PennyMac Financial Services, Inc. [PFSI] Filings

Quarter ended March 31,

(in thousands)

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

10-Q 1 pfsi-20240331x10q.htm 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

☒

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

For the quarterly period ended March 31, 2024

☐

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

For the transition period from to

Commission File Number: 001-38727

PennyMac Financial Services, Inc.

(Exact name of registrant as specified in its charter)


Delaware		83-1098934
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)


3043 Townsgate Road, Westlake Village, California		91361
(Address of principal executive offices)		(Zip Code)

(818) 224-7442

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $0.0001 par value		PFSI		New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☒		Accelerated filer ☐

Non-accelerated filer ☐		Smaller reporting company ☐
		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.


Class		Outstanding at April 29, 2024
Common Stock, $0.0001 par value		50,922,737

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PENNYMAC FINANCIAL SERVICES, INC.

FORM 10-Q

March 31, 2024

TABLE OF CONTENTS


		Page
	Special Note Regarding Forward-Looking Statements	3

PART I. FINANCIAL INFORMATION		6

Item 1.	Financial Statements (Unaudited):	6
	Consolidated Balance Sheets	6
	Consolidated Statements of Income	7
	Consolidated Statements of Changes in Stockholders’ Equity	8
	Consolidated Statements of Cash Flows	9
	Notes to Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	51
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	69
Item 4.	Controls and Procedures	70

PART II. OTHER INFORMATION		71

Item 1.	Legal Proceedings	71
Item 1A.	Risk Factors	71
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71
Item 3.	Defaults Upon Senior Securities	71
Item 4.	Mine Safety Disclosures	71
Item 5.	Other Information	72
Item 6.	Exhibits	73

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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, plans and strategies, contain financial and operating projections or state other forward-looking information. Examples of forward-looking statements include, but are not limited to, the following:

●

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;

●

discussions of our expectations regarding various macroeconomic factors, including variability in the economy or the impact of current and future regulations and legislation on our business; 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 several factors, many of which are beyond our control that could cause actual results to differ significantly from management’s expectations. Some of these factors are discussed below.

You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Quarterly Report on Form 10-Q (this “Report”), the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission (“SEC”) on February 21, 2024 and in our other SEC filings.

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

●

interest rate changes;

●

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

●

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 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 in real estate values, housing prices and housing sales;

●

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;

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●

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

●

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

●

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 the number of 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 contributor 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 ability to mitigate cybersecurity risks and cyber incidents;

●

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 PMT, 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 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.

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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)


	March 31,		December 31,
	2024		2023

	(in thousands, except share amounts)
ASSETS
Cash	$	927,394	$	938,371
Short-term investment at fair value		69		10,268
Principal-only stripped mortgage-backed securities at fair value pledged to creditors		524,576		—
Loans held for sale at fair value (includes $5,127,134 and $4,329,501 pledged to creditors)		5,200,350		4,420,691
Derivative assets		108,987		179,079
Servicing advances, net (includes valuation allowance of $67,327 and $73,991; $271,947 and $354,831 pledged to creditors)		499,955		694,038
Mortgage servicing rights at fair value (includes $7,406,892 and $7,033,892 pledged to creditors)		7,483,210		7,099,348
Investment in PennyMac Mortgage Investment Trust at fair value		1,101		1,121
Receivable from PennyMac Mortgage Investment Trust		30,835		29,262
Loans eligible for repurchase		4,401,896		4,889,925
Other (includes $16,175 and $15,653 pledged to creditors)		623,368		582,460
Total assets	$	19,801,741	$	18,844,563
LIABILITIES
Assets sold under agreements to repurchase	$	5,435,354	$	3,763,956
Mortgage loan participation purchase and sale agreements		363,798		446,054
Notes payable secured by mortgage servicing assets		1,972,020		1,873,415
Unsecured senior notes		2,521,031		2,519,651
Derivative liabilities		40,784		53,275
Mortgage servicing liabilities at fair value		1,732		1,805
Accounts payable and accrued expenses		263,338		449,896
Payable to PennyMac Mortgage Investment Trust		127,993		208,210
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		26,099		26,099
Income taxes payable		1,047,337		1,042,886
Liability for loans eligible for repurchase		4,401,896		4,889,925
Liability for losses under representations and warranties		29,976		30,788
Total liabilities		16,231,358		15,305,960

Commitments and contingencies – Note 18

STOCKHOLDERS’ EQUITY
Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 50,907,865 and 50,178,963 shares, respectively		5		5
Additional paid-in capital		27,179		24,287
Retained earnings		3,543,199		3,514,311
Total stockholders' equity		3,570,383		3,538,603
Total liabilities and stockholders' equity	$	19,801,741	$	18,844,563

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 March 31,
	2024		2023

	(in thousands, except earnings per share)
Revenues
Net gains on loans held for sale at fair value:
From non-affiliates	$	162,794	$	104,870
From PennyMac Mortgage Investment Trust		(353)		(485)
		162,441		104,385
Loan origination fees:
From non-affiliates		36,012		29,980
From PennyMac Mortgage Investment Trust		359		1,410
		36,371		31,390
Fulfillment fees from PennyMac Mortgage Investment Trust		4,016		11,923
Net loan servicing fees:
Loan servicing fees:
From non-affiliates		358,026		290,697
From PennyMac Mortgage Investment Trust		20,262		20,449
Other		45,896		26,911
		424,184		338,057
Change in fair value of mortgage servicing rights and mortgage servicing liabilities		(28,585)		(236,447)
Mortgage servicing rights hedging results		(294,645)		47,227
		(323,230)		(189,220)
Net loan servicing fees		100,954		148,837
Net interest expense:
Interest income		156,426		128,478
Interest expense		165,769		131,771
Net interest expense		(9,343)		(3,293)
Management fees from PennyMac Mortgage Investment Trust		7,188		7,257
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust		10		26
Results of real estate acquired in settlement of loans		406		142
Other		3,617		2,195
Total net revenues		305,660		302,862
Expenses
Compensation		146,376		147,935
Technology		35,967		36,038
Loan origination		30,568		27,086
Servicing		16,104		12,632
Professional services		9,262		21,007
Occupancy and equipment		8,676		8,820
Marketing and advertising		3,671		3,241
Other		11,153		7,956
Total expenses		261,777		264,715
Income before provision for income taxes		43,883		38,147
Provision for income taxes		4,575		7,769
Net income	$	39,308	$	30,378
Earnings per share
Basic	$	0.78	$	0.61
Diluted	$	0.74	$	0.57
Weighted average shares outstanding
Basic		50,547		50,154
Diluted		53,100		53,352

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 March 31, 2024
				Additional				Total
	Number of	Par		paid-in		Retained		stockholders'
	shares	value		capital		earnings		equity

	(in thousands)
Balance, December 31, 2023	50,179	$	5	$	24,287	$	3,514,311	$	3,538,603
Net income	—		—		—		39,308		39,308
Stock-based compensation	728		—		2,808		—		2,808
Issuance of common stock in settlement of directors' fees	1		—		84		—		84
Common stock dividend ($0.20 per share)	—		—		—		(10,420)		(10,420)
Balance, March 31, 2024	50,908	$	5	$	27,179	$	3,543,199	$	3,570,383


	Quarter ended March 31, 2023
				Additional				Total
	Number of	Par		paid-in		Retained		stockholders'
	shares	value		capital		earnings		equity

	(in thousands)
Balance, December 31, 2022	49,988	$	5	$	—	$	3,471,044	$	3,471,049
Net income	—		—		—		30,378		30,378
Stock-based compensation	876		—		6,850		—		6,850
Issuance of common stock in settlement of directors' fees	1		—		51		—		51
Common stock dividend ($0.20 per share)	—		—		—		(10,777)		(10,777)
Repurchase of common stock	(768)		—		(6,901)		(38,460)		(45,361)
Balance, March 31, 2023	50,097	$	5	$	—	$	3,452,185	$	3,452,190

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)


	Quarter ended March 31,
	2024		2023

	(in thousands)
Cash flow from operating activities
Net income	$	39,308	$	30,378
Adjustments to reconcile net income to net cash used in operating activities:
Net gains on loans held for sale at fair value		(162,441)		(104,385)
Change in fair value of mortgage servicing rights and mortgage servicing liabilities		28,585		236,447
Mortgage servicing rights hedging results		294,645		(47,227)
Accrual of unearned discounts on mortgage-backed securities		(264)		—
Capitalization of interest on loans held for sale		(128)		(223)
Amortization of debt issuance costs		7,357		4,708
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust		20		4
Results of real estate acquired in settlement in loans		(406)		(142)
Stock-based compensation expense		4,583		11,650
Reversal of provision for servicing advance losses		(1,541)		(3,081)
Depreciation and amortization		14,164		12,705
Amortization of operating lease right-of-use assets		3,436		5,055
Purchase of loans held for sale from PennyMac Mortgage Investment Trust		(16,302,059)		(13,451,030)
Origination of loans held for sale		(3,073,792)		(2,194,780)
Purchase of loans held for sale from non-affiliates		(496,609)		(404,963)
Purchase of loans from Ginnie Mae securities and early buyout investors		(791,726)		(714,110)
Sale to non-affiliates and principal payment of loans held for sale		19,676,917		13,385,341
Repurchase of loans subject to representations and warranties		(21,395)		(10,460)
Decrease in servicing advances		168,554		138,018
(Increase) decrease in receivable from PennyMac Mortgage Investment Trust		(1,999)		1,872
Sale of real estate acquired in settlement of loans		13,165		7,533
Increase in other assets		(33,707)		(64,777)
Decrease in accounts payable and accrued expenses		(182,097)		(43,767)
Decrease in operating lease liabilities		(4,380)		(4,914)
Decrease in payable to PennyMac Mortgage Investment Trust		(80,581)		(62,927)
Increase in income taxes payable		4,451		8,184
Net cash used in operating activities		(897,940)		(3,264,891)

Statements continue on the next page

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)


	Quarter ended March 31,
	2024		2023

	(in thousands)
Cash flow from investing activities
Decrease in short-term investment		10,199		8,610
Purchase of principal-only stripped mortgage-backed securities		(524,739)		—
Repayment of principal-only stripped mortgage-backed securities		116		—
Net settlement of derivative financial instruments used for hedging of mortgage servicing rights		(224,750)		78,438
Transfer of mortgage servicing rights relating to delinquent loans to Agency		—		232
Acquisition of capitalized software		(3,864)		(10,590)
Purchase of furniture, fixtures, equipment and leasehold improvements		(918)		(173)
Increase in margin deposits		(38,656)		(97,450)
Net cash used in investing activities		(782,612)		(20,933)
Cash flow from financing activities
Sale of assets under agreements to repurchase		20,836,772		16,713,811
Repurchase of assets sold under agreements to repurchase		(19,165,094)		(13,949,931)
Issuance of mortgage loan participation purchase and sale certificates		5,399,717		4,170,792
Repayment of mortgage loan participation purchase and sale certificates		(5,482,145)		(3,943,198)
Issuance of notes payable secured by mortgage servicing assets		725,000		680,000
Repayment of notes payable secured by mortgage servicing assets		(625,000)		(150,000)
Payment of debt issuance costs		(7,480)		(5,345)
Issuance of common stock pursuant to exercise of stock options		7,626		4,342
Payment of withholding taxes relating to stock-based compensation		(9,401)		(9,142)
Payment of dividends to holders of common stock		(10,420)		(10,777)
Repurchase of common stock		—		(45,361)
Net cash provided by financing activities		1,669,575		3,455,191
Net (decrease) increase in cash and restricted cash		(10,977)		169,367
Cash and restricted cash at beginning of quarter		938,371		1,328,539
Cash and restricted cash at end of quarter	$	927,394	$	1,497,906
Cash and restricted cash at end of quarter are comprised of the following:
Cash	$	—	$	1,497,903
Restricted cash included in Other assets		—		3
	$	—	$	1,497,906
Supplemental cash flow information:
Cash paid for interest	$	152,261	$	129,791
Cash paid (refunds received) for income taxes, net	$	124	$	(415)
Non-cash investing activities:
Mortgage servicing rights received from loan sales	$	412,520	$	286,533
Operating right-of-use assets recognized	$	—	$	1,727
Non-cash financing activities:
Issuance of common stock in settlement of directors' fees	$	84	$	51

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. (together, with its consolidated subsidiaries, unless the context indicates otherwise, “PFSI” or the “Company”) is a holding corporation and its primary assets are equity interests in Private National Mortgage Acceptance Company, LLC (“PNMAC”). The Company is the managing member of PNMAC, and it operates and controls all of the businesses and consolidates the financial results of PNMAC and its subsidiaries.

PNMAC is a Delaware limited liability company which, through its subsidiaries, engages in mortgage banking and investment management activities. PNMAC’s mortgage banking activities consist of residential mortgage loan production and servicing. PNMAC’s investment management activities and a portion of its mortgage banking activities are conducted on behalf of PennyMac Mortgage Investment Trust, a real estate investment trust that invests in residential mortgage-related assets and is separately listed on the New York Stock Exchange under the ticker symbol “PMT”. PNMAC’s primary wholly owned subsidiaries are:

●

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 has mortgage banking, loan servicing and mortgage loan recapture agreements with 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 Nonsupervised Title II Lender with the U.S. Department of Housing and Urban Development (“HUD”) and a lender/servicer with the U.S. Department of Veterans Affairs and U.S. Department of Agriculture (each of the above an “Agency” and collectively the “Agencies”).

●

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

Note 2—Basis of Presentation and Recently Issued Accounting Pronouncements

Basis of Presentation

The accompanying consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification for interim financial information and with the SEC’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these consolidated financial statements and notes do not include all of the information required by GAAP for complete financial statements. This interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

The accompanying consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, income, and cash flows for the interim periods presented, but are not necessarily indicative of income that may be expected for the full year ending December 31, 2024. Intercompany accounts and transactions have been eliminated.

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

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Recently Issued Accounting Pronouncements

During 2023, the FASB issued two Accounting Standards Updates (“ASUs”) aimed at increasing the amount of detail provided to financial statement users in certain existing disclosures. The ASUs do not require changes to the Company’s accounting. The ASUs are discussed below:

Segment Disclosures

The FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), that is intended to improve disclosures about a public entity’s reportable segments and addresses requests from investors and other allocators of capital for more detailed information about a reportable segment’s expenses.

The amendments in ASU 2023-07 are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The key amendments will require that the Company supplement its existing disclosures to include disclosure of:

●

significant segment expenses that are regularly provided to the chief operating decision maker included within each reported measure of segment profit or loss; and

●

an amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the significant expenses disclosed and each reported measure of segment profit or loss.

The Company will be required to apply the reporting specified by ASU 2023-07 in annual periods beginning with its fiscal year ending December 31, 2024 and for quarterly periods ended thereafter.

Income Tax Disclosures

The FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (“ASU 2023-09”), that is intended to enhance the level of detail and decision usefulness of income tax disclosures. ASU 2023-09 requires disclosures of:

●

Reconciliation of the expected tax at the applicable statutory federal income tax rate to the reported tax in a tabular format, using both percentages and amounts, broken out into specific categories with certain reconciling items of five percent or greater of the expected tax further broken out by nature and/or jurisdiction; and

●

Income taxes paid, net of refunds received, broken out between federal and state and local income taxes. Payments to individual jurisdictions representing five percent or more of the total income tax payments must also be separately disclosed.

The disclosures specified by ASU 2023-09 are required in the Company’s annual financial statements beginning with the year ended December 31, 2025, with early adoption permitted.

Note 3—Concentration of Risk

A portion of the Company’s activities relate to PMT. Revenues generated from PMT (generally comprised of gains on loans held for sale, loan origination and fulfillment fees, loan servicing fees, management fees, change in fair value of investment in and dividends received from PMT, and expense allocations charged to PMT) totaled 11% and 14% of total net revenues for the quarters ended March 31, 2024 and 2023, respectively. The Company also purchased 82% and 84% of its loan production from PMT during the quarters ended March 31, 2024 and 2023, respectively.

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The Company maintains cash and short-term investment balances at financial institutions in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. Should one or more of the financial institutions at which the Company’s deposits are maintained fail, there is no guarantee as to the extent that the Company would recover the funds deposited, whether through FDIC coverage or otherwise, or the timing of any recovery.

Note 4—Variable Interest Entities

The Company entered into securitization transactions in which variable interest entities (“VIEs”) may issue variable funding notes and term debt backed by beneficial interests in Ginnie Mae and Fannie Mae mortgage servicing rights (“MSRs”). The Company acts as guarantor of the variable funding notes and term debt. The Company determined that it is the primary beneficiary of the VIEs because as the holder and guarantor of the variable funding notes, it holds the variable interest in the VIEs. Therefore, PFSI consolidates the VIEs.

For financial reporting purposes, the MSRs financed by the consolidated VIEs are included in Mortgage servicing rights at fair value, the variable funding notes are included in Assets sold under agreements to repurchase, and the term debt is included in Notes payable secured by mortgage servicing assets on the Company’s consolidated balance sheets. This financing is detailed in Note 14 – Short-Term Borrowings and Note 15 – Long Term Debt.

Note 5—Related Party Transactions

PennyMac Mortgage Investment Trust

Operating Activities

Mortgage Loan Production Activities and MSR Recapture

Loan Sales

The Company sells newly originated loans to PMT under a mortgage loan purchase agreement. The Company has typically utilized the mortgage loan purchase agreement for the purpose of selling to PMT conforming balance non-government insured or guaranteed loans, as well as prime jumbo residential mortgage loans.

MSR Recapture

Pursuant to the terms of an MSR recapture agreement by and between the Company and PMT, if the Company refinances (recaptures) mortgage loans for which PMT holds the MSRs, the Company is generally required to transfer and convey to PMT cash in an amount equal to:

●

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 agreed to allocate sufficient resources to target a recapture rate of at least 15%.

The mortgage loans purchase and MSR recapture agreements expire on June 30, 2025.

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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 issued 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 loan commitments 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 loans 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 and certain Fannie Mae or Freddie Mac loans acquired by PLS.

Sourcing Fees

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

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

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


	Quarter ended March 31,
	2024		2023

	(in thousands)
Mortgage servicing rights recapture incurred included in Net gains on loans held for sale at fair value	$	(353)	$	(485)
Tax service fees earned from PMT included in Loan origination fees	$	359	$	1,410

Fulfillment fee revenue	$	4,016	$	11,923
Unpaid principal balance of loans fulfilled for PMT subject to fulfillment fees	$	1,771,681	$	6,628,810

Sourcing fees included in cost of loans purchased from PMT	$	1,605	$	1,328
Unpaid principal balance of loans purchased from PMT:
Government guaranteed or insured	$	7,856,925	$	9,213,712
Conventional conforming		8,189,930		4,062,874
	$	16,046,855	$	13,276,586

Loan Servicing

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

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Prime Servicing

●

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

●

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

Special Servicing

●

The base servicing fee rates for special servicing 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 special servicing loan.

●

The Company receives activity-based fees for modifications, foreclosures and liquidations that it facilitates with respect to special servicing loans, as well as other market-based refinancing and loan disposition fees.

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


	Quarter ended March 31,
Loan type serviced	2024		2023

	(in thousands)
Prime servicing	$	20,200	$	20,329
Special servicing		62		120
	$	20,262	$	20,449

The Servicing Agreement expires on June 30, 2025.

Investment Management Activities

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

●

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.”

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●

The performance incentive fee is equal to the sum of:

●

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

●

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

●

20% of the amount by which PMT’s “net income” for the quarter exceeds a 16% return on “equity” plus the “high watermark.”

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

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

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

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

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

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

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


	Quarter ended March 31,
	2024		2023

	(in thousands)
Base management	$	7,188	$	7,257
Performance incentive		—		—
	$	7,188	$	7,257

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.

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

The Company received reimbursements from PMT for expenses as follows:


	Quarter ended March 31,
	2024		2023

	(in thousands)
Reimbursement of:
Expenses incurred on PMT's behalf, net	$	6,414	$	5,661
Common overhead incurred by the Company		1,944		1,821
Compensation		165		165
	$	8,523	$	7,647
Payments and settlements during the quarter (1)	$	30,085	$	32,384

(1)	Payments and settlements include payments for the operating, investing and financing activities itemized in this Note.

Investing Activities

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

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


	March 31,		December 31,
	2024		2023

	(in thousands)
Common shares of beneficial interest of PennyMac Mortgage Investment Trust:
Fair value	$	1,101	$	1,121
Number of shares		75		75

Receivable from and Payable to PMT

Amounts receivable from and payable to PMT are summarized below:


	March 31,		December 31,
	2024		2023

	(in thousands)
Receivable from PMT:
Allocated expenses and expenses incurred on PMT's behalf	$	8,194	$	5,612
Correspondent production fees		7,368		8,288
Management fees		7,188		7,252
Servicing fees		6,730		6,809
Fulfillment fees		1,355		1,301
	$	30,835	$	29,262
Payable to PMT:
Amounts advanced by PMT to fund its servicing advances	$	127,992	$	208,154
Other		1		56
	$	127,993	$	208,210

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Exchanged Private National Mortgage Acceptance Company, LLC Unitholders

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

The Company has recorded a $26.1 million Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement as of March 31, 2024 and December 31, 2023. The Company did not make payments under the tax receivable agreement during the quarters ended March 31, 2024 and 2023.

Townsgate Closing Services, LLC

The Company advanced $801,000 to Townsgate Closing Services, LLC, under a revolving loan agreement. The revolving loan agreement has a maximum commitment amount of $1.5 million, matures on December 27, 2027, and earns interest at 9.75% per year as of March 31, 2024, subject to semi-annual adjustment indexed to the 10+ year USD High Yield Corporate Bond Index as determined by Tradeweb/Bloomberg. The outstanding balance is included in Other assets on the Company’s consolidated balance sheets. The Company recorded $20,000 and $21,000 of interest income related to the loan during the quarters ended March 31, 2024 and 2023, respectively.

Note 6—Loan Sales and Servicing Activities

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

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


	Quarter ended March 31,
	2024		2023

	(in thousands)
Cash flows:
Sales proceeds	$	19,676,917	$	13,385,341
Servicing fees received	$	336,248	$	268,423

The Company is contractually responsible for making the payments required to protect its beneficial interest holders’ interests in the properties collateralizing their loans and may, therefore, be required to advance amounts in excess of insurer or guarantor reimbursement limits. Therefore, the Company provides a valuation allowance on the servicing advances for these amounts in excess of amounts that are expected to ultimately be recovered from the loans’ insurers, guarantors, or beneficial interest holders.

The servicing advance valuation allowance is estimated based on relevant qualitative and quantitative information about past events, including historical collection and loss experience, current conditions, and reasonable and supportable forecasts that affect collectable amounts. The provision for losses on servicing advances is included in Servicing expense in the consolidated statements of income. Servicing advances are written off when they are deemed unrecoverable.

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The following is a summary of the allowance for losses on servicing advances:


	Quarter ended March 31,
	2024		2023

	(in thousands)
Balance at beginning of quarter	$	73,991	$	78,992
Reversals of provision for losses		(1,541)		(3,081)
Charge-offs, net		(5,123)		(733)
Balance at end of quarter	$	67,327	$	75,178

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


	March 31,		December 31,
	2024		2023

	(in thousands)
Unpaid principal balance of loans outstanding	$	364,441,567	$	352,790,614
Delinquent loans:
30-89 days	$	12,128,892	$	13,775,493
90 days or more:
Not in foreclosure	$	6,251,718	$	6,754,282
In foreclosure	$	647,459	$	618,694
Foreclosed	$	8,441	$	7,565
Loans in bankruptcy	$	1,479,461	$	1,415,614

The following tables summarize the Company’s loan servicing portfolio as measured by UPB:


	March 31, 2024
	Servicing				Total
	rights owned		Subservicing		loans serviced

	(in thousands)
Investor:
Non-affiliated entities:
Originated	$	364,441,567	$	—	$	364,441,567
Purchased		17,051,740		—		17,051,740
		381,493,307		—		381,493,307
PennyMac Mortgage Investment Trust		—		230,819,012		230,819,012
Loans held for sale		5,111,719		—		5,111,719
	$	386,605,026	$	230,819,012	$	617,424,038
Delinquent loans:
30 days	$	9,940,684	$	1,607,081	$	11,547,765
60 days		2,738,951		370,879		3,109,830
90 days or more:
Not in foreclosure		6,426,292		875,189		7,301,481
In foreclosure		692,930		111,713		804,643
Foreclosed		9,652		4,482		14,134
	$	19,808,509	$	2,969,344	$	22,777,853
Loans in bankruptcy	$	1,583,758	$	215,218	$	1,798,976
Custodial funds managed by the Company (1)	$	5,429,348	$	2,468,707	$	7,898,055

(1)

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 these custodial funds where it owns the MSRs and these fees are included in Interest income in the Company’s consolidated statements of income.

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	December 31, 2023
	Servicing				Total
	rights owned		Subservicing		loans serviced

	(in thousands)
Investor:
Non-affiliated entities:
Originated	$	352,790,614	$	—	$	352,790,614
Purchased		17,478,397		—		17,478,397
		370,269,011		—		370,269,011
PennyMac Mortgage Investment Trust		—		232,653,069		232,653,069
Loans held for sale		4,294,689		—		4,294,689
	$	374,563,700	$	232,653,069	$	607,216,769
Delinquent loans:
30 days	$	11,097,929	$	1,808,516	$	12,906,445
60 days		3,316,494		399,786		3,716,280
90 days or more:
Not in foreclosure		6,941,325		1,031,299		7,972,624
In foreclosure		686,359		92,618		778,977
Foreclosed		8,133		4,295		12,428
	$	22,050,240	$	3,336,514	$	25,386,754
Loans in bankruptcy	$	1,523,218	$	186,593	$	1,709,811
Custodial funds managed by the Company (1)	$	3,741,978	$	1,759,974	$	5,501,952

(1)

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:


	March 31,		December 31,
State	2024		2023

	(in thousands)
California	$	73,344,855	$	72,788,272
Florida		59,174,541		57,824,310
Texas		58,318,589		56,437,082
Virginia		35,562,555		35,376,266
Maryland		26,865,117		26,746,355
All other states		364,158,381		358,044,484
	$	617,424,038	$	607,216,769

Note 7—Fair Value

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

●

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

●

Level 2—Prices determined 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.

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●

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.

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:


	March 31, 2024
	Level 1		Level 2		Level 3		Total

	(in thousands)
Assets:
Short-term investment	$	69	$	—	$	—	$	69
Principal-only mortgage-backed securities		—		524,576		—		524,576
Loans held for sale		—		4,733,958		466,392		5,200,350
Derivative assets:
Interest rate lock commitments		—		—		74,545		74,545
Forward purchase contracts		—		21,887		—		21,887
Forward sales contracts		—		18,622		—		18,622
MBS put options		—		1,970		—		1,970
Put options on interest rate futures purchase contracts		25,353		—		—		25,353
Call options on interest rate futures purchase contracts		3,301		—		—		3,301
Total derivative assets before netting		28,654		42,479		74,545		145,678
Netting		—		—		—		(36,691)
Total derivative assets		28,654		42,479		74,545		108,987
Mortgage servicing rights		—		—		7,483,210		7,483,210
Investment in PennyMac Mortgage Investment Trust		1,101		—		—		1,101
	$	29,824	$	5,301,013	$	8,024,147	$	13,318,293
Liabilities:
Derivative liabilities:
Interest rate lock commitments	$	—	$	—	$	4,737	$	4,737
Forward purchase contracts		—		6,049		—		6,049
Forward sales contracts		—		35,649		—		35,649
Total derivative liabilities before netting		—		41,698		4,737		46,435
Netting		—		—		—		(5,651)
Total derivative liabilities		—		41,698		4,737		40,784
Mortgage servicing liabilities		—		—		1,732		1,732
	$	—	$	41,698	$	6,469	$	42,516

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	December 31, 2023
	Level 1		Level 2		Level 3		Total

	(in thousands)
Assets:
Short-term investment	$	10,268	$	—	$	—	$	10,268
Loans held for sale		—		3,942,127		478,564		4,420,691
Derivative assets:
Interest rate lock commitments		—		—		90,313		90,313
Forward purchase contracts		—		78,448		—		78,448
Forward sales contracts		—		6,151		—		6,151
MBS put options		—		413		—		413
MBS call options		—		6,265		—		6,265
Put options on interest rate futures purchase contracts		11,043		—		—		11,043
Call options on interest rate futures purchase contracts		66,176		—		—		66,176
Total derivative assets before netting		77,219		91,277		90,313		258,809
Netting		—		—		—		(79,730)
Total derivative assets		77,219		91,277		90,313		179,079
Mortgage servicing rights		—		—		7,099,348		7,099,348
Investment in PennyMac Mortgage Investment Trust		1,121		—		—		1,121
	$	88,608	$	4,033,404	$	7,668,225	$	11,710,507
Liabilities:
Derivative liabilities:
Interest rate lock commitments	$	—	$	—	$	720	$	720
Forward purchase contracts		—		5,141		—		5,141
Forward sales contracts		—		92,796		—		92,796
Call options on interest rate futures sales contracts		3,209		—		—		3,209
Total derivative liabilities before netting		3,209		97,937		720		101,866
Netting		—		—		—		(48,591)
Total derivative liabilities		3,209		97,937		720		53,275
Mortgage servicing liabilities		—		—		1,805		1,805
	$	3,209	$	97,937	$	2,525	$	55,080

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As shown above, certain of the Company’s loans held for sale, Interest Rate Lock Commitments (“IRLCs”), MSRs and MSLs are measured using Level 3 fair value inputs. Following are roll forwards of assets and liabilities measured at fair value using “Level 3” inputs at either the beginning or the end of the quarter presented:


	Quarter ended March 31, 2024
			Net interest		Mortgage
	Loans held		rate lock		servicing
Assets	for sale		commitments (1)		rights		Total

	(in thousands)
Balance, December 31, 2023	$	478,564	$	89,593	$	7,099,348	$	7,667,505
Purchases and issuances, net		905,860		100,271		—		1,006,131
Capitalization of interest and servicing advances		11,226		—		—		11,226
Sales and repayments		(383,999)		—		—		(383,999)
Mortgage servicing rights resulting from loan sales		—		—		412,520		412,520
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		17,142		—		—		17,142
Other factors		(572)		11,524		(28,658)		(17,706)
		16,570		11,524		(28,658)		(564)
Transfers from Level 3 to Level 2		(561,829)		—		—		(561,829)
Transfers to loans held for sale		—		(131,580)		—		(131,580)
Balance, March 31, 2024	$	466,392	$	69,808	$	7,483,210	$	8,019,410
Changes in fair value recognized during the quarter relating to assets still held at March 31, 2024	$	19,043	$	69,808	$	(28,658)	$	60,193

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


	Quarter ended
Liabilities	March 31, 2024
	(in thousands)
Mortgage servicing liabilities:
Balance, December 31, 2023	$	1,805
Changes in fair value included in income		(73)
Balance, March 31, 2024	$	1,732
Changes in fair value recognized during the quarter relating to liabilities still outstanding at March 31, 2024	$	(73)

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	Quarter ended March 31, 2023
			Net interest		Mortgage
	Loans held		rate lock		servicing
Assets	for sale		commitments (1)		rights			Total

	(in thousands)
Balance, December 31, 2022	$	345,772	$	25,844	$	5,953,621	$	6,325,237
Purchases and issuances, net		437,650		62,508		—		500,158
Capitalization of interest and servicing advances		7,655		—		—		7,655
Sales and repayments		(122,858)		—		(232)		(123,090)
Mortgage servicing rights resulting from loan sales		—		—		286,533		286,533
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		9,543		—		—		9,543
Other factors		793		72,412		(236,532)		(163,327)
		10,336		72,412		(236,532)		(153,784)
Transfers:
From Level 3 to Level 2		(365,714)		—		—		(365,714)
To real estate acquired in settlement of loans		(52)		—		—		(52)
To loans held for sale		—		(101,918)		—		(101,918)
Balance, March 31, 2023	$	312,789	$	58,846	$	6,003,390	$	6,375,025
Changes in fair value recognized during the quarter relating to assets still held at March 31, 2023	$	8,413	$	58,846	$	(236,532)	$	(169,273)

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


Liabilities	Quarter ended March 31, 2023
	(in thousands)
Mortgage servicing liabilities:
Balance, December 31, 2022	$	2,096
Changes in fair value included in income		(85)
Balance, March 31, 2023	$	2,011
Changes in fair value recognized during the quarter relating to liabilities still outstanding at March 31, 2023	$	(85)

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.

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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:



	2024							2023
		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:
Principal-only stripped mortgage-backed securities		$	—	$	(311)	$	(311)	$	—	$	—	$	—
Loans held for sale			129,329		—		129,329		165,947		—		165,947
Mortgage servicing rights			—		(28,658)		(28,658)		—		(236,532)		(236,532)
		$	129,329	$	(28,969)	$	100,360	$	165,947	$	(236,532)	$	(70,585)
Liabilities:
Mortgage servicing liabilities		$	—	$	73	$	73	$	—	$	85	$	85

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


	March 31, 2024						December 31, 2023
			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	$	5,162,089	$	5,062,370	$	99,719	$	4,378,042	$	4,233,764	$	144,278
90 days or more delinquent:
Not in foreclosure		32,071		35,496		(3,425)		35,253		38,922		(3,669)
In foreclosure		6,190		13,853		(7,663)		7,396		22,003		(14,607)
	$	5,200,350	$	5,111,719	$	88,631	$	4,420,691	$	4,294,689	$	126,002

Assets Measured at Fair Value on a Nonrecurring Basis

Following is a summary of assets that were measured at fair value on a nonrecurring basis:


Real estate acquired in settlement of loans	Level 1		Level 2		Level 3		Total

	(in thousands)
March 31, 2024	$	—	$	—	$	2,473	$	2,473
December 31, 2023	$	—	$	—	$	2,669	$	2,669

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

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Fair Value of Financial Instruments Carried at Amortized Cost

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

These liabilities are classified as “Level 3” fair value items due to the Company’s reliance on unobservable inputs to estimate their fair values. The Company has concluded that the fair values of these liabilities other than term notes and term loans included in Notes payable secured by mortgage servicing assets and the Unsecured senior notes approximate their carrying values due to their short terms and/or variable interest rates.

The Company estimates the fair value of the term notes, term loans and the Unsecured senior notes using indications of fair value provided by non-affiliate brokers, pricing services and internal estimates of fair value. The fair values and carrying values of these liabilities are summarized below:


	March 31, 2024				December 31, 2023
	Fair value		Carrying value		Fair value		Carrying value

	(in thousands)
Term notes and term loans	$	1,736,738	$	1,722,656	$	1,730,000	$	1,724,290
Unsecured senior notes	$	2,472,415	$	2,521,031	$	2,467,750	$	2,519,651

Valuation Governance

Most of the Company’s financial assets, and all of its derivatives, MSRs and MSLs, are carried at fair value with changes in fair value recognized in current period income. Certain of the Company’s financial assets and derivatives and all of its MSRs and MSLs are “Level 3” fair value assets and liabilities which require use of unobservable inputs that are significant to the estimation of the items’ fair values. Unobservable inputs reflect the Company’s own judgments about the factors that market participants use in pricing an asset or liability, and are based on the best information available under the circumstances.

Due to the difficulty in estimating the fair values of “Level 3” fair value assets and liabilities, the Company has assigned responsibility for estimating the fair values of these assets and liabilities to specialized staff within its capital markets group and subjects the valuation process to significant senior management oversight.

With respect to “Level 3” valuations other than IRLCs, the capital markets valuation staff group reports to the Company’s senior management valuation committee, which oversees the valuations. Capital markets valuation staff monitors the models used for valuation of the Company’s “Level 3” fair value assets and liabilities, including the models’ performance versus actual results, and reports those results as well as changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the valuations and any changes in model methods and inputs, to PFSI’s senior management valuation committee. The Company’s senior management valuation committee includes the Company’s chief financial, risk, and capital markets officers as well as other senior members of the Company’s finance, capital markets and risk management staffs.

To assess the reasonableness of its valuations, the capital markets valuation staff presents an analysis of the effect on the valuations of changes to the significant inputs to the models and, for MSRs, comparisons of its estimates of fair value and of key inputs to those procured from nonaffiliated brokers and published surveys.

The fair value of the Company’s IRLCs is developed by its capital markets risk management staff and is reviewed by its capital markets operations staff.

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Valuation Techniques and Inputs

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

Principal-Only Stripped Mortgage-Backed Securities

The Company categorizes principal-only stripped securities as “Level 2” fair value financial instruments. Fair values of these securities are established based on quoted market prices for these or similar securities.

Loans Held for Sale

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

Certain of the Company’s loans held for sale are not saleable into active markets and are therefore categorized as “Level 3” fair value assets. Loans held for sale categorized as “Level 3” fair value assets include:

●

Early buy out (“EBO”) loans. EBO loans are 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 a government guaranteed or insured loan from a Ginnie Mae security 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 a loan may be resold to an investor and thereafter may be repurchased to the extent it becomes eligible for resale into a new Ginnie Mae guaranteed security.

A loan becomes eligible for resale into a new Ginnie Mae security when the loan becomes current either through completion of a modification of the loan’s terms or after three months of timely payments following either the completion of a payment deferral program or borrower reperformance and when the issuance date of the new security is at least 120 days after the date the loan was last delinquent.

●

Loans with identified defects. 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.

●

Closed-end second lien mortgage loans. At present, there is no active market with observable inputs that are significant to the estimation of fair value of the closed-end second lien mortgage loans the Company produces.

The Company uses a discounted cash flow model to estimate the fair value of its “Level 3” fair value loans held for sale. The significant unobservable inputs used in the fair value measurement of the Company’s “Level 3” fair value loans held for sale are discount rates, home price projections, voluntary prepayment/resale and total prepayment/resale speeds. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment speeds.

Table of Contents

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



	March 31, 2024		December 31, 2023
Fair value (in thousands)	$	466,392	$	478,564
Key inputs (1):
Discount rate:
Range		6.7% – 10.2%		7.1% – 10.2%
Weighted average		7.4%		7.2%
Twelve-month projected housing price index change:
Range		1.8% – 1.9%		0.3% – 0.5%
Weighted average		1.8%		0.5%
Voluntary prepayment/resale speed (2):
Range		6.2% – 38.9%		4.0% – 36.9%
Weighted average		25.9%		24.8%
Total prepayment/resale speed (3):
Range		6.3% – 47.3%		4.0% – 50.3%
Weighted average		29.3%		32.2%

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

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

(3)	Total prepayment/resale speed is measured using life total CPR, which includes both voluntary and involuntary prepayment/resale speeds.

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

Derivative Financial Instruments

Interest Rate Lock Commitments

The Company categorizes IRLCs as “Level 3” fair value assets or liabilities. The Company estimates the fair values of IRLCs based on quoted Agency MBS prices, its estimate of the fair value of the MSRs it expects to receive in the sale of the loans and the probability that the loans will be funded or purchased (the “pull-through rate”).

The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the estimated fair values of MSRs attributable to the mortgage loans it has committed to originate or purchase. Significant changes in the pull-through rate or the MSR components of the IRLCs, in isolation, could result in significant changes in the IRLCs’ fair value measurements. The financial effects of changes in these inputs are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of IRLC fair value, but increase the pull-through rate for the loan principal and interest payment cash flow component, which has decreased in fair value. Changes in fair value of IRLCs are included in Net gains on loans held for sale at fair value in the Company’s consolidated statements of income.

Table of Contents

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



	March 31, 2024		December 31, 2023
Fair value (in thousands) (1)	$	69,808	$	89,593
Committed amount (in thousands)	$	7,270,122	$	6,349,628
Key inputs (2):
Pull-through rate:
Range		19.6% – 100%		10.2% – 100%
Weighted average		79.1%		81.1%
Mortgage servicing rights fair value expressed as:
Servicing fee multiple:
Range		1.1 – 7.8		1.1 – 7.3
Weighted average		4.4		4.2
Percentage of loan commitment amount:
Range		0.3% – 4.3%		0.3% – 4.3%
Weighted average		2.1%		1.9%

(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 values of hedging derivatives are included in Net gains on loans held for sale at fair value, or Net loan servicing fees – Mortgage servicing rights hedging results, as applicable, in the Company’s consolidated statements of income.

Mortgage Servicing Rights

MSRs are categorized as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the estimation of the fair value of MSRs include the applicable prepayment rate (prepayment speed), pricing spread (discount rate), and annual per-loan cost to service the underlying loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key inputs are not directly related. Changes in the fair value of MSRs are included in Net loan servicing fees—Change in fair value of mortgage servicing rights and mortgage servicing liabilities in the Company’s consolidated statements of income.

Table of Contents

Following are the key inputs used in determining the fair value of MSRs received by the Company when it retains the obligation to service the mortgage loans it sells:


	Quarter ended March 31,
	2024		2023

	(Amount recognized and unpaid principal balance of underlying loans in thousands)
MSR and pool characteristics:
Amount recognized	$	412,520	$	286,533
Unpaid principal balance of underlying loans	$	19,484,815	$	13,695,364
Weighted average servicing fee rate (in basis points)		44		50
Key inputs (1):
Annual total prepayment speed (2):
Range		7.9% – 15.9%		9.2% – 23.2%
Weighted average		11.0%		11.7%
Equivalent average life (in years):
Range		3.5 – 9.3		3.0 – 8.4
Weighted average		7.5		7.3
Pricing spread (3):
Range		5.5% – 12.6%		5.5% – 11.7%
Weighted average		6.3%		7.7%
Per-loan annual cost of servicing:
Range		$71 – $127		$68 – $125
Weighted average		$99		$103

(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. The Company applies a pricing spread to a derived United State Treasury Securities (“Treasury”) yield curve for purposes of discounting cash flows relating to 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:


	March 31, 2024	December 31, 2023

	(Fair value, unpaid principal balance of underlying
	loans and effect on fair value amounts in thousands)
Fair value	$ 7,483,210	$ 7,099,348
Pool characteristics:
Unpaid principal balance of underlying mortgage loans	$ 381,470,663	$ 370,244,119
Weighted average note interest rate	4.2%	4.1%
Weighted average servicing fee rate (in basis points)	38	38
Key inputs (1):
Annual total prepayment speed (2):
Range	6.0% – 17.6%	6.1% – 17.8%
Weighted average	7.9%	8.3%
Equivalent average life (in years):
Range	3.0 – 9.0	3.0 – 9.0
Weighted average	8.2	8.1
Effect on fair value of (3):
5% adverse change	($110,071)	($107,757)
10% adverse change	($216,317)	($211,643)
20% adverse change	($418,132)	($408,638)
Pricing spread (4):
Range	5.5% – 12.6%	5.5% – 12.6%
Weighted average	6.4%	6.4%
Effect on fair value of (3):
5% adverse change	($98,475)	($94,307)
10% adverse change	($194,382)	($186,129)
20% adverse change	($378,857)	($362,671)
Per-loan annual cost of servicing:
Range	$70 – $132	$70 – $135
Weighted average	$107	$107
Effect on fair value of (3):
5% adverse change	($45,114)	($44,572)
10% adverse change	($90,228)	($89,145)
20% adverse change	($180,457)	($178,289)

(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, these analyses should not be viewed as earnings forecasts.

(4)	The Company applies a pricing spread to a derived Treasury yield curve for purposes of discounting cash flows relating to MSRs.

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Mortgage Servicing Liabilities

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

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


		March 31,		December 31,
		2024		2023
Fair value (in thousands)	$	1,732	$	1,805
Pool characteristics:
Unpaid principal balance of underlying loans (in thousands)	$	22,644	$	24,892
Servicing fee rate (in basis points)		25		25
Key inputs (1):
Annual total prepayment speed (2)		15.9%		16.1%
Pricing spread (3)		8.5%		8.3%
Equivalent average life (in years)		5.1		5.1
Per-loan annual cost of servicing	$	992	$	1,043

(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)	The Company applies a pricing spread to a derived Treasury yield curve for purposes of discounting cash flows relating to MSLs.

Note 8—Mortgage-Backed Securities

During the quarter ended March 31, 2024, the Company began to invest in Agency principal-only stripped MBS for the purpose of hedging the fair value of its MSRs. MBS are carried at fair value with changes in fair value recognized in current period income. Changes in fair value arising from accrual of unearned discounts are recognized using the interest method and are included in Interest income. Changes in fair value arising from other factors are included in Mortgage servicing rights hedging results. All of the principal-only stripped MBS had contractual maturities of over ten years and were pledged to secure sales of assets under agreements to repurchase.

Following is a summary of the Company’s investment in principal-only stripped MBS:


	March 31, 2024
	(in thousands)
Principal balance	$	654,884
Unearned discounts		(129,997)
Cumulative valuation changes		(311)
Fair value	$	524,576

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Note 9—Loans Held for Sale at Fair Value

Loans held for sale at fair value include the following:


	March 31,		December 31,
Loan type	2024		2023

	(in thousands)
Government-insured or guaranteed	$	2,517,566	$	2,099,135
Conventional conforming		2,158,242		1,821,085
Jumbo		58,150		21,907
Closed-end second lien mortgage loans		230,639		322,015
Purchased from Ginnie Mae securities serviced by the Company		222,286		146,585
Repurchased pursuant to representations and warranties		13,467		9,964
	$	5,200,350	$	4,420,691
Fair value of loans pledged to secure:
Assets sold under agreements to repurchase	$	4,741,330	$	3,858,977
Mortgage loan participation purchase and sale agreements		385,804		470,524
	$	5,127,134	$	4,329,501

Note 10—Derivative Financial Instruments

The Company holds and issues derivative financial instruments in connection with its operating and investing activities. Derivative financial instruments are created in the Company’s loan production activities and when the Company enters into derivative transactions as part of its interest rate risk management activities. Derivative financial instruments created in the Company’s loan production activities are IRLCs that are created when the Company commits to purchase or originate a loan for sale.

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

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

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

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

Table of Contents

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


	March 31, 2024					December 31, 2023
		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	7,270,122	$	74,545	$	4,737	6,349,628	$	90,313	$	720
Subject to master netting arrangements (2):
Forward purchase contracts	14,624,053		21,887		6,049	15,863,667		78,448		5,141
Forward sales contracts	17,168,191		18,622		35,649	14,477,159		6,151		92,796
MBS put options	2,700,000		1,970		—	2,925,000		413		—
MBS call options	—		—		—	1,000,000		6,265		—
Put options on interest rate futures purchase contracts	8,917,500		25,353		—	8,717,500		11,043		—
Call options on interest rate futures purchase contracts	1,625,000		3,301		—	4,250,000		66,176		3,209
Treasury futures purchase contracts	8,068,300		—		—	5,986,500		—		—
Treasury futures sale contracts	9,408,000		—		—	10,677,000		—		—
Total derivatives before netting			145,678		46,435			258,809		101,866
Netting			(36,691)		(5,651)			(79,730)		(48,591)
		$	108,987	$	40,784		$	179,079	$	53,275
Deposits received from derivative counterparties included in the derivative balances above, net		$	(31,040)				$	(31,139)

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

(2)	All derivatives subject to master netting agreements are interest rate derivatives that are used as economic hedges.

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.


	March 31, 2024								December 31, 2023
			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	$	74,545	$	—	$	—	$	74,545	$	90,313	$	—	$	—	$	90,313
RJ O' Brien		28,654		—		—		28,654		74,010		—		—		74,010
Citibank, N.A.		3,476		—		—		3,476		2,947		—		—		2,947
Goldman Sachs		—		—		—		—		8,473		—		—		8,473
Mizuho Securities		—		—		—		—		1,467		—		—		1,467
Others		2,312		—		—		2,312		1,869		—		—		1,869
	$	108,987	$	—	$	—	$	108,987	$	179,079	$	—	$	—	$	179,079

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Derivative Liabilities, Financial Instruments and Collateral Held by Counterparty

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


	March 31, 2024								December 31, 2023
			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	$	4,737	$	—	$	—	$	4,737	$	720	$	—	$	—	$	720
Atlas Securitized Products, L.P.		1,203,385		(1,203,385)		—		—		1,210,473		(1,210,473)		—		—
Bank of America, N.A.		1,087,182		(1,086,753)		—		429		875,766		(872,148)		—		3,618
Royal Bank of Canada		666,511		(666,511)		—		—		457,743		(457,743)		—		—
Wells Fargo Bank, N.A.		443,386		(416,035)		—		27,351		116,275		(114,647)		—		1,628
JPMorgan Chase Bank, N.A.		412,478		(412,448)		—		30		243,225		(243,225)		—		—
BNP Paribas		322,871		(322,871)		—		—		185,425		(185,425)		—		—
Goldman Sachs		299,387		(299,205)		—		182		178,751		(178,751)		—		—
Citibank, N.A.		293,885		(293,885)		—		—		174,221		(174,221)		—		—
Morgan Stanley Bank, N.A.		227,757		(223,410)		—		4,347		195,714		(164,149)		—		31,565
Barclays Capital		197,489		(196,316)		—		1,173		128,488		(118,667)		—		9,821
Santander US Capital Markets LLC		195,541		(195,307)		—		234		—		—		—		—
Nomura Corporate Funding Americas		125,036		(125,000)		—		36		50,000		(50,000)		—		—
Athene Annuity & Life Assurance Company		661		—		—		661		2,111		—		—		2,111
Federal National Mortgage Association		189		—		—		189		1,337		—		—		1,337
Others		1,415		—		—		1,415		2,475		—		—		2,475
	$	5,481,910	$	(5,441,126)	$	—	$	40,784	$	3,822,724	$	(3,769,449)	$	—	$	53,275

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

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 March 31,
Derivative activity	Consolidated income statement line	2024		2023

		(in thousands)
Interest rate lock commitments	Net gains on loans held for sale at fair value (1)	$	(19,786)	$	33,002
Hedged item:
Interest rate lock commitments and loans held for sale	Net gains on loans held for sale at fair value	$	52,237	$	(94,798)
Mortgage servicing rights	Net loan servicing fees–Mortgage servicing rights hedging results	$	(294,334)	$	47,227

(1)

Represents net change in fair value of IRLCs from the beginning to the end of the quarter. Amounts recognized at the date of commitment and fair value changes recognized during the quarter until purchase of the underlying loans or the cancellation of the commitment are shown in the rollforward of IRLCs for the quarter in Note 7 – Fair Value – Assets and Liabilities Measured at Fair Value on a Recurring Basis.

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Note 11—Mortgage Servicing Rights and Mortgage Servicing Liabilities

Mortgage Servicing Rights at Fair Value

The activity in MSRs is as follows:


	Quarter ended March 31,
	2024		2023

	(in thousands)
Balance at beginning of quarter	$	7,099,348	$	5,953,621
Additions (deductions):
MSRs resulting from loan sales		412,520		286,533
Transfer of mortgage servicing rights relating to delinquent loans to Agency		—		(232)
		412,520		286,301
Change in fair value due to:
Changes in inputs used in valuation model (1)		169,952		(90,279)
Other changes in fair value (2)		(198,610)		(146,253)
Total change in fair value		(28,658)		(236,532)
Balance at end of quarter	$	7,483,210	$	6,003,390
Unpaid principal balance of underlying loans at end of quarter	$	381,470,663	$	321,263,982

	March 31,		December 31,
	2024		2023

	(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	$	7,406,892	$	7,033,892

(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.

Mortgage Servicing Liabilities at Fair Value

The activity in MSLs is summarized below:


	Quarter ended March 31,
	2024		2023

	(in thousands)
Balance at beginning of quarter	$	1,805	$	2,096
Changes in fair value due to:
Changes in inputs used in valuation model (1)		(27)		(15)
Other changes in fair value (2)		(46)		(70)
Total change in fair value		(73)		(85)
Balance at end of quarter	$	1,732	$	2,011
Unpaid principal balance of underlying loans at end of quarter	$	22,644	$	28,380

(1)	Principally reflects changes in annual total prepayment speed and per loan annual cost of servicing.

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

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Contractual servicing fees relating to MSRs and MSLs are recorded in Net loan servicing fees—Loan servicing fees—From non-affiliates on the Company’s consolidated statements of income; other fees relating to MSRs and MSLs are recorded in Net loan servicing fees—Loan servicing fees—Other on the Company’s consolidated statements of income. Such amounts are summarized below:


	Quarter ended March 31,
	2024		2023

	(in thousands)
Contractual servicing fees	$	358,026	$	290,697
Other fees:
Late charges		17,609		12,601
Other		2,640		2,181
	$	378,275	$	305,479

Note 12—Other Assets

Other assets are summarized below:


		March 31,		December 31,
	2024		2023

	(in thousands)
Margin deposits	$	154,321	$	135,645
Capitalized software, net		140,419		148,736
Operating lease right-of-use assets		46,490		49,926
Servicing fees receivable, net		34,312		37,271
Other servicing receivables		45,280		30,530
Interest receivable		39,837		35,196
Prepaid expenses		35,325		36,044
Real estate acquired in settlement of loans		18,195		14,982
Furniture, fixtures, equipment and building improvements, net		17,951		19,016
Deposits securing Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets		16,175		15,653
Other		75,063		59,461
	$	623,368	$	582,460
Deposits securing Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets	$	16,175	$	15,653

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Note 13—Leases

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

The Company’s lease agreements are summarized below:



	Quarter ended March 31,
	2024		2023

	(dollars in thousands)
Lease expense:
Operating leases	$	4,031	$	4,949
Short-term leases		84		163
Sublease income		(425)		(96)
Net lease expense included in Occupancy and equipment expense	$	3,690	$	5,016

Other information:
Payments for operating leases	$	4,974	$	5,696
Operating lease right-of-use assets recognized	$	—	$	1,727
Quarter end weighted averages:
Remaining lease term (in years)		4.1		4.6
Discount rate		3.8%		3.8%

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


Twelve months ended March 31,	Operating leases
	(in thousands)
2025	$	19,540
2026		18,635
2027		13,385
2028		5,791
2029		5,009
Thereafter		5,791
Total lease payments		68,151
Less imputed interest		(6,487)
Operating lease liability included in Accounts payable and accrued expenses	$	61,664

Note 14—Short-Term Debt

The borrowing facilities described throughout these Notes 14 and 15 contain various covenants, including financial covenants governing the Company’s net worth, debt-to-equity ratio and liquidity. Management believes that the Company was in compliance with these covenants as of March 31, 2024.

Assets Sold Under Agreements to Repurchase

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

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Assets sold under agreements to repurchase are summarized below:


	Quarter ended March 31,
	2024		2023

	(dollars in thousands)
Average balance of assets sold under agreements to repurchase	$	3,542,537	$	3,508,262
Weighted average interest rate (1)		7.24%		6.54%
Total interest expense	$	70,435	$	59,223
Maximum daily amount outstanding	$	5,442,438	$	5,768,570

(1)	Excludes the effect of amortization of debt issuance costs and utilization fees of $6.7 million and $2.6 million for the quarters ended March 31, 2024 and 2023, respectively.


		March 31,		December 31,
	2024		2023

	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	5,441,126	$	3,769,449
Unamortized debt issuance costs		(5,772)		(5,493)
	$	5,435,354	$	3,763,956
Weighted average interest rate		6.92%		7.05%
Available borrowing capacity (1):
Committed	$	712,341	$	1,282,040
Uncommitted		4,838,453		5,548,511
	$	5,550,794	$	6,830,551
Assets securing repurchase agreements:
Principal-only stripped MBS	$	524,576		—
Loans held for sale	$	4,741,330	$	3,858,977
Servicing advances (2)	$	271,947	$	354,831
Mortgage servicing rights (2)	$	6,533,305	$	6,284,239
Deposits (2)	$	16,175	$	15,653

(1)	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.

(2)

Beneficial interests in the Ginnie Mae MSRs, Fannie Mae MSRs, servicing advances and deposits together serve as the collateral backing servicing asset financing facilities that are included in Assets sold under agreements to repurchase and the term notes and term loans included in Notes payable secured by mortgage servicing assets. The term notes and term loans are described in Note 15 — Long-Term Debt - Notes payable secured by mortgage servicing assets.

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


Remaining maturity at March 31, 2024 (1)	Unpaid principal balance
	(dollars in thousands)
Within 30 days	$	1,291,192
Over 30 to 90 days		3,225,500
Over 90 to 180 days		139,760
Over 180 days to one year		210,923
Over one year to two years		573,751
Total assets sold under agreements to repurchase	$	5,441,126
Weighted average maturity (in months)		3.5

(1)

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

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and interest payable) relating to the Company’s assets sold under agreements to repurchase is summarized by counterparty below as of March 31, 2024:

Loans held for sale and MSRs



			Weighted average
Counterparty	Amount at risk		maturity of advances	Facility maturity
	(in thousands)
Atlas Securitized Products, L.P., Citibank, N.A., Goldman Sachs Bank USA & Nomura Corporate Funding Americas (1)	$	4,537,873	March 13, 2025	June 27, 2025
Atlas Securitized Products, L.P.	$	121,197	September 10, 2024	June 27, 2025
Bank of America, N.A.	$	73,125	April 28, 2024	June 12, 2025
Barclays Bank PLC	$	30,560	August 1, 2024	March 6, 2026
Royal Bank of Canada	$	29,023	April 28, 2024	February 12, 2025
JP Morgan Chase Bank, N.A.	$	21,732	July 20, 2024	June 9, 2025
BNP Paribas	$	13,954	June 15, 2024	September 30, 2025
Goldman Sachs Bank USA	$	12,362	July 16, 2024	December 8, 2025
Wells Fargo Bank, N.A.	$	11,917	June 11, 2024	May 3, 2025
Morgan Stanley Bank, N.A.	$	11,023	June 18, 2024	February 6, 2026
Citibank, N.A.	$	7,661	June 4, 2024	June 27, 2025

(1)

The amount at risk includes the beneficial interests in Ginnie Mae MSRs, Fannie Mae MSRs and servicing advances pledged to serve as the collateral backing servicing asset facilities included in Assets sold under agreements to repurchase and the term notes and term loans included in Notes payable secured by mortgage servicing assets.

Principal-only stripped MBS


Counterparty	Amount at risk		Maturity
	(in thousands)
Wells Fargo Bank, N.A.	$	11,838	April 26, 2024
JP Morgan Chase Bank, N.A.	$	11,546	April 26, 2024
Santander US Capital Markets LLC	$	8,968	April 30, 2024

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Mortgage Loan Participation Purchase and Sale Agreements

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

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

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


	Quarter ended March 31,
	2024		2023

Average balance	$	234,874	$	184,193
Weighted average interest rate (1)		6.69%		6.06%
Total interest expense	$	4,077	$	2,923
Maximum daily amount outstanding	$	515,990	$	515,537

(1)	Excludes the effect of amortization of debt issuance costs totaling $172,000 for the quarters ended March 31, 2024 and 2023.


	March 31,		December 31,
	2024		2023

	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	363,978	$	446,406
Unamortized debt issuance costs		(180)		(352)
	$	363,798	$	446,054
Weighted average interest rate		6.58%		6.60%
Fair value of loans pledged to secure mortgage loan participation purchase and sale agreements	$	385,804	$	470,524

Note 15—Long-Term Debt

Notes Payable Secured by Mortgage Servicing Assets

Term Notes and Term Loans

The Company, through its wholly-owned subsidiaries PNMAC, PLS and the PNMAC GMSR ISSUER TRUST (“Issuer Trust”) has entered into a structured finance transaction, in which PLS pledges and/or sells to the Issuer Trust participation certificates representing beneficial interests in Ginnie Mae mortgage servicing assets pursuant to a repurchase agreement. The Issuer Trust has issued variable funding notes to PLS, has issued secured term notes (the “Term Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”), and has entered into a series of syndicated term loans with various lenders (the “Term Loans”). The Term Notes and Term Loans are secured by participation certificates relating to Ginnie Mae mortgage servicing assets financed pursuant to the servicing asset repurchase facilities, and rank pari passu with the mortgage servicing assets variable funding notes.

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


				Maturity date
Issuance date	Principal balance		Annual interest rate spread (1)	Stated	Optional extension (2)
	(in thousands)
Term Notes:
June 3, 2022	$	500,000	4.25%	5/25/2027	5/25/2029
February 29, 2024		425,000	3.20%	3/26/2029	3/25/2031
Term Loans:
February 28, 2023		680,000	3.00%	2/25/2028	2/25/2029
October 25, 2023		125,000	3.00%	10/25/2028
	$	1,730,000

(1)	Interest is charged at a rate of SOFR plus a spread.

(2)	The Term Notes and Term Loans’ indentures provide the Company with the option to extend the maturity of certain of the Term Notes or Term Loans as specified in the respective agreements.

Freddie Mac MSR Note Payable

On December 16, 2022, the Company issued a note payable to a lender that is secured by Freddie Mac MSRs. Interest is charged at a rate of SOFR plus a spread as defined in the agreement. The facility expires on November 13, 2024. The maximum amount that the Company may borrow under the note payable is $400 million, $350 million of which is committed and which may be reduced by other debt outstanding with the counterparty.

Notes payable secured by mortgage servicing assets are summarized below:


	Quarter ended March 31,
	2024		2023

	(dollars in thousands)
Average balance	$	1,950,330	$	2,092,056
Weighted average interest rate (1)		8.92%		7.72%
Total interest expense	$	44,006	$	40,778

(1)	Excludes the effect of amortization of debt issuance costs totaling $750,000 and $932,000 for the quarters ended March 31, 2024 and 2023, respectively.


	March 31,		December 31,
	2024		2023

	(dollars in thousands)
Carrying value:
Unpaid principal balance:
Term Notes and Term Loans	$	1,730,000	$	1,730,000
Freddie Mac MSR Note Payable		250,000		150,000
		1,980,000		1,880,000
Unamortized debt issuance costs		(7,980)		(6,585)
	$	1,972,020	$	1,873,415
Weighted average interest rate		8.69%		8.82%
Assets pledged to secure notes payable (1):
Servicing advances	$	271,947	$	354,831
Mortgage servicing rights	$	7,406,892	$	7,033,892
Deposits	$	16,175	$	15,653

(1)

Beneficial interests in the Ginnie Mae MSRs, Fannie Mae MSRs, servicing advances and deposits together serve as the collateral backing servicing asset facilities that include Assets sold under agreements to repurchase and the Term Notes and Term Loans included in Notes payable secured by mortgage servicing assets.

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Unsecured Senior Notes

The Company has issued unsecured senior notes (the “Unsecured Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The Unsecured Notes are senior unsecured obligations of the Company and will rank senior in right of payment to any future subordinate indebtedness of the Company, equally in right of payment with all existing and future senior indebtedness of the Company and effectively subordinate to any existing and future secured indebtedness of the Company to the extent of the fair value of collateral securing such indebtedness.

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

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


Issuance date	Principal balance		Coupon interest rate	Maturity date	Optional redemption date (1)
	(in thousands)		(annual)
September 29, 2020	$	500,000	5.375%	October 15, 2025	October 15, 2022
October 19, 2020		150,000	5.375%	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
December 11, 2023		750,000	7.875%	December 15, 2029	December 15, 2026
	$	2,550,000

(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 interest.


	Quarter ended March 31,
	2024		2023

	(dollars in thousands)
Average balance	$	2,550,000	$	1,800,000
Weighted average interest rate (1)		5.90%		5.07%
Total interest expense	$	38,832	$	23,428

(1)	Excludes the effect of amortization of debt issuance costs of $1.4 million and $913,000 for the quarters ended March 31, 2024 and 2023, respectively.


	March 31,		December 31,
	2024		2023

	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	2,550,000	$	2,550,000
Unamortized debt issuance costs and premiums, net		(28,969)		(30,349)
	$	2,521,031	$	2,519,651
Weighted average interest rate		5.90%		5.90%

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Maturities of Long-Term Debt

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


	Twelve months ended March 31,
	2025		2026		2027		2028		2029		Thereafter		Total

	(in thousands)
Notes payable secured by mortgage servicing assets ⁽¹⁾	$	250,000	$	—	$	—	$	1,180,000	$	550,000	$	—	$	1,980,000
Unsecured senior notes		—		650,000		—		—		650,000		1,250,000		2,550,000
Total	$	250,000	$	650,000	$	—	$	1,180,000	$	1,200,000	$	1,250,000	$	4,530,000

(1)	The Term Notes and Term Loans’ indentures provide the Company with the option to extend the maturity of the Term Notes and Term Loans as specified in the respective agreements.

Note 16—Liability for Losses Under Representations and Warranties

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


	Quarter ended March 31,
	2024		2023

	(in thousands)
Balance at beginning of quarter	$	30,788	$	32,421
Provision for losses:
Resulting from sales of loans		3,952		1,735
Resulting from change in estimate		(3,320)		(1,445)
Losses incurred		(1,444)		(1,608)
Balance at end of quarter	$	29,976	$	31,103
Unpaid principal balance of loans subject to representations and warranties at end of quarter	$	366,147,661	$	303,983,805

Note 17—Income Taxes

The Company’s effective income tax rates were 10.4% and 20.4% for the quarters ended March 31, 2024 and 2023, respectively. The decrease in the effective income tax rate for the quarter ended March 31, 2024 when compared to the same period for 2023 was primarily due to a decrease in the permanent adjustment related to non-deductible compensation and an increase in excess tax benefits of options exercised and equity awards vested during the quarter.

Note 18—Commitments and Contingencies

Commitments to Purchase and Fund Mortgage Loans

The Company’s commitments to purchase and fund loans totaled $7.3 billion as of March 31, 2024.

Legal Proceedings

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

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Litigation

On November 5, 2019, Black Knight Servicing Technologies, LLC (“Black Knight”), now a wholly-owned subsidiary of Intercontinental Exchange, Inc. (NYSE: ICE), filed a Complaint and Demand for Jury Trial in the Fourth Judicial Circuit Court in and for Duval County, Florida (the “Florida State Court”), captioned Black Knight Servicing Technologies, LLC v. PennyMac Loan Services, LLC (“PLS”), Case No. 2019-CA-007908, alleging breach of contract and misappropriation of MSP® System trade secrets. On November 6, 2019, PLS filed unlawful monopolization claims against Black Knight pursuant to the Sherman Act and Clayton Act seeking injunctive relief. On March 30, 2020, the Florida State Court granted a motion to compel arbitration filed by the Company, after which all claims of the Company and Black Knight were consolidated into a binding arbitration.

On November 28, 2023, the arbitrator issued an interim award (the “Interim Award”) granting in part and denying in part Black Knight’s breach of contract claim. The arbitrator’s Interim Award also denied in full Black Knight’s claim of trade secrets misappropriation. The Interim Award granted Black Knight monetary damages in the amount of $155.2 million, plus prejudgment interest and reasonable attorneys’ fees, and it denied in full all of Black Knight’s claims for injunctive and declaratory relief.

The Interim Award also granted PLS’ claim that Black Knight violated federal antitrust laws, specifically unlawful monopolization in violation of Section 2 of the Sherman Act, and granted PLS’ claim for injunctive relief under the Sherman Act and Clayton Act, as well as its reasonable attorneys’ fees and costs. The parties subsequently agreed not to seek attorneys’ fees or costs on any claims.

As a result of the Interim Award, PLS’ loan servicing technology, known as Servicing Systems Environment, or SSE, and all related intellectual property and software developed by or on behalf of PLS, remain the proprietary technology of PLS, free and clear of any restrictions on use. To this end, the arbitrator expressly enjoined Black Knight from claiming ownership to any portion of SSE or preventing the Company from commercializing SSE. Black Knight is also enjoined from enforcing any of its contract clauses requiring that its clients process their loans exclusively on the MSP platform.

On January 12, 2024, the arbitrator issued the final award (the “Final Award”), reducing Black Knight’s monetary damages to $150.2 million, plus interest. As a result of the Final Award, the Company reported a pretax expense accrual of $158.4 million in its financial results for the fourth quarter of fiscal year 2023 on February 1, 2024. On February 14, 2024, the Company paid in full and Black Knight accepted payment of all damages and accrued interest due under the Final Award.

On March 15, 2024, the Florida State Court confirmed the Final Award, giving the rulings and remedies therein preclusive effect.

Note 19—Stockholders’ Equity

The Company’s board of directors previously approved the Company’s common stock repurchase program in the revised amount of $2 billion before transaction costs and excise tax.

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


	Quarter ended March 31,				Cumulative
	2024		2023		total (1)

	(in thousands)
Shares of common stock repurchased		—		768		34,063
Cost of shares of common stock repurchased	$	—	$	45,361	$	1,788,198

(1)	Amounts represent the total shares of common stock repurchased under the stock repurchase program from inception through March 31, 2024. Cumulative total cost of common stock repurchased includes $537,000 of transaction fees as of March 31, 2024.

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Note 20—Net Gains on Loans Held for Sale

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


	Quarter ended March 31,
	2024		2023

	(in thousands)
From non-affiliates:
Cash losses:
Loans	$	(309,190)	$	(55,386)
Hedging activities		150,219		(216,138)
		(158,971)		(271,524)
Non-cash gains:
Mortgage servicing rights resulting from loan sales		412,520		286,533
Provisions for losses relating to representations and warranties:
Pursuant to loan sales		(3,952)		(1,735)
Reductions in liability due to changes in estimate		3,320		1,445
Changes in fair values of loans and derivatives held at end of quarter:
Interest rate lock commitments		(19,786)		33,002
Loans		27,645		(64,191)
Hedging derivatives		(97,982)		121,340
		162,794		104,870
From PennyMac Mortgage Investment Trust (1)		(353)		(485)
	$	162,441	$	104,385

(1)	Gains on sales of loans to PMT are described in Note 4–Related Party Transactions–Transactions with PMT–Operating Activities.

Note 21—Net Interest Expense

Net interest expense is summarized below:


	Quarter ended March 31,
	2024		2023

	(in thousands)
Interest income:
Cash and short-term investments	$	14,582	$	16,245
Principal-only stripped mortgage-backed securities		270		—
Loans held for sale at fair value		65,421		60,993
Placement fees relating to custodial funds		76,133		51,219
From Townsgate Closing Services, LLC		20		21
		156,426		128,478
Interest expense:
Assets sold under agreements to repurchase		70,435		59,223
Mortgage loan participation purchase and sale agreements		4,077		2,923
Notes payable secured by mortgage servicing assets		44,006		40,778
Unsecured senior notes		38,832		23,428
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations		6,121		3,210
Interest on mortgage loan impound deposits		1,987		1,967
Other		311		242
		165,769		131,771
	$	(9,343)	$	(3,293)

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Note 22—Stock-based Compensation

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


	Quarter ended March 31,
	2024		2023

	(in thousands)
Grants:
Units:
Performance-based restricted share units ("RSUs")		246		307
Stock options		188		221
Time-based RSUs		145		182
Grant date fair value:
Performance-based RSUs	$	20,915	$	18,611
Stock options		6,935		5,492
Time-based RSUs		12,333		11,041
Total	$	40,183	$	35,144
Vestings and exercises:
Performance-based RSUs vested		309		612
Stock options exercised		331		156
Time-based RSUs vested		209		245
Stock-based compensation expense	$	4,583	$	11,650

Note 23—Earnings Per Share

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

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

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


	Quarter ended March 31,
	2024		2023

	(in thousands, except per share amounts)
Net income	$	39,308	$	30,378

Weighted average shares of common stock outstanding		50,547		50,154
Effect of dilutive securities - shares issuable under stock-based compensation plan		2,553		3,198
Weighted average diluted shares of common stock outstanding		53,100		53,352
Basic earnings per share	$	0.78	$	0.61
Diluted earnings per share	$	0.74	$	0.57

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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 March 31,
	2024		2023

	(in thousands except for weighted average exercise price)
Performance-based RSUs (1)		681		431
Time-based RSUs		51		72
Stock options (2)		66		348
Total anti-dilutive units and options		798		851
Weighted average exercise price of anti-dilutive stock options (2)	$	84.93	$	58.21

(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 quarter.

Note 24—Regulatory Capital and Liquidity Requirements

The Company, through PLS, is required to maintain specified levels of capital and liquidity to remain a seller/servicer in good standing with the Agencies. Such capital and liquidity requirements generally are tied to the size of the PLS’s loan servicing portfolio and loan origination volume.

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


	March 31, 2024						December 31, 2023
Requirement/Agency	Actual (1)			Requirement (1)			Actual (1)			Requirement (1)

	(dollars in thousands)
Capital
Fannie Mae & Freddie Mac	$	6,975,317		$	1,245,241		$	6,890,144		$	1,211,365
Ginnie Mae (2)	$	6,587,372		$	1,375,796		$	6,559,001		$	1,314,677
HUD	$	6,587,372		$	2,500		$	6,559,001		$	2,500
Liquidity
Fannie Mae & Freddie Mac	$	1,147,108		$	564,427		$	1,243,927		$	543,913
Ginnie Mae	$	1,394,563		$	406,799		$	1,684,457		$	389,501
Adjusted net worth / Total assets ratio
Ginnie Mae		43	%		6	%		48	%		6	%
Tangible net worth / Total assets ratio
Fannie Mae & Freddie Mac		35	%		6	%		37	%		6	%

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

(2)	Ginnie Mae has issued a risk-based capital requirement that will become effective December 31, 2024. The Company believes it is in compliance with the Agency’s pending requirement as of March 31, 2024.

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.

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Note 25—Segments

The Company conducts its business in three segments: production, servicing (together, production and servicing comprise its mortgage banking activities) and investment management:

●

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

●

The servicing segment performs loan servicing for loans held for sale and loans serviced for others, including for PMT.

●

The investment management segment represents the Company’s investment management activities relating to PMT, which include the activities associated with investment asset acquisitions and dispositions such as sourcing, due diligence, negotiation and settlement.

The Company’s reportable segments are identified based on their unique activities. The following disclosures about the Company’s business segments are presented consistent with the way the Company’s chief operating decision maker organizes and evaluates financial information for making operating decisions and assessing performance. The Company’s chief operating decision maker is its chief executive officer.

Financial performance and results by segment are as follows:


	Quarter ended March 31, 2024
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total

	(in thousands)
Revenues: (1)
Net gains on loans held for sale at fair value	$	141,431	$	21,010	$	162,441	$	—	$	162,441
Loan origination fees		36,371		—		36,371		—		36,371
Fulfillment fees from PennyMac Mortgage Investment Trust		4,016		—		4,016		—		4,016
Net loan servicing fees		—		100,954		100,954		—		100,954
Net interest expense:
Interest income		63,931		92,411		156,342		84		156,426
Interest expense		61,896		103,873		165,769		—		165,769
		2,035		(11,462)		(9,427)		84		(9,343)
Management fees		—		—		—		7,188		7,188
Other		818		1,096		1,914		2,119		4,033
Total net revenues		184,671		111,598		296,269		9,391		305,660
Expenses		148,779		106,662		255,441		6,336		261,777
Income before provision for income taxes	$	35,892	$	4,936	$	40,828	$	3,055	$	43,883
Segment assets at quarter end	$	5,413,277	$	14,373,780	$	19,787,057	$	14,684	$	19,801,741

(1)	All revenues are from external customers.

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	Quarter ended March 31, 2023
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total

	(in thousands)
Revenues: (1)
Net gains on loans held for sale at fair value	$	74,726	$	29,659	$	104,385	$	—	$	104,385
Loan origination fees		31,390		—		31,390		—		31,390
Fulfillment fees from PennyMac Mortgage Investment Trust		11,923		—		11,923		—		11,923
Net loan servicing fees		—		148,837		148,837		—		148,837
Net interest expense:
Interest income		56,993		71,485		128,478		—		128,478
Interest expense		54,083		77,688		131,771		—		131,771
		2,910		(6,203)		(3,293)		—		(3,293)
Management fees		—		—		—		7,257		7,257
Other		574		(223)		351		2,012		2,363
Total net revenues		121,523		172,070		293,593		9,269		302,862
Expenses		141,163		114,623		255,786		8,929		264,715
Income before provision for income taxes	$	(19,640)	$	57,447	$	37,807	$	340	$	38,147
Segment assets at quarter end	$	7,543,466	$	12,534,419	$	20,077,885	$	25,300	$	20,103,185

(1)	All revenues are from external customers.

Note 26—Subsequent Events

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

●

On April 24, 2024, the Company announced a cash dividend of $0.20 per common share. The dividend will be paid on May 24, 2024 to common stockholders of record as of May 14, 2024.

●

All agreements to sell assets under 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

Overview

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to the words “we,” “us,” “our” and the “Company” refer to PFSI and its subsidiaries.

Our Company

We are a specialty financial services firm primarily focused on the production and servicing of U.S. residential mortgage loans (activities which we refer to as mortgage banking) and the management of investments related to the U.S. mortgage market. We believe that our operating capabilities, specialized expertise, access to long-term investment capital, and the experience of our management team across all aspects of the mortgage business will allow us to profitably engage in these activities and capitalize on other related opportunities as they arise in the future.

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

●

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 separately listed on the New York Stock Exchange under the ticker symbol “PMT”.

●

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

Our principal mortgage banking subsidiary, PennyMac Loan Services, LLC (“PLS”), is a non-bank producer and servicer of mortgage loans in the United States. PLS is a seller/servicer for the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), each of which is a government-sponsored entity. PLS is also an approved issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”), a lender of the Federal Housing Administration (“FHA”), and a lender/servicer of the U.S. Department of Veterans Affairs (“VA”) and the U.S. Department of Agriculture (“USDA”). We refer to each of Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA and USDA as an “Agency” and collectively as the “Agencies.” PLS is able to service loans in all 50 states, the District of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands, and originate loans in all 50 states and the District of Columbia, either because PLS is properly licensed in a particular jurisdiction or exempt or otherwise not required to be licensed in that jurisdiction.

Our investment management subsidiary is PNMAC Capital Management, LLC (“PCM”), a Delaware limited liability company registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended. PCM has an investment management contract with PMT.

Business Trends

Due to ongoing inflationary pressures, over the last few quarters, the U.S. Federal Reserve has maintained the federal funds rate at its highest level since the great financial crisis of 2007 and has continued to reduce the federal government’s overall holdings of Treasury and mortgage-backed securities. Elevated interest rates are expected to constrain growth in the size of the mortgage origination market from an estimated $1.4 trillion in 2023 to an estimated $1.8 trillion in 2024 according to mortgage lending industry economists.

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The limited size of the mortgage origination market and interest rates at sustained higher levels continue to impact our mortgage production activities and gains from the redelivery of loans bought out from Ginnie Mae securities. However, market capacity has adjusted to the new environment allowing profit margins to improve from the levels seen in 2023. Higher interest rates have also increased the costs of floating rate borrowings, increased interest income from placement fees we receive relating to custodial funds that we manage on deposits and loans held for sale as compared to the same period in the prior year, and have led to prepayment speeds below historical averages in our mortgage servicing portfolio. We continued our acquisition of conventional loans from PMT during the quarter ended March 31, 2024 and expect to continue to purchase conventional loans from PMT during the remainder of 2024.

Results of Operations

Our results of operations are summarized below:


	Quarter ended March 31,
	2024		2023

	(dollars in thousands, except per share amounts)
Revenues:
Loan production revenues	$	202,828	$	147,698
Net loan servicing fees		100,954		148,837
Net interest expense		(9,343)		(3,293)
Management fees from PennyMac Mortgage Investment Trust		7,188		7,257
Other		4,033		2,363
Total net revenues		305,660		302,862
Expenses:
Compensation		146,376		147,935
Technology		35,967		36,038
Loan origination		30,568		27,086
Servicing		16,104		12,632
Professional services		9,262		21,007
Other		23,500		20,017
Total expenses		261,777		264,715
Income before provision for income taxes		43,883		38,147
Provision for income taxes		4,575		7,769
Net income	$	39,308	$	30,378
Earnings per share
Basic	$	0.78	$	0.61
Diluted	$	0.74	$	0.57
Annualized return on average stockholders' equity		4.4%		3.5%
Dividends declared per share	$	0.20	$	0.20
Income before provision for income taxes by segment:
Mortgage banking:
Production	$	35,892	$	(19,640)
Servicing		4,936		57,447
Total mortgage banking		40,828		37,807
Investment management		3,055		340
	$	43,883	$	38,147
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") (1)	$	227,728	$	128,967
During the quarter:
Interest rate lock commitments issued	$	22,585,632	$	18,871,512
At end of quarter:
Interest rate lock commitments outstanding	$	7,270,122	$	7,362,534
Unpaid principal balance of loan servicing portfolio:
Owned:
Mortgage servicing rights and liabilities	$	381,493,307	$	321,292,362
Loans held for sale		5,111,719		6,692,155
		386,605,026		327,984,517
Subserviced for PMT		230,819,012		236,489,881
	$	617,424,038	$	564,474,398

Net assets of PennyMac Mortgage Investment Trust	$	1,958,913	$	1,970,734
Book value per share	$	70.13	$	68.91

(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

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

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

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

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

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

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

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

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


	Quarter ended March 31,
	2024		2023

	(in thousands)
Net income	$	39,308	$	30,378
Provision for income taxes		4,575		7,769
Income before provision for income taxes		43,883		38,147
Depreciation and amortization		14,164		12,705
(Increase) decrease in fair value of MSRs net of MSLs due to changes in valuation inputs used in valuation models		(169,979)		90,264
Hedging losses (gains) associated with MSRs		294,645		(47,227)
Stock‑based compensation		4,583		11,650
Effect of arbitration accrual		1,600		—
Interest expense on corporate debt or corporate revolving credit facilities and capital lease		38,832		23,428
Adjusted EBITDA	$	227,728	$	128,967

Income Before Provisions for Income Taxes

For the quarter ended March 31, 2024, income before provision for income taxes increased $5.7 million compared to the same period in 2023. The increase was primarily due to a $58.1 million increase in Net gains on loans held for sale at fair value due to higher margins across all production channels and a $2.9 million decrease in total expenses, partially offset by a $47.9 million decrease in Net loan servicing fees resulting from increases in net MSR valuation losses in excess of growth in servicing fees and a $7.9 million decrease in Fulfillment fees from PennyMac Mortgage Investment Trust.

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Net Gains on Loans Held for Sale at Fair Value

In our production segment, revenues reflect the effects of market adjustments to higher interest rates continuing during the quarter ended March 31, 2024 compared to the same period in 2023.

During the quarter ended March 31, 2024, we recognized Net gains on loans held for sale at fair value totaling $162.4 million, an increase of $58.1 million compared to the same period in 2023. The increase was primarily due to higher margins across all production channels and an increase in production volume, partially offset by a decrease in EBO loan redelivery gains as a result of lower volumes and modifications during the quarter ended March 31, 2024 compared to the same period in 2023.

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


	Quarter ended March 31,
	2024		2023

	(in thousands)
From non-affiliates:
Cash losses:
Loans	$	(309,190)	$	(55,386)
Hedging activities		150,219		(216,138)
Total cash losses		(158,971)		(271,524)
Non-cash gains:
Changes in fair values of loans and derivative financial instruments outstanding at end of quarter:
Interest rate lock commitments		(19,786)		33,002
Loans		27,645		(64,191)
Hedging derivatives		(97,982)		121,340
		(90,123)		90,151
Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales		412,520		286,533
Provisions for losses relating to representations and warranties:
Pursuant to loan sales		(3,952)		(1,735)
Reductions in liability due to changes in estimate		3,320		1,445
Total non-cash gains		321,765		376,394
Total gains on sale from non-affiliates		162,794		104,870
From PennyMac Mortgage Investment Trust		(353)		(485)
	$	162,441	$	104,385
During the quarter:
Interest rate lock commitments issued:
By loan type:
Government-insured or guaranteed loans	$	10,794,258	$	12,527,083
Conventional conforming loans		11,322,087		6,124,614
Jumbo loans		128,116		67,869
Closed-end second lien mortgage loans		341,171		151,946
	$	22,585,632	$	18,871,512
By production channel:
Consumer direct	$	2,152,369	$	2,198,643
Broker direct		3,352,407		2,551,517
Correspondent		17,080,856		14,121,352
	$	22,585,632	$	18,871,512
At end of quarter:
Loans held for sale at fair value	$	5,200,350	$	6,772,423
Commitments to fund and purchase loans	$	7,270,122	$	7,362,534

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Non-Cash Elements of Gain on Sale of Loans Held for Sale

Our gains on loans held for sale include both cash and non-cash elements. We recognize a significant portion of our gains on loans held for sale when we make commitments to purchase or fund mortgage loans. We recognize this gain in the form of interest rate lock commitment (“IRLC”) derivatives. We adjust our initial gain amount as the loan purchase or origination process progresses until the loan is either funded or cancelled.

We also receive non-cash proceeds on sale that include our estimate of the fair value of MSRs and we incur mortgage servicing liabilities (which represent the fair value of the costs we expect to incur in excess of the fees we receive for EBO loans we have resold to third party investors) and for the fair value of our estimate of the losses we expect to incur relating to the representations and warranties we provide in our loan sale transactions.

The MSRs, MSLs, and liabilities for representations and warranties we recognize represent our estimate of the fair value of future benefits and costs we will realize for years in the future. These estimates represented approximately 254% of our gains on sales of loans held for sale at fair value for the quarter ended March 31, 2024, as compared to 274% for the same period in 2023. These estimates change as circumstances change and changes in these estimates are recognized in income in subsequent periods. Subsequent changes in the fair value of our MSRs significantly affect our results of operations.

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

The methods and key inputs we use to measure and update our measurements of IRLCs, MSRs and MSLs are detailed in Note 7 – Fair Value – Valuation Techniques and Inputs to the consolidated financial statements included in this Quarterly Report.

Representations and Warranties

Our agreements with the purchasers and insurers of our loans include representations and warranties related to the loans. The representations and warranties require adherence to purchaser and insurer origination and underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.

In the event of a breach of our representations and warranties, we may be required to either repurchase the loans with the identified defects or indemnify the purchaser or insurer. In such cases, we bear any subsequent credit losses on the loans. Our credit losses may be reduced by any recourse we have to correspondent originators that sold such loans to us and breached similar or other representations and warranties. In such event, we have the right to seek a recovery of related repurchase losses from that correspondent seller.

Our representations and warranties are generally not subject to stated limits of exposure. However, we believe that the current unpaid principal balance (“UPB”) of loans sold by us and subject to representation and warranty liability to date represents our maximum representations and warranties exposure.

The level of the liability for losses under representations and warranties is difficult to estimate and requires considerable judgment. The level of loan repurchase losses is dependent on economic factors, purchaser or insurer loss mitigation strategies, and other external conditions that may change over the lives of the underlying loans. Our estimate of the liability for representations and warranties is developed by our credit administration staff and approved by our senior management credit committee which includes senior management in our loan production, loan servicing and credit risk management areas.

The method we use to estimate our losses on representations and warranties is a function of our estimate of future defaults, loan repurchase rates, the severity of loss in the event of default, if applicable, and the probability of reimbursement by the correspondent loan seller. We establish a liability at our estimate of its fair value at the time loans are sold and review the adequacy of our recorded liability on a periodic basis.

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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 $4.0 million for the quarter ended March 31, 2024, compared to $1.7 million for the same period in 2023. The increase in the provision relating to current loan sales was primarily attributable to a change in the mix between government guaranteed and conventional loans sold for the quarter ended March 31, 2024 compared to the same period in 2023.

We also recorded reductions in the liability of $3.3 million for the quarter ended March 31, 2024 compared to $1.4 million for the same period in 2023. The reductions in the liability resulted from previously sold loans meeting performance criteria established by the Agencies which significantly limit the likelihood of certain repurchase or indemnification claims.

Following is a summary of loan repurchase activity and the UPB of loans subject to representations and warranties:


	Quarter ended March 31,
	2024		2023

	(in thousands)
During the quarter:
Indemnification activity:
Loans indemnified at beginning of quarter	$	75,724	$	35,961
New indemnifications		7,721		9,869
Less indemnified loans sold, repaid or refinanced		1,756		1,813
Loans indemnified at end of quarter	$	81,689	$	44,017
Repurchase activity:
Total loans repurchased	$	21,395	$	11,212
Less:
Loans repurchased by correspondent lenders		10,942		4,654
Loans repaid by borrowers or resold		6,827		28,350
Net loans repurchased (resolved) with losses chargeable to liability for representations and warranties	$	3,626	$	(21,792)
Losses charged to liability for representations and warranties	$	1,444	$	1,608

At end of quarter:
Unpaid principal balance of loans subject to representations and warranties	$	366,147,661	$	303,983,805
Liability for representations and warranties	$	29,976	$	31,103

During the quarter ended March 31, 2024, we repurchased loans totaling $21.4 million. We charged losses of $1.4 million to the liability during the quarter ended March 31, 2024. Our losses arising from representations and warranties have historically been minimized by our ability to either recover most of the losses from our correspondent sellers or from our ability to profitably refinance and resell repurchased loans.

Elevated interest rate levels may affect certain of our correspondent sellers’ ability to honor their obligations to repurchase defective loans, may increase the level of borrower defaults and may increase the level of repurchases we are required to make, thereby making it more difficult to minimize losses on repurchased loans. We expect these developments may increase the losses we incur in relation to our recorded liability for representations and warranties compared to our historical experience. However, we believe our recorded liability is presently adequate to absorb such losses.

Loan Origination Fees

Loan origination fees increased $4.9 million during the quarter ended March 31, 2024 compared to the same period in 2023 primarily due to an increase in production volume in our correspondent and broker direct channels.

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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 $7.9 million during the quarter ended March 31, 2024 compared to the same period in 2023. The decrease was primarily due to a decrease in loans produced on PMT’s behalf, partially offset by a decrease in discretionary reductions in the fulfillment fee rate during the quarter ended March 31, 2024 compared to the same period in 2023.

Net Loan Servicing Fees

Our net loan servicing fee income has two primary components: fees earned for servicing the loans and the effects of MSR and MSL valuation changes, net of hedging results as summarized below:


	Quarter ended March 31,
	2024		2023

	(in thousands)
Loan servicing fees	$	424,184	$	338,057
Effects of MSRs and MSLs net of hedging results		(323,230)		(189,220)
Net loan servicing fees	$	100,954	$	148,837

Loan Servicing Fees

Following is a summary of our loan servicing fees:


	Quarter ended March 31,
	2024		2023

	(in thousands)
From non-affiliates	$	358,026	$	290,697
From PennyMac Mortgage Investment Trust		20,262		20,449
Other:
Late charges		20,589		14,925
Other		25,307		11,986
		45,896		26,911
	$	424,184	$	338,057
Average loan servicing portfolio:
MSRs and MSLs	$	376,091,012	$	318,208,097
Subserviced for PMT	$	232,112,123	$	234,963,140

Loan servicing fees from non-affiliates generally relate to our MSRs which are primarily related to servicing we provide for loans included in Agency securitizations. These fees are contractually established at an annualized percentage of the UPB of the loan serviced and we collect these fees from borrower payments. Loan servicing fees from PMT are primarily related to PMT’s MSRs and are established at monthly per-loan amounts based on whether the loan is a fixed-rate or adjustable-rate loan and the loan’s delinquency or foreclosure status as detailed in Note 5 – Transactions with Related Parties to the consolidated financial statements included in this Quarterly Report. Other loan servicing fees are comprised primarily of borrower-contracted fees such as late charges and reconveyance fees.

Loan servicing fees from non-affiliates and other fees increased during the quarter ended March 31, 2024 compared to the same period in 2023. The increase was primarily due to growth of our loan servicing portfolio. Other servicing fees increased due to growth in our MSR portfolio combined with increased other incentives received for loss mitigation activities and recovery of servicing premiums from correspondent sellers for loans that paid off within a short period after origination.

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Effects of Mortgage Servicing Rights and Mortgage Servicing Liabilities

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

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


	Quarter ended March 31,
	2024		2023

	(in thousands)
MSR and MSL valuation changes and hedging results:
Changes in fair value attributable to changes in fair value inputs	$	169,979	$	(90,264)
Hedging results		(294,645)		47,227
		(124,666)		(43,037)
Changes in fair value attributable to realization of cash flows		(198,564)		(146,183)
Total change in fair value of mortgage servicing rights and mortgage servicing liabilities net of hedging results	$	(323,230)	$	(189,220)
Average balances:
Mortgage servicing rights	$	7,326,824	$	5,966,264
Mortgage servicing liabilities	$	1,767	$	2,054
At end of quarter:
Mortgage servicing rights	$	7,483,210	$	6,003,390
Mortgage servicing liabilities	$	1,732	$	2,011

Changes in fair value of MSRs attributable to changes in fair value inputs increased during the quarter ended March 31, 2024 compared to the same period in 2023. The increase was due to the effect of an increase in interest rates during the quarter ended March 31, 2024 compared to a decrease in interest rates during the same period in 2023. Increasing interest rates reduce the rate of prepayments of the underlying loans, which increases the cash flows expected from the servicing rights, while decreasing interest rates have the opposite effect.

Hedging results reflect valuation losses attributable to the effects of interest rate increase on the fair value of the hedging instruments as well as increased net exposure to interest rate volatility to limit elevated hedge coasts during the quarter ended March 31, 2024 compared to the opposite circumstances and effects in the same period in 2023.

Changes in realization of cash flows are influenced by changes in the level of servicing assets and liabilities and changes in estimates of the remaining cash flows to be realized. During the quarter ended March 31, 2024, realization of cash flows increased compared to the same period in 2023, primarily due to the growth in our investment in MSRs.

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Following is a summary of our loan servicing portfolio:



	March 31,		December 31,
	2024		2023

	(in thousands)
Loans serviced
Prime servicing:
Owned:
Mortgage servicing rights and liabilities
Originated	$	364,441,567	$	352,790,614
Purchased		17,051,740		17,478,397
		381,493,307		370,269,011
Loans held for sale		5,111,719		4,294,689
		386,605,026		374,563,700
Subserviced for PMT		230,809,585		232,643,144
Total prime servicing		617,414,611		607,206,844
Special servicing subserviced for PMT		9,427		9,925
Total loans serviced	$	617,424,038	$	607,216,769
Delinquencies:
Owned servicing:
30-89 days	$	12,679,635	$	14,414,423
90 days or more		7,128,874		7,635,817
	$	19,808,509	$	22,050,240
Subserviced for PMT:
30-89 days	$	1,977,960	$	2,208,302
90 days or more		991,384		1,128,212
	$	2,969,344	$	3,336,514

Following is a summary of characteristics of our MSR and MSL servicing portfolio as of March 31, 2024:


				Average
Loan type	Unpaid principal balance		Loan count	Note rate	Age (months)	Remaining maturity (months)		Loan size	FICO credit score at origination	Original LTV (1)	Current LTV (1)	60+ Delinquency (by UPB)

	(Dollars and loan count in thousands)
Government (2):
FHA	$	135,396,892	667	4.2%	45	318	$	203	677	93%	68%	4.4%
VA		123,698,646	453	3.7%	34	324	$	273	728	90%	71%	1.9%
USDA		20,921,264	141	3.8%	53	310	$	148	699	98%	66%	4.5%
Government-sponsored entities:
Fannie Mae		44,610,394	147	4.6%	25	316	$	303	761	73%	62%	0.4%
Freddie Mac		52,959,017	170	4.9%	19	323	$	311	757	74%	65%	0.5%
Closed-end second lien mortgage loans		624,790	8	10.2%	7	250	$	76	744	17%	17%	0.1%
Other (3)		3,282,304	9	6.5%	10	348	$	348	768	73%	69%	0.1%
	$	381,493,307	1,595	4.2%	36	320	$	239	717	87%	68%	2.6%

(1)	Loan-to-Value.

(2)	Government loans include loans securitized in Ginnie Mae pools as well as loans sold to private investors.

(3)	Represents on conventional loans sold to private investors.

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Net Interest Expense

Following is a summary of net interest expense:


	Quarter ended March 31,
	2024		2023

	(in thousands)
Interest income:
Cash and short-term investments	$	14,582	$	16,245
Principal-only stripped mortgage-backed securities		270		—
Loans held for sale at fair value		65,421		60,993
Placement fees relating to custodial funds		76,133		51,219
From Townsgate Closing Services, LLC		20		21
		156,426		128,478
Interest expense:
Short-term debt		74,512		62,146
Long-term debt		82,838		64,206
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations		6,121		3,210
Interest on mortgage loan impound deposits		1,987		1,967
Other		311		242
		165,769		131,771
	$	(9,343)	$	(3,293)

Net interest expense increased $6.1 million during the quarter ended March 31, 2024 compared to the same period in 2023. The increase was primarily due to an increase in interest expense on borrowings due to the higher interest rate environment and to growth in our balance sheet, partially offset by an increase in placement fees we receive relating to custodial funds that we manage due to increased earning rates.

Management Fees from PennyMac Mortgage Investment Trust

Management fees from PMT summarized below:


	Quarter ended March 31,
	2024		2023

	(in thousands)
Base management	$	7,188	$	7,257
Performance incentive		—		—
	$	7,188	$	7,257
Average net assets of PMT during the quarter	$	1,927,401	$	1,962,105

Management fees decreased $69,000 during the quarter ended March 31, 2024 compared to the same period in 2023. The decrease was due to a decrease in PMT’s shareholders’ equity which is the basis for the base management fees.

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Expenses

Compensation

Compensation expenses are summarized below:


	Quarter ended March 31,
	2024		2023

	(in thousands)
Salaries and wages	$	92,784	$	92,835
Severance		643		2,856
Incentive compensation		26,165		18,988
Taxes and benefits		22,201		21,606
Stock and unit-based compensation		4,583		11,650
	$	146,376	$	147,935
Head count:
Average		3,916		4,143
Quarter end		3,907		4,168

Compensation expense decreased $1.6 million during the quarter ended March 31, 2024 compared to the same period in 2023. The decrease was primarily due to a decrease in stock-based compensation resulting from lower expectations of achieving the performance goals on performance-based RSUs and a decrease in severance expenses, partially offset by an increase in incentive compensation due to an increase in production bonuses resulting from higher production volume.

Loan Origination

Loan origination expense increased $3.5 million for the quarter ended March 31, 2024 compared to the same period in 2023. The increase was primarily due to higher correspondent and broker direct origination volumes.

Servicing

Servicing expenses increased $3.5 million during the quarter ended March 31, 2024 compared to the same period in 2023. The increase was primarily due to an increase in provision for losses on servicing advances resulting from higher outstanding servicing advance balances during the quarter ended March 31, 2024 compared to the same period in 2023.

Professional Services

Professional expenses decreased $11.7 million during the quarter ended March 31, 2024 compared to the same period in 2023. The decrease was primarily due to decreased legal expenses related to the Black Knight litigation discussed in Note 18 – Commitments and Contingencies to the consolidated financial statements included in this Quarterly Report.

Provision for Income Taxes

Our effective income tax rate was 10.4% during the quarter ended March 31, 2024 compared to 20.4% during the same period in 2023. The decrease in the effective income tax rate for the quarter ended March 31, 2024 compared to the same period in 2023 was primarily due to a decrease in the permanent adjustment related to non-deductible compensation and an increase in excess tax benefits of options exercised and equity awards vested during the quarter.

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Balance Sheet Analysis

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


	March 31,		December 31,
	2024		2023

	(in thousands)
ASSETS
Cash and short-term investments	$	927,463	$	948,639
Principal-only stripped mortgage-backed securities at fair value pledged to creditors		524,576		—
Loans held for sale at fair value		5,200,350		4,420,691
Derivative assets		108,987		179,079
Servicing advances, net		499,955		694,038
Investments in and advances to affiliates		31,936		30,383
Mortgage servicing rights at fair value		7,483,210		7,099,348
Loans eligible for repurchase		4,401,896		4,889,925
Other		623,368		582,460
Total assets	$	19,801,741	$	18,844,563

LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt	$	5,799,152	$	4,210,010
Long-term debt		4,493,051		4,393,066
		10,292,203		8,603,076
Liability for loans eligible for repurchase		4,401,896		4,889,925
Income taxes payable		1,047,337		1,042,886
Other		489,922		770,073
Total liabilities		16,231,358		15,305,960
Stockholders' equity		3,570,383		3,538,603
Total liabilities and stockholders' equity	$	19,801,741	$	18,844,563
Leverage ratios:
Total debt / Stockholders' equity		2.9		2.4
Total debt / Tangible stockholders' equity (1)		3.0		2.5

(1)	Tangible stockholders’ equity represents total stockholders’ equity reduced by intangible assets, comprised of capitalized software, for the dates presented.

Total assets increased $1.0 billion from $18.8 billion at December 31, 2023 to $19.8 billion at March 31, 2024. The increase was primarily due to an increase of $524.6 million in principal-only stripped MBS at fair value, an increase of $779.7 million in loans held for sale at fair value and an increase of $383.9 million in MSRs, partially offset by a decrease in servicing advances of $194.1 million and a decrease in loans eligible for repurchase of $488.0 million.

Total liabilities increased $0.9 billion from $15.3 billion at December 31, 2023 to $16.2 billion at March 31, 2024. The increase was primarily due to an increase of $1.7 billion in borrowings to fund our inventory of loans held for sale, MBS and MSRs, partially offset by a decrease of $488.0 million in liability for loans eligible for repurchase and $186.6 million in accounts payable and accrued expenses. As a result of our increased inventory financing requirements, our leverage ratios increased during the quarter ended March 31, 2024 from December 31, 2023.

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Cash Flows

Our cash flows are summarized below:


	Quarter ended March 31,
	2024		2023		Change

	(in thousands)
Operating	$	(897,940)	$	(3,264,891)	$	2,366,951
Investing		(782,612)		(20,933)		(761,679)
Financing		1,669,575		3,455,191		(1,785,616)
Net (decrease) increase in cash	$	(10,977)	$	169,367	$	(180,344)

The net decrease in cash of $11.0 million during the quarter ended March 31, 2024 is discussed below.

Operating activities

Net cash used in operating activities totaled $897.9 million during the quarter ended March 31, 2024 compared with net cash used in operating activities of $3.3 billion during the same period in 2023. Our cash flows from operating activities are primarily influenced by changes in the levels of our inventory of mortgage loans held for sale as shown below:


	Quarter ended March 31,
	2024		2023

	(in thousands)
Cash flows from:
Loans held for sale	$	(1,008,664)	$	(3,390,002)
Other operating sources		110,724		125,111
	$	(897,940)	$	(3,264,891)

Investing activities

Net cash used in investing activities during the quarter ended March 31, 2024 totaled $782.6 million, primarily due to $524.7 million in purchase of principal-only stripped MBS, $224.8 million in net settlement of derivative financial instruments used to hedge our investment in MSRs and a $38.7 million increase in margin deposits. Net cash used in investing activities during the quarter ended March 31, 2023 totaled $20.9 million, primarily due to a $97.5 million increase in margin deposits and $10.6 million used in acquisition of capitalized software, partially offset by $78.4 million in net settlement of derivative financial instruments used to hedge our investment in MSRs.

Financing activities

Net cash provided by financing activities totaled $1.7 billion during the quarter ended March 31, 2024, primarily due to an increase of $1.7 billion in borrowings. The increase in borrowings primarily reflects the increase in inventory of loans held for sale and our investment in MSRs. Net cash provided by financing activities totaled $3.5 billion during the quarter ended March 31, 2023, primarily due to an increase of $3.5 billion in borrowings. The increase in borrowings primarily reflects the increase in inventory of loans held for sale.

Liquidity and Capital Resources

Our liquidity reflects our ability to meet our current obligations (including our operating expenses and, when applicable, the retirement of, and margin calls relating to, our debt, and margin calls relating to hedges on our commitments to purchase or originate mortgage loans and on our MSR investments), fund new originations and purchases, and make investments as we identify them. We expect our primary sources of liquidity to be through cash flows from business activities, proceeds from bank borrowings and proceeds from and issuance of equity or debt offerings. We believe that our liquidity is sufficient to meet our current liquidity needs.

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Our current borrowing strategy is to finance our assets where we believe such borrowing is prudent, appropriate and available. Our primary borrowing activities are in the form of sales of assets under agreements to repurchase, sales of mortgage loan participation purchase and sale certificates, notes payable secured by mortgage servicing rights and unsecured senior notes. A significant amount of our borrowings have short-term maturities and provide for advances with terms ranging from 30 days to 364 days. Because a significant portion of our current debt facilities consist of short-term debt, we expect to renew these facilities in advance of maturity in order to ensure our ongoing liquidity and access to capital or otherwise allow ourselves sufficient time to replace any necessary financing.

Secured debt facilities for MSRs and servicing advances take various forms. Fannie Mae MSRs, Ginnie Mae MSRs and servicing advances are pledged to special purpose entities, each of which issues variable funding notes (“VFNs”) and may issue term notes and term loans that are secured by such Ginnie Mae or Fannie Mae assets. Term notes are issued to qualified institutional buyers under Rule 144A of Securities Act and term loans are syndicated to banking entities, while the VFNs are sold to bank partners under agreements to repurchase. Freddie Mac MSR’s are pledged to a single lender under a bi-lateral loan and security agreement.

On February 29, 2024, the Company through its indirect subsidiary, PNMAC GMSR ISSUER TRUST (the “Issuer Trust”), issued an aggregate principal amount of $425 million in secured term notes (the “2024-GT1 Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933. The 2024-GT1 Notes will mature on March 26, 2029 or, if extended, either March 25, 2030 or March, 25, 2031. The 2024-GT1 Notes rank pari passu with other secured term notes issued by the Issuer Trust and are secured by certain participation certificates relating to Ginnie Mae mortgage servicing rights and excess servicing spread relating to such mortgage servicing rights that are financed by PLS.

Our repurchase agreements represent the sales of assets together with agreements for us to buy back the respective assets at a later date. The table below presents the average, maximum daily and ending balances:


	Quarter ended March 31,
	2024		2023

Average balance	$	3,542,537	$	3,508,262
Maximum daily balance	$	5,442,438	$	5,768,570
Balance at quarter end	$	5,441,126	$	5,768,570

The differences between the average and maximum daily balances on our repurchase agreements reflect both the effect of increasing loan inventory levels during the quarter ended March 31, 2024 and the fluctuations throughout the periods of our inventory as we fund and pool mortgage loans for sale in guaranteed mortgage securitizations.

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

Our secured financing agreements at PLS require us to comply with various financial and other restrictive covenants. The most significant financial covenants currently include the following:

●

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 indebtedness 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.

PFSI issued unsecured senior notes (the “Unsecured Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. The Unsecured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the Company’s existing and future wholly-owned domestic subsidiaries (other than certain excluded subsidiaries defined in the indentures under which the Unsecured Notes were issued).

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

●

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 financial and other covenants limit the amount of indebtedness that we may incur and affect our liquidity through minimum cash reserve requirements, we believe that these covenants currently provide us with sufficient flexibility to successfully operate our business and obtain the financing necessary to achieve that purpose.

We are also subject to liquidity and net worth requirements established by the Federal Housing Finance Agency (“FHFA”) for Agency seller/servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established minimum liquidity and net worth requirements for their approved non-depository single-family sellers/servicers in the case of Fannie Mae, Freddie Mac, and Ginnie Mae for its approved single-family issuers.

Ginnie Mae has issued risk-based capital requirements that will become effective December 31, 2024. We believe that we are in compliance with the Agency’s pending requirements as of March 31, 2024.

On August 4, 2021, our Board of Directors increased our common stock repurchase program from $1 billion to $2 billion. Share repurchases may be effected through open market purchases or privately negotiated transactions in accordance with applicable rules and regulations. The stock repurchase program does not have an expiration date and the authorization does not obligate us to acquire any particular amount of common stock. From inception through March 31, 2024, we have repurchased approximately $1.8 billion of common shares under our stock repurchase program.

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

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Debt Obligations

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

PLS is required to comply with financial and other restrictive covenants in certain financing agreements, as described further above in “Liquidity and Capital Resources”. As of March 31, 2024, we believe PLS was in compliance in all material respects with these covenants.

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

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

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

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Our debt obligations have the following sizes and maturities:


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

	(dollar amounts in thousands)
Loans sold under agreements to repurchase
Bank of America, N.A.	$	1,086,753	$	1,425,000	$	500,000	June 12, 2025
Atlas Securitized Products, L.P.	$	1,028,385	$	2,825,000	$	1,025,000	June 27, 2025
Royal Bank of Canada	$	666,511	$	1,000,000	$	325,000	February 12, 2025
BNP Paribas	$	322,871	$	600,000	$	250,000	September 30, 2025
Wells Fargo Bank, N.A.	$	268,774	$	600,000	$	300,000	May 3, 2025
JP Morgan Chase Bank, N.A.	$	263,096	$	1,500,000	$	50,000	June 9, 2025
Morgan Stanley Bank, N.A.	$	223,410	$	250,000	$	100,000	February 6, 2026
Barclays Bank PLC	$	196,316	$	250,000	$	100,000	March 6, 2026
Goldman Sachs Bank USA	$	174,205	$	200,000	$	100,000	December 8, 2025
Citibank, N.A.	$	168,885	$	620,000	$	270,000	June 27, 2025
Servicing assets sold under agreements to repurchase
Atlas Securitized Products, L.P.	$	175,000	$	175,000	$	175,000	June 27, 2025
Citibank, N.A.	$	125,000	$	380,000	$	280,000	June 27, 2025
Goldman Sachs Bank USA	$	125,000	$	325,000	$	325,000	February 7, 2025
Nomura Corporate Funding Americas	$	125,000	$	350,000	$	350,000	August 5, 2024
Mortgage-backed securities sold under agreements to repurchase
Santander US Capital Markets LLC	$	195,307
JP Morgan Chase Bank, N.A.	$	149,352
Wells Fargo Bank, N.A.	$	147,261
Mortgage loan participation purchase and sale agreements
Bank of America, N.A.	$	363,978	$	550,000	$	—	June 12, 2024
Notes payable
GMSR 2022-GT1 Notes	$	500,000	$	500,000			May 25, 2027
GMSR 2023-GTL1 Loans	$	680,000	$	680,000			February 25, 2028
GMSR 2023-GTL2 Loans	$	125,000	$	125,000			October 25, 2028
GMSR 2024-GT1 Notes	$	425,000	$	425,000			March 26, 2029
Barclays FHLMC MSR Facility	$	250,000	$	250,000	$	250,000	November 13, 2024
Unsecured Notes - 5.375%	$	650,000					October 15, 2025
Unsecured Notes - 4.25%	$	650,000					February 15, 2029
Unsecured Notes - 5.75%	$	500,000					September 15, 2031
Unsecured Notes - 7.875%	$	750,000					December 15, 2029

(1)	Outstanding indebtedness as of March 31, 2024.

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

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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 March 31, 2024:

Loans held for sale and MSRs


			Weighted average
			maturity of
			advances under
Counterparty	Amount at risk		repurchase agreement	Facility maturity
	(in thousands)
Atlas Securitized Products, L.P., Citibank, N.A., Goldman Sachs Bank USA & Nomura Corporate Funding Americas (1)	$	4,537,873	March 13, 2025	June 27, 2025
Atlas Securitized Products, L.P.	$	121,197	September 10, 2024	June 27, 2025
Bank of America, N.A.	$	73,125	April 28, 2024	June 12, 2025
Barclays Bank PLC	$	30,560	August 1, 2024	March 6, 2026
Royal Bank of Canada	$	29,023	April 28, 2024	February 12, 2025
JP Morgan Chase Bank, N.A.	$	21,732	July 20, 2024	June 9, 2025
BNP Paribas	$	13,954	June 15, 2024	September 30, 2025
Goldman Sachs Bank USA	$	12,362	July 16, 2024	December 8, 2025
Wells Fargo Bank, N.A.	$	11,917	June 11, 2024	May 3, 2025
Morgan Stanley Bank, N.A.	$	11,023	June 18, 2024	February 6, 2026
Citibank, N.A.	$	7,661	June 4, 2024	June 27, 2025

(1)	The borrowing facilities with Atlas Securitized Products, L.P., Citibank, N.A., Goldman Sachs Bank USA and Nomura Corporate Funding Americas are in the form of a sale of variable funding notes under an agreement to repurchase.

Principal-only stripped MBS


Counterparty	Amount at risk		Maturity
	(in thousands)
Wells Fargo Bank, N.A.	$	11,838	April 26, 2024
JP Morgan Chase Bank, N.A.	$	11,546	April 26, 2024
Santander US Capital Markets LLC	$	8,968	April 30, 2024

All debt financing arrangements that matured between March 31, 2024 and the date of this Report have been renewed or extended and are described in Note 14—Short-Term Debt to the accompanying consolidated financial statements.

Critical Accounting Estimates

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

Our Annual Report on Form 10-K for the year ended December 31, 2023 contains a discussion of our critical accounting policies, which utilize relevant critical accounting estimates. There have been no significant changes in our critical accounting policies and estimates during the quarter ended March 31, 2024 as compared to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Fair Value Risk

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

Interest Rate Risk

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

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

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

Prepayment Risk

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

Risk Management Activities

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

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

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Fair Value Sensitivities

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

Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs as of March 31, 2024, given several shifts in pricing spreads, prepayment speed and annual per loan cost of servicing:


Change in fair value attributable to shift in:	-20%		-10%		-5%		+5%		+10%		+20%

	(in thousands)
Prepayment speed	$	483,182	$	232,507	$	114,114	$	(110,071)	$	(216,317)	$	(418,132)
Pricing spread	$	421,572	$	205,043	$	101,139	$	(98,475)	$	(194,382)	$	(378,857)
Annual per-loan cost of servicing	$	180,457	$	90,228	$	45,114	$	(45,114)	$	(90,228)	$	(180,457)

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

Item 1A. Risk Factors

There have been no material changes from the risk factors set forth under Item 1A. For a discussion of our risk factors refer to our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 21, 2024.

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

There were no sales of unregistered equity securities during the quarter ended March 31, 2024.

Stock Repurchase Program


	Total 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)
January 1, 2024 – January 31, 2024		—	$	—		—	$	212,338,815
February 1, 2024 – February 29, 2024		—	$	—		—	$	212,338,815
March 1, 2024 – March 31, 2024		—	$	—		—	$	212,338,815
Total		—	$	—		—	$	212,338,815

(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 affected through privately negotiated transactions or open market purchases, including pursuant to a trading plan implemented pursuant to Rule 10b5-1 of the Exchange Act. The stock repurchase program does not have an expiration date but may be suspended, modified or discontinued at any time without prior notice.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

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Item 5. Other Information

During the quarter ended March 31, 2024, none of our directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) adopted, terminated or modified a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K).

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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	Series 2024-GT1 Indenture Supplement to Third Amended and Restated Base Indenture, dated as of February 29, 2024, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, and Atlas Securitized Products, L.P.	8-K	March 7, 2024

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

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

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

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

101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023 (ii) the Consolidated Statements of Income for the quarters ended March 31, 2024 and March 31, 2023, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended March 31, 2024 and March 31, 2023, (iv) the Consolidated Statements of Cash Flows for the quarters ended March 31, 2024 and March 31, 2023 and (v) the Notes to the Consolidated Financial Statements.	*

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101.INS	XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH	Inline XBRL Taxonomy Extension Schema Document

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document

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

*Filed herewith

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

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SIGNATURES

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

	PENNYMAC FINANCIAL SERVICES, INC.


Dated: May 1, 2024	By:	/s/ DAVID A. SPECTOR
		David A. Spector
		Chairman and Chief Executive Officer (Principal Executive Officer)

Dated: May 1, 2024	By:	/s/ DANIEL S. PEROTTI
		Daniel S. Perotti
		Senior Managing Director and Chief Financial Officer (Principal Financial Officer)