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PennyMac Financial Services, Inc. - Quarter Report: 2022 June (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 June 30, 2022

or

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

For the transition period from           to           

Commission File Number: 001-38727

PennyMac Financial Services, Inc.

(Exact name of registrant as specified in its charter)

Delaware

83-1098934

(State or other jurisdiction of

(IRS Employer

incorporation or organization)

Identification No.)

3043 Townsgate Road, Westlake Village, California

91361

(Address of principal executive offices)

(Zip Code)

(818224-7442

(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 August 2, 2022

Common Stock, $0.0001 par value

52,464,912

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

FORM 10-Q

June 30, 2022

TABLE OF CONTENTS

Page

Special Note Regarding Forward-Looking Statements

3

PART I. FINANCIAL INFORMATION

5

Item 1.

Financial Statements (Unaudited):

5

Consolidated Balance Sheets

5

Consolidated Statements of Income

6

Consolidated Statements of Changes in Stockholders’ Equity

7

Consolidated Statements of Cash Flows

8

Notes to Consolidated Financial Statements

10

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

59

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

77

Item 4.

Controls and Procedures

79

PART II. OTHER INFORMATION

80

Item 1.

Legal Proceedings

80

Item 1A.

Risk Factors

80

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

80

Item 3.

Defaults Upon Senior Securities

80

Item 4.

Mine Safety Disclosures

80

Item 5.

Other Information

80

Item 6.

Exhibits

81

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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 prepayment rates; 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, 2021, filed with the Securities and Exchange Commission (“SEC”) on February 23, 2022.

 

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

changes in prevailing interest rates;

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 corona virus (“COVID-19”);

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;

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Table of Contents

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

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

maintaining sufficient capital and liquidity and compliance with financial covenants;

our substantial amount of indebtedness;

increases in loan delinquencies and defaults;

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

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 ability to effectively identify, manage and hedge our credit, interest rate, prepayment, liquidity and climate 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.

 

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.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

    

June 30, 

December 31, 

    

2022

    

2021

(in thousands, except share amounts)

ASSETS

Cash

 $

1,415,396

 $

340,069

Short-term investment at fair value

4,961

6,873

Loans held for sale at fair value (includes $3,270,508 and $9,135,577 pledged to creditors)

3,586,810

9,742,483

Derivative assets

103,901

333,695

Servicing advances, net (includes valuation allowance of $66,143 and $120,940; $279,664 and $232,107 pledged to creditors)

570,822

702,160

Mortgage servicing rights at fair value (includes $5,163,544 and $3,856,791 pledged to creditors)

5,217,167

3,878,078

Operating lease right-of-use assets

82,078

89,040

Investment in PennyMac Mortgage Investment Trust at fair value

1,037

1,300

Receivable from PennyMac Mortgage Investment Trust

43,234

40,091

Loans eligible for repurchase

2,778,768

3,026,207

Other (includes $25,547 and $45,294 pledged to creditors)

468,081

616,616

Total assets

 $

14,272,255

 $

18,776,612

LIABILITIES

Assets sold under agreements to repurchase

 $

2,441,816

 $

7,292,735

Mortgage loan participation purchase and sale agreements

502,116

479,845

Obligations under capital lease

3,489

Notes payable secured by mortgage servicing assets

1,793,260

1,297,622

Unsecured senior notes

1,778,055

1,776,219

Derivative liabilities

42,702

22,606

Mortgage servicing liabilities at fair value

2,337

2,816

Accounts payable and accrued expenses

317,998

359,413

Operating lease liabilities

102,756

110,003

Payable to PennyMac Mortgage Investment Trust

98,991

228,019

Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement

27,014

30,530

Income taxes payable

885,721

685,262

Liability for loans eligible for repurchase

2,778,768

3,026,207

Liability for losses under representations and warranties

39,336

43,521

Total liabilities

10,810,870

15,358,287

Commitments and contingencies – Note 16

STOCKHOLDERS’ EQUITY

Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 52,938,854 and 56,867,202 shares, respectively

5

6

Additional paid-in capital

125,396

Retained earnings

3,461,380

3,292,923

Total stockholders' equity

3,461,385

3,418,325

Total liabilities and stockholders' equity

 $

14,272,255

 $

18,776,612

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

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Quarter ended June 30, 

  

Six months ended June 30, 

2022

2021

  

2022

2021

(in thousands, except earnings per share)

Revenues

Net gains on loans held for sale at fair value:

From non-affiliates

$

227,319

$

594,196

$

535,430

$

1,362,785

From PennyMac Mortgage Investment Trust

(4,752)

(11,548)

(14,404)

(25,796)

222,567

582,648

521,026

1,336,989

Loan origination fees:

From non-affiliates

37,541

90,163

103,057

186,008

From PennyMac Mortgage Investment Trust

2,404

7,128

4,746

15,320

39,945

97,291

107,803

201,328

Fulfillment fees from PennyMac Mortgage Investment Trust

20,646

54,020

37,400

114,855

Net loan servicing fees:

Loan servicing fees:

From non-affiliates

259,338

208,275

504,147

419,028

From PennyMac Mortgage Investment Trust

20,335

20,015

41,423

39,108

Other

22,677

31,731

48,038

61,330

302,350

260,021

593,608

519,466

Change in fair value of mortgage servicing rights and mortgage servicing liabilities

112,102

(336,268)

325,013

(112,805)

Change in fair value of excess servicing spread financing payable to
PennyMac Mortgage Investment Trust

(1,037)

Mortgage servicing rights hedging results

(176,005)

91,118

(393,865)

(351,033)

(63,903)

(245,150)

(68,852)

(464,875)

Net loan servicing fees

238,447

14,871

524,756

54,591

Net interest expense:

Interest income:

From non-affiliates

49,864

80,797

103,746

162,491

From PennyMac Mortgage Investment Trust

387

49,864

80,797

103,746

162,878

Interest expense:

To non-affiliates

71,127

102,431

148,434

208,864

To PennyMac Mortgage Investment Trust

1,280

71,127

102,431

148,434

210,144

Net interest expense

(21,263)

(21,634)

(44,688)

(47,266)

Management fees from PennyMac Mortgage Investment Trust

7,910

11,913

16,027

20,362

Change in fair value of investment in and dividends received from
PennyMac Mortgage Investment Trust

(194)

144

(192)

545

Results of real estate acquired in settlement of loans

810

540

1,353

1,320

Other

2,647

2,459

5,534

4,214

Total net revenues

511,515

742,252

1,169,019

1,686,938

Expenses

Compensation

198,192

265,067

443,739

523,896

Loan origination

44,931

75,675

120,264

163,067

Technology

34,621

34,236

69,407

67,908

Professional services

20,793

24,834

40,896

38,120

Marketing and advertising

13,007

10,213

35,410

16,878

Occupancy and equipment

9,371

9,029

18,840

18,067

Servicing

3,051

31,290

1,805

50,473

Other

10,023

12,393

26,612

23,006

Total expenses

333,989

462,737

756,973

901,415

Income before provision for income taxes

177,526

279,515

412,046

785,523

Provision for income taxes

48,363

75,286

109,290

204,426

Net income

$

129,163

$

204,229

$

302,756

$

581,097

Earnings per share

Basic

$

2.38

$

3.10

$

5.51

$

8.61

Diluted

$

2.28

$

2.94

$

5.23

$

8.16

Weighted average shares outstanding

Basic

54,167

65,890

54,995

67,493

Diluted

56,642

69,399

57,892

71,248

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

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

Quarter ended June 30, 2022

Additional

Total

Number of

Par

paid-in

Retained

stockholders'

    

shares

    

value

    

capital

    

earnings

    

equity

(in thousands)

Balance, March 31, 2022

55,342

$

6

$

$

3,441,597

$

3,441,603

Net income

129,163

129,163

Stock-based compensation

23

15,352

15,352

Issuance of common stock in settlement of directors' fees

1

51

51

Repurchase of common stock

(2,427)

(1)

(15,403)

(98,241)

(113,645)

Common stock dividend ($0.20 per share)

(11,139)

(11,139)

Balance, June 30, 2022

52,939

$

5

$

$

3,461,380

$

3,461,385

Quarter ended June 30, 2021

Additional

Total

Number of

Par

paid-in

Retained

stockholders'

    

shares

    

value

    

capital

    

earnings

    

equity

(in thousands)

Balance, March 31, 2021

66,961

$

7

$

762,585

$

2,704,822

$

3,467,414

Net income

204,229

204,229

Stock-based compensation

96

10,621

10,621

Issuance of common stock in settlement of directors' fees

1

50

50

Repurchase of common stock

(2,574)

(1)

(154,919)

(154,920)

Common stock dividend ($0.20 per share)

(13,565)

(13,565)

Balance, June 30, 2021

64,484

$

6

$

618,337

$

2,895,486

$

3,513,829

Six months ended June 30, 2022

Additional

Total

Number of

Par

paid-in

Retained

stockholders'

    

shares

    

value

    

capital

    

earnings

    

equity

(in thousands)

Balance, December 31, 2021

56,867

$

6

$

125,396

$

3,292,923

$

3,418,325

Net income

302,756

302,756

Stock-based compensation

817

17,823

17,823

Issuance of common stock in settlement of directors' fees

2

102

102

Repurchase of common stock

(4,747)

(1)

(143,321)

(111,735)

(255,057)

Common stock dividends ($0.40 per share)

(22,564)

(22,564)

Balance, June 30, 2022

52,939

$

5

$

$

3,461,380

$

3,461,385

Six months ended June 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

581,097

581,097

Stock-based compensation

803

14,622

14,622

Issuance of common stock in settlement of directors' fees

2

101

101

Repurchase of common stock

(7,227)

(1)

(443,438)

(443,439)

Common stock dividends ($0.40 per share)

(27,940)

(27,940)

Balance, June 30, 2021

64,484

$

6

$

618,337

$

2,895,486

$

3,513,829

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

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six months ended June 30, 

    

2022

    

2021

(in thousands)

Cash flow from operating activities

Net income

$

302,756

$

581,097

Adjustments to reconcile net income to net cash provided by operating activities:

Net gains on loans held for sale at fair value

(521,026)

(1,336,989)

Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread

(325,013)

113,842

Mortgage servicing rights hedging results

393,865

351,033

Capitalization of interest and advances on loans held for sale

(2,817)

(1,925)

Accrual of interest on excess servicing spread financing payable to PennyMac Mortgage Investment Trust

1,280

Amortization of debt issuance costs

10,133

13,977

Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust

263

(475)

Results of real estate acquired in settlement in loans

(1,353)

(1,320)

Stock-based compensation expense

24,223

19,771

Reversal of provision for servicing advance losses

(51,293)

(33,590)

Impairment of capitalized software

728

Depreciation and amortization

14,375

14,967

Amortization of right-of-use assets

7,755

6,918

Purchase of loans held for sale from PennyMac Mortgage Investment Trust

(23,982,890)

(35,474,697)

Origination of loans held for sale

(15,128,696)

(27,731,285)

Purchase of loans held for sale from non-affiliates

(1,215,388)

(2,664,336)

Purchase of loans from Ginnie Mae securities and early buyout investors

(4,752,678)

(11,562,768)

Sale to non-affiliates and principal payments of loans held for sale

50,841,788

79,007,900

Sale of loans held for sale to PennyMac Mortgage Investment Trust

298,862

Repurchase of loans subject to representations and warranties

(45,176)

(43,914)

Decrease in servicing advances

128,940

12,543

(Increase) decrease in receivable from PennyMac Mortgage Investment Trust

(3,998)

18,058

Sale of real estate acquired in settlement of loans

9,937

9,503

Decrease in other assets

134,692

63,006

(Decrease) increase in accounts payable and accrued expenses

(54,033)

61,121

Decrease in operating lease liabilities

(8,040)

(8,265)

Decrease in payable to PennyMac Mortgage Investment Trust

(140,615)

(28,584)

Payments to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement

(3,516)

(3,350)

Increase (decrease) in income taxes payable

200,459

(52,648)

Net cash provided by operating activities

6,131,516

1,331,598

Statements continue on the next page

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

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PENNYMAC FINANCIAL SERVICES, INC.

(Continued) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six months ended June 30, 

    

2022

    

2021

(in thousands)

Cash flow from investing activities

Decrease in short-term investment

1,912

11,497

Net change in assets purchased from PMT under agreement to resell

80,862

Net settlement of derivative financial instruments used for hedging of mortgage servicing rights

(574,109)

(345,621)

Acquisition of capitalized software

(39,267)

(21,594)

Decrease in margin deposits

188,176

134,666

Purchase of furniture, fixtures, equipment and leasehold improvements

(4,089)

(5,049)

Net cash used in investing activities

(427,377)

(145,239)

Cash flow from financing activities

Sale of assets under agreements to repurchase

42,087,498

69,437,269

Repurchase of assets sold under agreements to repurchase

(46,938,843)

(70,839,012)

Issuance of mortgage loan participation purchase and sale certificates

9,556,801

12,508,356

Repayment of mortgage loan participation purchase and sale certificates

(9,533,871)

(12,517,580)

Repayment of obligations under capital lease

(3,489)

(4,187)

Issuance of notes payable secured by mortgage servicing assets

500,000

Issuance of unsecured senior notes

650,000

Repayment of excess servicing spread financing

(134,624)

Payment of debt issuance costs

(12,892)

(18,648)

Issuance of common stock pursuant to exercise of stock options

1,380

3,397

Payment of withholding taxes relating to stock-based compensation

(7,780)

(8,546)

Payment of dividend to holders of common stock

(22,564)

(27,940)

Repurchase of common stock

(255,057)

(443,439)

Net cash used in financing activities

(4,628,817)

(1,394,954)

Net increase (decrease) in cash and restricted cash

1,075,322

(208,595)

Cash and restricted cash at beginning of period

340,093

532,781

Cash and restricted cash at end of period

$

1,415,415

$

324,186

Cash and restricted cash at end of period are comprised of the following:

Cash

$

1,415,396

$

324,158

Restricted cash included in Other assets

19

28

$

1,415,415

$

324,186

Supplemental cash flow information:

Cash paid for interest

$

154,745

$

208,015

Cash (refunds received) paid for income taxes, net

$

(91,169)

$

257,074

Non-cash investing activities:

Mortgage servicing rights resulting from loan sales

$

1,014,555

$

953,895

Operating right-of-use assets recognized

$

793

$

7,813

Non-cash financing activities:

Mortgage servicing liabilities resulting from loan sales

$

$

64,383

Issuance of Excess servicing spread payable to PennyMac Mortgage Investment Trust
pursuant to a recapture agreement

$

$

557

Issuance of common stock in settlement of directors' fees

$

102

$

101

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

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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 equity interests in Private National Mortgage Acceptance Company, LLC (“PNMAC”). The Company is the managing member of PNMAC, and it operates and controls all of the businesses and consolidates the financial results of PNMAC and its subsidiaries.

PNMAC is a Delaware limited liability company which, through its subsidiaries, engages in mortgage banking and investment management activities. PNMAC’s mortgage banking activities consist of residential mortgage loan production and servicing. PNMAC’s investment management activities and a portion of its 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. PNMAC’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 U.S. Department of Veterans Affairs (“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

The accompanying consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s Accounting Standards Codification for interim financial information and with the Securities and Exchange Commission’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these consolidated financial statements and notes do not include all of the information required by GAAP for complete financial statements. This interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

The accompanying consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, income, and cash flows for the interim periods presented, but are not necessarily indicative of income to be anticipated for the full year ending December 31, 2022. 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.

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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, change in fair value of investment in and dividends received from PMT, and expense allocations received from PMT) totaled 9% and 11% of total net revenue for the quarters ended June 30, 2022 and 2021, respectively, and 8% and 10% for the six months ended June 30, 2022 and 2021, respectively. The Company also purchased 66% and 54% of its newly originated loan production from PMT during the quarters ended June 30, 2022 and 2021, respectively, and 59% and 54% during the six months ended June 30, 2022 and 2021, respectively.

Note 4—Related Party Transactions

Transactions with PMT

Operating Activities

Mortgage Loan Production Activities and Mortgage Servicing Rights (“MSRs”) 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

Pursuant to the terms of an MSR recapture agreement by and between the Company and PMT, which was amended and restated for a term of five years effective July 1, 2020, if the Company refinances mortgage loans for which PMT holds the MSRs, the Company is generally required to transfer and convey to PMT cash in an amount equal to:

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

Fulfillment Services

The Company provides PMT with certain mortgage banking services, including fulfillment and disposition-related services, for which it receives a monthly fulfillment fee. Pursuant to the terms of a mortgage banking services agreement, the fulfillment fees shall not exceed the following:

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
$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
$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.

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Sourcing Fees

PMT does not hold the Ginnie Mae approval required to issue Ginnie Mae mortgage-backed securities (“MBS”) and act as a servicer. Accordingly, under the mortgage banking services agreement, the Company purchases mortgage loans underwritten in accordance with the Ginnie Mae MBS Guide “as is” and without recourse of any kind from PMT at PMT’s cost less an administrative fee plus accrued interest and a sourcing fee ranging from one to two basis points, generally based on the average number of calendar days the loans are held by PMT before being purchased by the Company.

While the Company purchases these mortgage loans “as is” and without recourse of any kind from PMT, where the Company has a claim for repurchase, indemnity or otherwise against a correspondent seller, it is entitled, at its sole expense, to pursue any such claim through or in the name of PMT.

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

Quarter ended June 30, 

Six months ended June 30, 

    

2022

    

2021

   

2022

    

2021

(in thousands)

Net gains on loans held for sale at fair value:

Net losses on loans held for sale to PMT (primarily cash)

$

(1,429)

$

$

(2,820)

$

Mortgage servicing rights and excess servicing spread recapture incurred

(3,323)

(11,548)

(11,584)

(25,796)

$

(4,752)

$

(11,548)

$

(14,404)

$

(25,796)

Sale of loans held for sale to PMT

$

39,824

$

$

298,862

$

Tax service fees earned from PMT included in Loan origination fees

$

2,404

$

7,128

$

4,746

$

15,320

Fulfillment fee revenue

    

$

20,646

    

$

54,020

    

$

37,400

$

114,855

Unpaid principal balance ("UPB") of loans fulfilled for PMT subject to fulfillment fees

$

10,323,700

$

30,479,292

$

20,092,962

$

64,241,132

Sourcing fees included in cost of loans purchased from PMT

$

1,063

$

1,630

$

2,359

$

3,368

Unpaid principal balance of loans purchased from PMT

$

10,634,209

$

16,297,216

$

23,381,988

$

33,856,791

Loan Servicing

The Company and PMT have entered into a loan servicing agreement (the “Servicing Agreement”), pursuant to which the Company provides subservicing for PMT’s MSRs and loans held for sale (prime servicing) and its portfolio of residential mortgage loans purchased with credit deterioration (special servicing). The Servicing Agreement provides for servicing fees of per-loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced loan or the real estate acquired in settlement of loans (“REO”). The Company also remains entitled to customary ancillary income and market-based fees and charges relating to loans it services for PMT. 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.

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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.

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”).

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 June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

   

2021

(in thousands)

Loan type serviced:

Loans acquired for sale

$

258

$

630

$

522

$

1,173

Loans at fair value

106

80

316

217

Mortgage servicing rights

19,971

19,305

40,585

37,718

$

20,335

$

20,015

$

41,423

$

39,108

The Servicing Agreement expires on June 30, 2025.

Investment Management Activities

The Company has a management agreement with PMT (the “Management Agreement”), pursuant to which the Company oversees PMT’s business affairs in conformity with 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.”

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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 June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

   

2021

(in thousands)

Base management

$

7,910

$

8,648

$

16,027

    

$

17,097

Performance incentive

3,265

3,265

$

7,910

$

11,913

$

16,027

$

20,362

Expense Reimbursement

Under the Management Agreement, PMT reimburses the Company for its organizational and operating expenses, including third-party expenses, incurred on PMT’s behalf, it being understood that the Company and its affiliates shall allocate a portion of their personnel’s time to provide certain legal, tax and investor relations services for the direct benefit of PMT. With respect to the allocation of the Company’s and its affiliates’ personnel compensation, the Company is reimbursed $165,000 per fiscal quarter, such amount to be reviewed annually and not preclude reimbursement for any other services performed by the Company or its affiliates.

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

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The Company received reimbursements from PMT for expenses as follows:

Quarter ended June 30, 

Six months ended June 30, 

    

2022

    

2021

   

2022

   

2021

(in thousands)

Reimbursement of:

    

                

    

                

    

                

Expenses incurred on PMT's behalf, net

$

2,834

$

7,804

$

8,191

$

9,140

Common overhead incurred by the Company

1,809

1,268

3,673

1,839

Compensation

165

165

330

330

$

4,808

$

9,237

$

12,194

$

11,309

Payments and settlements during the period (1)

$

29,562

$

74,441

$

69,326

$

187,182

(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 PNMAC, 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.

PMT Common Stock

The Company owns 75,000 common shares of beneficial interest of PMT.

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

Quarter ended June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

(in thousands)

Interest income relating to Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell

$

$

$

$

387

Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust

$

(194)

$

144

$

(192)

$

545

June 30, 

December 31, 

    

2022

    

2021

(in thousands)

Common shares of beneficial interest of PennyMac Mortgage Investment Trust:

Fair value

$

1,037

$

1,300

Number of shares

75

75

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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”) 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.

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 six months ended June 30, 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:

Six months ended

June 30, 2021

(in thousands)

Excess servicing spread financing:

Balance at beginning of period

$

131,750

Issuance pursuant to recapture agreement

557

Accrual of interest

1,280

Change in fair value

1,037

Repayment

(134,624)

Balance at end of period

$

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

$

614

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Receivable from and Payable to PMT

Amounts receivable from and payable to PMT are summarized below:

June 30, 

December 31, 

    

2022

    

2021

(in thousands)

Receivable from PMT:

Allocated expenses and expenses incurred on PMT's behalf

$

12,053

$

15,431

Fulfillment fees

10,511

Management fees

7,910

8,918

Servicing fees

6,725

6,848

Correspondent production fees

6,035

8,894

$

43,234

$

40,091

Payable to PMT:

Amounts advanced by PMT to fund its servicing advances

$

95,409

$

212,066

Other

3,582

15,953

$

98,991

$

228,019

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 PNMAC that provides for the payment from time to time by the Company to PNMAC’s exchanged unitholders of an amount equal to 85% of the amount of the net tax benefits, if any, that the Company is deemed to realize as a result of (i) increases in tax basis of PNMAC’s assets resulting from exchanges of ownership interests in PNMAC and (ii) certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.

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 PNMAC who effected exchanges of ownership interests in PNMAC for the Company’s common stock before the closing of the reorganization.

The Company has recorded $27.0 million and $30.5 million Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement as of June 30, 2022 and December 31, 2021, respectively. The Company made $3.5 million of payments under the tax receivable agreement during the quarter and six months ended June 30, 2022 and made $3.4 million of payments during the quarter and six months ended June 30, 2021.

.

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Note 5—Loan Sales and Servicing Activities

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

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

Quarter ended June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

 

(in thousands)

Cash flows:

   

   

   

Sales proceeds

$

19,574,766

$

41,739,700

$

50,841,788

$

79,007,900

Servicing fees received (1)

$

228,834

$

201,866

$

433,762

$

397,648

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

The following table summarizes the UPB of the loans sold by the Company in transactions when it maintains continuing involvement with the loans as servicer:

June 30, 

December 31,

    

 

2022

   

2021

(in thousands)

UPB of loans outstanding

$

276,627,961

$

254,524,015

Delinquencies (1):

30-89 days

$

8,229,868

$

6,129,597

90 days or more:

Not in foreclosure

$

4,937,553

$

8,399,299

In foreclosure

$

761,684

$

715,016

Foreclosed

$

6,809

$

6,900

Bankruptcy

$

1,127,843

$

1,039,362

Delinquent loans in COVID-19 pandemic-related forbearance plans:

30-89 days

$

1,186,431

$

1,020,290

90 days or more

2,346,059

2,550,703

$

3,532,490

$

3,570,993

(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.

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Table of Contents

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

June 30, 2022

Servicing

Total

    

rights owned

    

Subservicing

    

loans serviced

(in thousands)

Investor:

Non-affiliated entities:

    

Originated

$

276,627,961

    

$

    

$

276,627,961

Purchased

20,683,203

20,683,203

297,311,164

297,311,164

PennyMac Mortgage Investment Trust

226,388,582

226,388,582

Loans held for sale

3,575,712

3,575,712

$

300,886,876

$

226,388,582

$

527,275,458

Delinquent loans (1):

30 days

$

6,978,732

$

1,273,934

$

8,252,666

60 days

1,973,027

215,132

2,188,159

90 days or more:

Not in foreclosure

5,211,953

809,369

6,021,322

In foreclosure

843,852

77,542

921,394

Foreclosed

7,737

11,824

19,561

$

15,015,301

$

2,387,801

$

17,403,102

Bankruptcy

$

1,309,018

$

123,905

$

1,432,923

Delinquent loans in COVID-19 pandemic-related forbearance plans:

30 days

$

628,325

$

109,758

$

738,083

60 days

603,333

88,208

691,541

90 days or more

2,439,641

431,331

2,870,972

$

3,671,299

$

629,297

$

4,300,596

Custodial funds managed by the Company (2)

$

5,656,246

$

2,907,651

$

8,563,897

(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.

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December 31, 2021

Servicing

Total

    

rights owned

    

Subservicing

    

loans serviced

(in thousands)

Investor:

Non-affiliated entities:

Originated

$

254,524,015

    

$

    

$

254,524,015

Purchased

23,861,358

23,861,358

278,385,373

278,385,373

PennyMac Mortgage Investment Trust

221,892,142

221,892,142

Loans held for sale

9,430,766

9,430,766

$

287,816,139

$

221,892,142

$

509,708,281

Delinquent loans (1):

30 days

$

5,338,545

$

974,055

$

6,312,600

60 days

1,604,782

190,727

1,795,509

90 days or more:

Not in foreclosure

9,001,137

1,750,628

10,751,765

In foreclosure

829,494

43,793

873,287

Foreclosed

8,017

16,489

24,506

$

16,781,975

$

2,975,692

$

19,757,667

Bankruptcy

$

1,261,980

$

133,655

$

1,395,635

Delinquent loans in COVID-19 pandemic-related forbearance plans:

30 days

$

554,161

$

81,580

$

635,741

60 days

556,990

89,534

646,524

90 days or more

2,732,089

638,703

3,370,792

$

3,843,240

$

809,817

$

4,653,057

Custodial funds managed by the Company (2)

$

8,485,081

$

3,823,527

$

12,308,608

(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.

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:

June 30, 

December 31, 

State

    

2022

    

2021

(in thousands)

California

$

67,505,093

$

67,317,935

Florida

47,896,679

45,222,233

Texas

44,140,186

42,064,686

Virginia

32,497,446

31,442,370

Maryland

24,673,589

23,922,075

All other states

310,562,465

299,738,982

$

527,275,458

$

509,708,281

20

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 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.

21

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:

June 30, 2022

    

Level 1

    

Level 2

    

Level 3

    

Total

(in thousands)

Assets:

Short-term investment

$

4,961

$

$

$

4,961

Loans held for sale at fair value

3,083,257

503,553

3,586,810

Derivative assets:

Interest rate lock commitments

70,685

70,685

Forward purchase contracts

61,855

61,855

Forward sales contracts

24,499

24,499

MBS put options

7,868

7,868

Put options on interest rate futures purchase contracts

11,844

11,844

Call options on interest rate futures purchase contracts

13,709

13,709

Total derivative assets before netting

25,553

94,222

70,685

190,460

Netting

(86,559)

Total derivative assets

25,553

94,222

70,685

103,901

Mortgage servicing rights at fair value

5,217,167

5,217,167

Investment in PennyMac Mortgage Investment Trust

1,037

1,037

$

31,551

$

3,177,479

$

5,791,405

$

8,913,876

Liabilities:

Derivative liabilities:

Interest rate lock commitments

$

$

$

5,534

$

5,534

Forward purchase contracts

13,005

13,005

Forward sales contracts

89,488

89,488

Total derivative liabilities before netting

102,493

5,534

108,027

Netting

(65,325)

Total derivative liabilities

102,493

5,534

42,702

Mortgage servicing liabilities at fair value

2,337

2,337

$

$

102,493

$

7,871

$

45,039

22

Table of Contents

December 31, 2021

    

Level 1

    

Level 2

    

Level 3

    

Total

(in thousands)

Assets:

Short-term investment

$

6,873

$

$

$

6,873

Loans held for sale at fair value

8,613,607

1,128,876

9,742,483

Derivative assets:

Interest rate lock commitments

323,473

323,473

Forward purchase contracts

20,485

20,485

Forward sales contracts

40,215

40,215

MBS put options

7,655

7,655

Swaption purchase contracts

1,625

1,625

Put options on interest rate futures purchase contracts

3,141

3,141

Call options on interest rate futures purchase contracts

2,078

2,078

Total derivative assets before netting

5,219

69,980

323,473

398,672

Netting

(64,977)

Total derivative assets

5,219

69,980

323,473

333,695

Mortgage servicing rights at fair value

3,878,078

3,878,078

Investment in PennyMac Mortgage Investment Trust

1,300

1,300

$

13,392

$

8,683,587

$

5,330,427

$

13,962,429

Liabilities:

Derivative liabilities:

Interest rate lock commitments

$

$

$

1,280

$

1,280

Forward purchase contracts

18,007

18,007

Forward sales contracts

35,415

35,415

Total derivative liabilities before netting

53,422

1,280

54,702

Netting

(32,096)

Total derivative liabilities

53,422

1,280

22,606

Mortgage servicing liabilities at fair value

2,816

2,816

$

$

53,422

$

4,096

$

25,422

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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 June 30, 2022

Net interest 

Mortgage 

Loans held

rate lock

servicing 

Assets

    

for sale

    

commitments (1)

    

rights

    

Total

(in thousands)

Balance, March 31, 2022

$

776,590

$

37,899

$

4,707,039

$

5,521,528

Purchases and issuances, net

598,948

145,980

744,928

Capitalization of interest and advances

15,608

15,608

Sales and repayments

(129,896)

(129,896)

Mortgage servicing rights resulting from loan sales

398,253

398,253

Changes in fair value included in income arising from:

Changes in instrument-specific credit risk

(24,394)

(24,394)

Other factors

(8,922)

(167,106)

111,875

(64,153)

(33,316)

(167,106)

111,875

(88,547)

Transfers from Level 3 to Level 2

(723,995)

(723,995)

Transfers to real estate acquired in settlement of loans

(386)

(386)

Transfers to loans held for sale

48,378

48,378

Balance, June 30, 2022

$

503,553

$

65,151

$

5,217,167

$

5,785,871

Changes in fair value recognized during the quarter relating to assets still held at June 30, 2022

$

(18,079)

$

65,151

$

111,875

$

158,947

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

Quarter ended

Liabilities

    

June 30, 2022

(in thousands)

Mortgage servicing liabilities:

Balance, March 31, 2022

$

2,564

Changes in fair value included in income

(227)

Balance, June 30, 2022

$

2,337

Changes in fair value recognized during the quarter relating to liabilities still outstanding at June 30, 2022

$

(227)

Quarter ended June 30, 2021

Net interest 

Mortgage

Loans held

rate lock

servicing

Assets

for sale

    

commitments (1)

    

rights

    

Total

(in thousands)

Balance, March 31, 2021

    

$

5,202,065

$

337,940

$

3,268,910

$

8,808,915

Purchases and issuances, net

6,828,094

351,934

7,180,028

Capitalization of interest and advances

60,439

60,439

Sales and repayments

(3,866,340)

(3,866,340)

Mortgage servicing rights resulting from loan sales

483,362

483,362

Changes in fair value included in income arising from:

Changes in instrument-specific credit risk

179,792

179,792

Other factors

332,435

(339,624)

(7,189)

179,792

332,435

(339,624)

172,603

Transfers from Level 3 to Level 2

(4,585,789)

(4,585,789)

Transfers to loans held for sale

(678,699)

(678,699)

Balance, June 30, 2021

$

3,818,261

$

343,610

$

3,412,648

$

7,574,519

Changes in fair value recognized during the quarter relating to assets still held at June 30, 2021

$

74,184

$

343,610

$

(339,624)

$

78,170

24

Table of Contents

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

Quarter ended

Liabilities

    

June 30, 2021

(in thousands)

Mortgage servicing liabilities:

Balance, March 31, 2021

$

46,026

Mortgage servicing liabilities resulting from loan sales

57,421

Changes in fair value included in income

(3,356)

Balance, June 30, 2021

$

100,091

Changes in fair value recognized during the quarter relating to liabilities still outstanding at June 30, 2021

$

(3,356)

Six months ended June 30, 2022

Net interest 

Mortgage 

Loans held

rate lock

servicing 

Assets

for sale

  

commitments (1)

  

rights

  

Total

    

(in thousands)

Balance, December 31, 2021

$

1,128,876

$

322,193

$

3,878,078

$

5,329,147

Purchases and issuances, net

2,733,726

307,289

3,041,015

Capitalization of interest and advances

47,719

47,719

Sales and repayments

(1,264,888)

(1,264,888)

Mortgage servicing rights resulting from loan sales

1,014,555

1,014,555

Changes in fair value included in income arising from:

Changes in instrument-specific credit risk

(30,210)

(30,210)

Other factors

(21,318)

(566,483)

324,534

(263,267)

(51,528)

(566,483)

324,534

(293,477)

Transfers from Level 3 to Level 2

(2,089,966)

(2,089,966)

Transfers to real estate acquired in settlement of loans

(386)

(386)

Transfers to loans held for sale

2,152

2,152

Balance, June 30, 2022

$

503,553

$

65,151

$

5,217,167

$

5,785,871

Changes in fair value recognized during the period relating to assets still held at June 30, 2022

$

(28,700)

$

65,151

$

324,534

$

360,985

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

Six months ended

Liabilities

June 30, 2022

(in thousands)

Mortgage servicing liabilities:

Balance, December 31, 2021

    

$

2,816

Changes in fair value included in income

(479)

Balance, June 30, 2022

$

2,337

Changes in fair value recognized during the period relating to liabilities still outstanding at June 30, 2022

$

(479)

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Table of Contents

Six months ended June 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

11,056,535

829,867

11,886,402

Capitalization of interest and advances

78,844

78,844

Sales and repayments

(4,795,241)

(4,795,241)

Mortgage servicing rights resulting from loan sales

953,895

953,895

Changes in fair value included in income arising from:

Changes in instrument-specific credit risk

227,946

227,946

Other factors

152,822

(122,421)

30,401

227,946

152,822

(122,421)

258,347

Transfers from Level 3 to Level 2

(7,424,910)

(7,424,910)

Transfers to real estate acquired in settlement of loans

(82)

(82)

Transfers of interest rate lock commitments to loans held for sale

(1,316,105)

(1,316,105)

Balance, June 30, 2021

$

3,818,261

$

343,610

$

3,412,648

$

7,574,519

Changes in fair value recognized during the period relating to assets still held at June 30, 2021

$

135,823

$

343,610

$

(122,421)

$

357,012

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

Six months ended June 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

Mortgage servicing liabilities resulting from loan sales

64,383

64,383

Changes in fair value included in income

1,037

(9,616)

(8,579)

Repayments

(134,624)

(134,624)

Balance, June 30, 2021

$

$

100,091

$

100,091

Changes in fair value recognized during the period relating to liabilities still outstanding at June 30, 2021

$

$

(9,616)

$

(9,616)

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.

26

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 June 30, 

2022

2021

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 

$

(96,365)

$

$

(96,365)

$

761,841

$

$

761,841

Mortgage servicing rights

111,875

111,875

(339,624)

(339,624)

$

(96,365)

$

111,875

$

15,510

$

761,841

$

(339,624)

$

422,217

Liabilities:

Mortgage servicing liabilities

$

$

227

$

227

$

$

3,356

$

3,356

Six months ended June 30, 

2022

2021

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 

$

(204,343)

$

$

(204,343)

$

1,411,960

$

$

1,411,960

Mortgage servicing rights

324,534

324,534

(122,421)

(122,421)

$

(204,343)

$

324,534

$

120,191

$

1,411,960

$

(122,421)

$

1,289,539

Liabilities:

Excess servicing spread financing payable to PennyMac Mortgage Investment Trust

$

$

$

$

$

(1,037)

$

(1,037)

Mortgage servicing liabilities

479

479

9,616

9,616

$

$

479

$

479

$

$

8,579

$

8,579

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

June 30, 2022

December 31, 2021

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

$

3,513,307

$

3,494,822

$

18,485

$

9,577,398

$

9,263,242

$

314,156

90 days or more delinquent:

Not in foreclosure

63,177

65,812

(2,635)

153,162

153,875

(713)

In foreclosure

10,326

15,078

(4,752)

11,923

13,649

(1,726)

$

3,586,810

$

3,575,712

$

11,098

$

9,742,483

$

9,430,766

$

311,717

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)

June 30, 2022

$

$

$

1,666

$

1,666

December 31, 2021

$

$

$

2,588

$

2,588

27

Table of Contents

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

Quarter ended June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

(in thousands)

Real estate acquired in settlement of loans

$

(326)

$

(434)

$

(740)

$

(743)

Fair Value of Financial Instruments Carried at Amortized Cost

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

These liabilities are classified as “Level 3” fair value items due to the Company’s reliance on unobservable inputs to estimate their fair values. The Company has concluded that the fair values of these liabilities other than 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 indications of fair value provided by non-affiliate brokers. The fair value and carrying value of these notes are summarized below:

    

June 30, 2022

    

December 31, 2021

Fair value

Carrying value

Fair value

Carrying value

(in thousands)

Notes payable secured by mortgage servicing assets

$

1,746,784

$

1,793,260

$

1,302,640

$

1,297,622

Unsecured senior notes

$

1,416,500

$

1,778,055

$

1,790,375

$

1,776,219

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 responsibility for estimating the fair value of these assets and liabilities 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 responsible for estimating the fair values of “Level 3” fair value assets and liabilities other than IRLCs and maintaining its valuation policies and procedures.

The Company’s Capital Markets Risk Management staff develops the fair value of the Company’s IRLCs which is reviewed by its Capital Markets Operations group.

28

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 financial, investment and credit 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.

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 securities 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 they become 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.

29

Table of Contents

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

    

June 30, 2022

    

December 31, 2021

Fair value (in thousands)

$

503,553

$

1,128,876

Key inputs (1):

Discount rate:

Range

3.3% – 10.2%

2.2% – 9.2%

Weighted average

3.6%

2.3%

Twelve-month projected housing price index change:

Range

2.2% – 2.6%

6.1% – 6.5%

Weighted average

2.4%

6.2%

Voluntary prepayment/resale speed (2):

Range

4.7% – 28.6%

0.4% – 30.3%

Weighted average

24.6%

22.0%

Total prepayment speed (3):

Range

4.8% – 37.4%

0.4% – 39.3%

Weighted average

31.2%

28.2%

(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.

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Table of Contents

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

    

June 30, 2022

    

December 31, 2021

Fair value (in thousands) (1)

 

$

65,151

$

322,193

Key inputs (2):

Pull-through rate:

Range

7.9% – 100%

8.0% – 100%

Weighted average

84.3%

78.4%

Mortgage servicing rights fair value expressed as:

Servicing fee multiple:

Range

(3.2) – 7.0

(8.5) – 6.7

Weighted average

4.1

3.8

Percentage of loan commitment amount

Range

(0.6)% – 3.8%

(1.6)% – 3.6%

Weighted average

1.8%

1.5%

(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 – Mortgage servicing rights 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 prepayment rate (prepayment speed), pricing spread (discount rate), and annual per-loan cost to service the underlying loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key inputs are not directly related. Changes in the fair value of MSRs are included in Net loan servicing feesChange in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.

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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 June 30, 

Six months ended June 30, 

2022

2021

  

2022

2021

(Amount recognized and unpaid principal balance of underlying loans in thousands)

MSR and pool characteristics:

    

    

Amount recognized

$

398,253

$

483,362

$

1,014,555

$

953,895

Unpaid principal balance of underlying loans

$

19,377,222

$

36,830,098

$

49,953,192

$

71,773,352

Weighted average servicing fee rate (in basis points)

42

33

43

33

Key inputs (1):

Annual total prepayment speed (2):

Range

5.7% – 19.3%

6.7% – 17.7%

5.7% – 23.4%

6.2% – 16.7%

Weighted average

8.4%

8.5%

8.3%

8.1%

Equivalent average life (in years):

Range

4.3 – 9.2

4.0 – 8.8

3.7 – 9.2

4.1 – 9.0

Weighted average

8.5

8.1

8.4

8.3

Pricing spread (3):

Range

5.7% – 11.7%

6.0% – 16.9%

5.7% – 16.1%

6.0% – 16.9%

Weighted average

8.2%

8.9%

7.7%

9.2%

Per-loan annual cost of servicing:

Range

$80 – $146

$80 – $117

$80 – $176

$81 – $117

Weighted average

$103

$104

$104

$104

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

(2)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.

(3)Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. Effective January 1, 2022, the Company applies a pricing spread to the United State Treasury Securities (the “Treasury”) yield curve for purposes of discounting cash flows relating to MSRs. Through December 31, 2021, the Company applied its pricing spread to the United States Dollar London Interbank Offered Rate (“LIBOR”)/swap curve. The change in reference interest rate from the LIBOR/swap to the Treasury did not have a significant effect on the Company’s fair value measurement of MSRs.

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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:

June 30, 2022

December 31, 2021

(Fair value, unpaid principal balance of underlying 

 loans and effect on fair value amounts in thousands)

Fair value

$ 5,217,167

$ 3,878,078

Pool characteristics:

Unpaid principal balance of underlying loans

$ 297,269,682

$ 278,324,780

Weighted average note interest rate

3.2%

3.2%

Weighted average servicing fee rate (in basis points)

35

34

Key inputs (1):

Annual total prepayment speed (2):

Range

5.5% – 19.0%

7.9% – 26.7%

Weighted average

8.2%

10.7%

Equivalent average life (in years):

Range

2.0 – 9.2

3.1 – 7.7

Weighted average

8.0

6.8

Effect on fair value of (3):

5% adverse change

($79,424)

($80,109)

10% adverse change

($156,226)

($157,252)

20% adverse change

($302,462)

($303,259)

Pricing spread (4):

Range

4.9% – 14.8%

5.3% – 15.5%

Weighted average

6.9%

7.7%

Effect on fair value of (3):

5% adverse change

($76,013)

($59,577)

10% adverse change

($149,848)

($117,352)

20% adverse change

($291,326)

($227,791)

Per-loan annual cost of servicing:

Range

$79 – $156

$79 – $197

Weighted average

$106

$108

Effect on fair value of (3):

5% adverse change

($37,615)

($32,979)

10% adverse change

($75,231)

($65,958)

20% adverse change

($150,461)

($131,916)

(1)Weighted average inputs are based on the UPB of the underlying loans.
(2)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.
(3)These 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 to account for changing circumstances. For these reasons, the estimates should not be viewed as earnings forecasts.
(4)Effective January 1, 2022, the Company applies a pricing spread to the Treasury yield curve for purposes of discounting cash flows relating to MSRs. Through December 31, 2021, the Company applied its pricing spread to the United States Dollar LIBOR/swap curve. The change in reference interest rate from the LIBOR/swap to the Treasury did not have a significant effect on the Company’s fair value measurement of MSRs.

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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 six months ended June 30, 2021, the Company repaid its outstanding ESS financing payable to PMT.

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 feesChange in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.

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

June 30, 

December 31, 

2022

2021

Fair value (in thousands)

$

2,337

$

2,816

Pool characteristics:

 

    

Unpaid principal balance of underlying loans (in thousands)

$

41,481

$

60,593

Servicing fee rate (in basis points)

25

25

Key inputs (1):

Annual total prepayment speed (2)

18.0%

19.8%

Pricing spread (3)

7.5%

6.9%

Equivalent average life (in years)

4.7

4.1

Per-loan annual cost of servicing

$

1,253

$

1,406

(1)Weighted average inputs are based on UPB of the underlying mortgage loans.
(2)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.

(3)Effective January 1, 2022, the Company applies a pricing spread to the Treasury yield curve for purposes of discounting cash flows relating to MSLs. Through December 31, 2021, the Company applied its pricing spread to the United States Dollar London LIBOR/swap curve. The change in reference interest rate from the LIBOR/swap to the Treasury did not have a significant effect on the Company’s fair value measurement of MSLs.

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Table of Contents

Note 7—Loans Held for Sale at Fair Value

Loans held for sale at fair value include the following:

June 30, 

December 31, 

Loan type

    

2022

    

2021

(in thousands)

Government-insured or guaranteed

$

2,409,046

$

6,030,518

Conventional conforming

644,470

2,583,089

Jumbo

29,741

Purchased from Ginnie Mae securities serviced by the Company

450,598

1,082,444

Repurchased pursuant to representations and warranties

52,955

46,432

$

3,586,810

$

9,742,483

Fair value of loans pledged to secure:

Assets sold under agreements to repurchase

$

2,738,333

$

8,629,861

Mortgage loan participation purchase and sale agreements

532,175

505,716

$

3,270,508

$

9,135,577

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.

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Table of Contents

Derivative Notional Amounts, Fair Value of Derivatives and Netting of Financial Instruments

The Company has elected to present net derivative asset and liability positions, and cash collateral obtained from or posted to its counterparties when subject to a master netting arrangement that is legally enforceable on all counterparties in the event of default. The derivatives that are not subject to a master netting arrangement are IRLCs.

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

June 30, 2022

December 31, 2021

Fair value

Fair value

Notional

Derivative

Derivative

Notional

Derivative

Derivative

Derivative instrument

    

amount (1)

    

assets

    

liabilities

    

amount (1)

    

assets

    

liabilities

(in thousands)

Not subject to master netting arrangements:

Interest rate lock commitments

7,665,657

$

70,685

$

5,534

14,111,795

$

323,473

$

1,280

Subject to master netting arrangements (2):

Forward purchase contracts

9,437,616

61,855

13,005

22,007,383

20,485

18,007

Forward sales contracts

14,556,614

24,499

89,488

34,429,676

40,215

35,415

MBS put options

2,600,000

7,868

9,550,000

7,655

Put options on interest rate futures purchase contracts

3,175,000

11,844

2,450,000

3,141

Call options on interest rate futures purchase contracts

2,405,000

13,709

1,250,000

2,078

Swaption purchase contracts

5,375,000

1,625

Treasury futures purchase contracts

2,861,700

1,544,800

Treasury futures sale contracts

3,886,900

1,925,000

Interest rate swap futures purchase contracts

3,010,600

Interest rate swap futures sale contracts

2,187,200

Total derivatives before netting

190,460

108,027

398,672

54,702

Netting

(86,559)

(65,325)

(64,977)

(32,096)

$

103,901

$

42,702

$

333,695

$

22,606

Deposits received from derivative counterparties, net

$

21,234

$

32,881

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

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

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Table of Contents

Derivative Assets, Financial Instruments, and Cash Collateral Held by Counterparty

The following table summarizes by significant counterparty the amount of derivative asset positions after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance to qualify for setoff accounting.

June 30, 2022

December 31, 2021

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

$

70,685

$

$

$

70,685

$

323,473

$

$

$

323,473

RJ O'Brien

25,552

25,552

5,219

5,219

Nomura Securities International, Inc.

6,938

6,938

Bank of America, N.A.

3,005

3,005

Others

726

726

1,998

1,998

$

103,901

$

$

$

103,901

$

333,695

$

$

$

333,695

Derivative Liabilities, Financial Instruments and Collateral Held by Counterparty

The following table summarizes by significant counterparty the amount of derivative liabilities and assets sold under agreements to repurchase after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance to qualify for setoff accounting. All assets sold under agreements to repurchase are secured by sufficient collateral or have fair value that exceeds the liability amount recorded on the consolidated balance sheets.

June 30, 2022

December 31, 2021

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 (1)

 

pledged

 

amount

 

balance sheet

 

instruments (1)

 

pledged

 

amount

(in thousands)

Interest rate lock commitments

$

5,534

$

$

$

5,534

$

1,280

$

$

$

1,280

Credit Suisse First Boston Mortgage Capital LLC

1,003,404

(1,002,552)

852

1,974,278

(1,969,670)

4,608

Bank of America, N.A.

485,306

(477,673)

7,633

1,758,690

(1,758,690)

Citibank, N.A.

228,578

(225,646)

2,932

403,003

(402,806)

197

Goldman Sachs

198,695

(186,361)

12,334

853,147

(850,918)

2,229

Royal Bank of Canada

182,820

(182,820)

496,064

(496,064)

JPMorgan Chase Bank, N.A.

111,571

(107,675)

3,896

300,912

(300,912)

Morgan Stanley Bank, N.A.

88,467

(86,760)

1,707

299,580

(292,105)

7,475

Wells Fargo Bank, N.A.

83,803

(79,082)

4,721

203,779

(200,338)

3,441

Barclays Capital

60,082

(59,891)

191

677,419

(676,685)

734

BNP Paribas

37,554

(37,554)

349,172

(349,172)

Others

2,902

2,902

2,642

2,642

$

2,488,716

$

(2,446,014)

$

$

42,702

$

7,319,966

$

(7,297,360)

$

$

22,606

(1)Amounts represent the UPB of Assets sold under agreements to repurchase.

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Table of Contents

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 June 30, 

Six months ended June 30, 

Derivative activity

    

Income statement line

    

2022

    

2021

    

2022

    

2021

(in thousands)

Interest rate lock commitments

Net gains on loans held for sale at fair value (1)

$

27,251

$

5,670

$

(257,043)

$

(333,416)

Hedged item:

Interest rate lock commitments and loans held for sale

Net gains on loans held for sale at fair value

$

296,290

$

(167,734)

$

997,069

$

294,804

Mortgage servicing rights

Net loan servicing fees–Mortgage servicing rights hedging results

$

(176,005)

$

91,118

$

(393,865)

$

(351,033)

(1)Represents net change 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.

Note 9—Mortgage Servicing Rights and Mortgage Servicing Liabilities

Mortgage Servicing Rights at Fair Value

The activity in MSRs is as follows:

Quarter ended June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

(in thousands)

Balance at beginning of period

$

4,707,039

$

3,268,910

$

3,878,078

$

2,581,174

MSRs resulting from loan sales

398,253

483,362

1,014,555

953,895

Change in fair value due to:

Changes in valuation inputs used in valuation model (1)

233,697

(239,514)

557,625

73,376

Other changes in fair value (2)

(121,822)

(100,110)

(233,091)

(195,797)

Total change in fair value

111,875

(339,624)

324,534

(122,421)

Balance at end of period

$

5,217,167

$

3,412,648

$

5,217,167

$

3,412,648

UPB of underlying loans at end of period

$

297,269,682

$

252,475,400

June 30, 

December 31,

2022

2021

(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

$

5,163,544

$

3,856,791

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

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

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Table of Contents

Mortgage Servicing Liabilities at Fair Value

The activity in MSLs is summarized below:

Quarter ended June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

(in thousands)

Balance at beginning of period

$

2,564

$

46,026

$

2,816

$

45,324

Mortgage servicing liabilities resulting from loan sales

57,421

64,383

Changes in fair value due to:

Changes in valuation inputs used in valuation model (1)

(129)

11,083

(267)

17,847

Other changes in fair value (2)

(98)

(14,439)

(212)

(27,463)

Total change in fair value

(227)

(3,356)

(479)

(9,616)

Balance at end of period

$

2,337

$

100,091

$

2,337

$

100,091

UPB of underlying loans at end of period

$

41,481

$

6,135,249

(1)Principally reflects changes in expected borrower performance and servicer losses given default. 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 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.

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 June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

(in thousands)

Contractual servicing fees

$

259,338

$

208,275

$

504,147

$

419,028

Other fees:

                  

Late charges

9,527

6,665

19,644

14,596

Other

3,541

7,768

8,535

15,622

$

272,406

$

222,708

$

532,326

$

449,246

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Table of Contents

Note 10—Leases

The Company has operating lease agreements relating to its facilities. The Company’s operating lease agreements have remaining terms ranging from less than one year to eight years; some of the operating lease agreements include options to extend the term for up to five years. None of the Company’s operating lease agreements require the Company to make variable lease payments.

The Company’s lease agreements are summarized below:

Quarter ended June 30, 

Six months ended June 30, 

2022

    

2021

    

2022

    

2021

(dollars in thousands)

Lease expense:

Operating leases

$

5,008

$

4,508

$

9,962

$

8,874

Short-term leases

241

420

460

470

Net lease expense included in Occupancy and equipment

$

5,249

$

4,928

$

10,422

$

9,344

Other information:

Payments for operating leases

$

5,388

$

5,149

$

10,257

$

10,185

Operating lease right-of-use assets recognized

$

793

$

4,570

$

793

$

7,813

Period end weighted averages:

Remaining lease term (in years)

5.3

5.9

Discount rate

3.9%

4.1%

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

Twelve months ended June 30,

Operating leases

(in thousands)

2022

$

22,626

2023

22,993

2024

22,109

2025

20,059

2026

13,400

Thereafter

14,471

Total lease payments

115,658

Less imputed interest

(12,902)

Operating lease liability

$

102,756

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Note 11—Other Assets

Other assets are summarized below:

June 30, 

December 31, 

2022

    

2021

(in thousands)

Capitalized software, net

$

138,382

$

109,480

Margin deposits

64,783

100,482

Prepaid expenses

46,486

64,924

Furniture, fixtures, equipment and building improvements, net

31,756

31,677

Deposits securing Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets

25,547

36,632

Other servicing receivables

22,554

113,820

Servicing fees receivable, net

18,693

23,672

Interest receivable

10,828

9,688

Real estate acquired in settlement of loans

8,002

7,474

Other

101,050

118,767

$

468,081

$

616,616

Other assets pledged to secure:

Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets

$

25,547

$

36,632

Obligations under capital lease:

Capitalized software, net

4,546

Furniture, fixture, equipment and building improvements, net

4,116

$

25,547

$

45,294

Note 12—Short-Term Debt

The borrowing facilities described throughout these Notes 12 and 13 contain various covenants, including financial covenants governing the Company’s net worth, debt-to-equity ratio and liquidity. Management believes that the Company was in compliance with these covenants as of June 30, 2022.

Assets Sold Under Agreements to Repurchase

The Company has multiple borrowing facilities in the form of asset sales under agreements to repurchase. These borrowing facilities are secured by loans held for sale at fair value or participation certificates backed by mortgage servicing assets. Eligible assets are sold at advance rates based on the fair value (as determined by the lender) of the assets sold. Interest is charged at a rate based on the Secured Overnight Financing Rate (“SOFR”) or LIBOR, as applicable. 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 its wholly-owned subsidiaries, PLS, PNMAC, 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 PNMAC (the “FMSR PC Repurchase Agreement”). In return, PFSI ISSUER TRUST- FMSR 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 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 (the “FMSR Term Notes”). The maximum principal balance of the FMSR VFN is $1 billion.

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Under the FMSR 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 FMSR 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 a term extending through May 31, 2024. 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 SOFR to the date of such repurchase.

Freddie Mac MSR Facility

On December 7, 2021, the Company entered a Master Repurchase Agreement secured by Freddie Mac MSRs with a maximum purchase price of $175 million which may be further reduced by amounts outstanding with Credit Suisse under other financing facilities. The facility expires on May 31, 2024. The Company is not currently borrowing under this facility.

Ginnie Mae MSR Facility

The Company, through its wholly-owned subsidiaries PLS, PNMAC, and the Issuer Trust, have a structured finance transaction, in which 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 (the “GNMA MSR Facility”). In return, the Issuer Trust has issued to PLS, pursuant to the terms of an indenture, the Series 2016-MSRVF1 Variable Funding Note, known as the “PNMAC GMSR ISSUER TRUST MSR Collateralized Notes, Series 2016-MSRVF1” (the “VFN”), and 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 $2 billion.

On July 30, 2021, the Company, through its wholly-owned subsidiaries PLS, PNMAC and the Issuer Trust, entered into agreements to syndicate existing variable funding note repurchase agreements as part of the Ginnie Mae MSR structured finance facility. The Company entered into 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 PNMAC, as a guarantor (the “Syndicated GMSR Servicing Spread Agreement”), related to the servicing spread. The Syndicated GMSR Servicing Spread Agreement added Citibank as a syndicate buyer of MSRs and related ESS, and increased the borrowing capacity from $400 to $500 million, all of which is committed on a 50-50 pro rata basis between CSCIB and Citibank.

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Ginnie Mae Servicing Advances

On April 1, 2020, the Company, through its wholly-owned subsidiaries PLS, PNMAC and the PNMAC GMSR ISSUER TRUST, 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 servicing advance receivables 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.

On July 30, 2021, the Company, through its wholly-owned subsidiaries PLS, PNMAC and the Issuer Trust, entered into agreements to syndicate existing variable funding note repurchase agreements, as part of the Ginnie Mae servicing advance facility. The Company entered into 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 PNMAC, as a guarantor (the “Syndicated GMSR SAR Agreement”). The Syndicated GMSR SAR Agreement added Citibank as a syndicate buyer of servicing advances receivables and provides a $600 million borrowing capacity, all of which is committed on a 50-50 pro rata basis between CSCIB and Citibank.

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Assets sold under agreements to repurchase are summarized below:

Quarter ended June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

 

(dollars in thousands)

Average balance of assets sold under agreements to repurchase

$

2,215,595

$

7,571,340

$

2,964,727

$

7,999,580

Weighted average interest rate (1)

2.80

%  

2.07

%

2.42

%  

2.13

%

Total interest expense

$

18,949

$

44,623

$

42,719

$

96,802

Maximum daily amount outstanding

$

3,316,376

$

10,856,677

$

7,289,147

$

10,856,677

June 30, 

December 31, 

    

2022

    

2021

(dollars in thousands)

Carrying value:

Unpaid principal balance funded under:

Committed facilities

$

2,290,666

$

5,079,581

Uncommitted facilities

155,348

2,217,779

2,446,014

7,297,360

Unamortized debt issuance costs

(4,198)

(4,625)

$

2,441,816

$

7,292,735

Weighted average interest rate

3.32

%

1.83

%

Available borrowing capacity (2):

Committed

$

1,614,334

$

285,419

Uncommitted

6,464,652

8,417,221

$

8,078,986

$

8,702,640

Fair value of assets securing repurchase agreements:

Loans held for sale

$

2,738,333

$

8,629,861

Servicing advances (3)

$

279,664

$

232,107

Mortgage servicing rights (3)

$

5,163,544

$

3,552,812

Deposits (3)

$

25,547

$

36,632

Margin deposits (4)

$

8,375

$

10,875

(1)Excludes the effect of amortization of debt issuance costs and utilization fees of $3.5 million and $5.3 million for the quarters ended June 30, 2022 and 2021, respectively, and $7.1 million and $11.8 million for the six months ended June 30, 2022 and 2021, respectively.
(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 for 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.

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

Remaining maturity at June 30, 2022

    

Unpaid principal balance

(dollars in thousands)

Within 30 days

$

430,925

Over 30 to 90 days

1,491,071

Over 90 to 180 days

41,509

Over 180 days to one year

382,509

Over one year to two years

100,000

Total assets sold under agreements to repurchase

$

2,446,014

Weighted average maturity (in months)

4.0

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 June 30, 2022:

Weighted average

Counterparties

    

Amount at risk

    

maturity of advances  

    

Facility maturity

(in thousands)

Credit Suisse First Boston Mortgage Capital LLC & Citibank, N.A. (1)

$

3,085,625

May 31, 2024

May 31, 2024

Royal Bank of Canada

$

88,969

August 2, 2022

June 14, 2023

Bank of America, N.A.

$

82,621

October 12, 2022

June 5, 2024

JP Morgan Chase Bank, N.A.

$

75,401

August 17, 2022

June 6, 2024

Credit Suisse First Boston Mortgage Capital LLC

$

58,007

September 23, 2022

May 31, 2024

Barclays Bank PLC

$

19,202

September 29, 2022

November 3, 2022

Wells Fargo Bank, N.A.

$

18,324

September 29, 2022

November 17, 2023

Goldman Sachs

$

16,177

October 20, 2022

December 23, 2022

JP Morgan Chase Bank, N.A.

$

13,596

October 29, 2022

June 17, 2024

Citibank, N.A.

$

12,895

    

October 9, 2022

    

April 26, 2024

BNP Paribas

$

7,534

October 4, 2022

July 31, 2023

Morgan Stanley Bank, N.A.

$

4,359

October 14, 2022

January 3, 2024

(1)The calculation of the amount at risk includes the VFN and the Term Notes because beneficial interests in the Ginnie Mae MSRs and servicing advances are pledged to the Issuer Trust and together serve as the collateral backing for 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.

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.

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

Quarter ended June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

 

(dollars in thousands)

Average balance

$

214,654

$

254,343

$

218,977

$

265,390

Weighted average interest rate (1)

2.25

%  

1.36

%

1.98

%  

1.35

%  

Total interest expense

$

1,377

$

1,039

$

2,497

$

2,134

Maximum daily amount outstanding

$

514,054

$

528,844

$

515,043

$

528,844

(1)Excludes the effect of amortization of debt issuance costs totaling $172,000 for the quarters ended June 30, 2022 and 2021, and $344,000 for the six months ended June 30, 2022 and 2021.

    

June 30, 

December 31, 

2022

    

2021

(dollars in thousands)

Carrying value:

Unpaid principal balance

$

502,775

$

479,845

Unamortized debt issuance costs

(659)

$

502,116

    

$

479,845

Weighted average interest rate

2.85

%  

1.48

%

Fair value of loans pledged to secure mortgage loan participation purchase and sale agreements

$

532,175

$

505,716

Note 13—Long-Term Debt

Obligations Under Capital Lease

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

Obligations under capital lease are summarized below:

Quarter ended June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

(dollars in thousands)

Average balance

$

523

$

9,072

$

1,695

$

10,169

Weighted average interest rate

2.49%

2.10%

2.18%

2.12%

Total interest expense

$

5

$

48

$

20

$

107

Maximum daily amount outstanding

$

1,396

$

10,468

$

3,489

$

11,864

December 31, 

    

2021

(dollars in thousands)

Unpaid principal balance

    

$

3,489

Weighted average interest rate

2.11%

Assets pledged to secure obligations under capital lease:

Capitalized software

$

4,546

Furniture, fixtures and equipment

$

4,116

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Notes Payable Secured by Mortgage Servicing Assets

Term Notes

In connection with the GNMA MSR Facility, the Issuer Trust issued secured term notes (the “Term Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”). The Term Notes are secured by participation certificates relating to Ginnie Mae mortgage servicing assets financed pursuant to the GNMA MSR Facility, and rank pari passu with the VFNs and the GMSR Servicing Advance Notes.

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

Annual interest rate

Issuance date

Principal balance

Index

Spread

Stated maturity date (1)

(in thousands)

February 28, 2018

$

650,000

One-month LIBOR

2.85%

2/25/2023

August 10, 2018

650,000

One-month LIBOR

2.65%

8/25/2023

June 3, 2022

500,000

SOFR

4.25%

5/25/2027

$

1,800,000

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

Notes payable secured by mortgage servicing assets are summarized below:

Quarter ended June 30, 

Six months ended June 30, 

    

2022

    

2021

  

2022

    

2021

(dollars in thousands)

Average balance

$

1,426,373

$

1,300,000

$

1,363,536

$

1,300,000

Weighted average interest rate (1)

3.69%

2.91%

3.34%

2.90%

Total interest expense

$

13,656

$

10,104

$

23,565

$

19,992

(1)Excludes the effect of amortization of debt issuance costs totaling $548,000 and $634,000 for the quarters ended June 30, 2022 and 2021, respectively, and $1.0 and $1.2 million for the six months ended June 30, 2022 and 2021, respectively.

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June 30, 

December 31, 

    

2022

    

2021

(dollars in thousands)

Carrying value:

Unpaid principal balance

$

1,800,000

    

$

1,300,000

Unamortized debt issuance costs

(6,740)

(2,378)

$

1,793,260

$

1,297,622

Weighted average interest rate

4.76%

2.84%

Assets pledged to secure notes payable (1):

Servicing advances

$

279,664

$

232,107

Mortgage servicing rights

$

4,681,236

$

3,856,791

Deposits

$

25,547

$

36,632

(1)Beneficial interests in the Ginnie Mae MSRs, servicing advances and deposits are pledged to the Issuer Trust and together serve as the collateral for the VFN, the GMSR Servicing Advance Notes and any outstanding 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. Beneficial interests in the Fannie Mae MSRs are pledged to the PFSI Issuer Trust - FMSR and serve as the collateral for the FMSR VFN and any outstanding FMSR Term Notes. The FMSR VFN financing is included in Assets sold under agreements to repurchase and any outstanding FMSR Term Note would be 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.

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.

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.

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Quarter ended June 30, 

Six months ended June 30, 

    

2022

  

2021

  

2022

    

2021

(dollars in thousands)

Average balance

$

1,800,000

$

1,300,000

$

1,800,000

$

1,152,762

Weighted average interest rate (1)

5.07%

4.81%

5.07%

4.81%

Total interest expense

$

23,688

$

16,169

$

47,116

$

28,839

(1)Excludes the effect of amortization of debt issuance costs of $923,000 and $571,000 for the quarters ended June 30, 2022 and 2021, respectively, and $1.8 million and $918,000 for the six months ended June 30, 2022 and 2021, respectively.

June 30, 

December 31, 

    

2022

    

2021

(dollars in thousands)

Carrying value:

Unpaid principal balance

$

1,800,000

$

1,800,000

Unamortized debt issuance costs and premiums, net

(21,945)

(23,781)

$

1,778,055

$

1,776,219

Weighted average interest rate

5.07%

5.07%

Maturities of Long-Term Debt

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

Twelve months ended June 30,

    

2023

    

2024

    

2025

    

2026

    

2027

    

Thereafter

    

Total

(in thousands)

Notes payable secured by mortgage servicing assets

$

650,000

$

650,000

$

$

$

500,000

$

$

1,800,000

Unsecured senior notes

650,000

1,150,000

1,800,000

Total

$

650,000

$

650,000

$

$

650,000

$

500,000

$

1,150,000

$

3,600,000

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 June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

 

(in thousands)

Balance at beginning of period

$

42,794

$

38,428

$

43,521

$

32,688

Provision for losses:

Resulting from sales of loans

2,182

10,304

6,236

20,357

Reduction in liability due to change in estimate

(2,227)

(3,640)

(5,396)

(7,325)

Losses incurred, net

(3,413)

(757)

(5,025)

(1,385)

Balance at end of period

$

39,336

$

44,335

$

39,336

$

44,335

Unpaid principal balance of loans subject to representations and warranties at end of period

$

278,793,884

$

234,327,924

Note 15—Income Taxes

The Company’s effective income tax rates were 27.2% and 26.9% for the quarters ended June 30, 2022 and 2021, respectively, and 26.5% and 26.0% for the six months ended June 30, 2022 and 2021, respectively.

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Note 16—Commitments and Contingencies

Commitments to Purchase and Fund Mortgage Loans

The Company’s commitments to purchase and fund loans totaled $7.7 billion as of June 30, 2022.

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.

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. 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 before 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.

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Cessation of the LIBOR Index

The Company historically used a LIBOR index to establish the applicable interest rates in lending and financing transactions. One-week and two-month United States Dollar LIBOR rates have been discontinued in 2022 and non-U.S. dollar LIBOR settings cease to be representative. The Company has serviced LIBOR-based adjustable rate mortgages and other financial arrangements that may incorporate fallback provisions or replacement provisions related to the LIBOR transition. The discontinuation of LIBOR could materially affect our interest expense and earnings, our cost of capital, and the fair value of certain of our assets and the instruments we use to hedge their value. Furthermore, the transition away from widely used benchmark rates like LIBOR could result in customers or other market participants challenging the determination of their interest or dividend payments, disputing the interpretations or implementation of contract or instrument “fallback” provisions and other transition related changes.

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 June 30, 

Six months ended June 30, 

Cumulative

2022

    

2021

    

2022

    

2021

    

total (1)

(in thousands)

Shares of common stock repurchased

2,427

2,574

4,747

7,227

29,821

Cost of shares of common stock repurchased

$

113,645

$

154,920

$

255,057

$

443,439

$

1,565,678

(1)Amounts represent the total shares of common stock repurchased under the stock repurchase program from inception through June 30, 2022.

Note 18—Net Gains on Loans Held for Sale

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

Quarter ended June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

(in thousands)

From non-affiliates:

Cash (losses) gains:

Loans

$

(451,171)

$

387,305

$

(1,395,392)

    

$

470,017

Hedging activities

82,617

(325,651)

972,704

410,574

(368,554)

61,654

(422,688)

880,591

Non-cash gains:

Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales

398,253

425,941

1,014,555

889,512

Provisions for losses relating to representations and warranties:

Pursuant to loan sales

(2,182)

(10,304)

(6,236)

(20,357)

Reductions in liability due to change in estimate

2,227

3,640

5,396

7,325

Changes in fair values of loans and derivatives held at period end:

Interest rate lock commitments

27,251

5,670

(257,043)

(333,416)

Loans

(43,349)

(50,322)

177,081

54,900

Hedging derivatives

213,673

157,917

24,365

(115,770)

227,319

594,196

535,430

1,362,785

From PennyMac Mortgage Investment Trust (1)

(4,752)

(11,548)

(14,404)

(25,796)

$

222,567

$

582,648

$

521,026

$

1,336,989

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

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Note 19—Net Interest Expense

Net interest expense is summarized below:

Quarter ended June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

(in thousands)

Interest income:

From non-affiliates:

Cash and short-term investments

$

405

$

747

$

977

$

1,734

Loans held for sale at fair value

36,777

76,453

85,890

151,277

Placement fees relating to custodial funds

12,682

3,597

16,879

9,480

49,864

80,797

103,746

162,491

From PennyMac Mortgage Investment Trust—Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell

387

49,864

80,797

103,746

162,878

Interest expense:

To non-affiliates:

Assets sold under agreements to repurchase

18,949

44,623

42,719

96,802

Mortgage loan participation purchase and sale agreements

1,377

1,039

2,497

2,134

Obligations under capital lease

5

48

20

107

Notes payable secured by mortgage servicing assets

13,656

10,104

23,565

19,992

Unsecured senior notes

23,688

16,169

47,116

28,839

Interest shortfall on repayments of mortgage loans serviced for Agency securitizations

12,286

29,144

29,765

58,580

Interest on mortgage loan impound deposits

1,166

1,304

2,752

2,410

71,127

102,431

148,434

208,864

To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value

1,280

71,127

102,431

148,434

210,144

$

(21,263)

$

(21,634)

$

(44,688)

$

(47,266)

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Note 20—Stock-based Compensation

On May 24, 2022, PFSI’s stockholders approved and adopted the 2022 Equity Incentive Plan and no additional equity awards will be issued from the Company’s 2013 Equity Incentive Plan.

Following is a summary of the stock-based compensation activity:

Quarter ended June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

(in thousands)

Grants:

Units:

Performance-based restricted share units ("RSUs")

342

310

Stock options

574

249

Time-based RSUs

331

171

Grant date fair value:

Performance-based RSUs

$

$

$

19,522

$

18,237

Stock options

12,138

5,116

Time-based RSUs

18,903

10,066

Total

$

$

$

50,563

$

33,419

Vestings and exercises:

Performance-based RSUs vested

643

640

Stock options exercised

19

97

63

185

Time-based RSUs vested

2

2

246

307

Compensation expense

$

14,948

$

8,894

$

24,223

$

19,771

Note 21—Earnings Per Share

Basic earnings per share is determined by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is determined by dividing net income by the weighted average number of shares of common stock outstanding, assuming all dilutive securities were issued.

The Company’s potentially dilutive securities are stock-based compensation awards. The Company applies the treasury stock method to determine the diluted weighted average number of shares of common stock outstanding based on the outstanding stock-based compensation awards.

The following table summarizes the basic and diluted earnings per share calculations:

Quarter ended June 30, 

Six months ended June 30, 

    

2022

    

2021

   

2022

   

2021

(in thousands, except per share amounts)

Net income

$

129,163

    

$

204,229

$

302,756

    

$

581,097

Weighted average basic shares of common stock outstanding

54,167

65,890

54,995

67,493

Effect of dilutive securities - shares issuable under stock-based compensation plan

2,475

3,509

2,897

3,755

Weighted average shares of common stock applicable to diluted earnings per share

56,642

69,399

57,892

71,248

Basic earnings per share

$

2.38

$

3.10

$

5.51

$

8.61

Diluted earnings per share

$

2.28

$

2.94

$

5.23

$

8.16

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Calculations of diluted earnings per share require certain potentially dilutive shares to be excluded when their inclusion in the diluted earnings per share calculation would be anti-dilutive. The following table summarizes the weighted-average number of anti-dilutive outstanding RSUs and stock options excluded from the calculation of diluted earnings per share:

Quarter ended June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

(in thousands except for weighted-average exercise price)

Performance-based RSUs (1)

508

308

412

215

Time-based RSUs

144

233

Stock options (2)

1,424

249

1,256

173

Total anti-dilutive units and options

2,076

557

1,901

388

Weighted average exercise price of anti-dilutive stock options (2)

$

58.49

$

58.85

$

58.68

$

58.85

(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—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 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.

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.

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

June 30, 2022

December 31, 2021

Requirement/Agency 

    

Actual (1)

    

Requirement (1)

    

Actual (1)

    

Requirement (1)

 

(dollars in thousands)

Capital

Fannie Mae & Freddie Mac

$

6,338,183

$

754,717

$

5,872,064

$

722,040

Ginnie Mae

$

5,763,953

$

959,193

$

5,424,747

$

976,303

HUD

$

5,763,953

$

2,500

$

5,424,747

$

2,500

Liquidity

Fannie Mae & Freddie Mac

$

1,359,587

$

101,256

$

316,659

$

93,973

Ginnie Mae

$

1,359,587

$

232,759

$

316,659

$

220,577

Adjusted net worth / Total assets ratio

Ginnie Mae

40

%  

6

%  

29

%  

6

%

Tangible net worth / Total assets ratio

Fannie Mae & Freddie Mac

45

%  

6

%  

32

%  

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 the Company’s ability to sell loans to and service loans on behalf of the respective Agency.

Note 23—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.

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Financial performance and results by segment are as follows:

Quarter ended June 30, 2022

Mortgage Banking

Investment

    

Production

    

Servicing

    

Total

    

Management

    

Total

 

(in thousands)

Revenue: (1)

                    

Net gains on loans held for sale at fair value

$

152,895

$

69,672

$

222,567

$

$

222,567

Loan origination fees

39,945

39,945

39,945

Fulfillment fees from PennyMac Mortgage Investment Trust

20,646

20,646

20,646

Net loan servicing fees

238,447

238,447

238,447

Net interest income (expense):

Interest income

28,379

21,485

49,864

49,864

Interest expense

19,207

51,920

71,127

71,127

9,172

(30,435)

(21,263)

(21,263)

Management fees

7,910

7,910

Other

583

900

1,483

1,780

3,263

Total net revenue

223,241

278,584

501,825

9,690

511,515

Expenses

213,587

110,959

324,546

9,443

333,989

Income before provision for income taxes

$

9,654

$

167,625

$

177,279

$

247

$

177,526

Segment assets at quarter end

$

3,735,706

$

10,509,950

$

14,245,656

$

26,599

$

14,272,255

(1)All revenues are from external customers.

Quarter ended June 30, 2021

Mortgage Banking

Investment

    

Production

    

Servicing

    

Total

    

Management

    

 Total

 

(in thousands)

Revenue: (1)

Net gains on loans held for sale at fair value

$

419,293

$

163,355

$

582,648

$

$

582,648

Loan origination fees

97,291

97,291

97,291

Fulfillment fees from PennyMac Mortgage Investment Trust

54,020

54,020

54,020

Net loan servicing fees

14,871

14,871

14,871

Net interest expense:

Interest income

31,830

48,967

80,797

80,797

Interest expense

36,913

65,515

102,428

3

102,431

(5,083)

(16,548)

(21,631)

(3)

(21,634)

Management fees

11,913

11,913

Other

630

925

1,555

1,588

3,143

Total net revenue

566,151

162,603

728,754

13,498

742,252

Expenses

321,709

131,679

453,388

9,349

462,737

Income before provision for income taxes

$

244,442

$

30,924

$

275,366

$

4,149

$

279,515

Segment assets at quarter end

$

7,670,877

$

16,185,956

$

23,856,833

$

23,305

$

23,880,138

(1)All revenues are from external customers.

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Six months ended June 30, 2022

Mortgage Banking

Investment

    

Production

    

Servicing

    

Total

    

Management

    

Total

 

(in thousands)

Revenues: (1)

                    

Net gains on loans held for sale at fair value

$

374,505

$

146,521

$

521,026

$

$

521,026

Loan origination fees

107,803

107,803

107,803

Fulfillment fees from PennyMac Mortgage Investment Trust

37,400

37,400

37,400

Net loan servicing fees

524,756

524,756

524,756

Net interest income (expense):

Interest income

59,320

44,426

103,746

103,746

Interest expense

46,266

102,168

148,434

148,434

13,054

(57,742)

(44,688)

(44,688)

Management fees

16,027

16,027

Other

1,368

1,516

2,884

3,811

6,695

Total net revenue

534,130

615,051

1,149,181

19,838

1,169,019

Expenses

515,206

222,273

737,479

19,494

756,973

Income before provision for income taxes

$

18,924

$

392,778

$

411,702

$

344

$

412,046

Segment assets at period end

$

3,735,706

$

10,509,950

$

14,245,656

$

26,599

$

14,272,255

(1)All revenues are from external customers.

Six months ended June 30, 2021

Mortgage Banking

Investment

    

Production

    

Servicing

    

Total

    

Management

    

 Total

  

(in thousands)

Revenues: (1)

Net gains on loans held for sale at fair value

$

935,256

$

401,733

$

1,336,989

$

$

1,336,989

Loan origination fees

201,328

201,328

201,328

Fulfillment fees from PennyMac Mortgage Investment Trust

114,855

114,855

114,855

Net loan servicing fees

54,591

54,591

54,591

Net interest expense:

Interest income

61,361

101,517

162,878

162,878

Interest expense

74,985

135,153

210,138

6

210,144

(13,624)

(33,636)

(47,260)

(6)

(47,266)

Management fees

20,362

20,362

Other

1,227

2,122

3,349

2,730

6,079

Total net revenue

1,239,042

424,810

1,663,852

23,086

1,686,938

Expenses

631,705

252,142

883,847

17,568

901,415

Income before provision for income taxes

$

607,337

$

172,668

$

780,005

$

5,518

$

785,523

Segment assets at period end

$

7,670,877

$

16,185,956

$

23,856,833

$

23,305

$

23,880,138

(1)All revenues are from external customers.

(

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Note 24—Subsequent Events

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

On August 2, 2022, the Company announced that the board of directors declared cash dividend of $0.20 per common share. The dividend will be paid on August 26, 2022 to common shareholders of record as of August 16, 2022.

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

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

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

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 PennyMac Mortgage Investment Trust, a mortgage real estate investment trust listed on the New York Stock Exchange under the ticker symbol “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.

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Our principal mortgage banking subsidiary, PennyMac Loan Services, LLC (“PLS”), is a non-bank producer and servicer of mortgage loans in the United States. PLS is a seller/servicer for the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), each of which is a government-sponsored entity. PLS is also an approved issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”), a lender of the Federal Housing Administration (“FHA”), and a lender/servicer of the U.S. Department of Veterans Affairs (“VA”) and the U.S. Department of Agriculture (“USDA”). We refer to each of Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA and USDA as an “Agency” and collectively as the “Agencies.” PLS is able to service loans in all 50 states, the District of Columbia, 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 PMT.

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Results of Operations

Our results of operations are summarized below:

Quarter ended June 30, 

Six months ended June 30, 

    

2022

    

2021

   

2022

    

2021

 

 

(dollars in thousands, except per share amounts)

Revenues:

Net gains on loans held for sale at fair value

$

222,567

$

582,648

$

521,026

$

1,336,989

Loan origination fees

39,945

97,291

107,803

201,328

Fulfillment fees from PennyMac Mortgage Investment Trust

20,646

54,020

37,400

114,855

Net loan servicing fees

238,447

14,871

524,756

54,591

Net interest expense

(21,263)

(21,634)

(44,688)

(47,266)

Management fees

7,910

11,913

16,027

20,362

Other

3,263

3,143

6,695

6,079

Total net revenues

511,515

742,252

1,169,019

1,686,938

Expenses:

Compensation

198,192

265,067

443,739

523,896

Loan origination

44,931

75,675

120,264

163,067

Technology

34,621

34,236

69,407

67,908

Servicing

3,051

31,290

1,805

50,473

Other

53,194

56,469

121,758

96,071

Total expenses

333,989

462,737

756,973

901,415

Income before provision for income taxes

177,526

279,515

412,046

785,523

Provision for income taxes

48,363

75,286

109,290

204,426

Net income

$

129,163

$

204,229

$

302,756

$

581,097

Earnings per share

Basic

$

2.38

$

3.10

$

5.51

$

8.61

Diluted

$

2.28

$

2.94

$

5.23

$

8.16

Annualized return on average stockholders' equity

14.9%

23.3%

17.6%

33.2%

Dividend declared per share

$

0.20

$

0.20

$

0.40

$

0.40

Income before provision for income taxes by segment:

Mortgage banking:

Production

$

9,885

$

244,442

$

19,155

$

607,337

Servicing

167,394

30,924

392,547

172,668

Total mortgage banking

177,279

275,366

411,702

780,005

Investment management

247

4,149

344

5,518

$

177,526

$

279,515

$

412,046

$

785,523

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") (1)

$

165,710

$

471,440

$

333,753

$

1,145,748

During the period:

Interest rate lock commitments issued

$

17,872,576

$

34,271,160

$

42,998,079

$

70,389,873

At end of period:

Interest rate lock commitments outstanding

$

7,665,657

$

13,879,343

Unpaid principal balance of loan servicing portfolio:

Owned:

Mortgage servicing rights and liabilities

$

297,311,164

$

258,610,649

Loans held for sale

3,575,712

10,438,935

300,886,876

269,049,584

Subserviced for PMT

226,388,582

204,174,462

$

527,275,458

$

473,224,046

Net assets of PennyMac Mortgage Investment Trust

$

2,070,640

$

2,343,390

Book value per share

$

65.38

$

54.49

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

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fair value of excess servicing spread (“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:

a)they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments;
b)they do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payment on our debt; and
c)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 June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

(in thousands)

Net income

$

129,163

$

204,229

$

302,756

$

581,097

Provision for income taxes

48,363

75,286

109,290

204,426

Income before provision for income taxes

177,526

279,515

412,046

785,523

Depreciation and amortization

7,364

7,335

14,375

14,967

(Increase) decrease in fair value of MSRs net of MSLs due to changes in valuation inputs used in valuation models

(233,826)

250,597

(557,892)

(55,529)

Increase in fair value of ESS payable to PennyMac Mortgage Investment Trust

1,037

Hedging losses (gains) associated with MSRs

176,005

(91,118)

393,865

351,033

Stock‑based compensation

14,948

8,894

24,223

19,771

Interest expense on corporate debt or corporate revolving credit facilities and capital lease

23,693

16,217

47,136

28,946

Adjusted EBITDA

$

165,710

$

471,440

$

333,753

$

1,145,748

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Business Trends

Due to significant inflationary pressures, the U.S. Federal Reserve raised the federal funds rate in the first half of 2022 and is expected to continue to raise interest rates through the year as well as reduce the federal government’s overall portfolio of Treasury and mortgage-backed securities. Increasing interest rates are expected to reduce the size of the mortgage origination market from an estimated $4.4 trillion in 2021 to a current forecast range from $2.4 trillion to $2.8 trillion for 2022 according to leading economists. Lower projected mortgage transaction volumes and increasing interest rates are expected to cause a decrease in all mortgage production activities and increase competition in the mortgage production business, while also leading to a reduction in prepayment speeds in our mortgage servicing portfolio from the elevated levels experienced in 2021. Rising interest rates will increase the costs of certain floating rate borrowings, as well as provide greater interest income from our placement fees on deposits and loans held for sale. We have and expect to continue to reduce business expenses to align with the lower projected mortgage production activities for the remainder of the year.

Income Before Provisions for Income Taxes

For the quarter ended June 30, 2022, income before provision for income taxes decreased $102.0 million compared to the same period in 2021. The decrease was primarily due to a $360.1 million decrease in Net gains on loans held for sale at fair value, a $57.3 million decrease in Loan origination fees and a $33.4 million decrease in fulfillment fees from PMT due to lower production volumes and overall gain on sale margins during the quarter ended June 30, 2022 compared to the same period in 2021, partially offset by a $223.6 million increase in Net loan servicing fees reflecting improved valuation results in our MSRs and a $128.7 million decrease in total expenses, primarily due to reductions in compensation, loan origination and servicing expenses.

For the six months ended June 30, 2022, income before provision for income taxes decreased $373.5 million compared to the same period in 2021. The decrease was primarily due to a $816.0 million decrease in Net gains on loans held for sale at fair value, a $93.5 million decrease in Loan origination fees and a $77.5 million decrease in fulfillment fees from PMT due to lower production volumes and gain on sale margins during the six months ended June 30, 2022 compared to the same period in 2021, partially offset by a $470.2 million increase in Net loan servicing fees reflecting improved valuation results in our MSRs and a $144.4 million decrease in total expenses.

Net Gains on Loans Held for Sale at Fair Value

In our production segment, revenues reflect the effects of increasing interest rates on both demand for mortgage loans and gain on sale margins during the quarter and six months ended June 30, 2022 compared to the strong demand due to the historically low interest rate environment that prevailed during the same periods in 2021.

During the quarter and six months ended June 30, 2022, we recognized Net gains on loans held for sale at fair value totaling $222.6 million and $521.0 million, respectively, a decrease of $360.1 million and $816.0 million, respectively, compared to the same periods in 2021. The decreases were primarily due to lower production volumes, lower overall gain on sale margins and decreases in early buyout (“EBO”) loan redelivery gains as a result of lower volumes and modifications as well as gain on sale margins during the quarter and six months ended June 30, 2022 compared to the same periods in 2021.

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

Quarter ended June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

 

(in thousands)

From non-affiliates:

Cash gains:

                       

                       

                       

                       

Loans

$

(451,171)

$

387,305

$

(1,395,392)

$

470,017

Hedging activities

82,617

(325,651)

972,704

410,574

Total cash gains

(368,554)

61,654

(422,688)

880,591

Non-cash gains:

Change in fair value of loans and derivative financial instruments outstanding at end of period:

Interest rate lock commitments

27,251

5,670

(257,043)

(333,416)

Loans

(43,349)

(50,322)

177,081

54,900

Hedging derivatives

213,673

157,917

24,365

(115,770)

197,575

113,265

(55,597)

(394,286)

Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales

398,253

425,941

1,014,555

889,512

Provisions for losses relating to representations and warranties:

Pursuant to loan sales

(2,182)

(10,304)

(6,236)

(20,357)

Reductions in liability due to change in estimate

2,227

3,640

5,396

7,325

Total non-cash gains

595,873

532,542

958,118

482,194

Total gains on sale from non-affiliates

227,319

594,196

535,430

1,362,785

From PennyMac Mortgage Investment Trust (primarily cash)

(4,752)

(11,548)

(14,404)

(25,796)

$

222,567

$

582,648

$

521,026

$

1,336,989

During the period:

Interest rate lock commitments issued:

By loan type:

Government-insured or guaranteed mortgage loans

$

13,666,180

$

23,397,624

$

30,799,395

$

48,544,503

Conventional conforming mortgage loans

4,173,683

10,873,536

12,147,958

21,845,370

Jumbo mortgage loans

32,713

50,726

$

17,872,576

$

34,271,160

$

42,998,079

$

70,389,873

By production channel:

Consumer direct

$

4,326,453

$

14,107,575

$

13,437,966

$

27,491,791

Broker direct

2,219,730

4,506,355

5,746,359

10,177,154

Correspondent

11,326,393

15,657,230

23,813,754

32,720,928

$

17,872,576

$

34,271,160

$

42,998,079

$

70,389,873

At end of period:

Loans held for sale at fair value

$

3,586,810

$

10,884,506

Commitments to fund and purchase loans

$

7,665,657

$

13,879,343

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Non-cash elements of gain on sale of loans held for sale

Our gains on loans held for sale include both cash and non-cash elements. We recognize a significant portion of our gains on loans held for sale when we make commitments to purchase or fund mortgage loans. We recognize this gain in the form of interest rate lock 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 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 179% and 195% of our gains on sales of loans held for sale at fair value for the quarter and six months ended June 30, 2022, respectively, as compared to 72% and 66% for the quarter and six months ended June 30, 2021, respectively. These estimates change as circumstances change and changes in these estimates are recognized in income in subsequent periods. Subsequent changes in the fair value of our MSRs significantly affect our results of operations.

Interest Rate Lock Commitments, Mortgage Servicing Rights and Mortgage Servicing Liabilities

The methods and key inputs we use to measure and update our measurements of IRLCs, MSRs and MSLs are detailed in Note 6 – Fair value – Valuation Techniques and Inputs to the consolidated financial statements included in this Quarterly Report.

Representations and Warranties

Our agreements with the purchasers and insurers 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 unpaid principal balance (“UPB”) of loans sold by us and subject to representation and warranty liability to date represents the maximum exposure to repurchases related to representations and warranties.

The level of the liability for losses under representations and warranties is difficult to estimate and requires considerable judgment. The level of loan repurchase losses is dependent on economic factors, purchaser or insurer loss mitigation strategies, and other external conditions that may change over the lives of the underlying loans. Our estimate of the liability for representations and warranties is developed by our credit 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.

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We recorded provisions for losses under representations and warranties relating to current loan sales as a component of Net gains on loans held for sale at fair value totaling $2.2 million and $6.2 million for the quarter and six months ended June 30, 2022, respectively, compared to $10.3 million and $20.4 million for the quarter and six months ended June 30, 2021, respectively. The decreases in the provision relating to current loan sales are primarily attributable to a reduction in loan sales.

We also recorded reductions in the liability of $2.2 million and $5.4 million during the quarter and six months ended June 30, 2022, respectively, compared to $3.6 million and $7.3 million during the quarter and six months ended June 30, 2021, 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 June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

(in thousands)

During the period:

                       

                       

                       

                       

Indemnification activity:

Loans indemnified at beginning of period

$

19,941

$

14,239

$

15,079

$

13,788

New indemnifications

5,725

5,100

11,366

7,255

Less indemnified loans sold, repaid or refinanced

605

2,805

1,384

4,509

Loans indemnified at end of period

$

25,061

$

16,534

$

25,061

$

16,534

Repurchase activity:

Total loans repurchased

$

28,020

$

25,928

$

45,549

$

43,914

Less:

Loans repurchased by correspondent lenders

8,391

13,763

15,849

22,452

Loans repaid by borrowers or resold with defects resolved

8,164

1,927

13,660

4,576

Net loans repurchased with losses chargeable to liability for representations and warranties

$

11,465

$

10,238

$

16,040

$

16,886

Losses charged to liability for representations and warranties

$

3,413

$

757

$

5,025

$

1,385

At end of period:

Unpaid principal balance of loans subject to representations and warranties

$

278,793,884

$

234,327,924

Liability for representations and warranties

$

39,336

$

44,335

During the quarter and six months ended June 30, 2022, we repurchased loans totaling $28.0 million and $45.5 million, respectively. We charged losses of $3.4 million and $5.0 million to the liability during the quarter and six months ended June 30, 2022, respectively. Our losses arising from representations and warranties have historically been minimized by our ability to either recover most of the losses from our correspondent sellers or from our ability to profitably refinance and resell repurchased loans. The recent increases in market interest rates may affect certain of our correspondent sellers’ ability to honor their obligations to repurchase delinquent loans. Furthermore, these market factors and expected economic slowdown may increase the level of borrower defaults, increasing the level of repurchases we are required to make and making profitable resolutions of repurchased loans more difficult. We expect these developments will increase the losses we incur in relation to our representations and warranties compared to our historical experience. However, we believe our recorded liability is presently adequate to absorb such losses.

Loan Origination Fees

Loan origination fees decreased $57.3 million and $93.5 million during the quarter and six months ended June 30, 2022, respectively, compared to the same periods in 2021. The decreases were primarily due to a decrease in the volume of loans we produced.

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Fulfillment Fees from PennyMac Mortgage Investment Trust

Fulfillment fees from PMT represent fees we collect for services we perform on behalf of PMT in connection with the acquisition, packaging and sale of loans. The fulfillment fees are calculated based on the number of loans we fulfill for PMT.

Fulfillment fees decreased $33.4 million and $77.5 million during the quarter and six months ended June 30, 2022, respectively, compared to the same periods in 2021. The decreases were primarily due to a decrease in loan production volume.

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 June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

(in thousands)

Loan servicing fees

$

302,350

$

260,021

$

593,608

$

519,466

Effects of MSRs and MSLs

(63,903)

(245,150)

(68,852)

(464,875)

Net loan servicing fees

$

238,447

$

14,871

$

524,756

$

54,591

Loan servicing fees

Following is a summary of our loan servicing fees:

Quarter ended June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

(in thousands)

Loan servicing fees:

From non-affiliates

$

259,338

$

208,275

$

504,147

$

419,028

From PennyMac Mortgage Investment Trust

20,335

20,015

41,423

39,108

Other

Late charges

11,356

7,938

23,312

16,902

Other

11,321

23,793

24,726

44,428

22,677

31,731

48,038

61,330

$

302,350

$

260,021

$

593,608

$

519,466

Average loan servicing portfolio

MSRs and MSLs

$

294,119,536

$

253,626,369

$

289,506,967

$

249,351,346

Subserviced for PMT

$

224,340,103

$

196,351,853

$

223,145,653

$

188,856,542

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.

The increases in loan servicing fees from non-affiliates and from PMT for the quarter and six months ended June 30, 2022 were primarily due to growth of our loan servicing portfolio as compared to the same periods in 2021. The decreases in other loan servicing fees for the quarter and six months ended June 30, 2022, were primarily due to decreases in fees charged to correspondent lenders related to borrower early loan payoffs resulting from the reduction in prepayment activity we experienced in the current rising interest rate environment as compared to the same periods in 2021.

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Mortgage Servicing Rights and Mortgage Servicing Liabilities

We have elected to carry our servicing assets and liabilities at fair value. Changes in fair value have two components: changes due to realization of the contractual servicing fees and changes due to changes in market inputs used to estimate the fair value of MSRs and MSLs. We endeavor to moderate the effects of changes in fair value by entering into derivatives transactions and, until March 2021, by 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 June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

(in thousands)

MSR and MSL valuation changes:

Realization of cash flows

$

(121,724)

$

(85,671)

$

(232,879)

$

(168,334)

Other changes in fair value of mortgage servicing rights and mortgage servicing liabilities

233,826

(250,597)

557,892

55,529

112,102

(336,268)

325,013

(112,805)

Change in fair value of excess servicing spread

(1,037)

Hedging results

(176,005)

91,118

(393,865)

(351,033)

Total change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing net of hedging results

$

(63,903)

$

(245,150)

$

(68,852)

$

(464,875)

Average balances:

Mortgage servicing rights

$

5,021,736

$

3,346,877

$

4,660,794

$

3,120,761

Mortgage servicing liabilities

$

2,442

$

62,098

$

2,560

$

55,229

Excess servicing spread financing

$

$

$

$

43,484

At end of period:

Mortgage servicing rights

$

5,217,167

$

3,412,648

Mortgage servicing liabilities

$

2,337

$

100,091

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 six months ended June 30, 2022, realization of cash flows increased primarily due to the growth in our investment in MSRs partially offset by a reduction in the rate at which the MSRs are expected to be realized as a result of slower prepayment expectations in 2022 as compared to 2021.

Other changes in fair value of MSRs increased during both the six months ended June 30, 2022 and the same period in 2021 due to significant increases in interest rates and resulting decreases in expected future prepayment speeds in each period. The change for the six months ended June 30, 2022 was larger than the same period in 2021 due to the larger increase in interest rates experienced during the six months ended June 30, 2022.

Hedging results reflect valuation losses attributable to the effects of interest rate increases on the fair value of the hedging instruments during the six months ended June 30, 2022 and 2021.

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Following is a summary of our loan servicing portfolio:

June 30, 

December 31, 

    

2022

    

2021

(in thousands)

Loans serviced

Prime servicing:

Owned:

Mortgage servicing rights and liabilities

Originated

$

276,627,961

$

254,524,015

Acquired

20,683,203

23,861,358

297,311,164

278,385,373

Loans held for sale

3,575,712

9,430,766

300,886,876

287,816,139

Subserviced for PMT

226,365,581

221,864,120

Total prime servicing

527,252,457

509,680,259

Special servicing subserviced for PMT

23,001

28,022

Total loans serviced

$

527,275,458

$

509,708,281

Delinquencies:

Owned servicing (1):

30-89 days

$

8,951,759

$

6,943,327

90 days or more

6,063,542

9,838,648

$

15,015,301

$

16,781,975

Delinquent loans in COVID-19 pandemic-related forbearance:

30-89 days

$

1,231,658

$

1,111,151

90 days or more

2,439,641

2,732,089

$

3,671,299

$

3,843,240

Subserviced for PMT (1):

30-89 days

$

1,489,066

$

1,164,782

90 days or more

898,735

1,810,910

$

2,387,801

$

2,975,692

Delinquent loans in COVID-19 pandemic-related forbearance:

30-89 days

$

197,966

$

171,114

90 days or more

431,331

638,703

$

629,297

$

809,817

(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.

Net Interest Expense

Net interest expense decreased $371,000 and $2.6 million during the quarter and six months ended June 30, 2022 compared to the same periods in 2021. The decreases were primarily due to:

an increase in placement fees we receive relating to custodial funds that we manage due to increased earning rates, partially offset by lower average balances of custodial funds held;
a decrease in interest shortfall on repayments of loans serviced for Agency securitizations, reflecting decreased loan payoffs as a result of decreased borrower refinancing activity due to the higher interest rate environment; partially offset by
an increase in interest on unsecured senior notes.

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Management Fees from PennyMac Mortgage Investment Trust

Quarter ended June 30, 

Six months ended June 30, 

2022

   

2021

    

2022

    

2021

(in thousands)

Base management

    

$

7,910

    

$

8,648

$

16,027

    

$

17,097

Performance incentive

3,265

3,265

$

7,910

$

11,913

$

16,027

$

20,362

Net assets of PMT at end of period

$

2,070,640

$

2,343,390

Management fees decreased $4.0 million and $4.3 million during the quarter and six months ended June 30, 2022, respectively, compared to the same periods in 2021. The decreases were primarily due to the non-recurrence of $3.3 million of performance inventive fees earned during the quarter and six months ended June 30, 2021, as result of PMT’s profitability during the measurement period ended June 30, 2021, on which its performance incentive fee was based. Base management fees declined due to a decrease in PMT’s shareholders’ equity which is the basis for the base management fees.

Expenses

Compensation

Compensation expenses are summarized below:

Quarter ended June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

(in thousands)

Salaries and wages

$

116,059

$

154,391

$

258,068

$

298,022

Severance

7,456

15

12,591

84

Incentive compensation

39,245

71,888

93,543

144,543

Taxes and benefits

20,484

29,879

55,314

61,476

Stock and unit-based compensation

14,948

8,894

24,223

19,771

$

198,192

$

265,067

$

443,739

$

523,896

Head count:

Average

5,706

7,151

6,316

7,008

Period end

5,088

7,231

Compensation expense decreased $66.9 million and $80.2 million during the quarter and six months ended June 30, 2022, respectively, compared to the same periods in 2021. The decreases were primarily due to reductions in loan production in 2022 that resulted in a workforce reduction and decreased incentive compensation accruals due to reduced achievement of profitability targets.

Loan origination

Loan origination expense decreased $30.7 million and $42.8 million during the quarter and six months ended June 30, 2022, respectively, compared to the same periods in 2021. The decreases were primarily due to decreased lending activities during the quarter and six months ended June 30, 2022 compared to the same periods during 2021.

Servicing

Servicing expenses decreased $28.2 million and $48.7 million during the quarter and six months ended June 30, 2022, respectively, compared to the same periods in 2021. These decreases were primarily due to a larger reversal of the provision for estimated servicing advance losses recorded in prior periods than during the quarter and six months ended June 30, 2022. The reduction reflects the ongoing improvements in the performance of our servicing portfolio as we continue to resolve delinquent loans relating to the COVID-19 pandemic.

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Professional services

Professional expenses decreased $4.0 million during the quarter ended June 30, 2022 compared to the same period in 2021 primarily due to a decrease in consulting expenses related to technology infrastructure. Professional expenses increased $2.8 million during the six months ended June 30, 2022 compared to the same period in 2021 primarily due to increase in legal and consulting fees related to our investments in technology infrastructure.

Marketing and advertising

Marketing and advertising expense increased $2.8 million and $18.5 million during the quarter and six months ended June 30, 2022, respectively, compared to the same periods in 2021. The increases were primarily attributable to our new brand marketing campaign and increased marketing expenses for consumer direct lending.

Provision for Income Taxes

Our effective income tax rates were 27.2% and 26.5% during the quarter and six months ended June 30, 2022, respectively, compared to 26.9% and 26.0% during the same periods in 2021.

Balance Sheet Analysis

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

June 30, 

December 31, 

    

2022

    

2021

(in thousands)

ASSETS

Cash and short-term investments

$

1,420,357

$

346,942

Loans held for sale at fair value

3,586,810

9,742,483

Derivative assets

103,901

333,695

Servicing advances, net

570,822

702,160

Investments in and advances to affiliates

44,271

41,391

Mortgage servicing rights

5,217,167

3,878,078

Loans eligible for repurchase

2,778,768

3,026,207

Other

550,159

705,656

Total assets

$

14,272,255

$

18,776,612

LIABILITIES AND STOCKHOLDERS' EQUITY

Short-term debt

$

2,943,932

$

7,772,580

Long-term debt

3,571,315

3,077,330

6,515,247

10,849,910

Liability for loans eligible for repurchase

2,778,768

3,026,207

Income taxes payable

885,721

685,262

Other

631,134

796,908

Total liabilities

10,810,870

15,358,287

Stockholders' equity

3,461,385

3,418,325

Total liabilities and stockholders' equity

$

14,272,255

$

18,776,612

Leverage ratios:

Total debt / Stockholders' equity

1.9

3.2

Total debt / Tangible stockholders' equity

2.0

3.3

Total assets decreased $4.5 billion from $18.8 billion at December 31, 2021 to $14.3 billion at June 30, 2022. The decrease was primarily due to decreases of $6.2 billion in loans held for sale at fair value, partially offset by an increase of $1.3 billion in MSRs. The decrease in loans held for sale at fair value was primarily due to lower origination volume during the six months ended June 30, 2022.

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Total liabilities decreased $4.5 billion from $15.3 billion at December 31, 2021 to $10.8 billion at June 30, 2022. The decrease was primarily due to a decrease of $4.8 billion in short-term debt, partially offset by an increase of $494 million in long-term debt, reflecting decreased borrowing requirements relating to our inventory of loans held for sale, partially offset by financing of our growing investment in MSRs.

Cash Flows

Our cash flows are summarized below:

    

Six months ended June 30, 

 

2022

    

2021

    

Change

 

(in thousands)

Operating

$

6,131,516

$

1,331,598

$

4,799,918

Investing

(427,377)

 

(145,239)

 

(282,138)

Financing

(4,628,817)

 

(1,394,954)

 

(3,233,863)

Net increase (decrease) in cash and restricted cash

$

1,075,322

$

(208,595)

$

1,283,917

Our cash flows resulted in a net increase in cash and restricted cash of $1.1 billion during the six months ended June 30, 2022 as discussed below.

Operating activities

Net cash provided by operating activities totaled $6.1 billion during the six months ended June 30, 2022 compared with net cash provided in operating activities of $1.3 billion during the same period in 2021. Our cash flows from operating activities are primarily influenced by changes in the levels of our inventory of mortgage loans held for sale as shown below:

Six months ended June 30, 

2022

2021

(in thousands)

Cash flows from:

Loans held for sale

$

6,015,822

$

1,530,900

Other operating sources

115,694

(199,302)

$

6,131,516

$

1,331,598

Investing activities

Net cash used in investing activities during the six months ended June 30, 2022 totaled $427.4 million, primarily due to $574.1 million in net settlement of derivative financial instruments used to hedge our investment in MSRs, partially offset by a $188.2 million decrease in margin deposits. Net cash used in investing activities during the six months ended June 30, 2021 totaled $145.2 million, primarily due to $345.6 million in net settlement of derivative financial instruments used to hedge our investment in MSRs, partially offset by a $134.7 million decrease in margin deposits.

Financing activities

Net cash used in financing activities totaled $4.6 billion during the six months ended June 30, 2022, primarily due to a decrease of $4.8 billion in short-term borrowings and $255.1 million of common stock repurchases, partially offset by issuance of a $500 million term note. The reduction in borrowings reflects reduced inventory of loans held for sale. Net cash used in financing activities totaled $1.4 billion during the six months ended June 30, 2021, primarily due to a decrease of $761.0 million in borrowings, $443.4 million of repurchase of our common stock and $134.6 million of repayment of ESS financing.

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Liquidity and Capital Resources

Our liquidity reflects our ability to meet our current obligations (including our operating expenses and, when applicable, the retirement of, and margin calls relating to, our debt, and margin calls relating to hedges on our commitments to purchase or originate mortgage loans and on our MSR investments), fund new originations and purchases, and make investments as we identify them. We expect our primary sources of liquidity to be through cash flows from business activities, proceeds from bank borrowings and proceeds from and issuance of equity or debt offerings. In addition, we utilized existing borrowings to increase our cash balances to over $1.4 billion in the second quarter of 2022. 

The effect of the COVID-19 pandemic on our operations, liquidity and capital resources remain uncertain and difficult to predict, for further discussion of the potential impacts of the COVID-19 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, 2021, filed with the SEC on February 23, 2022.

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 secured by mortgage servicing rights, 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 30 days to 364 days. Because a significant portion of our current debt facilities consist of short-term debt, we expect to renew these facilities in advance of maturity in order to ensure our ongoing liquidity and access to capital or otherwise allow ourselves sufficient time to replace any necessary financing.

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 June 30, 

Six months ended June 30, 

    

2022

    

2021

    

2022

    

2021

(in thousands)

Average balance

$

2,215,595

$

7,571,340

$

2,964,727

$

7,999,580

Maximum daily balance

$

3,316,376

$

10,856,677

$

7,289,147

$

10,856,677

Balance at period end

$

2,290,666

$

8,262,251

The differences between the average and maximum daily balances on our repurchase agreements reflect both the effect of decreasing loan inventory levels during the six months ended June 30, 2022 and the fluctuations throughout the periods of our inventory as we fund and pool mortgage loans for sale in guaranteed mortgage securitizations.

Our repurchase agreements also contain margin call provisions that, upon notice from the applicable lender at its option, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. A margin deficit will generally result from any decrease in the market value (as determined by the applicable lender) of the assets subject to the related financing agreement. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.

Our secured financing agreements at PLS require us to comply with various financial 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.

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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:

The 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 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;

The 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%;

The 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

The 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.

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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 June 30, 2022, we have repurchased approximately $1.6 billion of common shares under our stock repurchase program.

We continue to explore a variety of means of financing our business, including debt financing through bank warehouse lines of credit, bank loans, repurchase agreements, securitization transactions and corporate debt. However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing will take or whether such efforts will be successful.

Off-Balance Sheet Arrangements and Guarantees

As of June 30, 2022, we have not entered into any off-balance sheet arrangements.

Debt Obligations

As described further above in “Liquidity and Capital Resources,” we currently finance certain of our assets through short-term borrowings with major financial institutions in the form of sales of assets under agreements to repurchase and mortgage loan participation purchase and sale agreements. We access the capital market for long-term debt through the issuance of secured term notes and unsecured senior notes and we have an outstanding long term capital lease. The issuer under our secured term note facilities is PLS or a wholly-owned issuer trust guaranteed by PNMAC. In addition, we have issued unsecured senior notes guaranteed by certain of our restricted wholly-owned domestic subsidiaries.

Under the terms of these financing 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 June 30, 2022, we believe we were in compliance in all material respects with these covenants.

Many of our debt financing agreements contain a condition precedent to obtaining additional funding that requires PLS to maintain positive net income for at least one of the previous two consecutive quarters, or other similar measures. PLS is compliant with all such conditions.

The financing agreements also contain margin call provisions that, upon notice from the applicable lender, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.

In addition, the financing agreements contain events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, servicer termination events and defaults, material adverse changes, bankruptcy or insolvency proceedings and other events of default customary for these types of transactions. The remedies for such events of default are also customary for these types of transactions and include the acceleration of the principal amount outstanding under the agreements and the liquidation by our lenders of the mortgage loans or other collateral then subject to the agreements.

The Company issued unsecured senior notes (the “Unsecured Notes”) to qualified institutional buyers in 2020 and 2021 under Rule 144A of the Securities Act of 1933, as amended. The Unsecured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the Company’s existing and future wholly-owned domestic subsidiaries (other than certain excluded subsidiaries defined in the indentures under which the Unsecured Notes were issued). The Company is required to maintain certain financial covenants under terms of the Unsecured Notes, as described further above in “Liquidity and Capital Resources.” We believe the Company was in compliance with all financial covenants in the Unsecured Notes as of June 30, 2022.

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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

$

952,552

$

2,950,000

$

1,200,000

May 31, 2024

Credit Suisse First Boston Mortgage Capital LLC and Citibank, N.A. (3)

$

100,000

$

100,000

$

100,000

May 31, 2024

Bank of America, N.A.

$

477,673

$

1,425,000

$

380,000

June 5, 2024

Goldman Sachs Bank USA

$

186,361

$

1,000,000

$

500,000

December 23, 2022

Royal Bank of Canada

$

182,820

$

1,000,000

$

225,000

June 14, 2023

Citibank, N.A.

$

175,646

$

950,000

$

600,000

April 26, 2024

Morgan Stanley Bank, N.A.

$

86,760

$

500,000

$

200,000

January 3, 2024

Wells Fargo Bank, N.A.

$

79,082

$

500,000

$

200,000

November 17, 2023

JPMorgan Chase Bank, N.A.

$

73,810

$

500,000

$

50,000

June 17, 2024

Barclays Bank PLC

$

59,891

$

500,000

$

150,000

November 3, 2022

BNP Paribas

$

37,554

$

600,000

$

300,000

July 31, 2023

JPMorgan Chase Bank, N.A.

$

33,865

$

500,000

$

June 6, 2024

Mortgage loan participation purchase and sale agreements

Bank of America, N.A.

$

502,775

$

550,000

$

June 7, 2023

Notes payable

GMSR 2018-GT1 Notes

$

650,000

$

650,000

February 25, 2023

GMSR 2018-GT2 Notes

$

650,000

$

650,000

August 25, 2023

GMSR 2022-GT1 Notes

$

500,000

500,000

May 25, 2027

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

(1)Outstanding indebtedness as of June 30, 2022.
(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 CSFB and 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 and 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.

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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 June 30, 2022:

Weighted average

maturity of 

advances under 

Counterparty

    

Amount at risk

    

repurchase agreement

   

Facility maturity

(in thousands)

Credit Suisse First Boston Mortgage Capital LLC and Citibank, N.A. (1)

$

3,085,625

May 31, 2024

May 31, 2024

Royal Bank of Canada

$

88,969

August 2, 2022

June 14, 2023

Bank of America, N.A.

$

82,621

October 12, 2022

June 5, 2024

JP Morgan Chase Bank, N.A.

$

75,401

August 17, 2022

June 6, 2024

Credit Suisse First Boston Mortgage Capital LLC (2)

$

58,007

September 23, 2022

May 31, 2024

Barclays Bank PLC

$

19,202

September 29, 2022

November 3, 2022

Wells Fargo Bank, N.A.

$

18,324

September 29, 2022

November 17, 2023

Goldman Sachs

$

16,177

October 20, 2022

December 23, 2022

JP Morgan Chase Bank, N.A.

$

13,596

October 29, 2022

June 17, 2024

Citibank, N.A. (2)

$

12,895

October 9, 2022

April 26, 2024

BNP Paribas

$

7,534

October 4, 2022

July 31, 2023

Morgan Stanley Bank, N.A.

$

4,359

October 14, 2022

January 3, 2024

(1)The borrowing facility with Credit Suisse First Boston Mortgage Capital LLC and 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 June 30, 2022 and the date of this Report have been renewed or extended and are described in Note 12Short-Term Debt to the accompanying consolidated financial statements.

Critical Accounting Estimates

Preparation of financial statements in compliance with GAAP requires us to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Certain of these estimates significantly influence the portrayal of our financial condition and results, and they require us to make difficult, subjective or complex judgments. Our critical accounting policies primarily relate to our fair value estimates.

Our Annual Report on Form 10-K for the year ended December 31, 2021 contains a discussion of our critical accounting policies, which utilize relevant critical accounting estimates.

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.

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Interest Rate Risk

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

In general, rising interest rates negatively affect the fair value of our IRLCs and inventory of mortgage loans held for sale and positively affect the fair value of our MSRs. Changes in interest rates significantly influence the prepayment speeds of the loans underlying our investments in MSRs, which can have a significant effect on their fair values. Changes in interest rate are most prominently reflected in the prepayment speeds of the loans underlying our investments in MSRs and the discount rate used in their valuation.

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

Prepayment Risk

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

Risk Management Activities

We engage in risk management activities primarily in an effort to mitigate the effect of changes in interest rates on the fair value of our assets. To manage this price risk, we use derivative financial instruments acquired with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the fair value of our assets, primarily prepayment exposure on our MSR investments as well as IRLCs and our inventory of loans held for sale. Our objective is to minimize our hedging expense and maximize our loss coverage based on a given hedge expense target. We do not use derivative financial instruments other than IRLCs for purposes other than in support of our risk management activities.

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

Fair Value Sensitivities

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

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Table of Contents

Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs as of June 30, 2022, 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)

Prepayment speed

$

346,740

$

167,258

$

82,179

$

(79,424)

$

(156,226)

$

(302,462)

Pricing spread

$

327,698

$

158,923

$

78,280

$

(76,013)

$

(149,848)

$

(291,326)

Annual per-loan cost of servicing

$

150,461

$

75,231

$

37,615

$

(37,615)

$

(75,231)

$

(150,461)

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. However, no matter how well a control system is designed and operated, it can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports.

Our management has conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report as required by paragraph (b) of Rule 13a-15 under the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this Report, to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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. See Note 16 Commitments and Contingencies, to the financial statements contained in this report for a discussion of legal proceedings that are incorporated by reference into this Item 1. 

Item 1A. Risk Factors

There have been no material changes from the risk factors set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 23, 2022.

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

There were no sales of unregistered equity securities during the quarter ended June 30, 2022.

Stock Repurchase Program

The following table summarizes information about our stock repurchase during the quarter ended June 30, 2022:

    

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)

April 1, 2022 – April 30, 2022

904,989

$

48.63

904,989

$

503,957,362

May 1, 2022 – May 31, 2022

559,604

$

48.04

559,604

$

477,072,376

June 1, 2022 – June 30, 2022

962,400

$

44.42

962,400

$

434,321,914

Total

2,426,993

$

46.83

2,426,993

$

434,321,914

(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

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Item 6. Exhibits

Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC File
Number 001-35916 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

10.1†

2022 Equity Incentive Plan

*

10.2

Amendment No. 1 to Third Amended and Restated Base Indenture, dated as of June 8, 2022, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, Credit Suisse First Boston Mortgage Capital LLC, and Pentalpha Surveillance LLC.

8-K

June 14, 2022

10.3

Series 2022-GT1 Indenture Supplement to Third Amended and Restated Base Indenture, dated as of June 8, 2022, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, and Credit Suisse First Boston Mortgage Capital LLC.

8-K

June 14, 2022

10.4

Flow Servicing Agreement, dated as of June 1, 2022, by and between PennyMac Loan Services, LLC and PennyMac Corp.

*

10.5

Amendment No. 2 to Third Amended and Restated Base Indenture, dated as of June 9, 2022, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, Credit Suisse First Boston Mortgage Capital LLC and Pentalpha Surveillance LLC.

*

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10.6

Joint Amendment No. 7 to Series 2016-MSRVF1 Indenture Supplement and Amendment No. 5 to Series 2020-SPIADVF1 Indenture Supplement, dated as of June 8, 2022, 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.

*

10.7

Omnibus Amendment No. 1 to Amended and Restated Master Repurchase Agreements, dated as of June 8, 2022, 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 and SERIES 2020-SPIADVF1.

*

10.8

Amendment No. 2 to SERIES 2020-SPIADVF1 Amended and Restated Master Repurchase Agreement, dated as of June 9, 2022, by and among PennyMac Loan Services, LLC, Credit Suisse AG, Cayman Islands Branch, Citibank, N. A., and Credit Suisse First Boston Mortgage Capital, LLC.

*

10.9

Amendment No. 1 to Amended and Restated Master Repurchase Agreement, dated as of June 9, 2022, by and among PNMAC GMSR ISSUER TRUST, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC, Credit Suisse AG, Cayman Islands Branch, Citibank, N. A., and Credit Suisse First Boston Mortgage Capital, LLC.

*

31.1

Certification of David A. Spector pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*

31.2

Certification of Daniel S. Perotti pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

*

32.1

Certification of David A. Spector pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

**

32.2

Certification of Daniel S. Perotti pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

**

101

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 (ii) the Consolidated Statements of Operation for the quarter ended June 30, 2022 and June 30, 2021, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarter ended June 30, 2022 and June 30, 2021, (iv) the Consolidated Statements of Cash Flows for the quarter ended June 30, 2022 and June 30, 2021 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

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101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101).

*Filed herewith

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

† Indicates management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

PENNYMAC FINANCIAL SERVICES, INC.

Dated: August 5, 2022

By:

/s/ DAVID A. SPECTOR

David A. Spector

Chairman and Chief Executive Officer

(Principal Executive Officer)

Dated: August 5, 2022

By:

/s/ DANIEL S. PEROTTI

Daniel S. Perotti

Senior Managing Director and

Chief Financial Officer

(Principal Financial Officer)

84