ended September 30, 2021, respectively.


	September 30,			December 31,
	2021			2020

	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	1,800,000		$	650,000
Unamortized debt issuance costs, net of issuance premiums		(16,770)			(4,180)
	$	1,783,230		$	645,820
Weighted average interest rate		5.07	%		5.38	%

Table of Contents

Maturities of Long-Term Debt

Maturities of long-term debt obligations (based on final maturity dates) are as follows:


	Twelve months ended September 30,
	2022		2023		2024		2025		2026		Thereafter		Total

	(in thousands)
Obligations under capital lease	$	5,583	$	—	$	—	$	—	$	—	$	—	$	5,583
Notes payable secured by mortgage servicing assets		—		1,300,000		—		—		—		—		1,300,000
Unsecured Notes		—		—		—		—		650,000		1,150,000		1,800,000
Total	$	5,583	$	1,300,000	$	—	$	—	$	650,000	$	1,150,000	$	3,105,583

Note 14—Liability for Losses Under Representations and Warranties

Following is a summary of the Company’s liability for losses under representations and warranties:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Balance at beginning of period	$	44,335	$	25,909	$	32,688	$	21,446
Provision for losses:
Resulting from sales of loans		6,561		5,219		26,918		13,120
Reduction in liability due to change in estimate		(4,355)		(2,473)		(11,680)		(5,419)
Losses incurred, net		(735)		(151)		(2,120)		(643)
Balance at end of period	$	45,806	$	28,504	$	45,806	$	28,504
Unpaid principal balance of loans subject to representations and warranties at end of period	$	245,528,045	$	199,194,983

Note 15—Income Taxes

The Company’s effective income tax rates were 26.6% and 26.5% for the quarters ended September 30, 2021 and 2020, respectively, and 26.2% and 26.4% for the nine months ended September 30, 2021 and 2020, respectively.

The CARES Act, passed in March 2020, introduced a number of tax law changes which are generally taxpayer favorable and in December 2020, the Taxpayer Certainty and Disaster Tax Relief Act was signed into law. No material changes in the Company’s effective income tax rates resulted from either Act.

Note 16—Commitments and Contingencies

Litigation

From time to time, the Company may be a party to legal proceedings, lawsuits and other claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on the financial condition, income, or cash flows of the Company.

Table of Contents

The BKI Complaint seeks damages for breach of contract and misappropriation of trade secrets, injunctive relief under the Florida Uniform Trade Secrets Act and declaratory judgment of ownership of all intellectual property and software developed by or on behalf of PLS as a result of its wrongful use of and access to the MSP® System and related trade secret and confidential information. On March 30, 2020, the Florida State Court granted a motion to compel arbitration filed by PLS. Consequently, on April 27, 2020, PLS dismissed its federal court action without prejudice to pursue those claims in arbitration as well. While no assurance can be provided as to the ultimate outcome of this claim or the account of any losses to the Company, the Company believes the BKI Complaint is without merit and plans to vigorously defend the matter, which remains pending.

Regulatory Matters

The Company and/or its subsidiaries are subject to various state and federal regulations related to its loan production and servicing operations by the various states it operates in as well as federal agencies such as the Consumer Financial Protection Bureau (“CFPB”), HUD, and the FHA and is subject to the requirements of the Agencies to which it sells loans and for which it performs loan servicing activities. As a result, the Company may become involved in information-gathering requests, reviews, investigations and proceedings (both formal and informal) by such various federal, state and local regulatory bodies.

On January 7, 2021, PLS received a letter from the CFPB notifying PLS that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, the CFPB’s Office of Enforcement was considering recommending that the CFPB take legal action against PLS for alleged violations of the Real Estate Settlement Procedures Act and Truth in Lending Act. The CFPB's examination covered the period from March 2015 through September 2016. Should the CFPB commence an action, it may seek restitution, civil monetary penalties, injunctive relief, or other corrective action, the extent of which remains uncertain at this time. Notably, certain of the alleged violations were originally self-identified by PLS and remediated prior to the CFPB's examination, and all alleged violations were fully remediated as of August 2017. PLS confirmed these remediation actions as well as full restitution to any affected borrowers in its response to the NORA letter submitted on February 8, 2021. While the NORA process remains open and pending at this time, and there can be no assurance as to the nature or extent of any actions taken by the CFPB with regard to these alleged violations, the Company does not believe that the ultimate resolution of this matter will have a material adverse effect on its financial statements or operations.

Commitments to Purchase and Fund Mortgage Loans

The Company’s commitments to purchase and fund loans totaled $15.8 billion as of September 30, 2021.

Table of Contents

Note 17—Stockholders’ Equity

In August 2021, the Company’s board of directors approved an increase to the Company’s common stock repurchase program from $1 billion to $2 billion.

Following is a summary of activity under the stock repurchase program:


	Quarter ended September 30,				Nine months ended September 30,				Cumulative
	2021		2020		2021		2020		total (1)

	(in thousands)
Shares of common stock repurchased		4,195		118		11,422		7,331		21,128
Cost of shares of common stock repurchased	$	257,354	$	6,927	$	700,793	$	248,210	$	1,053,220

(1)	Amounts represent the total shares of common stock repurchased under the stock repurchase program from inception through September 30, 2021.

Note 18—Net Gains on Loans Held for Sale

Net gains on loans held for sale at fair value are summarized below:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
From non-affiliates:
Cash gains:
Loans	$	135,841	$	605,559	$	605,858	$	1,219,732
Hedging activities		(9,788)		(72,268)		400,786		(421,947)
		126,053		533,291		1,006,644		797,785
Non-cash gains:
Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales		398,665		245,946		1,288,177		747,219
Provisions for losses relating to representations and warranties:
Pursuant to loan sales		(6,561)		(5,219)		(26,918)		(13,120)
Reductions in liability due to change in estimate		4,355		2,473		11,680		5,419
Changes in fair values of loans and derivatives held at period end:
Interest rate lock commitments		17,313		173,381		(316,103)		404,795
Loans		109,411		(79,776)		164,311		(140,878)
Hedging derivatives		(9,506)		(5,052)		(125,276)		17,955
		639,730		865,044		2,002,515		1,819,175
From PennyMac Mortgage Investment Trust (1)		(12,976)		(9,775)		(38,772)		62,549
	$	626,754	$	855,269	$	1,963,743	$	1,881,724

(1)	Gains on sale of loans to PMT are described in Note 4–Related Party Transactions.

Table of Contents

Note 19—Net Interest Expense

Net interest expense is summarized below:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Interest income:
From non-affiliates:
Cash and short-term investments	$	768	$	1,259	$	2,502	$	4,863
Loans held for sale at fair value		63,726		41,854		215,003		120,866
Placement fees relating to custodial funds		3,818		9,163		13,298		44,419
		68,312		52,276		230,803		170,148
From PennyMac Mortgage Investment Trust—Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell		—		676		387		2,686
		68,312		52,952		231,190		172,834

Interest expense:
To non-affiliates:
Assets sold under agreements to repurchase		35,783		27,322		132,585		70,493
Mortgage loan participation purchase and sale agreements		1,026		999		3,160		3,870
Obligations under capital lease		36		83		143		354
Notes payable secured by mortgage servicing assets		9,896		10,177		29,888		36,131
Unsecured senior notes		17,442		—		46,281		—
Corporate revolving line of credit		—		561		—		1,537
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations		24,886		20,711		83,466		54,536
Interest on mortgage loan impound deposits		1,642		1,256		4,052		4,561
		90,711		61,109		299,575		171,482
To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value		—		2,070		1,280		6,416
		90,711		63,179		300,855		177,898
	$	(22,399)	$	(10,227)	$	(69,665)	$	(5,064)

Table of Contents

Note 20—Stock-based Compensation

As of September 30, 2021, the Company had one stock-based compensation plan. Following is a summary of the stock-based compensation activity:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Grants:
Units:
Performance-based restricted share units ("RSUs")		—		—		310		422
Stock options		—		—		249		273
Time-based RSUs		—		—		171		310
Grant date fair value:
Performance-based RSUs	$	—	$	—	$	18,237	$	14,788
Stock options		—		—		5,116		2,770
Time-based RSUs		—		—		10,066		10,823
Total	$	—	$	—	$	33,419	$	28,381
Vestings and exercises:
Performance-based RSUs vested		—		—		640		603
Stock options exercised		104		152		289		476
Time-based RSUs vested		2		7		309		355
Compensation expense	$	8,824	$	7,095	$	28,595	$	26,220

Note 21—Earnings Per Share

Basic earnings per share is determined by dividing net income by the weighted average number of shares of common stock outstanding during the 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:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands, except per share amounts)
Net income	$	249,310	$	535,160	$	830,407	$	1,194,080

Weighted average basic shares of common stock outstanding		62,085		72,439		65,671		76,292

Effect of dilutive securities - Shares issuable under stock-based compensation plan		3,567		3,699		3,670		3,326
Weighted average shares of common stock applicable to diluted earnings per share		65,652		76,138		69,341		79,618
Basic earnings per share	$	4.02	$	7.39	$	12.65	$	15.65
Diluted earnings per share	$	3.80	$	7.03	$	11.98	$	15.00

Table of Contents

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 performance-based RSUs and stock options excluded from the calculation of diluted earnings per share:



	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands except for weighted-average exercise price)
Performance-based RSUs (1)		302		—		244		335
Time-based RSUs		—		—		68		—
Stock options (2)		249		—		199		217
Total anti-dilutive shares and units		551		—		511		552
Weighted average exercise price of anti-dilutive stock options (2)	$	58.85	$	—	$	58.85	$	35.03

(1)	Certain performance-based RSUs were outstanding but not included in the computation of earnings per share because the performance thresholds included in such RSUs have not been achieved.

(2)	Certain stock options were outstanding but not included in the computation of diluted earnings per share because the weighted-average exercise prices were above the average stock prices for the period.

Note 22—Supplemental Cash Flow Information


	Nine months ended September 30,
	2021		2020

	(in thousands)
Cash paid for interest	$	301,014	$	184,087
Cash paid for income taxes, net	$	257,597	$	260,723
Non-cash investing activity:
Mortgage servicing rights resulting from loan sales	$	1,386,324	$	753,795
Operating right-of-use assets recognized	$	20,871	$	8,219
Non-cash financing activity:
Mortgage servicing liabilities resulting from loan sales	$	98,147	$	6,576
Issuance of Excess servicing spread payable to PennyMac Mortgage Investment Trust pursuant to a recapture agreement	$	557	$	1,393
Issuance of common stock in settlement of directors' fees	$	151	$	144

Note 23—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 liquid asset requirements generally are tied to the size of the Company’s loan servicing portfolio, loan origination volume and delinquency rates.

The Company is subject to financial eligibility requirements established by the Federal Housing Finance Agency (“FHFA”) for sellers/servicers eligible to sell or service mortgage loans with Fannie Mae and Freddie Mac. The eligibility requirements include:

●

tangible net worth of $2.5 million plus 25 basis points of the UPB of the Company’s total 1-4 unit servicing portfolio, excluding mortgage loans subserviced for others;

●

a liquidity requirement equal to 3.5 basis points of the aggregate UPB serviced for the Agencies plus 200 basis points of total nonperforming Agency servicing UPB less 70% of such nonperforming Agency servicing UPB in excess of 600 basis points where the underlying loans are in COVID-19 forbearance but were current at the time they entered forbearance.

Table of Contents

The Company is also subject to financial eligibility requirements for Ginnie Mae single-family issuers. The eligibility requirements include net worth of $2.5 million plus 35 basis points of PLS' outstanding Ginnie Mae single-family obligations and a liquidity requirement equal to the greater of $1.0 million or 10 basis points of PLS' outstanding Ginnie Mae single-family securities.

The Agencies’ capital and liquidity requirements, the calculations of which are specified by each Agency, are summarized below:


	September 30, 2021						December 31, 2020
Agency requirement – PLS	Actual (1)			Requirement (1)			Actual (1)			Requirement (1)

	(dollars in thousands)
Capital
Fannie Mae & Freddie Mac	$	5,593,909		$	696,005		$	4,454,680		$	633,331
Ginnie Mae	$	5,204,078		$	1,048,132		$	3,794,112		$	1,058,641
HUD	$	5,204,078		$	2,500		$	3,794,112		$	2,500
Liquidity
Fannie Mae & Freddie Mac	$	432,263		$	90,400		$	506,096		$	84,444
Ginnie Mae	$	432,263		$	216,767		$	506,096		$	215,722
Adjusted net worth / Total assets ratio
Ginnie Mae		27	%		6	%		12	%		6	%
Tangible net worth / Total assets ratio
Fannie Mae & Freddie Mac		29	%		6	%		14	%		6	%

(1)	Calculated in compliance with the respective Agency’s requirements.

Noncompliance with an Agency’s requirements can result in such Agency taking various remedial actions up to and including terminating PennyMac’s ability to sell loans to and service loans on behalf of the respective Agency.

Note 24—Segments

The Company operates in three segments: production, servicing and investment management.

Two of the segments are in the mortgage banking business: production and servicing. The production segment performs loan origination, acquisition and sale activities. The servicing segment performs servicing of loans, execution and management of early buyout loan transactions and servicing of loans sourced and managed by the investment management segment for PMT, including executing the loan resolution strategy identified by the investment management segment relating to distressed mortgage loans.

The investment management segment represents the activities of the Company’s investment manager, which include sourcing, performing diligence, bidding and closing investment asset acquisitions and managing the acquired assets and correspondent production activities for PMT.

Table of Contents

Financial performance and results by segment are as follows:


	Quarter ended September 30, 2021
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total

	(in thousands)
Revenue: (1)
Net gains on loans held for sale at fair value	$	496,568	$	130,186	$	626,754	$	—	$	626,754
Loan origination fees		94,581		—		94,581		—		94,581
Fulfillment fees from PennyMac Mortgage Investment Trust		43,922		—		43,922		—		43,922
Net loan servicing fees		—		33,630		33,630		—		33,630
Net interest income (expense):
Interest income		33,307		35,005		68,312		—		68,312
Interest expense		28,570		62,139		90,709		2		90,711
		4,737		(27,134)		(22,397)		(2)		(22,399)
Management fees		—		—		—		8,520		8,520
Other		218		148		366		1,238		1,604
Total net revenue		640,026		136,830		776,856		9,756		786,612
Expenses		309,460		128,876		438,336		8,727		447,063
Income before provision for income taxes	$	330,566	$	7,954	$	338,520	$	1,029	$	339,549
Segment assets at quarter end	$	7,926,709	$	11,797,702	$	19,724,411	$	20,727	$	19,745,138

(1)	All revenues are from external customers.


	Quarter ended September 30, 2020
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total

	(in thousands)
Revenue: (1)
Net gains on loans held for sale at fair value	$	700,830	$	154,439	$	855,269	$	—	$	855,269
Loan origination fees		75,572		—		75,572		—		75,572
Fulfillment fees from PennyMac Mortgage Investment Trust		54,839		—		54,839		—		54,839
Net loan servicing fees		—		132,807		132,807		—		132,807
Net interest income (expense):
Interest income		26,050		26,902		52,952		—		52,952
Interest expense		18,325		44,850		63,175		4		63,179
		7,725		(17,948)		(10,223)		(4)		(10,227)
Management fees		—		—		—		8,508		8,508
Other		132		1,802		1,934		1,290		3,224
Total net revenue		839,098		271,100		1,110,198		9,794		1,119,992
Expenses		225,817		159,407		385,224		6,477		391,701
Income before provision for income taxes	$	613,281	$	111,693	$	724,974	$	3,317	$	728,291
Segment assets at quarter end	$	7,319,838	$	23,843,110	$	31,162,948	$	17,917	$	31,180,865

(1)	All revenues are from external customers.

Table of Contents


	Nine months ended September 30, 2021
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total

	(in thousands)
Revenue: (1)
Net gains on loans held for sale at fair value	$	1,431,824	$	531,919	$	1,963,743	$	—	$	1,963,743
Loan origination fees		295,909		—		295,909		—		295,909
Fulfillment fees from PennyMac Mortgage Investment Trust		158,777		—		158,777		—		158,777
Net loan servicing fees		—		88,221		88,221		—		88,221
Net interest income (expense):		—		—
Interest income		94,668		136,522		231,190		—		231,190
Interest expense		103,555		197,292		300,847		8		300,855
		(8,887)		(60,770)		(69,657)		(8)		(69,665)
Management fees		—		—		—		28,882		28,882
Other		1,445		2,270		3,715		3,968		7,683
Total net revenue		1,879,068		561,640		2,440,708		32,842		2,473,550
Expenses		941,165		381,018		1,322,183		26,295		1,348,478
Income before provision for income taxes	$	937,903	$	180,622	$	1,118,525	$	6,547	$	1,125,072
Segment assets at period end	$	7,926,709	$	11,797,702	$	19,724,411	$	20,727	$	19,745,138

(1)	All revenues are from external customers


	Nine months ended September 30, 2020
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total

	(in thousands)
Revenue: (1)
Net gains on loans held for sale at fair value	$	1,637,193	$	244,531	$	1,881,724	$	—	$	1,881,724
Loan origination fees		192,091		—		192,091		—		192,091
Fulfillment fees from PennyMac Mortgage Investment Trust		149,594		—		149,594		—		149,594
Net loan servicing fees		—		412,952		412,952		—		412,952
Net interest income (expense):
Interest income		71,840		100,994		172,834		—		172,834
Interest expense		51,124		126,756		177,880		18		177,898
		20,716		(25,762)		(5,046)		(18)		(5,064)
Management fees		—		—		—		25,851		25,851
Other		483		1,473		1,956		4,347		6,303
Total net revenue		2,000,077		633,194		2,633,271		30,180		2,663,451
Expenses		608,602		413,071		1,021,673		18,395		1,040,068
Income before provision for income taxes	$	1,391,475	$	220,123	$	1,611,598	$	11,785	$	1,623,383
Segment assets at period end	$	7,319,838	$	23,843,110	$	31,162,948	$	17,917	$	31,180,865

(1)	All revenues are from external customers.

Table of Contents

Note 25—Subsequent Events

Management has evaluated all events and transactions through the date the Company issued these consolidated financial statements. During this period:

●

On November 4, 2021, the Company’s board of directors declared a cash dividend of $0.20 per common share. The dividend will be paid on November 24, 2021 to common shareholders of record as of November 15, 2021.

●

All agreements to repurchase assets that matured before the date of this Report were extended or renewed.

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Statements

The following discussion and analysis of financial condition and results of operations should be read with the consolidated financial statements including the related notes of PennyMac Financial Services, Inc. (“PFSI”) included within this Quarterly Report on Form 10-Q.

Statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those expressed or implied in such statements. You can identify these forward-looking statements by words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the section entitled “Risk Factors” in Part II Item 1A and in our Annual Report on Form 10-K, as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and our other filings with the United States Securities and Exchange Commission (“SEC”). The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date hereof and we assume no obligation to update or supplement any forward-looking statements.

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.

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 our management’s experience across all aspects of the mortgage business will allow us to profitably grow these activities and capitalize on other related opportunities as they arise in the future.

Our primary assets are direct and indirect equity interests in Private National Mortgage Acceptance Company, LLC (“PennyMac”). We are the managing member of PennyMac, and we operate and control all of the businesses and affairs of PennyMac, and consolidate the financial results of PennyMac and its subsidiaries. We conduct our business in three segments: production, servicing (together, production and servicing comprise our mortgage banking activities) and investment management.

●

The production segment performs loan origination, acquisition and sale activities.

●

The servicing segment performs loan servicing for both newly originated loans we are holding for sale and loans we service for others, including for PMT.

●

The investment management segment represents our investment management activities, which include the activities associated with investment asset acquisitions and dispositions such as sourcing, due diligence, negotiation and settlement.

Table of Contents

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 Veterans Administration (“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, Guam and the U.S. Virgin Islands, and originate loans in 49 states and the District of Columbia, either because PLS is properly licensed in a particular jurisdiction or exempt or otherwise not required to be licensed in that jurisdiction.

Our investment management subsidiary is PNMAC Capital Management, LLC (“PCM”), a Delaware limited liability company registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended. PCM has an investment management contract with PennyMac Mortgage Investment Trust (“PMT”), a mortgage real estate investment trust listed on the New York Stock Exchange under the ticker symbol PMT.

Table of Contents

Results of Operations

Our results of operations are summarized below:


	Quarter ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020

	(dollars in thousands, except per share amounts)
Revenues:
Net gains on loans held for sale at fair value	$	626,754		$	855,269		$	1,963,743		$	1,881,724
Loan origination fees		94,581			75,572			295,909			192,091
Fulfillment fees from PennyMac Mortgage Investment Trust		43,922			54,839			158,777			149,594
Net loan servicing fees		33,630			132,807			88,221			412,952
Net interest expense		(22,399)			(10,227)			(69,665)			(5,064)
Management fees		8,520			8,508			28,882			25,851
Other		1,604			3,224			7,683			6,303
Total net revenue		786,612			1,119,992			2,473,550			2,663,451
Expenses:
Compensation		249,183			202,440			773,079			550,762
Loan origination		80,932			53,752			243,999			150,677
Technology		32,406			28,964			100,314			69,976
Servicing		27,892			71,110			78,365			169,779
Other		56,650			35,435			152,721			98,874
Total expenses		447,063			391,701			1,348,478			1,040,068
Income before provision for income taxes		339,549			728,291			1,125,072			1,623,383
Provision for income taxes		90,239			193,131			294,665			429,303
Net income	$	249,310		$	535,160		$	830,407		$	1,194,080
Earnings per share
Basic	$	4.02		$	7.39		$	12.65		$	15.65
Diluted	$	3.80		$	7.03		$	11.98		$	15.00
Annualized return on average common stockholders' equity		28.6	%		77.6	%		31.7	%		63.8	%
Dividend declared per share	$	0.20		$	0.15		$	0.60		$	0.39
Income before provision for income taxes by segment:
Mortgage banking:
Production	$	330,566		$	613,281		$	937,903		$	1,391,475
Servicing		7,954			111,693			180,622			220,123
Total mortgage banking		338,520			724,974			1,118,525			1,611,598
Investment management		1,029			3,317			6,547			11,785
	$	339,549		$	728,291		$	1,125,072		$	1,623,383
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") (1)	$	524,524		$	769,805		$	1,670,272		$	1,688,677
During the period:
Interest rate lock commitments issued	$	37,431,969		$	36,564,786		$	107,821,842		$	87,334,326
At end of period:
Interest rate lock commitments outstanding	$	15,804,462		$	18,873,579
Unpaid principal balance of loan servicing portfolio:
Owned:
Mortgage servicing rights	$	259,220,948		$	234,850,997
Mortgage servicing liabilities		8,885,785			1,799,562
Loans held for sale		9,295,126			8,749,673
		277,401,859			245,400,232
Subserviced for PMT		218,013,788			156,496,568
	$	495,415,647		$	401,896,800

Net assets of PennyMac Mortgage Investment Trust	$	2,479,327		$	2,281,266
Book value per share	$	58.00		$	41.67

(1)

To provide investors with information in addition to our results as determined by accounting principles generally accepted in the United States (“GAAP”), we disclose Adjusted EBITDA as a non-GAAP measure. Adjusted EBITDA is a measure that is frequently used in our industry to measure performance and we believe that this measure provides supplemental information that is useful to investors. Adjusted EBITDA is not a financial measure calculated in accordance with GAAP and should not be considered as a substitute for net income, or any other performance measure calculated in accordance with GAAP.

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”) and mortgage servicing liabilities (“MSLs”), due to changes in the valuation inputs we use in our valuation models, increase (decrease) in fair value of

Table of Contents

ESS payable to PMT, hedging losses (gains) associated with MSRs, stock-based compensation and interest expense on corporate debt or corporate revolving credit facilities and capital lease.

We believe that the presentation of Adjusted EBITDA provides useful information to investors regarding our results of operations because each measure assists both investors and management in analyzing and benchmarking the performance and value of our business. However, other companies may define Adjusted EBITDA differently, and as a result, our measures of Adjusted EBITDA may not be directly comparable to those of other companies.

Adjusted EBITDA measures have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments;

they do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payment on our debt; and

they are not adjusted for all non-cash income or expense items that are reflected in our consolidated statements of cash flows.

Because of these limitations, Adjusted EBITDA measures are not intended as alternatives to net income as an indicator of our operating performance and should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations.

The following table presents a reconciliation of Adjusted EBITDA to our net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, for each of the periods indicated:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Net income	$	249,310	$	535,160	$	830,407	$	1,194,080
Provision for income taxes		90,239		193,131		294,665		429,303
Income before provisions for income taxes		339,549		728,291		1,125,072		1,623,383
Depreciation and amortization		6,762		6,401		21,729		17,126
Decrease in fair value of MSRs and MSLs due to changes in valuation inputs used in valuation models		65,452		37,030		9,923		1,065,678
(Increase) decrease in fair value of ESS payable to PennyMac Mortgage Investment Trust		—		(3,135)		1,037		(18,293)
Hedging losses (gains) associated with MSRs		86,459		(6,521)		437,492		(1,027,327)
Stock‑based compensation		8,824		7,095		28,595		26,220
Interest expense on corporate debt or corporate revolving credit facilities and capital lease		17,478		644		46,424		1,890
Adjusted EBITDA	$	524,524	$	769,805	$	1,670,272	$	1,688,677

Impact of COVID-19

The United States continues to be impacted by the COVID-19 pandemic (the “Pandemic” or “COVID-19”) and the effects of market and government responses to the Pandemic. These developments have resulted in continued economic uncertainty, financial hardships and unemployment for many existing borrowers.

Table of Contents

As part of its response to the Pandemic, the federal government included requirements in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act that we provide borrowers with loans we service for the Agencies with substantial payment forbearance. As a result of the CARES Act and other regulatory requirements, our costs to service delinquent loans in our servicing portfolio have increased and may require us to finance advances of principal and interest payments to the investors holding these loans, as well as property taxes, insurance and other costs to protect investors’ interest in the properties collateralizing the loans. As of September 30, 2021, 2.7% of loans in our predominately government-insured or guaranteed MSR portfolio were in forbearance plans and delinquent resulting in an increase in the level of servicing advances we have been required to make in order to fund borrower delinquencies.

The Pandemic has had a mixed effect on the earnings of our servicing segment by reducing the amount of placement fees we earn on custodial deposits related to these loans and increasing our cost to service due to higher delinquency and default rates, offset by gains we recognize when we are able to modify and resell previously delinquent government loans. Over time, as borrowers exit forbearance we would expect these activities relating to delinquent government loans to trend towards more normalized levels. In order to mitigate the risks and costs of maintaining delinquent government loans in Ginnie Mae securities or in our loan inventory, we sell a portion of those loans to third-party investors; we increased the volume of our sales of these loans in the quarter ended September 30, 2021, and serviced $8.9 billion in UPB of these loans for third-party investors at the end of the period.

In our production segment, gain on sale margins reflect both the strong but moderating demand for loans due to historically low interest rates as well as growth in loan production from our consumer direct and broker direct channels from the same periods in 2020. The mortgage origination market for 2020 was estimated at $4.1 trillion and current forecasts estimate of the origination market at 4.2 trillion for 2021. The increase in demand for mortgage loans in 2020, combined with constraints on mortgage industry origination capacity that existed before the Pandemic, allowed us to realize higher gain-on sale margins in our production segment in 2020. As industry capacity has adjusted to demand, our gain on sale margins have moderated from 2020 levels, and in certain channels reflect the effects of significant competitive pressures.

The current environment caused by the Pandemic in the United States is historically unprecedented and the source of much uncertainty surrounding future economic and market prospects and the ongoing effects on our future prospects are difficult to anticipate. For further discussion of the potential impacts of the Pandemic please also see the section entitled “Risk Factors” in Part II. Item 1A. and in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 25, 2021.

Income Before Provisions for Income Taxes

For the quarter ended September 30, 2021, income before provision for income taxes decreased $388.7 million compared to the same period in 2020. The decrease was primarily due to a $228.5 million decrease in Net gains on loans held for sale at fair value due to lower gain on sale margins across all production channels during the quarter ended September 30, 2021 compared to the same period in 2020, a $99.2 million decrease in Net loan servicing fees reflecting higher negative valuation adjustments and hedging results, and a $55.4 million increase in total expenses. The increase in total expenses was mainly due to increases in compensation and origination expenses reflecting the growth of our mortgage banking activities.

For the nine months ended September 30, 2021, income before provision for income taxes decreased $498.3 million compared to the same period in 2020. The decrease was primarily due to a decrease in net loan servicing fees and an increase in total expenses, partially offset by an increase in production revenue (Net gains on loans held for sale at fair value, Loan origination fees and Fulfillment fees from PennyMac Mortgage Investment Trust), which reflects higher production volume during the nine months ended September 30, 2021 compared to the same period in 2020. The decrease in net servicing fees reflects negative valuation adjustments and hedging results during the nine months ended September 30, 2021 as compared to the same period in 2020. The increase in total expenses was mainly due to increases in compensation and origination expenses reflecting the growth of our mortgage banking activities.

Table of Contents

Net Gains on Loans Held for Sale at Fair Value

During the quarter and nine months ended September 30, 2021, we recognized Net gains on loans held for sale at fair value totaling $626.8 million and $2.0 billion, respectively, a decrease of $228.5 million during the quarter ended September 30, 2021 compared to the same period in 2020 and an increase of $82.0 million during the nine months ended September 30, 2021 compared to the same period in 2020. The decrease during the quarter ended September 30, 2021compared to the same period in 2020 was primarily due to decreases in gain on sale margins across all channels and the increase during the nine months ended September 30, 2021 compared to the same period in 2020 was primarily due to an increase in production volume, partially offset by decreased gain on sale margins.

Our net gains on loans held for sale are summarized below:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
From non-affiliates:
Cash gains:
Loans	$	135,841	$	605,559	$	605,858	$	1,219,732
Hedging activities		(9,788)		(72,268)		400,786		(421,947)
Total cash gains		126,053		533,291		1,006,644		797,785
Non-cash gains:
Change in fair value of loans and derivative financial instruments outstanding at end of period:
Interest rate lock commitments		17,313		173,381		(316,103)		404,795
Loans		109,411		(79,776)		164,311		(140,878)
Hedging derivatives		(9,506)		(5,052)		(125,276)		17,955
		117,218		88,553		(277,068)		281,872
Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales		398,665		245,946		1,288,177		747,219
Provisions for losses relating to representations and warranties:
Pursuant to loan sales		(6,561)		(5,219)		(26,918)		(13,120)
Reductions in liability due to change in estimate		4,355		2,473		11,680		5,419
Total non-cash gains		513,677		331,753		995,871		1,021,390
Total gains on sale from non-affiliates		639,730		865,044		2,002,515		1,819,175
From PennyMac Mortgage Investment Trust (primarily cash)		(12,976)		(9,775)		(38,772)		62,549
	$	626,754	$	855,269	$	1,963,743	$	1,881,724
During the period:
Interest rate lock commitments issued:
Government-insured or guaranteed mortgage loans	$	24,061,473	$	26,629,871	$	72,605,976	$	63,728,308
Conventional mortgage loans		13,370,496		9,934,915		35,215,866		23,596,038
Jumbo mortgage loans		—		—		—		8,304
Home equity lines of credit		—		—		—		1,676
	$	37,431,969	$	36,564,786	$	107,821,842	$	87,334,326
At end of period:
Loans held for sale at fair value	$	9,659,695	$	9,126,172
Commitments to fund and purchase loans	$	15,804,462	$	18,873,579

Table of Contents

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 commitments (“IRLC”). 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 liabilities for mortgage servicing liabilities (which represent the fair value of the costs we expect to incur in excess of the fees we receive for the early buyout of delinquent loans (“EBO loans”) we have resold to third party investors) and for the fair value of our estimate of the losses we expect to incur relating to the representations and warranties we provide in our loan sale transactions.

The MSRs, MSLs, and liability 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 63% and 65% of our gain on sale of loans held for sale at fair value for the quarter and nine months ended September 30, 2021, respectively, as compared to 28% and 39% for the quarter and nine months ended September 30, 2020, respectively. These estimates change as circumstances change and changes in these estimates are recognized in income in subsequent periods.

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 is detailed in Note 6 – Fair value – Valuation Techniques and Inputs to the consolidated financial statements included in this Quarterly Report.

Representations and Warranties

Our agreements with the purchasers and insurers 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 losses on the loans. Our credit losses may be reduced by any recourse we have to correspondent originators that sold such loans to us and breached similar or other representations and warranties. In such event, we have the right to seek a recovery of related repurchase losses from that correspondent seller.

Our representations and warranties are generally not subject to stated limits of exposure. However, we believe that the current 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 administration staff and approved by our senior management credit committee which 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 review our liability estimate on a periodic basis.

Table of Contents

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 $6.6 million and $26.9 million for the quarter and nine months ended September 30, 2021, respectively, compared to $5.2 million and $13.1 million for the quarter and nine months ended September 30, 2020, respectively. The increase in the provision relating to current loan sales is primarily attributable to increased sales of loans and increased loss assumptions relating to our securitizations of reperforming EBO loans.

We also recorded reductions in the liability of $4.4 million and $11.7 million during the quarter and nine months ended September 30, 2021, respectively, compared to $2.5 million and $5.4 million during the quarter and nine months ended September 30, 2020, respectively. 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:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
During the period:
Indemnification activity:
Loans indemnified by PFSI at beginning of period	$	16,534	$	16,396	$	13,788	$	15,366
New indemnifications		2,058		1,285		9,313		3,731
Less indemnified loans sold, repaid or refinanced		3,104		2,053		7,613		3,469
Loans indemnified by PFSI at end of period	$	15,488	$	15,628	$	15,488	$	15,628
Repurchase activity:
Total loans repurchased by PFSI	$	31,109	$	9,146	$	75,023	$	43,699
Less:
Loans repurchased by correspondent lenders		7,857		7,207		30,309		23,713
Loans repaid by borrowers or resold with defects resolved		6,508		5,282		11,084		12,649
Net loans repurchased with losses chargeable to liability for representations and warranties	$	16,744	$	(3,343)	$	33,630	$	7,337
Net losses charged to liability for representations and warranties	$	735	$	151	$	2,120	$	643

At end of period:
Unpaid principal balance of loans subject to representations and warranties	$	245,528,045	$	199,194,983
Liability for representations and warranties	$	45,806	$	28,504

During the quarter and nine months ended September 30, 2021, we repurchased loans totaling $31.1 million and $75.0 million in UPB, respectively. We recorded losses of $735,000 and $2.1 million net of recoveries during the quarter and nine months ended September 30, 2021, respectively. If the outstanding balance of loans we purchase and sell subject to representations and warranties increases, the loans sold continue to season, economic conditions change, correspondent lenders become unwilling or unable to repurchase defective loans, or investor and insurer loss mitigation strategies are adjusted, the level of repurchase and loss activity may increase.

Loan origination fees

Loan origination fees increased $19.0 million and $103.8 million during the quarter and nine months ended September 30, 2021, respectively, compared to the same periods in 2020. The increases were primarily due to an increase in volume of loans we produced.

Table of Contents

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 were calculated as a percentage of the UPB of the loans we fulfilled for PMT through June 30, 2020. Effective July 1, 2020, fulfillment fees are calculated based on the number of loans we fulfill for PMT.

Fulfillment fees decreased $10.9 million during the quarter ended September 30, 2021 compared to the same period in 2020. The decrease was primarily due to a decrease in loan commitment volume and an increase in discretionary reductions in our fee schedule, partially offset by an increase in PMT’s loan production volume. Fulfilment fees increased $9.2 million during the nine months ended September 30, 2021 compared to the same period in 2020. The increase was primarily due to an increase in PMT’s loan production volume, partially offset by the effect of the amendment to the fulfillment fee structure noted above, which generally reduced the fulfillment fees collected per loan fulfilled.

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:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Loan servicing fees	$	267,758	$	250,368	$	787,224	$	735,551
Effects of MSRs and MSLs		(234,128)		(117,561)		(699,003)		(322,599)
Net loan servicing fees	$	33,630	$	132,807	$	88,221	$	412,952

Loan Servicing Fees

Following is a summary of our loan servicing fees:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Loan servicing fees:
From non-affiliates	$	216,592	$	203,696	$	635,620	$	601,527
From PennyMac Mortgage Investment Trust		20,703		18,752		59,811		48,806
Other
Late charges		8,779		8,378		25,681		32,251
Other		21,684		19,542		66,112		52,967
		30,463		27,920		91,793		85,218
	$	267,758	$	250,368	$	787,224	$	735,551
Average loan servicing portfolio (1)
MSRs	$	255,848,174	$	234,329,363	$	248,618,772	$	231,482,498
MSLs	$	7,510,517	$	1,965,041	$	5,263,080	$	2,331,068
Subserviced for PMT	$	211,094,125	$	152,096,012	$	196,232,751	$	146,109,184

(1)	Excluding PFSI-owned loans

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 unpaid principal balance of the loan serviced and we collect these fees from borrower payments. Loan servicing fees from PMT are primarily related to PMT’s MSRs and are established at monthly per-loan amounts based on whether the loan is a fixed-rate or adjustable-rate loan and the loan’s delinquency or foreclosure status as detailed in Note 4 – Transactions with Related Parties to the consolidated financial statements included in this Report. Other loan servicing fees are comprised primarily of borrower-contracted fees such as late charges and reconveyance fees.

Table of Contents

The increases in loan servicing fees from non-affiliates and from PMT for the quarter and nine months ended September 30, 2021, as compared to the same periods ended September 30, 2020, were primarily due to growth of our loan servicing portfolio. The increases in other loan servicing fees for the quarter and nine months ended on September 30, 2021, compared to the same periods ended in 2020, were primarily due to increases in fees related to borrower early loan payoffs resulting from the current low interest rate environment.

Mortgage Servicing Rights and Mortgage Servicing Liabilities

The company has elected to carry its 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 changes in fair value by entering into derivatives transactions and – through March of 2021 – with financing certain of our purchases of MSRs with the sale of a portion of the MSR assets’ cash flows to PMT in the form of ESS.

Change in fair value of MSRs, MSLs and ESS and the related hedging results are summarized below:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
MSR and MSL valuation changes:
Realization of cash flows	$	(82,217)	$	(90,187)	$	(250,551)	$	(302,541)
Other changes in fair value of mortgage servicing rights and mortgage servicing liabilities		(65,452)		(37,030)		(9,923)		(1,065,678)
		(147,669)		(127,217)		(260,474)		(1,368,219)
Change in fair value of excess servicing spread		—		3,135		(1,037)		18,293
Hedging results		(86,459)		6,521		(437,492)		1,027,327
Total change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing net of hedging results	$	(234,128)	$	(117,561)	$	(699,003)	$	(322,599)
Average balances:
Mortgage servicing rights	$	3,466,325	$	2,252,504	$	3,229,798	$	2,364,573
Mortgage servicing liabilities	$	101,021	$	31,070	$	69,059	$	29,635
Excess servicing spread financing	$	—	$	149,035	$	28,830	$	158,636
At end of period:
Mortgage servicing rights	$	3,611,120	$	2,333,821
Mortgage servicing liabilities	$	47,567	$	31,698
Excess servicing spread financing	$	—	$	142,990

Changes in realization of cash flows are influenced by changes in the level of servicing assets and liabilities and changes in estimates of the remaining cash flows to be realized. During the quarter and nine months ended September 30, 2021 as compared to the same periods ended September 30, 2020, realization of cash flows decreased primarily due to a significant increase in the balance of loans underlying our MSLs, which contribute positively to realization of cash flows as the liabilities decrease with the resolution of the loans.

Other changes in fair value of MSRs reflect faster-than anticipated prepayments and increases in short-term prepayment projections of the mortgage loans underlying our investment in MSRs during the quarter and nine months ended September 30, 2021, while increased expectations of prepayments due to interest rate declines impacted other changes in fair value of MSRs during the same periods ended September 30, 2020.

Hedging results reflect valuation losses attributable to the effects of interest rate increases on the fair value of the hedging instruments during the quarter and nine months ended September 30, 2021, as compared to the impact of interest rate declines in the comparable periods in 2020.

Table of Contents

Following is a summary of our loan servicing portfolio:



	September 30,		December 31,
	2021		2020

	(in thousands)
Loans serviced
Prime servicing:
Owned:
Mortgage servicing rights
Originated	$	232,373,814	$	196,873,590
Acquired		26,847,134		41,537,219
		259,220,948		238,410,809
Mortgage servicing liabilities		8,885,785		2,857,492
Loans held for sale		9,295,126		11,063,938
		277,401,859		252,332,239
Subserviced for PMT		217,984,987		174,360,317
Total prime servicing		495,386,846		426,692,556
Special servicing subserviced for PMT		28,801		58,274
Total loans serviced	$	495,415,647	$	426,750,830
Delinquencies:
Owned servicing (1):
30-89 days	$	6,601,724	$	7,611,216
90 days or more		13,322,455		22,545,750
	$	19,924,179	$	30,156,966
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days	$	1,643,010	$	3,225,010
90 days or more		5,922,433		14,904,052
	$	7,565,443	$	18,129,062
Subserviced for PMT (1):
30-89 days	$	1,098,566	$	1,250,381
90 days or more		2,275,366		4,543,660
	$	3,373,932	$	5,794,041
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days	$	258,066	$	593,517
90 days or more		1,408,078		3,690,505
	$	1,666,144	$	4,284,022

(1)	Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act.

Table of Contents

Net Interest expense

Net interest expense increased $12.2 million and $64.6 million, during the quarter and nine months ended September 30, 2021, respectively, compared to the same periods in 2020. The increases were primarily due to:

●

a decrease in placement fees we receive relating to custodial funds that we manage due to decreased earning rates;

●

an increase in interest shortfall on repayments of loans serviced for Agency securitizations, reflecting increased loan payoffs as a result of increased borrower refinancing activity due to the lower interest rate environment; and

●

interest on unsecured senior notes that bear interest at higher rates than the secured borrowings they replace and that were not outstanding during the nine months ended September 30, 2020.

Management fees from PennyMac Mortgage Investment Trust

Management fees earned from PMT are summarized below:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Base management	$	8,778	$	8,508	$	25,875	$	25,851
Performance incentive (adjustment)		(258)		—		3,007		—
	$	8,520	$	8,508	$	28,882	$	25,851
Net assets of PMT at end of period	$	2,479,327	$	2,281,266

Management fees increased $12,000 and $3.0 million during the quarter and nine months ended September 30, 2021, respectively, compared to the same periods in 2020. The increase in the nine months ended September 30, 2021 was primarily due to $3.0 million of performance incentive fees earned as a result of PMT’s increased profitability during the measurement period ended September 30, 2021, on which its performance incentive fee is based.

Expenses

Compensation

Compensation expenses are summarized below:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Salaries and wages	$	148,275	$	117,230	$	446,381	$	308,629
Incentive compensation		63,715		57,257		208,258		154,597
Taxes and benefits		28,369		20,858		89,845		61,316
Stock and unit-based compensation		8,824		7,095		28,595		26,220
	$	249,183	$	202,440	$	773,079	$	550,762
Head count:
Average		7,247		5,672		7,081		4,978
Period end		7,261		6,019

Compensation expense increased $46.7 million and $222.3 million, respectively, during the quarter and nine months ended September 30, 2021, compared to the same period in 2020. The increases were primarily due to growth in head count made to accommodate the growth in our loan production and servicing activities.

Table of Contents

Loan origination

Loan origination expense increased $27.2 million and $93.3 million, respectively, during the quarter and nine months ended September 30, 2021 compared to the same periods in 2020. The increases were primarily due to increased lending activities during the quarter and nine months ended September 30, 2021, compared to the same periods during 2020.

Technology

Technology expense increased $3.4 million and $30.3 million, respectively, during the quarter and nine months ended September 30, 2021, compared to the same periods in 2020. The increases were primarily due to growth in our loan servicing operations and continued investment in our loan production and servicing infrastructure.

Servicing

Servicing expenses decreased $43.2 million and $91.4 million, respectively, during the quarter and nine months ended September 30, 2021, compared to the same periods in 2020. This decrease in servicing expenses was primarily due to reversal of the provision for estimated servicing advances losses recorded in prior periods during the quarter and nine months ended September 30, 2021. The reduction reflects the recent improvements in the performance of our servicing portfolio.

Professional services

Professional expenses increased $6.1 million and $18.3 million, respectively, during the quarter and nine months ended September 30, 2021, compared to the same periods in 2020. The increases were primarily due to increases in legal fees and consulting fees related to our investments in technology infrastructure.

Provision for Income Taxes

Our effective income tax rates were 26.6% and 26.2% during the quarter and nine months ended September 30, 2021, respectively, compared to 26.5% and 26.4% during the same periods in 2020.

Table of Contents

Balance Sheet Analysis

Following is a summary of key balance sheet items as of the dates presented:


	September 30,		December 31,
	2021		2020

	(in thousands)
ASSETS
Cash and short-term investments	$	481,543	$	547,933
Loans held for sale at fair value		9,659,695		11,616,400
Derivative assets		429,984		711,238
Servicing advances, net		522,906		579,528
Investments in and advances to affiliates		51,470		168,972
Mortgage servicing rights		3,611,120		2,581,174
Loans eligible for repurchase		4,335,378		14,625,447
Other		653,042		767,103
Total assets	$	19,745,138	$	31,597,795

LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt	$	7,416,941	$	10,176,274
Long-term debt		3,085,989		2,085,274
Liability for loans eligible for repurchase		4,335,378		14,625,447
Income taxes payable		659,768		622,700
Other		742,760		698,712
Total liabilities		16,240,836		28,208,407
Stockholders' equity		3,504,302		3,389,388
Total liabilities and stockholders' equity	$	19,745,138	$	31,597,795
Leverage ratio:
Total Debt / Stockholders' equity		3.0		3.6
Total Debt / Tangible stockholders' equity		3.1		3.7

Total assets decreased $11.9 billion from $31.6 billion at December 31, 2020 to $19.7 billion at September 30, 2021. The decrease was primarily due to decreases of $10.3 billion in loans eligible for repurchase and $2.0 billion in loans held for sale at fair value, partially offset by an increase of $1.0 billion in MSRs. The decrease in loans eligible for repurchase was primarily due to increased early buyout activity resulting in a decrease in delinquent loans underlying Ginnie Mae securities in our servicing portfolio during the nine months ended September 30, 2021.

Total liabilities decreased $12.0 billion from $28.2 billion at December 31, 2020 to $16.2 billion at September 30, 2021. The decrease was primarily due to a decrease of $10.3 billion in liability for loans eligible for repurchase, a decrease of $2.8 billion in short-term debt, partially offset by an increase of $1.0 billion in long-term debt.

Cash Flows

Our cash flows are summarized below:


	Nine months ended September 30,
	2021		2020		Change

	(in thousands)
Operating	$	2,770,083	$	(3,923,531)	$	6,693,614
Investing		(301,458)		924,599		(1,226,057)
Financing		(2,524,885)		3,339,596		(5,864,481)
Net (decrease) increase in cash and restricted cash	$	(56,260)	$	340,664	$	(396,924)

Table of Contents

Our cash flows resulted in a net decrease in cash and restricted cash of $56.2 million during the nine months ended September 30, 2021 as discussed below.

Operating activities

Net cash provided by operating activities totaled $2.8 billion during the nine months ended September 30, 2021 compared with net cash used in operating activities of $3.9 billion during the same period in 2020. Our cash flows from operating activities are primarily influenced by changes in the levels of our inventory of mortgage loans as shown below:


	Nine months ended September 30,
	2021		2020

	(in thousands)
Cash flows from:
Loans held for sale	$	3,030,122	$	(3,383,080)
Other operating sources		(260,039)		(540,451)
	$	2,770,083	$	(3,923,531)

Investing activities

Net cash used in investing activities during the nine months ended September 30, 2021 totaled $301.5 million, primarily due to $471.3 million in net settlement of derivative financial instruments used to hedge our investment in MSRs, partially offset by a $117.1 million decrease in margin deposits. Net cash provided by investing activities during the nine months ended September 30, 2020 totaled $924.6 million, primarily due to $1.0 billion in net settlement of derivative financial instruments used to hedge our investment in MSRs.

Financing activities

Net cash used in financing activities totaled $2.5 billion during the nine months ended September 30, 2021, primarily due to a decrease of $1.6 billion in borrowings, $700.8 million of repurchase of our common stock and $134.6 million of repayment of ESS financing. The reduction in borrowings reflects reduced inventory of loans held for sale, combined with repurchase of common stock. Net cash provided by financing activities totaled $3.3 billion during the nine months ended September 30, 2020, primarily due to reduced financing of mortgage loans held for sale and the issuance of Unsecured Notes.

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, proceeds from and issuance of equity or debt offerings. We believe that our liquidity is sufficient to meet our current liquidity needs.

The effect of the Pandemic on our operations, liquidity and capital resources remain uncertain and difficult to predict, for further discussion of the potential impacts of the Pandemic please also see the section entitled “Risk Factors” in Part II. Item 1A. and in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 25, 2021.

The CARES Act allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from the COVID-19 pandemic and may require us as the servicer to advance principal and interest to investors for up to four months on Fannie Mae and Freddie Mac loans and longer on Ginnie Mae and other government agency backed loans, as well as advancing property taxes, insurance premiums and other expenses. In April 2020, the Company entered into a new Ginnie Mae servicing advance financing transaction allowing the Company to borrow $600 million in excess of our currently outstanding MSR term notes against Ginnie

Table of Contents

Mae MSRs and servicing advances. The Ginnie Mae servicing advances eligible for financing include advances made to support regularly scheduled monthly principal and interest to mortgage-backed securities holders, taxes, homeowners insurance and escrowed items and other costs related to servicing delinquent loans. We are also in ongoing discussions with our lending partners to align our servicing advance assets and financing capacity, and to further diversify our financing alternatives.

The COVID-19 pandemic has significantly increased the number of loans that are delinquent in our Ginnie Mae MSR portfolio. The Ginnie Mae guidelines provides us with the option to purchase loans that are at least three months delinquent out of the underlying Ginnie Mae securities as an alternative to continuing to advance principal and interest payments to the holders of the Ginnie Mae securities. We refer to such loans as “early buyout” or EBO loans.

During the nine months ended September 30, 2021, we purchased $16.4 billion in UPB of EBO loans from our Ginnie Mae MSR portfolio. Our objective is to work with the borrowers to cure the loan delinquency through either borrower reperformance or modification of the loans’ terms. When curing the delinquency is not feasible, we work to settle the loan and collect our claims from the applicable insurer or guarantor. When we are able to cure the delinquency, we are able to re-deliver the cured loan into another Ginnie Mae guaranteed security. Depending on the method used to cure a borrower delinquency, the Ginnie Mae program may require at least a six month period of timely borrower payments before we are able to re-deliver the loan. Therefore, regardless of whether we cure or settle the repurchased loan, our investment in the EBO loans may require a substantial holding period. We have financed our EBO purchases by expanding our borrowing capacity under existing facilities and by procuring a dedicated EBO repurchase agreement facility.

Our current borrowing strategy is to finance our assets where we believe such borrowing is prudent, appropriate and available. Our 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, a capital lease and unsecured senior notes. A significant amount of our borrowings have short-term maturities and provide for advances with terms ranging from 45 days to 240 days. Because a significant portion of our current debt facilities consist of short-term borrowings, 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.

The Syndicated GMSR Servicing Spread Agreement added Citibank as a syndicate buyer, and increased the maximum purchase price from $400 to $500 million, all of which was committed on a 50-50 pro rata basis between CSCIB and Citibank. The Syndicated GMSR SAR Agreement added Citibank as a syndicate buyer, with the maximum purchase price of $600 million unchanged, all of which is committed on a 50-50 pro rata basis between CSCIB and Citibank.

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:


	Quarter ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020

	(in thousands)
Average balance	$	6,031,491	$	3,363,140	$	7,336,341	$	2,669,336
Maximum daily balance	$	8,044,148	$	7,267,046	$	10,969,029	$	7,267,046
Balance at period end	$	6,903,302	$	7,267,046

Table of Contents

The differences between the average and maximum daily balances on our repurchase agreements reflect the fluctuations throughout the month 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 covenants. The most significant financial covenants currently include the following:

●

a minimum in unrestricted cash and cash equivalents of $100 million;

●

a minimum tangible net worth of $1.25 billion;

●

a maximum ratio of total liabilities to tangible net worth of 10:1; and

●

at least one other warehouse or repurchase facility that finances amounts and assets that are similar to those being financed under certain of our existing secured financing agreements.

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.

Our Unsecured Notes’ indentures contain covenants that limit the Company and our restricted subsidiaries’ ability to engage in specified types of transactions, including, but not limited to the following:

●

pay dividends or distributions, redeem or repurchase equity, prepay subordinated debt and make certain loans or investments;

●

incur, assume or guarantee additional debt or issue preferred stock;

●

incur liens on assets;

●

merge or consolidate with another person or sell all or substantially all of our assets to another person;

●

transfer, sell or otherwise dispose of certain assets including capital stock of subsidiaries;

●

enter into transactions with affiliates; and

●

allow to exist certain restrictions on the ability of our non-guarantor restricted subsidiaries to pay dividends or make other payments to us.

Although these financial 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, as summarized below:

●

FHFA liquidity requirement is equal to 0.035% (3.5 basis points) of total Agency servicing UPB plus an incremental 200 basis points of the amount by which total nonperforming Agency servicing UPB (reduced

Table of Contents

by 70% of the UPB of nonperforming Agency loans that are in COVID-19 payment forbearance and were current when they entered such forbearance) exceeds 6% of the applicable Agency servicing UPB; allowable assets to satisfy liquidity requirement include cash and cash equivalents (unrestricted), certain investment-grade securities that are available for sale or held for trading including Agency mortgage-backed securities, obligations of Fannie Mae or Freddie Mac, and U.S. Treasury obligations, and unused and available portions of committed servicing advance lines;

●

FHFA net worth requirement is a minimum net worth of $2.5 million plus 0.25% (25 basis points) of UPB for total 1-4 unit residential mortgage loans serviced and a tangible net worth/total assets ratio greater than or equal to 6%;

●

Ginnie Mae single-family issuer minimum liquidity requirement is equal to the greater of $1.0 million or 0.10% (10 basis points) of the issuer’s outstanding Ginnie Mae single-family securities, which must be met with cash and cash equivalents; and

●

Ginnie Mae net worth requirement is equal to $2.5 million plus 0.35% (35 basis points) of the issuer’s outstanding Ginnie Mae single-family obligations.

We believe that we are currently in compliance with the applicable Agency requirements.

On August 4, 2021, our Board of Directors increased our common stock repurchase program from $1 billion to $2 billion. Share repurchases may be effected through open market purchases or privately negotiated transactions in accordance with applicable rules and regulations. The stock repurchase program does not have an expiration date and the authorization does not obligate us to acquire any particular amount of common stock. From inception through September 30, 2021, we have repurchased $1.0 billion of common shares under our stock repurchase program.

We continue to explore a variety of means of financing our continued growth, 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.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Off-Balance Sheet Arrangements and Guarantees

As of September 30, 2021, we have not entered into any off-balance sheet arrangements.

Debt Obligations

As described further above in “Liquidity and Capital Resources,” our debt obligations include borrowings with major financial institution counterparties in the form of sales of assets under agreements to repurchase, mortgage loan participation purchase and sale agreements, notes payable and a capital lease.

The borrower under assets sold under agreements to repurchase, mortgage loan participation purchase and sale agreements and certain notes payables may be PLS, the Issuer Trust or the PFSI Issuer Trust. All PLS debt obligations are guaranteed by PennyMac.

Under the terms of these agreements, PLS is required to comply with certain financial covenants, as described further above in “Liquidity and Capital Resources,” and various non-financial covenants customary for transactions of this nature. As of September 30, 2021, we believe we were in compliance in all material respects with these covenants.

The repurchase 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.

Table of Contents

In addition, the 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.

The Company has issued Unsecured Notes that 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 Company is required to maintain certain financial covenants under terms of the Unsecured Notes. On September 16, 2021, the Company issued $500 million aggregate principal amount of 5.75% unsecured senior notes due on September 15, 2031. We believe the Company was in compliance with all financial covenants in the Unsecured Notes as of September 30, 2021.

Our debt obligations have the following size and maturities:


	Outstanding		Total		Committed
Lender	indebtedness (1)		facility size (2)		facility (2)		Maturity date (2)

	(dollar amounts in thousands)
Assets sold under agreements to repurchase
Credit Suisse First Boston Mortgage Capital LLC (3)	$	1,966,825	$	4,950,000	$	1,950,000	March 31, 2023
Credit Suisse First Boston Mortgage Capital LLC & Citibank, N.A. (3)	$	100,000	$	100,000	$	100,000	March 31, 2023
Bank of America, N.A.	$	1,374,800	$	1,800,000	$	540,000	June 7, 2023
Royal Bank of Canada	$	881,805	$	1,000,000	$	500,000	September 14, 2022
JPMorgan Chase Bank, N.A.	$	714,819	$	3,000,000	$	—	September 29, 2023
JPMorgan Chase Bank, N.A.	$	39,301	$	750,000	$	50,000	June 6, 2023
Barclays Bank PLC	$	657,729	$	750,000	$	375,000	November 3, 2022
Goldman Sachs Bank USA	$	297,957	$	1,000,000	$	500,000	December 23, 2022
BNP Paribas	$	297,821	$	600,000	$	300,000	July 31, 2023
Morgan Stanley Bank, N.A.	$	247,579	$	600,000	$	300,000	November 2, 2022
Wells Fargo Bank, N.A.	$	223,713	$	350,000	$	175,000	October 6, 2022
Citibank, N.A. (3)	$	100,953	$	950,000	$	600,000	August 10, 2023
Mortgage loan participation purchase and sale agreements
Bank of America, N.A.	$	519,784	$	550,000	$	—	June 8, 2022
Notes payable
GMSR 2018-GT1 Notes	$	650,000	$	650,000			February 25, 2023
GMSR 2018-GT2 Notes	$	650,000	$	650,000			August 25, 2023
Unsecured Senior Notes - 5.375%	$	650,000	$	650,000			October 15, 2025
Unsecured Senior Notes - 4.25%	$	650,000	$	650,000			February 15, 2029
Unsecured Senior Notes - 5.75%	$	500,000	$	500,000			September 15, 2031
Credit Suisse AG (3)	$	—	$	—	$	—	November 19, 2021
Obligations under capital lease
Banc of America Leasing and Capital LLC	$	5,583	$	25,000	$	—	June 13, 2022

(1)	Outstanding indebtedness as of September 30, 2021.

(2)	Total facility size, committed facility and maturity date include contractual changes through the date of this Report.

(3)

The $100 million is borrowed from with CSFB & Citibank, N.A. under a sale of a VFN under an agreement to repurchase up to a maximum of $500 million secured by Ginnie Mae MSRs. No borrowing is outstanding from CSFB & Citibank, N.A. under a sale of the GMSR Servicing Advance Notes under an agreement to repurchase up to a maximum of $600 million. Maximum amounts borrowed under both agreements to repurchase may be reduced by amounts utilized under other debt agreements with CSFB and Citibank N.A.

Table of Contents

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to our assets sold under agreements to repurchase is summarized by counterparty below as of September 30, 2021:


			Weighted average
			maturity of
			advances under
Counterparty	Amount at risk		repurchase agreement	Facility maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC & Citibank, N.A. (1)	$	2,403,804	March 31, 2023	March 31, 2023
Credit Suisse First Boston Mortgage Capital LLC (2)	$	255,253	November 18, 2021	March 31, 2023
Bank of America, N.A.	$	753,370	December 21, 2021	June 7, 2023
JP Morgan Chase Bank, N.A.	$	372,221	November 21, 2021	September 29, 2023
JP Morgan Chase Bank, N.A.	$	54,487	December 7, 2021	June 6, 2023
Goldman Sachs	$	246,809	November 11, 2021	December 23, 2022
BNP Paribas	$	152,152	December 21, 2021	July 31, 2023
Barclays Bank PLC	$	78,565	November 30, 2021	November 3, 2022
Royal Bank of Canada	$	78,230	January 3, 2022	September 14, 2022
Morgan Stanley Bank, N.A.	$	20,794	November 26, 2021	November 2, 2022
Wells Fargo Bank, N.A.	$	10,636	December 19, 2021	October 6, 2022
Citibank, N.A. (2)	$	5,401	December 2, 2021	August 10, 2023

(1)	The borrowing facility with Credit Suisse First Boston Mortgage Capital LLC & Citibank, N.A. is in the form of a sale of a variable funding note under an agreement to repurchase.

(2)	The borrowing facilities with Credit Suisse First Boston Mortgage Capital LLC and Citibank, N.A. are in the form of an asset sale under agreement to repurchase.

All debt financing arrangements that matured between September 30, 2021 and the date of this Report have been renewed or extended and are described in Note 12—Short-Term Borrowings to the accompanying consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, real estate values and other market-based risks. The primary market risks that we are exposed to are fair value risk, interest rate risk and prepayment risk.

Fair Value Risk

Our IRLCs, mortgage loans held for sale, MSRs and MSLs are reported at their fair values. The fair value of these assets fluctuates primarily due to changes in interest rates. The fair value risk we face is primarily attributable to interest rate risk and prepayment risk.

Interest Rate Risk

Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. Changes in interest rates affect both the fair value of, and interest income we earn from, our mortgage-related investments and our derivative financial instruments. This effect is most pronounced with fixed-rate mortgage assets.

In general, rising interest rates negatively affect the fair value of our IRLCs and inventory of mortgage loans held for sale and positively affect the fair value of our MSRs. Changes in interest rate significantly influence the prepayment speeds of the loans underlying our investments in MSRs and ESS, 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 ESS and the discount rate used in their valuation.

Table of Contents

Our operating results will depend, in part, on differences between the income from our investments and our financing costs. Presently our debt financing is based on a floating rate of interest calculated on a fixed spread over the relevant index, as determined by the particular financing arrangement.

Prepayment Risk

To the extent that the actual prepayment rate on the mortgage loans underlying our MSRs differs from what we projected when we initially recognized these assets and liabilities when we measure fair value as of the end of each reporting period, the carrying value of these assets and liabilities will be affected. In general, a decrease in the principal balances of the mortgage loans underlying our MSRs or an increase in prepayment expectations will decrease our estimates of the fair value of the MSRs, thereby reducing net servicing income, partially offset by the beneficial effect on net servicing income of a corresponding reduction in the fair value of our MSLs and ESS.

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 and repurchase agreement derivatives (both of which arise from our operations) for purposes other than in support of our risk management activities.

Our strategies are reviewed daily within a disciplined risk management framework. We use a variety of interest rate and spread shifts and scenarios and define target limits for market value and liquidity loss in those scenarios. With respect to our IRLCs and inventory of loans held for sale, we use MBS forward sale contracts to lock in the price at which we will sell the mortgage loans or resulting MBS, and further use MBS put options to mitigate the risk of our IRLCs not closing at the rate we expect. With respect to our MSRs, we seek to mitigate mortgage-based loss exposure utilizing MBS forward purchase and sale contracts, address exposures to smaller interest rate shifts with Treasury and interest rate swap futures, and use options and swaptions to achieve target coverage levels for larger interest rate shocks.

Fair Value Sensitivities

The following sensitivity analyses are limited in that they were performed at a particular point in time; only contemplate the movements in the indicated variables; do not incorporate changes to other variables; are subject to the accuracy of various models and inputs used; and do not incorporate other factors that would affect our overall financial performance in such scenarios, including operational adjustments made by management to account for changing circumstances. For these reasons, the following estimates should not be viewed as earnings forecasts.

Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs as of September 30, 2021, 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%

	(in thousands)
Pricing spread	$	257,091	$	124,202	$	61,065	$	(59,086)	$	(116,282)	$	(225,331)
Prepayment speed	$	338,259	$	162,613	$	79,766	$	(76,847)	$	(150,928)	$	(291,339)
Annual per-loan cost of servicing	$	126,799	$	63,399	$	31,700	$	(31,700)	$	(63,399)	$	(126,799)

Table of Contents

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 has been no change in our internal control over financial reporting during the quarter ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II. OTHER INFORMATION

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. Set forth below are material updates to legal proceedings of the Company.

On November 5, 2019, Black Knight Servicing Technologies, LLC, a wholly-owned indirect subsidiary of Black Knight, Inc. (“BKI”), filed a Complaint and Demand for Jury Trial in the Fourth Judicial Circuit Court in and for Duval County, Florida (the “Florida State Court”), captioned Black Knight Servicing Technologies, LLC v. PennyMac Loan Services, LLC, Case No. 2019-CA-007908 (the “BKI Complaint”). Allegations contained within the BKI Complaint include breach of contract and misappropriation of MSP® System trade secrets in order to develop an imitation mortgage-processing system intended to replace the MSP® System. The BKI Complaint seeks damages for breach of contract and misappropriation of trade secrets, injunctive relief under the Florida Uniform Trade Secrets Act and declaratory judgment of ownership of all intellectual property and software developed by or on behalf of PLS as a result of its wrongful use of and access to the MSP® System and related trade secret and confidential information. On March 30, 2020, the Florida State Court granted a motion to compel arbitration filed by PLS. Consequently, on April 27, 2020, PLS dismissed its federal court action without prejudice to pursue those claims in arbitration as well. While no assurance can be provided as to the ultimate outcome of this claim or the account of any losses to the Company, the Company believes the BKI Complaint is without merit and plans to vigorously defend the matter, which remains pending.

On January 7, 2021, PLS received a letter from the CFPB notifying PLS that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, the CFPB’s Office of Enforcement was considering recommending that the CFPB take legal action against PLS for alleged violations of the Real Estate Settlement Procedures Act and Truth in Lending Act. The CFPB's examination covered the period from March 2015 through September 2016. Should the CFPB commence an action, it may seek restitution, civil monetary penalties, injunctive relief, or other corrective action, the extent of which remains uncertain at this time. Notably, certain of the alleged violations were originally self-identified by PLS and remediated prior to the CFPB's examination, and all alleged violations were fully remediated as of August 2017. PLS confirmed these remediation actions as well as full restitution to any affected borrowers in its response to the NORA letter on February 8, 2021. While the NORA process remains open and pending at this time, and there can be no assurance as to the nature or extent of any actions taken by the CFPB with regard to these alleged violations, we do not believe that the ultimate resolution of this matter will have a material adverse effect on our financial statements or operations.

Table of Contents

Item 1A. Risk Factors

There have been no material changes from the risk factors set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 25, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of unregistered equity securities during the quarter ended September 30, 2021.

The following table summarizes information about our stock repurchase during the quarter ended September 30, 2021:


	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or program (1)		Approximate dollar value of shares that may yet be purchased under the plans or program (1)
July 1, 2021 – July 31, 2021		2,531,713	$	60.16		2,531,713	$	52,707,024
August 1, 2021 – August 31, 2021		530,237	$	66.23		530,237	$	1,018,077,871
September 1, 2021 – September 30, 2021		1,133,494	$	63.69		1,133,494	$	946,779,369
Total		4,195,444	$	63.08		4,195,444	$	946,779,369

(1)

In August 2021, the Company’s board of directors approved an increase to the Company’s common stock repurchase program from $1 billion to $2 billion. The stock repurchase program does not require the Company to purchase a specific number of shares, and the timing and amount of any shares repurchased are based on market conditions and other factors, including price, regulatory requirements and capital availability. Stock repurchases may be effected through privately negotiated transactions or open market purchases, including pursuant to a trading plan implemented pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The stock repurchase program does not have an expiration date but may be suspended, modified or discontinued at any time without prior notice.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None

Table of Contents

Item 6. Exhibits


		Incorporated by Reference from the Below-Listed Form (Each Filed under SEC File Number 15-68669 or 001-38727)

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.	8-K12B	November 1, 2018

3.1.1	Certificate of Amendment to Amended and Restated Certificate of Incorporation of New PennyMac Financial Services, Inc.	8-K12B	November 1, 2018

3.2	Amended and Restated Bylaws of New PennyMac Financial Services, Inc.	8-K12B	November 1, 2018

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

4.1	Indenture, dated as of September 16, 2021, among PennyMac Financial Services, Inc., the guarantors party thereto and U.S. Bank, National Association, as trustee, relating to the 5.750% Senior Notes due 2031.	8-K	September 16, 2021

4.2	Form of Global Note for 5.750% Senior Notes due 2031 (included in Exhibit 4.1).	8-K	September 16, 2021

4.3	First Supplemental Indenture, dated October 7, 2021, among PennyMac Financial Services, Inc., the guarantors party thereto and U.S. Bank, National Association, as trustee, relating to the 4.250% Senior Notes due 2029.	8-K	October 7, 2021

4.4	Second Supplemental Indenture, dated as of October 7, 2021, among PennyMac Financial Services, Inc., the guarantors party thereto and U.S. Bank, National Association, as trustee, relating to the 5.375% Senior Notes due 2025.	8-K	October 7, 2021

10.1	Amended and Restated Master Repurchase Agreement, dated as of July 30, 2021, by and among PennyMac Loan Services, LLC, Credit Suisse AG, Cayman Islands Branch, Citibank, N.A., and Credit Suisse First Boston Mortgage Capital, LLC, MSR Collateralized Notes, Series 2016-MSRVF1.	8-K	August 5, 2021

10.2	Amendment No. 3 to the Series 2020-MSRVF1 Indenture Supplement, dated as of July 30, 2021, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, Credit Suisse First Boston Mortgage Capital, LLC, and Credit Suisse AG, Cayman Islands Branch.	8-K	August 5, 2021

10.3	Amendment No. 5 to the Series 2016-MSRVF1 Indenture Supplement, dated as of July 30, 2021, by and among PNMAC GMSR ISSUER TRUST, Citibank N.A., PennyMac Loan Services, LLC and Credit Suisse First Boston Mortgage Capital LLC.	8-K	August 5, 2021

10.4	Amended and Restated Master Repurchase Agreement, dated as of July 30, 2021, by and among PennyMac Loan Services, LLC, Credit Suisse AG, Cayman Islands Branch, Citibank, N.A., and Credit Suisse First Boston Mortgage Capital, LLC, MSR Collateralized Notes, Series 2020-SPIADVF1.	8-K	August 5, 2021

Table of Contents


		Incorporated by Reference from the Below-Listed Form (Each Filed under SEC File Number 15-68669 or 001-38727)

Exhibit No.	Exhibit Description	Form	Filing Date
10.5	Second Amended and Restated Guaranty, dated as of July 30, 2021, by Private National Mortgage Acceptance Company, LLC in favor of Credit Suisse First Boston Mortgage Capital, LLC on behalf of Credit Suisse AG, Cayman Islands Branch and Citibank, N.A.	8-K	August 5, 2021

10.6†	PennyMac Financial Services, Inc. Change of Control Severance Plan.	8-K	September 28, 2021

10.7	Amendment No. 3 to Fourth Amended and Restated Flow Servicing Agreement, dated as of September 29, 2021, by and between PennyMac Loan Services, LLC and PennyMac Operating Partnership, L.P.	*

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, formatted in Inline XBRL: (i) the Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 (ii) the Consolidated Statements of Income for the quarters ended September 30, 2021 and September 30, 2020, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended September 30, 2021 and September 30, 2020, (iv) the Consolidated Statements of Cash Flows for the quarters ended September 30, 2021 and September 30, 2020 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 101.LAB 101.PRE	Inline XBRL Taxonomy Extension Definition Linkbase Document Inline XBRL Taxonomy Extension Label Linkbase Document Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (embedded within the Inline XBRL document).

*Filed herewith

**The certifications attached hereto as Exhibits 32.1 and 32.2 are furnished to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.

† Indicates management contract or compensatory plan or arrangement.

Portions of the exhibit have been redacted.

Table of Contents

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.

	PENNYMAC FINANCIAL SERVICES, INC.
	(Registrant)

Dated: November 4, 2021	By:	/s/ DAVID A. SPECTOR
		David A. Spector
		Chairman and Chief Executive Officer

Dated: November 4, 2021	By:	/s/ DANIEL S. PEROTTI
		Daniel S. Perotti
		Senior Managing Director and Chief Financial Officer