PennyMac Financial Services 10Q 2022 Q3 Quarterly report

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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 September 30, 2022

☐

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 October 31, 2022
Common Stock, $0.0001 par value		50,081,414

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PENNYMAC FINANCIAL SERVICES, INC.

FORM 10-Q

September 30, 2022

TABLE OF CONTENTS


		Page
	Special Note Regarding Forward-Looking Statements	3

PART I. FINANCIAL INFORMATION		5

Item 1.	Financial Statements (Unaudited):	5
	Consolidated Balance Sheets	5
	Consolidated Statements of Income	6
	Consolidated Statements of Changes in Stockholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	59
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	79
Item 4.	Controls and Procedures	81

PART II. OTHER INFORMATION		82

Item 1.	Legal Proceedings	82
Item 1A.	Risk Factors	82
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	82
Item 3.	Defaults Upon Senior Securities	82
Item 4.	Mine Safety Disclosures	82
Item 5.	Other Information	82
Item 6.	Exhibits	83

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

●

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

●

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

●

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

●

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

Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. There are a number of factors, many of which are beyond our control that could cause actual results to differ significantly from management’s expectations. Some of these factors are discussed below.

You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on February 23, 2022.

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

●

interest rate changes;

●

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

●

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

●

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

●

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

●

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

●

declines in real estate values or significant changes in U.S. housing prices or activity in the U.S. housing market;

●

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;

●

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

●

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

●

maintaining sufficient capital and liquidity and compliance with financial covenants;

●

our substantial amount of indebtedness;

●

increases in loan delinquencies and defaults;

●

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

●

our reliance on PennyMac Mortgage Investment Trust (“PMT”) as a significant 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 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 mitigate cybersecurity risks and cyber incidents;

●

our ability to pay dividends to our stockholders; and

●

our organizational structure and certain requirements in our charter documents.

Other factors that could also cause results to differ from our expectations may not be described in this Report or any other document. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.

Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	September 30,		December 31,
	2022		2021

	(in thousands, except share amounts)
ASSETS
Cash	$	1,558,679	$	340,069
Short-term investment at fair value		36,098		6,873
Loans held for sale at fair value (includes $4,012,264 and $9,135,577 pledged to creditors)		4,149,726		9,742,483
Derivative assets		164,160		333,695
Servicing advances, net (includes valuation allowance of $63,713 and $120,940; $253,370 and $232,107 pledged to creditors)		455,083		702,160
Mortgage servicing rights at fair value (includes $5,604,447 and $3,856,791 pledged to creditors)		5,661,672		3,878,078
Operating lease right-of-use assets		72,138		89,040
Investment in PennyMac Mortgage Investment Trust at fair value		884		1,300
Receivable from PennyMac Mortgage Investment Trust		32,306		40,091
Loans eligible for repurchase		3,757,538		3,026,207
Other (includes $9,886 and $45,294 pledged to creditors)		473,527		616,616
Total assets	$	16,361,811	$	18,776,612
LIABILITIES
Assets sold under agreements to repurchase	$	3,487,335	$	7,292,735
Mortgage loan participation purchase and sale agreements		367,473		479,845
Notes payable secured by mortgage servicing assets		1,793,972		1,297,622
Unsecured senior notes		1,778,988		1,776,219
Obligations under capital lease		—		3,489
Derivative liabilities		125,487		22,606
Mortgage servicing liabilities at fair value		2,214		2,816
Accounts payable and accrued expenses		358,187		359,413
Operating lease liabilities		92,380		110,003
Payable to PennyMac Mortgage Investment Trust		87,978		228,019
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		26,675		30,530
Income taxes payable		964,307		685,262
Liability for loans eligible for repurchase		3,757,538		3,026,207
Liability for losses under representations and warranties		37,187		43,521
Total liabilities		12,879,721		15,358,287

Commitments and contingencies – Note 16

STOCKHOLDERS’ EQUITY
Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 51,011,021 and 56,867,202 shares, respectively		5		6
Additional paid-in capital		—		125,396
Retained earnings		3,482,085		3,292,923
Total stockholders' equity		3,482,090		3,418,325
Total liabilities and stockholders' equity	$	16,361,811	$	18,776,612

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

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands, except earnings per share)
Revenues
Net gains on loans held for sale at fair value:
From non-affiliates	$	170,342	$	639,730	$	705,772	$	2,002,515
From PennyMac Mortgage Investment Trust		(1,648)		(12,976)		(16,052)		(38,772)
		168,694		626,754		689,720		1,963,743
Loan origination fees:
From non-affiliates		31,845		88,040		134,902		274,048
From PennyMac Mortgage Investment Trust		2,192		6,541		6,938		21,861
		34,037		94,581		141,840		295,909
Fulfillment fees from PennyMac Mortgage Investment Trust		18,407		43,922		55,807		158,777
Net loan servicing fees:
Loan servicing fees:
From non-affiliates		270,336		216,592		774,483		635,620
From PennyMac Mortgage Investment Trust		20,247		20,703		61,670		59,811
Other		22,497		30,463		70,535		91,793
		313,080		267,758		906,688		787,224
Change in fair value of mortgage servicing rights and mortgage servicing liabilities		95,411		(147,669)		420,424		(260,474)
Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust		—		—		—		(1,037)
Mortgage servicing rights hedging results		(164,749)		(86,459)		(558,614)		(437,492)
		(69,338)		(234,128)		(138,190)		(699,003)
Net loan servicing fees		243,742		33,630		768,498		88,221
Net interest income (expense):
Interest income:
From non-affiliates		82,994		68,312		186,740		230,803
From PennyMac Mortgage Investment Trust		—		—		—		387
		82,994		68,312		186,740		231,190
Interest expense:
To non-affiliates		82,965		90,711		231,399		299,575
To PennyMac Mortgage Investment Trust		—		—		—		1,280
		82,965		90,711		231,399		300,855
Net interest income (expense)		29		(22,399)		(44,659)		(69,665)
Management fees from PennyMac Mortgage Investment Trust		7,731		8,520		23,758		28,882
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust		(119)		(67)		(311)		478
Results of real estate acquired in settlement of loans		528		378		1,881		1,698
Other		3,241		1,293		8,775		5,507
Total net revenues		476,290		786,612		1,645,309		2,473,550
Expenses
Compensation		157,793		249,183		601,532		773,079
Loan origination		28,356		80,932		148,620		243,999
Technology		35,647		32,406		105,054		100,314
Professional services		16,230		24,429		57,126		62,549
Marketing and advertising		7,601		11,360		43,011		28,238
Occupancy and equipment		11,299		9,389		30,139		27,456
Servicing		20,399		27,892		22,204		78,365
Other		13,493		11,472		40,105		34,478
Total expenses		290,818		447,063		1,047,791		1,348,478
Income before provision for income taxes		185,472		339,549		597,518		1,125,072
Provision for income taxes		50,338		90,239		159,628		294,665
Net income	$	135,134	$	249,310	$	437,890	$	830,407
Earnings per share
Basic	$	2.59	$	4.02	$	8.10	$	12.65
Diluted	$	2.46	$	3.80	$	7.69	$	11.98
Weighted average shares outstanding
Basic		52,170		62,085		54,043		65,671
Diluted		54,968		65,652		56,913		69,341

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 September 30, 2022
				Additional				Total
	Number of	Par		paid-in		Retained		stockholders'
	shares	value		capital		earnings		equity

	(in thousands)
Balance, June 30, 2022	52,939	$	5	$	—	$	3,461,380	$	3,461,385
Net income	—		—		—		135,134		135,134
Stock-based compensation	20		—		6,863		—		6,863
Issuance of common stock in settlement of directors' fees	1		—		52		—		52
Repurchase of common stock	(1,949)		—		(6,915)		(92,787)		(99,702)
Common stock dividend ($0.20 per share)	—		—		—		(21,642)		(21,642)
Balance, September 30, 2022	51,011	$	5	$	—	$	3,482,085	$	3,482,090


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

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


	Nine months ended September 30, 2022
				Additional				Total
	Number of	Par		paid-in		Retained		stockholders'
	shares	value		capital		earnings		equity

	(in thousands)
Balance, December 31, 2021	56,867	$	6	$	125,396	$	3,292,923	$	3,418,325
Net income	—		—		—		437,890		437,890
Stock-based compensation	837		—		24,686		—		24,686
Issuance of common stock in settlement of directors' fees	3		—		154		—		154
Repurchase of common stock	(6,696)		(1)		(150,236)		(204,522)		(354,759)
Common stock dividends ($0.60 per share)	—		—		—		(44,206)		(44,206)
Balance, September 30, 2022	51,011	$	5	$	—	$	3,482,085	$	3,482,090


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

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

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)


	Nine months ended September 30,
	2022		2021

	(in thousands)
Cash flow from operating activities
Net income	$	437,890	$	830,407
Adjustments to reconcile net income to net cash provided by operating activities:
Net gains on loans held for sale at fair value		(689,720)		(1,963,743)
Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread		(420,424)		261,511
Mortgage servicing rights hedging results		558,614		437,492
Capitalization of interest and advances on loans held for sale		(3,122)		(4,573)
Accrual of interest on excess servicing spread financing payable to PennyMac Mortgage Investment Trust		—		1,280
Amortization of debt issuance costs		14,560		19,154
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust		416		(372)
Results of real estate acquired in settlement in loans		(1,881)		(1,698)
Stock-based compensation expense		30,689		28,595
Reversal of provision for servicing advance losses		(52,113)		(44,535)
Depreciation and amortization		23,809		21,729
Impairment of capitalized software		—		728
Amortization of operating lease right-of-use assets		11,796		10,539
Purchase of loans held for sale from PennyMac Mortgage Investment Trust		(36,544,166)		(51,471,399)
Origination of loans held for sale		(18,343,547)		(41,634,531)
Purchase of loans held for sale from non-affiliates		(1,564,173)		(3,867,782)
Purchase of loans from Ginnie Mae securities and early buyout investors		(5,620,437)		(17,969,911)
Sale to non-affiliates and principal payments of loans held for sale		67,056,886		118,048,768
Sale of loans held for sale to PennyMac Mortgage Investment Trust		298,862		—
Repurchase of loans subject to representations and warranties		(76,865)		(75,023)
Decrease (increase) in servicing advances		234,529		(18,718)
Decrease in receivable from PennyMac Mortgage Investment Trust		6,941		27,404
Sale of real estate acquired in settlement of loans		15,419		11,712
Decrease in other assets		74,433		95,836
(Decrease) increase in accounts payable and accrued expenses		(13,922)		45,707
Decrease in operating lease liabilities		(12,562)		(12,457)
Decrease in payable to PennyMac Mortgage Investment Trust		(153,276)		(39,755)
Payments to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement		(3,855)		(3,350)
Increase in income taxes payable		279,045		37,068
Net cash provided by operating activities		5,543,826		2,770,083

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)


	Nine months ended September 30,
	2022		2021

	(in thousands)
Cash flow from investing activities
(Increase) decrease in short-term investment		(29,225)		10,171
Net change in assets purchased from PMT under agreement to resell		—		80,862
Net settlement of derivative financial instruments used for hedging of mortgage servicing rights		(810,749)		(471,322)
Purchase of mortgage servicing rights		(3,927)		—
Acquisition of capitalized software		(59,631)		(32,276)
Purchase of furniture, fixtures, equipment and leasehold improvements		(5,604)		(5,999)
Decrease in margin deposits		425,569		117,106
Net cash used in investing activities		(483,567)		(301,458)
Cash flow from financing activities
Sale of assets under agreements to repurchase		58,606,620		100,929,294
Repurchase of assets sold under agreements to repurchase		(62,413,898)		(103,689,987)
Issuance of mortgage loan participation purchase and sale certificates		14,947,597		17,990,980
Repayment of mortgage loan participation purchase and sale certificates		(15,059,445)		(17,992,673)
Issuance of notes payable secured by mortgage servicing assets		500,000		—
Issuance of unsecured senior notes		—		1,150,000
Repayment of obligations under capital lease		(3,489)		(6,281)
Repayment of excess servicing spread financing		—		(134,624)
Payment of debt issuance costs		(14,087)		(27,355)
Issuance of common stock pursuant to exercise of stock options		1,777		5,770
Payment of withholding taxes relating to stock-based compensation		(7,780)		(8,578)
Payment of dividend to holders of common stock		(44,206)		(40,638)
Repurchase of common stock		(354,759)		(700,793)
Net cash used in financing activities		(3,841,670)		(2,524,885)
Net increase (decrease) in cash and restricted cash		1,218,589		(56,260)
Cash and restricted cash at beginning of period		340,093		532,781
Cash and restricted cash at end of period	$	1,558,682	$	476,521
Cash and restricted cash at end of period are comprised of the following:
Cash	$	1,558,679	$	476,497
Restricted cash included in Other assets		3		24
	$	1,558,682	$	476,521
Supplemental cash flow information:
Cash paid for interest	$	236,504	$	301,014
Cash (refunds received) paid for income taxes, net	$	(119,417)	$	257,597
Non-cash investing activities:
Mortgage servicing rights resulting from loan sales	$	1,359,632	$	1,386,324
Operating right-of-use assets recognized	$	1,364	$	20,871
Unsettled portion of MSR acquisitions	$	213	$	—
Non-cash financing activities:
Mortgage servicing liabilities resulting from loan sales	$	—	$	98,147
Issuance of Excess servicing spread payable to PennyMac Mortgage Investment Trust pursuant to a recapture agreement	$	—	$	557
Issuance of common stock in settlement of directors' fees	$	154	$	151

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 indicated 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 loan servicing activities are conducted on behalf of PennyMac Mortgage Investment Trust (“PMT”), a publicly-traded real estate mortgage investment trust that invests primarily in mortgage-related assets. PNMAC’s primary wholly owned subsidiaries are:

●

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

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

●

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

Note 2—Basis of Presentation

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

The accompanying consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, income, and cash flows for the interim periods presented, but are not necessarily indicative of income that may be expected for the full year ending December 31, 2022. Intercompany accounts and transactions have been eliminated.

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

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Note 3—Concentration of Risk

A portion of the Company’s activities relate to PMT. Revenues generated from PMT (generally comprised of gains on loans held for sale, loan origination and fulfillment fees, loan servicing fees, change in fair value of excess servicing spread financing (“ESS”), net interest, management fees, change in fair value of investment in and dividends received from PMT, and expense allocations charged to PMT) totaled 10% and 9% of total net revenue for the quarters ended September 30, 2022 and 2021, respectively, and 8% and 9% for the nine months ended September 30, 2022 and 2021, respectively. The Company also purchased 78% and 51% of its newly originated loan production from PMT during the quarters ended September 30, 2022 and 2021, respectively, and 65% and 53% during the nine months ended September 30, 2022 and 2021, respectively.

Note 4—Related Party Transactions

Transactions with PMT

Operating Activities

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

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

●

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

●

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

●

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

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

Fulfillment Services

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

●

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

●

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

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●

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

Sourcing Fees

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

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

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


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
Net gains on loans held for sale at fair value:
Net losses on loans held for sale to PMT (primarily cash)	$	—	$	—	$	(2,820)	$	—
Mortgage servicing rights and excess servicing spread recapture incurred		(1,648)		(12,976)		(13,232)		(38,772)
	$	(1,648)	$	(12,976)	$	(16,052)	$	(38,772)
Sale of loans held for sale to PMT	$	—	$	—	$	298,862	$	—

Tax service fees earned from PMT included in Loan origination fees	$	2,192	$	6,541	$	6,938	$	21,861

Fulfillment fee revenue	$	18,407	$	43,922	$	55,807	$	158,777
Unpaid principal balance ("UPB") of loans fulfilled for PMT subject to fulfillment fees	$	10,226,513	$	28,605,098	$	30,319,475	$	92,846,231

Sourcing fees included in cost of loans purchased from PMT	$	1,203	$	1,537	$	3,562	$	4,905
Unpaid principal balance of loans purchased from PMT	$	12,261,222	$	15,249,441	$	35,643,210	$	49,106,232

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, loans at fair value held in consolidated variable interest entities and loans held for sale (“Prime Servicing”) and its portfolio of residential mortgage loans purchased with credit deterioration (“Special Servicing”). The Servicing Agreement provides for servicing fees of per-loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced loan or the real estate acquired in settlement of loans (“REO”). The Company also remains entitled to customary ancillary income and market-based fees and charges relating to loans it services for PMT.

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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.

●

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

Special Servicing

●

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

●

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

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


	Quarter ended September 30,				Nine months ended September 30,
Loan type serviced	2022		2021		2022		2021

	(in thousands)
Loans acquired for sale	$	258	$	698	$	780	$	1,871
Loans at fair value		111		89		427		306
Mortgage servicing rights		19,878		19,916		60,463		57,634
	$	20,247	$	20,703	$	61,670	$	59,811

The Servicing Agreement expires on June 30, 2025.

Investment Management Activities

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

●

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

●

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

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

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

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

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

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

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

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

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


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
Base management	$	7,731	$	8,778	$	23,758	$	25,875
Performance incentive (adjustment)		—		(258)		—		3,007
	$	7,731	$	8,520	$	23,758	$	28,882

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 September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
Reimbursement of:
Expenses incurred on PMT's behalf, net	$	705	$	4,396	$	8,896	$	13,536
Common overhead incurred by the Company		2,574		1,548		6,247		3,387
Compensation		165		165		495		495
	$	3,444	$	6,109	$	15,638	$	17,418
Payments and settlements during the period (1)	$	41,509	$	51,020	$	110,835	$	238,202

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

Investing Activities

Master Repurchase Agreement

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

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

PMT Common Stock

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

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


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
Interest income relating to Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell	$	—	$	—	$	—	$	387
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust	$	(119)	$	(67)	$	(311)	$	478


	September 30,		December 31,
	2022		2021

	(in thousands)
Common shares of beneficial interest of PennyMac Mortgage Investment Trust:
Fair value	$	884	$	1,300
Number of shares		75		75

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Financing Activities

Spread Acquisition and MSR Servicing Agreements

The Company has a master spread acquisition and MSR servicing agreement with PMT (the “Spread Acquisition Agreement”) pursuant to which the Company may sell to PMT, from time to time, the right to receive participation certificates representing beneficial ownership in ESS arising from Ginnie Mae MSRs acquired by the Company, in which case the Company generally would be required to service or subservice the related mortgage loans for Ginnie Mae.

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

During the nine months ended September 30, 2021, the Company repaid its outstanding ESS financing through the repurchase of the ESS from PMT.

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


	Nine months ended
	September 30, 2021
	(in thousands)
Excess servicing spread financing:
Balance at beginning of period	$	131,750
Issuance pursuant to recapture agreement		557
Accrual of interest		1,280
Change in fair value		1,037
Repayment		(134,624)
Balance at end of period	$	—
Recapture incurred pursuant to refinancings by the Company of mortgage loans subject to excess servicing spread financing included in Net gains on loans held for sale at fair value	$	614

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Receivable from and Payable to PMT

Amounts receivable from and payable to PMT are summarized below:


	September 30,		December 31,
	2022		2021

	(in thousands)
Receivable from PMT:
Management fees	$	7,731	$	8,918
Correspondent production fees		6,812		8,894
Servicing fees		6,711		6,848
Allocated expenses and expenses incurred on PMT's behalf		5,571		15,431
Fulfillment fees		5,481		—
	$	32,306	$	40,091
Payable to PMT:
Amounts advanced by PMT to fund its servicing advances	$	84,418	$	212,066
Other		3,560		15,953
	$	87,978	$	228,019

Exchanged Private National Mortgage Acceptance Company, LLC Unitholders

On May 8, 2013, the Company entered into a tax receivable agreement with certain former owners of PNMAC that provides for the payment from time to time by the Company to PNMAC’s exchanged unitholders of an amount equal to 85% of the amount of the net tax benefits, if any, that the Company is deemed to realize as a result of (i) increases in tax basis of PNMAC’s assets resulting from exchanges of ownership interests in PNMAC and (ii) certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.

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

The Company has recorded $26.7 million and $30.5 million Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement as of September 30, 2022 and December 31, 2021, respectively. The Company made $340,000 and $3.9 million of payments under the tax receivable agreement during the quarter and nine months ended September 30, 2022, respectively. The Company made $3.4 million of payments under the tax receivable agreement during the nine months ended September 30, 2021.

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Note 5—Loan Sales and Servicing Activities

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

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


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
Cash flows:
Sales proceeds	$	16,215,098	$	39,040,868	$	67,056,886	$	118,048,768
Servicing fees received (1)	$	242,622	$	178,684	$	676,384	$	576,332

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

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


	September 30,		December 31,
	2022		2021

	(in thousands)
UPB of loans outstanding	$	283,653,037	$	254,524,015
Delinquent loans (1):
30-89 days	$	9,359,346	$	6,129,597
90 days or more:
Not in foreclosure	$	5,706,722	$	8,399,299
In foreclosure	$	726,438	$	715,016
Foreclosed	$	8,324	$	6,900
Loans in bankruptcy	$	1,128,050	$	1,039,362
Delinquent loans in COVID-19 pandemic-related forbearance plans:
30-89 days	$	1,501,578	$	1,020,290
90 days or more		2,708,785		2,550,703
	$	4,210,363	$	3,570,993

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

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


	September 30, 2022
	Servicing				Total
	rights owned		Subservicing		loans serviced

	(in thousands)
Investor:
Non-affiliated entities:
Originated	$	283,653,037	$	—	$	283,653,037
Purchased		20,182,332		—		20,182,332
		303,835,369		—		303,835,369
PennyMac Mortgage Investment Trust		—		230,978,819		230,978,819
Loans held for sale		4,287,585		—		4,287,585
	$	308,122,954	$	230,978,819	$	539,101,773
Subserviced for the Company (1)	$	375,370	$	—	$	375,370
Delinquent loans (2):
30 days	$	7,604,547	$	1,302,774	$	8,907,321
60 days		2,447,898		247,285		2,695,183
90 days or more:
Not in foreclosure		5,980,180		785,860		6,766,040
In foreclosure		807,860		71,060		878,920
Foreclosed		8,959		8,595		17,554
	$	16,849,444	$	2,415,574	$	19,265,018
Loans in bankruptcy	$	1,288,876	$	126,299	$	1,415,175
Delinquent loans in COVID-19 pandemic-related forbearance plans:
30 days	$	717,783	$	121,966	$	839,749
60 days		830,299		110,363		940,662
90 days or more		2,813,468		435,609		3,249,077
	$	4,361,550	$	667,938	$	5,029,488
Custodial funds managed by the Company (3)	$	5,385,565	$	2,898,932	$	8,284,497

(1)	Certain of the mortgage loans for which the Company has purchased the MSRs are subserviced on the Company’s behalf by other mortgage loan servicers on an interim basis when servicing of the loans has not yet been transferred to the Company’s loan servicing platform.

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

(3)

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 they are included in Interest income in the Company’s consolidated statements of income.

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	December 31, 2021
	Servicing				Total
	rights owned		Subservicing		loans serviced

	(in thousands)
Investor:
Non-affiliated entities:
Originated	$	254,524,015	$	—	$	254,524,015
Purchased		23,861,358		—		23,861,358
		278,385,373		—		278,385,373
PennyMac Mortgage Investment Trust		—		221,892,142		221,892,142
Loans held for sale		9,430,766		—		9,430,766
	$	287,816,139	$	221,892,142	$	509,708,281
Delinquent loans (1):
30 days	$	5,338,545	$	974,055	$	6,312,600
60 days		1,604,782		190,727		1,795,509
90 days or more:
Not in foreclosure		9,001,137		1,750,628		10,751,765
In foreclosure		829,494		43,793		873,287
Foreclosed		8,017		16,489		24,506
	$	16,781,975	$	2,975,692	$	19,757,667
Loans in bankruptcy	$	1,261,980	$	133,655	$	1,395,635
Delinquent loans in COVID-19 pandemic-related forbearance plans:
30 days	$	554,161	$	81,580	$	635,741
60 days		556,990		89,534		646,524
90 days or more		2,732,089		638,703		3,370,792
	$	3,843,240	$	809,817	$	4,653,057
Custodial funds managed by the Company (2)	$	8,485,081	$	3,823,527	$	12,308,608

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

(2)

Following is a summary of the geographical distribution of loans included in the Company’s loan servicing portfolio for the top five and all other states as measured by UPB:


	September 30,		December 31,
State	2022		2021

	(in thousands)
California	$	67,949,538	$	67,317,935
Florida		49,221,053		45,222,233
Texas		45,908,590		42,064,686
Virginia		33,026,449		31,442,370
Maryland		25,093,210		23,922,075
All other states		317,902,933		299,738,982
	$	539,101,773	$	509,708,281

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Note 6—Fair Value

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

●

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

●

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

●

Level 3— Prices determined using significant unobservable inputs. In situations where observable inputs are unavailable, unobservable inputs may be used. Unobservable inputs reflect the Company’s own judgments about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances.

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

Fair Value Accounting Elections

The Company identified its MSRs, its mortgage servicing liabilities (“MSLs”) and all of its non-cash financial assets to be accounted for at fair value so changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance. The Company has also identified its ESS financing to be accounted for at fair value as a means of hedging the related MSRs’ fair value risk.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

Following is a summary of assets and liabilities that are measured at fair value on a recurring basis:


	September 30, 2022
	Level 1		Level 2		Level 3		Total

	(in thousands)
Assets:
Short-term investment	$	36,098	$	—	$	—	$	36,098
Loans held for sale at fair value		—		3,805,090		344,636		4,149,726
Derivative assets:
Interest rate lock commitments		—		—		12,195		12,195
Forward purchase contracts		—		5,042		—		5,042
Forward sales contracts		—		375,955		—		375,955
MBS put options		—		17,152		—		17,152
MBS call options		—		55		—		55
Put options on interest rate futures purchase contracts		70,577		—		—		70,577
Call options on interest rate futures purchase contracts		4,680		—		—		4,680
Total derivative assets before netting		75,257		398,204		12,195		485,656
Netting		—		—		—		(321,496)
Total derivative assets		75,257		398,204		12,195		164,160
Mortgage servicing rights at fair value		—		—		5,661,672		5,661,672
Investment in PennyMac Mortgage Investment Trust		884		—		—		884
	$	112,239	$	4,203,294	$	6,018,503	$	10,012,540
Liabilities:
Derivative liabilities:
Interest rate lock commitments	$	—	$	—	$	68,398	$	68,398
Forward purchase contracts		—		226,369		—		226,369
Forward sales contracts		—		8,819		—		8,819
MBS call options		—		118		—		118
Put options on interest rate futures sales contracts		11,766		—		—		11,766
Call options on interest rate futures sale contracts		375		—		—		375
Total derivative liabilities before netting		12,141		235,306		68,398		315,845
Netting		—		—		—		(190,358)
Total derivative liabilities		12,141		235,306		68,398		125,487
Mortgage servicing liabilities at fair value		—		—		2,214		2,214
	$	12,141	$	235,306	$	70,612	$	127,701

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	December 31, 2021
	Level 1		Level 2		Level 3		Total

	(in thousands)
Assets:
Short-term investment	$	6,873	$	—	$	—	$	6,873
Loans held for sale at fair value		—		8,613,607		1,128,876		9,742,483
Derivative assets:
Interest rate lock commitments		—		—		323,473		323,473
Forward purchase contracts		—		20,485		—		20,485
Forward sales contracts		—		40,215		—		40,215
MBS put options		—		7,655		—		7,655
Swaption purchase contracts		—		1,625		—		1,625
Put options on interest rate futures purchase contracts		3,141		—		—		3,141
Call options on interest rate futures purchase contracts		2,078		—		—		2,078
Total derivative assets before netting		5,219		69,980		323,473		398,672
Netting		—		—		—		(64,977)
Total derivative assets		5,219		69,980		323,473		333,695
Mortgage servicing rights at fair value		—		—		3,878,078		3,878,078
Investment in PennyMac Mortgage Investment Trust		1,300		—		—		1,300
	$	13,392	$	8,683,587	$	5,330,427	$	13,962,429
Liabilities:
Derivative liabilities:
Interest rate lock commitments	$	—	$	—	$	1,280	$	1,280
Forward purchase contracts		—		18,007		—		18,007
Forward sales contracts		—		35,415		—		35,415
Total derivative liabilities before netting		—		53,422		1,280		54,702
Netting		—		—		—		(32,096)
Total derivative liabilities		—		53,422		1,280		22,606
Mortgage servicing liabilities at fair value		—		—		2,816		2,816
	$	—	$	53,422	$	4,096	$	25,422

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


	Quarter ended September 30, 2022
			Net interest		Mortgage
	Loans held		rate lock		servicing
Assets	for sale		commitments (1)		rights		Total

	(in thousands)
Balance, June 30, 2022	$	503,553	$	65,151	$	5,217,167	$	5,785,871
Purchases and issuances, net		260,721		38,481		4,140		303,342
Capitalization of interest and advances		6,361		—		—		6,361
Sales and repayments		(71,078)		—		—		(71,078)
Mortgage servicing rights resulting from loan sales		—		—		345,077		345,077
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		(9,217)		—		—		(9,217)
Other factors		(4,801)		(127,835)		95,288		(37,348)
		(14,018)		(127,835)		95,288		(46,565)
Transfers from Level 3 to Level 2		(340,903)		—		—		(340,903)
Transfers to loans held for sale		—		(32,000)		—		(32,000)
Balance, September 30, 2022	$	344,636	$	(56,203)	$	5,661,672	$	5,950,105
Changes in fair value recognized during the quarter relating to assets still held at September 30, 2022	$	(16,166)	$	(56,203)	$	95,288	$	22,919

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

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	Quarter ended
Liabilities	September 30, 2022
	(in thousands)
Mortgage servicing liabilities:
Balance, June 30, 2022	$	2,337
Changes in fair value included in income		(123)
Balance, September 30, 2022	$	2,214
Changes in fair value recognized during the quarter relating to liabilities still outstanding at September 30, 2022	$	(123)


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

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

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



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

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	Nine months ended September 30, 2022
			Net interest		Mortgage
	Loans held		rate lock		servicing
Assets	for sale		commitments (1)		rights		Total

	(in thousands)
Balance, December 31, 2021	$	1,128,876	$	322,193	$	3,878,078	$	5,329,147
Purchases and issuances, net		2,994,447		345,770		4,140		3,344,357
Capitalization of interest and advances		54,080		—		—		54,080
Sales and repayments		(1,335,966)		—		—		(1,335,966)
Mortgage servicing rights resulting from loan sales		—		—		1,359,632		1,359,632
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		(39,427)		—		—		(39,427)
Other factors		(26,119)		(694,318)		419,822		(300,615)
		(65,546)		(694,318)		419,822		(340,042)
Transfers from Level 3 to Level 2		(2,430,869)		—		—		(2,430,869)
Transfers to real estate acquired in settlement of loans		(386)		—		—		(386)
Transfers to loans held for sale		—		(29,848)		—		(29,848)
Balance, September 30, 2022	$	344,636	$	(56,203)	$	5,661,672	$	5,950,105
Changes in fair value recognized during the period relating to assets still held at September 30, 2022	$	(31,587)	$	(56,203)	$	419,822	$	332,032

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



	Nine months ended
Liabilities	September 30, 2022
	(in thousands)
Mortgage servicing liabilities:
Balance, December 31, 2021	$	2,816
Changes in fair value included in income		(602)
Balance, September 30, 2022	$	2,214
Changes in fair value recognized during the period relating to liabilities still outstanding at September 30, 2022	$	(602)


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

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

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

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

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

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.

Assets and Liabilities Measured at Fair Value under the Fair Value Option

Net changes in fair values included in income for assets and liabilities carried at fair value as a result of management’s election of the fair value option by income statement line item are summarized below:


	Quarter ended September 30,
	2022						2021
	Net gains on		Net				Net gains on		Net
	loans held		loan				loans held		loan
	for sale at		servicing				for sale at		servicing
	fair value		fees		Total		fair value		fees		Total

	(in thousands)
Assets:
Loans held for sale	$	(69,358)	$	—	$	(69,358)	$	645,536	$	—	$	645,536
Mortgage servicing rights		—		95,288		95,288		—		(233,957)		(233,957)
	$	(69,358)	$	95,288	$	25,930	$	645,536	$	(233,957)	$	411,579
Liabilities:
Mortgage servicing liabilities	$	—	$	123	$	123	$	—	$	86,288	$	86,288


	Nine months ended September 30,
	2022						2021
	Net gains on		Net				Net gains on		Net
	loans held		loan				loans held		loan
	for sale at		servicing				for sale at		servicing
	fair value		fees		Total		fair value		fees		Total

	(in thousands)
Assets:
Loans held for sale	$	(273,701)	$	—	$	(273,701)	$	2,057,496	$	—	$	2,057,496
Mortgage servicing rights		—		419,822		419,822		—		(356,378)		(356,378)
	$	(273,701)	$	419,822	$	146,121	$	2,057,496	$	(356,378)	$	1,701,118
Liabilities:
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust	$	—	$	—	$	—	$	—	$	(1,037)	$	(1,037)
Mortgage servicing liabilities		—		602		602		—		95,904		95,904
	$	—	$	602	$	602	$	—	$	94,867	$	94,867

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


	September 30, 2022						December 31, 2021
			Principal						Principal
			amount						amount
	Fair		due upon				Fair		due upon
Loans held for sale	value		maturity		Difference		value		maturity		Difference

	(in thousands)
Current through 89 days delinquent	$	4,087,039	$	4,217,099	$	(130,060)	$	9,577,398	$	9,263,242	$	314,156
90 days or more delinquent:
Not in foreclosure		50,232		54,141		(3,909)		153,162		153,875		(713)
In foreclosure		12,455		16,345		(3,890)		11,923		13,649		(1,726)
	$	4,149,726	$	4,287,585	$	(137,859)	$	9,742,483	$	9,430,766	$	311,717

Assets Measured at Fair Value on a Nonrecurring Basis

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


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

	(in thousands)
September 30, 2022	$	—	$	—	$	911	$	911
December 31, 2021	$	—	$	—	$	2,588	$	2,588

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


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
Real estate acquired in settlement of loans	$	(131)	$	(284)	$	(838)	$	(912)

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, Unsecured senior notes and Obligations under capital lease are carried at amortized cost.

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

The Company estimates the fair value of the Notes payable secured by mortgage servicing assets and the Unsecured senior notes using indications of fair value provided by non-affiliate brokers. The fair value and carrying value of these notes are summarized below:


	September 30, 2022				December 31, 2021
	Fair value		Carrying value		Fair value		Carrying value

	(in thousands)
Notes payable secured by mortgage servicing assets	$	1,717,125	$	1,793,972	$	1,302,640	$	1,297,622
Unsecured senior notes	$	1,371,500	$	1,778,988	$	1,790,375	$	1,776,219

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Valuation Governance

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

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

●

The Company’s Financial Analysis and Valuation group (the “FAV group”) is responsible for estimating the fair values of “Level 3” fair value assets and liabilities other than IRLCs and maintaining its valuation policies and procedures.

●

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

With respect to the non-IRLC “Level 3” valuations, the FAV group reports to the Company’s senior management valuation committee, which oversees the valuations. The FAV group monitors the models used for valuation of the Company’s “Level 3” fair value assets and liabilities, including the models’ performance versus actual results, and reports those results as well as changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the valuation and any changes in model methods and inputs, to the Company’s senior management valuation committee. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation of changes to the significant inputs to the models.

The Company’s senior management valuation committee includes the Company’s chief financial, investment and credit officers as well as other senior members of the Company’s finance, capital markets and risk management staffs.

Valuation Techniques and Inputs

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

Loans Held for Sale

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

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

●

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

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

●

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

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

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



	September 30, 2022		December 31, 2021
Fair value (in thousands)	$	344,636	$	1,128,876
Key inputs (1):
Discount rate:
Range		3.3% – 10.2%		2.2% – 9.2%
Weighted average		3.6%		2.3%
Twelve-month projected housing price index change:
Range		(0.1)% – 0.1%		6.1% – 6.5%
Weighted average		0.0%		6.2%
Voluntary prepayment/resale speed (2):
Range		4.7% – 27.6%		0.4% – 30.3%
Weighted average		24.4%		22.0%
Total prepayment/resale speed (3):
Range		4.8% – 37.4%		0.4% – 39.3%
Weighted average		31.9%		28.2%

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

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

(3)	Total prepayment/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 value of IRLCs based on quoted Agency MBS prices, its estimate of the fair value of the MSRs it expects to receive in the sale of the loans and the probability that the loan will be funded or purchased (the “pull-through rate”).

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

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



	September 30, 2022		December 31, 2021
Fair value (in thousands) (1)	$	(56,203)	$	322,193
Key inputs (2):
Pull-through rate:
Range		7.9% – 100%		8.0% – 100%
Weighted average		79.5%		78.4%
Mortgage servicing rights fair value expressed as:
Servicing fee multiple:
Range		(3.3) – 7.5		(8.5) – 6.7
Weighted average		4.4		3.8
Percentage of loan commitment amount
Range		(0.6)% – 3.8%		(1.6)% – 3.6%
Weighted average		2.0%		1.5%

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

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

Hedging Derivatives

Fair values of derivative financial instruments actively traded on exchanges are categorized by the Company as “Level 1” fair value assets and liabilities; fair values of derivative financial instruments based on observable interest rates, volatilities and prices in the MBS or other markets are categorized by the Company as “Level 2” fair value assets and liabilities.

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

Mortgage Servicing Rights

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

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


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(Amount recognized and unpaid principal balance of underlying loans in thousands)
MSR and pool characteristics:
Amount recognized	$	345,077	$	432,429	$	1,359,632	$	1,386,324
Unpaid principal balance of underlying loans	$	16,003,556	$	33,697,228	$	65,956,748	$	105,470,580
Weighted average servicing fee rate (in basis points)		49		34		44		33
Key inputs (1):
Annual total prepayment speed (2):
Range		6.8% – 19.1%		7.2% – 31.0%		5.7% – 23.4%		6.2% – 31.0%
Weighted average		11.1%		9.2%		9.0%		8.5%
Equivalent average life (in years):
Range		4.0 – 8.1		3.0 – 8.4		3.7 – 9.2		3.0 – 9.0
Weighted average		7.4		7.7		8.1		8.1
Pricing spread (3):
Range		5.5% – 11.4%		6.0% – 16.9%		5.5% – 16.1%		6.0% – 16.9%
Weighted average		8.1%		8.5%		7.8%		9.0%
Per-loan annual cost of servicing:
Range		$79 – $116		$80 – $117		$79 – $177		$80 – $117
Weighted average		$105		$102		$104		$104

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

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

(3)

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

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Following is a quantitative summary of key inputs used in the valuation of the Company’s MSRs and the effect on the fair value from adverse changes in those inputs:


	September 30, 2022	December 31, 2021

	(Fair value, unpaid principal balance of underlying
	loans and effect on fair value amounts in thousands)
Fair value	$ 5,661,672	$ 3,878,078
Pool characteristics:
Unpaid principal balance of underlying loans	$ 303,800,226	$ 278,324,780
Weighted average note interest rate	3.3%	3.2%
Weighted average servicing fee rate (in basis points)	36	34
Key inputs (1):
Annual total prepayment speed (2):
Range	5.1% – 17.1%	7.9% – 26.7%
Weighted average	7.6%	10.7%
Equivalent average life (in years):
Range	3.8 – 9.3	3.1 – 7.7
Weighted average	8.3	6.8
Effect on fair value of (3):
5% adverse change	($75,034)	($80,109)
10% adverse change	($147,692)	($157,252)
20% adverse change	($286,318)	($303,259)
Pricing spread (4):
Range	4.9% – 14.8%	5.3% – 15.5%
Weighted average	6.9%	7.7%
Effect on fair value of (3):
5% adverse change	($80,798)	($59,577)
10% adverse change	($159,312)	($117,352)
20% adverse change	($309,839)	($227,791)
Per-loan annual cost of servicing:
Range	$80 – $149	$79 – $197
Weighted average	$106	$108
Effect on fair value of (3):
5% adverse change	($38,133)	($32,979)
10% adverse change	($76,265)	($65,958)
20% adverse change	($152,531)	($131,916)

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

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

(3)

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

(4)

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

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Excess Servicing Spread Financing at Fair Value

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

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

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

During the nine months ended September 30, 2021, the Company repaid its outstanding ESS financing payable to PMT.

Mortgage Servicing Liabilities

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

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


		September 30,		December 31,
		2022		2021
Fair value (in thousands)	$	2,214	$	2,816
Pool characteristics:
Unpaid principal balance of underlying loans (in thousands)	$	35,143	$	60,593
Servicing fee rate (in basis points)		25		25
Key inputs (1):
Annual total prepayment speed (2)		17.5%		19.8%
Equivalent average life (in years)		4.8		4.1
Pricing spread (3)		7.7%		6.9%
Per-loan annual cost of servicing	$	1,208	$	1,406

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

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

(3)

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

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Note 7—Loans Held for Sale at Fair Value

Loans held for sale at fair value include the following:


	September 30,		December 31,
Loan type	2022		2021

	(in thousands)
Government-insured or guaranteed	$	3,256,696	$	6,030,518
Conventional conforming		536,800		2,583,089
Jumbo		11,594		—
Home equity loans		972		—
Purchased from Ginnie Mae securities serviced by the Company		299,157		1,082,444
Repurchased pursuant to representations and warranties		44,507		46,432
	$	4,149,726	$	9,742,483
Fair value of loans pledged to secure:
Assets sold under agreements to repurchase	$	3,626,320	$	8,629,861
Mortgage loan participation purchase and sale agreements		385,944		505,716
	$	4,012,264	$	9,135,577

Note 8—Derivative Financial Instruments

The Company holds and issues derivative financial instruments in connection with its operating activities. Derivative financial instruments are created 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.

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

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

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


	September 30, 2022					December 31, 2021
		Fair value					Fair value
	Notional	Derivative		Derivative		Notional	Derivative		Derivative
Derivative instrument	amount (1)	assets		liabilities		amount (1)	assets		liabilities

	(in thousands)
Not subject to master netting arrangements:
Interest rate lock commitments	7,070,065	$	12,195	$	68,398	14,111,795	$	323,473	$	1,280
Subject to master netting arrangements (2):
Forward purchase contracts	9,477,520		5,042		226,369	22,007,383		20,485		18,007
Forward sales contracts	14,995,779		375,955		8,819	34,429,676		40,215		35,415
MBS put options	700,000		17,152		—	9,550,000		7,655		—
MBS call options	—		55		118	—		—		—
Put options on interest rate futures purchase contracts	4,335,000		70,577		—	2,450,000		3,141		—
Call options on interest rate futures purchase contracts	2,675,000		4,680		—	1,250,000		2,078		—
Put options on interest rate futures sale contracts	300,000		—		11,766	—		—		—
Call options on interest rate futures sale contracts	400,000		—		375	—		—		—
Swaption purchase contracts	—		—		—	5,375,000		1,625		—
Treasury futures purchase contracts	4,143,200		—		—	1,544,800		—		—
Treasury futures sale contracts	3,491,400		—		—	1,925,000		—		—
Interest rate swap futures purchase contracts	—		—		—	3,010,600		—		—
Interest rate swap futures sale contracts	—		—		—	2,187,200		—		—
Total derivatives before netting			485,656		315,845			398,672		54,702
Netting			(321,496)		(190,358)			(64,977)		(32,096)
		$	164,160	$	125,487		$	333,695	$	22,606
Deposits received from derivative counterparties included in the derivative balances above, net		$	131,138				$	32,881

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

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

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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.


	September 30, 2022								December 31, 2021
			Gross amount not									Gross amount not
			offset in the									offset in the
			consolidated									consolidated
	Net amount		balance sheet						Net amount			balance sheet
	of assets in the				Cash				of assets in the					Cash
	consolidated		Financial		collateral		Net		consolidated			Financial		collateral		Net
	balance sheet		instruments		received		amount		balance sheet			instruments		received		amount

	(in thousands)
Interest rate lock commitments	$	12,195	$	—	$	—	$	12,195	$	323,473		$	—	$	—	$	323,473
RJ O'Brien		63,116		—		—		63,116		5,219			—		—		5,219
Morgan Stanley Bank, N.A.		54,619		—		—		54,619		—	��				—		—
Bank of America, N.A.		17,549		—		—		17,549		3,005			—		—		3,005
Citibank, N.A.		10,660		—		—		10,660		—			—		—		—
Others		6,021		—		—		6,021		1,998			—		—		1,998
	$	164,160	$	—	$	—	$	164,160	$	333,695		$	—	$	—	$	333,695

Derivative Liabilities, Financial Instruments and Collateral Held by Counterparty

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

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	September 30, 2022								December 31, 2021
			Gross amounts								Gross amounts
			not offset in the								not offset in the
	Net amount		consolidated						Net amount		consolidated
	of liabilities		balance sheet						of liabilities		balance sheet
	in the				Cash				in the				Cash
	consolidated		Financial		collateral		Net		consolidated		Financial		collateral		Net
	balance sheet		instruments (1)		pledged		amount		balance sheet		instruments (1)		pledged		amount

	(in thousands)
Interest rate lock commitments	$	68,398	$	—	$	—	$	68,398	$	1,280	$	—	$	—	$	1,280
Credit Suisse First Boston Mortgage Capital LLC		1,116,556		(1,116,343)		—		213		1,974,278		(1,969,670)		—		4,608
Bank of America, N.A.		995,818		(995,818)		—		—		1,758,690		(1,758,690)		—		—
Morgan Stanley Bank, N.A.		269,997		(269,997)		—		—		299,580		(292,105)		—		7,475
BNP Paribas		242,282		(241,058)		—		1,224		349,172		(349,172)		—		—
Royal Bank of Canada		198,400		(198,400)		—		—		496,064		(496,064)		—		—
Wells Fargo Bank, N.A.		194,706		(187,153)		—		7,553		203,779		(200,338)		—		3,441
Barclays Capital		184,647		(161,390)		—		23,257		677,419		(676,685)		—		734
Citibank, N.A.		157,702		(157,702)		—		—		403,003		(402,806)		—		197
JPMorgan Chase Bank, N.A.		142,962		(139,205)		—		3,757		300,912		(300,912)		—		—
Goldman Sachs		36,515		(23,016)		—		13,499		853,147		(850,918)		—		2,229
Bank of Oklahoma		3,791		—		—		3,791		603		—		—		603
Nomura Securities International, Inc.		3,178		—		—		3,178		273		—		—		273
Others		617		—		—		617		1,766		—		—		1,766
	$	3,615,569	$	(3,490,082)	$	—	$	125,487	$	7,319,966	$	(7,297,360)	$	—	$	22,606

(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 September 30,				Nine months ended September 30,
Derivative activity	Income statement line	2022		2021		2022		2021

		(in thousands)
Interest rate lock commitments	Net gains on loans held for sale at fair value (1)	$	(121,353)	$	17,313	$	(378,396)	$	(316,103)
Hedged item:
Interest rate lock commitments and loans held for sale	Net gains on loans held for sale at fair value	$	363,272	$	(19,294)	$	1,360,341	$	275,510
Mortgage servicing rights	Net loan servicing fees–Mortgage servicing rights hedging results	$	(164,749)	$	(86,459)	$	(558,614)	$	(437,492)

(1)

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

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Note 9—Mortgage Servicing Rights and Mortgage Servicing Liabilities

Mortgage Servicing Rights at Fair Value

The activity in MSRs is as follows:


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
Balance at beginning of period	$	5,217,167	$	3,412,648	$	3,878,078	$	2,581,174
Additions:
MSRs resulting from loan sales		345,077		432,429		1,359,632		1,386,324
Purchases		4,140		—		4,140		—
		349,217		432,429		1,363,772		1,386,324
Change in fair value due to:
Changes in valuation inputs used in valuation model (1)		237,154		(119,674)		794,779		(46,298)
Other changes in fair value (2)		(141,866)		(114,283)		(374,957)		(310,080)
Total change in fair value		95,288		(233,957)		419,822		(356,378)
Balance at end of period	$	5,661,672	$	3,611,120	$	5,661,672	$	3,611,120
UPB of underlying loans at end of period					$	303,800,226	$	259,220,948

					September 30,		December 31,
					2022		2021

					(in thousands)
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets					$	5,604,447	$	3,856,791

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

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

Mortgage Servicing Liabilities at Fair Value

The activity in MSLs is summarized below:


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
Balance at beginning of period	$	2,337	$	100,091	$	2,816	$	45,324
Mortgage servicing liabilities resulting from loan sales		—		33,764	��	—		98,147
Changes in fair value due to:
Changes in valuation inputs used in valuation model (1)		(38)		(54,222)		(305)		(36,375)
Other changes in fair value (2)		(85)		(32,066)		(297)	��	(59,529)
Total change in fair value		(123)		(86,288)		(602)		(95,904)
Balance at end of period	$	2,214	$	47,567	$	2,214	$	47,567
UPB of underlying loans at end of period					$	35,143	$	8,885,785

(1)

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

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

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


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
Contractual servicing fees	$	270,336	$	216,592	$	774,483	$	635,620
Other fees:
Late charges		10,533		7,480		30,177		22,076
Other		2,952		7,457		11,487		23,079
	$	283,821	$	231,529	$	816,147	$	680,775

Note 10—Leases

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

The Company’s lease agreements are summarized below:



	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(dollars in thousands)
Lease expense:
Operating leases	$	5,046	$	4,671	$	15,008	$	13,545
Short-term leases		235		196		695		666
Net lease expense included in Occupancy and equipment	$	5,281	$	4,867	$	15,703	$	14,211

Other information:
Payments for operating leases	$	5,544	$	5,210	$	15,801	$	15,395
Operating lease right-of-use assets recognized	$	571	$	13,058	$	1,364	$	20,871
Period end weighted averages:
Remaining lease term (in years)						4.9		6.0
Discount rate						3.8%		4.0%

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


Twelve months ended September 30,	Operating leases
	(in thousands)
2023	$	24,786
2024		21,921
2025		18,855
2026		15,424
2027		8,896
Thereafter		13,263
Total lease payments		103,145
Less imputed interest		(10,765)
Operating lease liability	$	92,380

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Note 11—Other Assets

Other assets are summarized below:


		September 30,		December 31,
	2022		2021

	(in thousands)
Capitalized software, net	$	152,655	$	109,480
Derivative settlements receivable		115,384		20,026
Prepaid expenses		47,008		64,924
Furniture, fixtures, equipment and building improvements, net		29,928		31,677
Servicing fees receivable, net		25,861		23,672
Other servicing receivables		19,928		113,820
Interest receivable		18,793		9,688
Deposits securing Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets		9,886		36,632
Real estate acquired in settlement of loans		7,963		7,474
Margin deposits		1,539		100,482
Other		44,582		98,741
	$	473,527	$	616,616
Other assets pledged to secure:
Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets	$	9,886	$	36,632
Obligations under capital lease:
Capitalized software, net		—		4,546
Furniture, fixture, equipment and building improvements, net		—		4,116
	$	9,886	$	45,294

Note 12—Short-Term Debt

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

Assets Sold Under Agreements to Repurchase

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

Fannie Mae MSR Facility

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

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

PLS also entered into a master repurchase agreement on April 28, 2021 (the “FMSR VFN Repurchase Agreement”) with Credit Cuisse First Boston Mortgage Capital LLC (“CSFB”), as administrative agent, and Credit Suisse AG, Cayman Islands Branch (“CSCIB”), as purchaser, pursuant to which PLS sold the FMSR VFN to CSCIB with an agreement to repurchase such FMSR VFN at a later date. The FMSR VFN Repurchase Agreement has a term extending through May 31, 2024. The FMSR VFN Repurchase Agreement provides for a maximum purchase price of $250 million, all of which is committed.

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

Freddie Mac MSR Facility

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

Ginnie Mae MSR Facility

The Company, through its wholly-owned subsidiaries PLS, PNMAC, and the Issuer Trust, have a structured finance transaction, in which PLS pledges and/or sells to the Issuer Trust participation certificates representing beneficial interests in MSRs and ESS pursuant to the terms of the PC Repurchase Agreement (the “GNMA MSR Facility”). In return, the Issuer Trust has issued to PLS, pursuant to the terms of an indenture, the Series 2016-MSRVF1 Variable Funding Note, known as the “PNMAC GMSR ISSUER TRUST MSR Collateralized Notes, Series 2016-MSRVF1” (the “VFN”), and has issued and may, from time to time pursuant to the terms of any supplemental indenture, issue to institutional investors additional term notes, in each case secured on a pari passu basis by the participation certificates relating to the MSRs and ESS. The maximum principal balance of the VFN is $2 billion.

On July 30, 2021, the Company, through its wholly-owned subsidiaries PLS, PNMAC and the Issuer Trust, entered into agreements to syndicate existing variable funding note repurchase agreements as part of the Ginnie Mae MSR structured finance facility. The Company entered into an Amended and Restated Series 2016-MSRVF1 Master Repurchase Agreement by and among PLS, as seller, CSFB, as administrative agent to the buyers, CSCIB, as a buyer, Citibank, N.A., as a buyer, and PNMAC, as a guarantor (the “Syndicated GMSR Servicing Spread Agreement”), related to the servicing spread. The Syndicated GMSR Servicing Spread Agreement added Citibank as a syndicate buyer of MSRs and related ESS, and increased the borrowing capacity from $400 to $500 million, all of which is committed on a 50-50 pro rata basis between CSCIB and Citibank.

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Ginnie Mae Servicing Advances

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

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

On July 30, 2021, the Company, through its wholly-owned subsidiaries PLS, PNMAC and the Issuer Trust, entered into agreements to syndicate existing variable funding note repurchase agreements, as part of the Ginnie Mae servicing advance facility. The Company entered into an Amended and Restated Series 2020-SPIADVF1 Master Repurchase Agreement by and among PLS, as seller, CSFB, as administrative agent to the buyers, CSCIB, as a buyer, Citibank, as a buyer, and PNMAC, as a guarantor (the “Syndicated GMSR SAR Agreement”). The Syndicated GMSR SAR Agreement added Citibank as a syndicate buyer of servicing advances receivables and provides a $600 million borrowing capacity, all of which is committed on a 50-50 pro rata basis between CSCIB and Citibank.

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Assets sold under agreements to repurchase are summarized below:


	Quarter ended September 30,						Nine months ended September 30,
	2022			2021			2022			2021

	(dollars in thousands)
Average balance of assets sold under agreements to repurchase	$	1,949,452		$	6,031,491		$	2,622,581		$	7,336,341
Weighted average interest rate (1)		4.34	%		2.11	%		2.90	%		2.12	%
Total interest expense	$	24,329		$	35,783		$	67,048		$	132,585
Maximum daily amount outstanding	$	3,490,082		$	8,044,148		$	7,289,147		$	10,969,029


		September 30,			December 31,
	2022			2021

	(dollars in thousands)
Carrying value:
Unpaid principal balance funded under:
Committed facilities	$	2,703,673		$	5,079,581
Uncommitted facilities		786,409			2,217,779
		3,490,082			7,297,360
Unamortized debt issuance costs		(2,747)			(4,625)
	$	3,487,335		$	7,292,735
Weighted average interest rate		4.66	%		1.83	%
Available borrowing capacity (2):
Committed	$	801,328		$	285,419
Uncommitted		5,333,590			8,417,221
	$	6,134,918		$	8,702,640
Fair value of assets securing repurchase agreements:
Loans held for sale	$	3,626,320		$	8,629,861
Servicing advances (3)	$	253,370		$	232,107
Mortgage servicing rights (3)	$	5,604,447		$	3,552,812
Deposits (3)	$	9,886		$	36,632

(1)	Excludes the effect of amortization of debt issuance costs and utilization fees of $3.0 million and $3.7 million for the quarters ended September 30, 2022 and 2021, respectively, and $10.1 million and $15.5 million for the nine months ended September 30, 2022 and 2021, respectively.

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

(3)

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

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


Remaining maturity at September 30, 2022	Unpaid principal balance
	(dollars in thousands)
Within 30 days	$	715,649
Over 30 to 90 days		2,469,343
Over 90 to 180 days		191,861
Over 180 days to one year		13,229
Over one year to two years		100,000
Total assets sold under agreements to repurchase	$	3,490,082
Weighted average maturity (in months)		3.1

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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 interest payable) relating to the Company’s assets sold under agreements to repurchase is summarized by counterparty below as of September 30, 2022:



			Weighted average
Counterparties	Amount at risk		maturity of advances	Facility maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC & Citibank, N.A. (1)	$	3,451,397	May 31, 2024	May 31, 2024
JP Morgan Chase Bank, N.A. (warehouse facility)	$	77,947	December 4, 2022	June 17, 2024
JP Morgan Chase Bank, N.A. (EBO facility)	$	39,006	August 16, 2023	June 6, 2024
Credit Suisse First Boston Mortgage Capital LLC	$	39,317	November 13, 2022	May 31, 2024
Royal Bank of Canada	$	24,518	January 13, 2023	September 14, 2023
Morgan Stanley Bank, N.A.	$	23,564	December 10, 2022	January 3, 2024
BNP Paribas	$	13,192	December 16, 2022	July 31, 2023
Barclays Bank PLC	$	11,178	November 3, 2022	November 3, 2022
Citibank, N.A.	$	7,062	December 16, 2022	April 26, 2024
Bank of America, N.A.	$	5,367	December 15, 2022	June 5, 2024
Goldman Sachs	$	414	December 11, 2022	December 23, 2023
Wells Fargo Bank, N.A.	$	—	September 30, 2022	November 17, 2023

(1)

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

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

Mortgage Loan Participation Purchase and Sale Agreements

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 the securitization of the mortgage loans and sale of the resulting securities. A commitment to sell the securities resulting from the pending securitization between the Company and a non-affiliate is also assigned to the lender at the time a participation certificate is sold.

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

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


	Quarter ended September 30,						Nine months ended September 30,
	2022			2021			2022			2021

	(dollars in thousands)
Average balance	$	210,639		$	237,849		$	216,167		$	256,109
Weighted average interest rate (1)		3.65	%		1.44	%		2.53	%		1.38	%
Total interest expense	$	2,073		$	1,026		$	4,570		$	3,160
Maximum daily amount outstanding	$	507,297		$	532,819		$	515,043		$	532,819

(1)	Excludes the effect of amortization of debt issuance costs totaling $135,000 and $172,000 for the quarters ended September 30, 2022 and 2021, respectively, and $479,000 and $516,000 for the nine months ended September 30, 2022 and 2021, respectively.


	September 30,			December 31,
	2022			2021

	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	367,997		$	479,845
Unamortized debt issuance costs		(524)			—
	$	367,473		$	479,845
Weighted average interest rate		4.48	%		1.48	%
Fair value of loans pledged to secure mortgage loan participation purchase and sale agreements	$	385,944		$	505,716

Note 13—Long-Term Debt

Notes Payable Secured by Mortgage Servicing Assets

Term Notes

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

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


			Annual interest rate
Issuance date	Principal balance		Index	Spread	Stated maturity date (1)
	(in thousands)
February 28, 2018	$	650,000	One-month LIBOR	2.85%	2/25/2023
August 10, 2018		650,000	One-month LIBOR	2.65%	8/25/2023
June 3, 2022		500,000	SOFR	4.25%	5/25/2027
	$	1,800,000

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

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Notes payable secured by mortgage servicing assets are summarized below:


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(dollars in thousands)
Average balance	$	1,800,000	$	1,300,000	$	1,510,623	$	1,300,000
Weighted average interest rate (1)		5.31%		2.87%		4.13%		2.89%
Total interest expense	$	24,795	$	9,896	$	48,360	$	29,888

(1)	Excludes the effect of amortization of debt issuance costs totaling $726,000 and $570,000 for the quarters ended September 30, 2022 and 2021, respectively, and $1.7 million for the nine months ended September 30, 2022 and 2021.


	September 30,		December 31,
	2022		2021

	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	1,800,000	$	1,300,000
Unamortized debt issuance costs		(6,028)		(2,378)
	$	1,793,972	$	1,297,622
Weighted average interest rate		6.12%		2.84%
Assets pledged to secure notes payable (1):
Servicing advances	$	253,370	$	232,107
Mortgage servicing rights	$	5,089,648	$	3,856,791
Deposits pledged to the Issuer Trust	$	9,886	$	36,632

(1)

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

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Unsecured Senior Notes

The Company issued unsecured senior notes (the “Unsecured Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The Unsecured Notes are senior unsecured obligations of the Company and will rank senior in right of payment to any future subordinated indebtedness of the Company, equally in right of payment with all existing and future senior indebtedness of the Company and effectively subordinated to any 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 subordinated indebtedness of the guarantors, equally in right of payment with all existing and future senior indebtedness of the guarantors and effectively subordinated to any 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 subordinated to the indebtedness and liabilities of the Company’s subsidiaries that do not guarantee the Unsecured Notes.

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


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

(1)

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


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(dollars in thousands)
Average balance	$	1,800,000	$	1,381,522	$	1,800,000	$	1,229,853
Weighted average interest rate (1)		5.07%		4.91%		5.07%		4.86%
Total interest expense	$	23,949	$	17,442	$	71,065	$	46,281

(1)	Excludes the effect of amortization of debt issuance costs of $933,000 and $492,000 for the quarters ended September 30, 2022 and 2021, respectively, and $2.8 million and $1.4 million for the nine months ended September 30, 2022 and 2021, respectively.


	September 30,		December 31,
	2022		2021

	(dollars in thousands)
Carrying value:
Unpaid principal balance	$	1,800,000	$	1,800,000
Unamortized debt issuance costs and premiums, net		(21,012)		(23,781)
	$	1,778,988	$	1,776,219
Weighted average interest rate		5.07%		5.07%

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Maturities of Long-Term Debt

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


	Twelve months ended September 30,
	2023		2024		2025		2026		2027		Thereafter		Total

	(in thousands)
Notes payable secured by mortgage servicing assets (1)	$	1,300,000	$	—	$	—	$	—	$	500,000	$	—	$	1,800,000
Unsecured senior notes		—		—		—		650,000		—		1,150,000		1,800,000
Total	$	1,300,000	$	—	$	—	$	650,000	$	500,000	$	1,150,000	$	3,600,000

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

Obligations Under Capital Lease

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

Obligations under capital lease are summarized below:


	Quarter ended		Nine months ended September 30,
	September 30, 2021		2022		2021

	(dollars in thousands)
Average balance	$	6,804	$	1,130	$	9,072
Weighted average interest rate		2.09%		2.18%		2.11%
Total interest expense	$	36	$	20	$	143
Maximum daily amount outstanding	$	7,677	$	3,489	$	11,864


	December 31,
	2021
	(dollars in thousands)
Unpaid principal balance	$	3,489
Weighted average interest rate		2.11%
Assets pledged to secure obligations under capital lease:
Capitalized software	$	4,546
Furniture, fixtures and equipment	$	4,116

Note 14—Liability for Losses Under Representations and Warranties

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


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
Balance at beginning of period	$	39,336	$	44,335	$	43,521	$	32,688
Provision for losses:
Resulting from sales of loans		1,651		6,561		7,887		26,918
Reduction in liability due to change in estimate		(1,769)		(4,355)		(7,165)		(11,680)
Losses incurred, net		(2,031)		(735)		(7,056)		(2,120)
Balance at end of period	$	37,187	$	45,806	$	37,187	$	45,806
Unpaid principal balance of loans subject to representations and warranties at end of period					$	285,532,190	$	245,528,045

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Note 15—Income Taxes

The Company’s effective income tax rates were 27.1% and 26.6% for the quarters ended September 30, 2022 and 2021, respectively, and 26.7% and 26.2% for the nine months ended September 30, 2022 and 2021, respectively. The increases in the effective income tax rates for the quarter and nine month ended September 30, 2022, as compared to the same periods in 2021, were primarily attributable to an increase in nondeductible compensation.

Note 16—Commitments and Contingencies

Commitments to Purchase and Fund Mortgage Loans

The Company’s commitments to purchase and fund loans totaled $7.1 billion as of September 30, 2022.

Litigation

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

On November 5, 2019, Black Knight Servicing Technologies, LLC, a wholly-owned indirect subsidiary of Black Knight, Inc. (“BKI”), filed a Complaint and Demand for Jury Trial in the Fourth Judicial Circuit Court in and for Duval County, Florida (the “Florida State Court”), captioned Black Knight Servicing Technologies, LLC v. PennyMac Loan Services, LLC, Case No. 2019-CA-007908 (the “BKI Complaint”). Allegations contained within the BKI Complaint include breach of contract and misappropriation of MSP® System trade secrets in order to develop an imitation mortgage-processing system intended to replace the MSP® System.

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

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Regulatory Matters

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

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

Cessation of the LIBOR Index

The Company historically used a LIBOR index to establish the applicable interest rates in lending and financing transactions. One-week and two-month United States Dollar LIBOR rates have been discontinued in 2022 and non-U.S. dollar LIBOR settings cease to be representative. The Company has serviced LIBOR-based adjustable rate mortgages and other financial arrangements that may incorporate fallback provisions or replacement provisions related to the LIBOR transition.

The discontinuation of LIBOR could materially affect our interest expense and earnings, our cost of capital, and the fair value of certain of our assets and the instruments we use to hedge their value. Furthermore, the transition away from widely used benchmark rates like LIBOR could result in customers or other market participants challenging the determination of their interest or dividend payments, disputing the interpretations or implementation of contract or instrument “fallback” provisions and other transition related changes.

Note 17—Stockholders’ Equity

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

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


	Quarter ended September 30,				Nine months ended September 30,				Cumulative
	2022		2021		2022		2021		total (1)

	(in thousands)
Shares of common stock repurchased		1,949		4,195		6,696		11,422		31,770
Cost of shares of common stock repurchased	$	99,702	$	257,354	$	354,759	$	700,793	$	1,665,380

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

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Note 18—Net Gains on Loans Held for Sale

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


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
From non-affiliates:
Cash (losses) gains:
Loans	$	(587,659)	$	135,841	$	(1,983,051)	$	605,858
Hedging activities		570,864		(9,788)		1,543,568		400,786
		(16,795)		126,053		(439,483)		1,006,644
Non-cash gains:
Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales		345,077		398,665		1,359,632		1,288,177
Provisions for losses relating to representations and warranties:
Pursuant to loan sales		(1,651)		(6,561)		(7,887)		(26,918)
Reductions in liability due to change in estimate		1,769		4,355		7,165		11,680
Changes in fair values of loans and derivatives held at period end:
Interest rate lock commitments		(121,353)		17,313		(378,396)		(316,103)
Loans		170,887		109,411		347,968		164,311
Hedging derivatives		(207,592)		(9,506)		(183,227)		(125,276)
		170,342		639,730		705,772		2,002,515
From PennyMac Mortgage Investment Trust (1)		(1,648)		(12,976)		(16,052)		(38,772)
	$	168,694	$	626,754	$	689,720	$	1,963,743

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

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Note 19—Net Interest Income (Expense)

Net interest expense is summarized below:


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
Interest income:
From non-affiliates:
Cash and short-term investments	$	7,759	$	768	$	8,736	$	2,502
Loans held for sale at fair value		38,945		63,726		124,835		215,003
Placement fees relating to custodial funds		36,290		3,818		53,169		13,298
		82,994		68,312		186,740		230,803
From PennyMac Mortgage Investment Trust—Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell		—		—		—		387
		82,994		68,312		186,740		231,190
Interest expense:
To non-affiliates:
Assets sold under agreements to repurchase		24,329		35,783		67,048		132,585
Mortgage loan participation purchase and sale agreements		2,073		1,026		4,570		3,160
Obligations under capital lease		—		36		20		143
Notes payable secured by mortgage servicing assets		24,795		9,896		48,360		29,888
Unsecured senior notes		23,949		17,442		71,065		46,281
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations		5,620		24,886		35,385		83,466
Interest on mortgage loan impound deposits		2,199		1,642		4,951		4,052
		82,965		90,711		231,399		299,575
To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value		—		—		—		1,280
		82,965		90,711		231,399		300,855
	$	29	$	(22,399)	$	(44,659)	$	(69,665)

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Note 20—Stock-based Compensation

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

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


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
Grants:
Units:
Performance-based restricted share units ("RSUs")		—		—		342		310
Stock options		—		—		574		249
Time-based RSUs		—		—		331		171
Grant date fair value:
Performance-based RSUs	$	—	$	—	$	19,522	$	18,237
Stock options		—		—		12,138		5,116
Time-based RSUs		—		—		18,903		10,066
Total	$	—	$	—	$	50,563	$	33,419
Vestings and exercises:
Performance-based RSUs vested		—		—		643		640
Stock options exercised		20		104		83		289
Time-based RSUs vested		—		2		246		309
Stock-based compensation expense	$	6,466	$	8,824	$	30,689	$	28,595

Note 21—Earnings Per Share

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

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

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


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands, except per share amounts)
Net income	$	135,134	$	249,310	$	437,890	$	830,407

Weighted average basic shares of common stock outstanding		52,170		62,085		54,043		65,671
Effect of dilutive securities - shares issuable under stock-based compensation plan		2,798		3,567		2,870		3,670
Weighted average shares of common stock applicable to diluted earnings per share		54,968		65,652		56,913		69,341
Basic earnings per share	$	2.59	$	4.02	$	8.10	$	12.65
Diluted earnings per share	$	2.46	$	3.80	$	7.69	$	11.98

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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 September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands except for weighted average exercise price)
Performance-based RSUs (1)		325		302		268		244
Time-based RSUs		—		—		116		68
Stock options (2)		1,423		249		1,312		199
Total anti-dilutive units and options		1,748		551		1,696		511
Weighted average exercise price of anti-dilutive stock options (2)	$	58.49	$	58.85	$	58.61	$	58.85

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

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

Note 22—Regulatory Capital and Liquidity Requirements

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

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

●

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

●

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

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

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


	September 30, 2022						December 31, 2021
Requirement/Agency	Actual (1)			Requirement (1)			Actual (1)			Requirement (1)

	(dollars in thousands)
Capital
Fannie Mae & Freddie Mac	$	6,556,595		$	772,807		$	5,872,064		$	722,040
Ginnie Mae	$	5,868,827		$	933,482		$	5,424,747		$	976,303
HUD	$	5,868,827		$	2,500		$	5,424,747		$	2,500
Liquidity
Fannie Mae & Freddie Mac	$	1,545,995		$	103,846		$	316,659		$	93,973
Ginnie Mae	$	1,545,995		$	239,211		$	316,659		$	220,577
Adjusted net worth / Total assets ratio
Ginnie Mae		36	%		6	%		29	%		6	%
Tangible net worth / Total assets ratio
Fannie Mae & Freddie Mac		40	%		6	%		32	%		6	%

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

In August 2022, the Agencies issued revised capital and liquidity requirements. The requirements will be effective at various dates beginning September 30, 2023, for issuers of securities guaranteed by Ginnie Mae and seller/servicers of mortgage loans to Fannie Mae and Freddie Mac. The Company believes it is in compliance with Agencies’ revised requirements as currently interpreted as of September 30, 2022.

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

Note 23—Segments

The Company 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 Company’s chief operating decision maker is its chief executive officer. 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.

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Financial performance and results by segment are as follows:


	Quarter ended September 30, 2022
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total

	(in thousands)
Revenue: (1)
Net gains on loans held for sale at fair value	$	140,683	$	28,011	$	168,694	$	—	$	168,694
Loan origination fees		34,037		—		34,037		—		34,037
Fulfillment fees from PennyMac Mortgage Investment Trust		18,407		—		18,407		—		18,407
Net loan servicing fees		—		243,742		243,742		—		243,742
Net interest income (expense):
Interest income		30,825		52,169		82,994		—		82,994
Interest expense		24,970		57,995		82,965		—		82,965
		5,855		(5,826)		29		—		29
Management fees		—		—		—		7,731		7,731
Other		474		556		1,030		2,620		3,650
Total net revenue		199,456		266,483		465,939		10,351		476,290
Expenses		160,884		121,200		282,084		8,734		290,818
Income before provision for income taxes	$	38,572	$	145,283	$	183,855	$	1,617	$	185,472
Segment assets at quarter end	$	4,708,512	$	11,626,311	$	16,334,823	$	26,988	$	16,361,811

(1)	All revenues are from external customers.


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

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

(1)	All revenues are from external customers.

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	Nine months ended September 30, 2022
	Mortgage Banking						Investment
	Production		Servicing		Total		Management		Total

	(in thousands)
Revenues: (1)
Net gains on loans held for sale at fair value	$	515,188	$	174,532	$	689,720	$	—	$	689,720
Loan origination fees		141,840		—		141,840		—		141,840
Fulfillment fees from PennyMac Mortgage Investment Trust		55,807		—		55,807		—		55,807
Net loan servicing fees		—		768,498		768,498		—		768,498
Net interest income (expense):
Interest income		90,145		96,595		186,740		—		186,740
Interest expense		71,236		160,163		231,399		—		231,399
		18,909		(63,568)		(44,659)		—		(44,659)
Management fees		—		—		—		23,758		23,758
Other		1,842		2,072		3,914		6,431		10,345
Total net revenue		733,586		881,534		1,615,120		30,189		1,645,309
Expenses		676,090		343,473		1,019,563		28,228		1,047,791
Income before provision for income taxes	$	57,496	$	538,061	$	595,557	$	1,961	$	597,518
Segment assets at period end	$	4,708,512	$	11,626,311	$	16,334,823	$	26,988	$	16,361,811

(1)	All revenues are from external customers.


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

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

(1)	All revenues are from external customers.

(

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Note 24—Subsequent Events

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

●

On October 25, 2022, the Company announced that the board of directors declared a cash dividend of $0.20 per common share. The dividend will be paid on November 23, 2022 to common shareholders of record as of November 14, 2022.

●

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

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

Cautionary Statement Regarding Forward-Looking Statements

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

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

Overview

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

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Our principal mortgage banking subsidiary, PennyMac Loan Services, LLC (“PLS”), is a non-bank producer and servicer of mortgage loans in the United States. PLS is a seller/servicer for the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), each of which is a government-sponsored entity. PLS is also an approved issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”), a lender of the Federal Housing Administration (“FHA”), and a lender/servicer of the U.S. Department of Veterans Affairs (“VA”) and the U.S. Department of Agriculture (“USDA”). We refer to each of Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA and USDA as an “Agency” and collectively as the “Agencies.” PLS is able to service loans in all 50 states, the District of Columbia, Guam and the U.S. Virgin Islands, and originate loans in 49 states and the District of Columbia, either because PLS is properly licensed in a particular jurisdiction or exempt or otherwise not required to be licensed in that jurisdiction.

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

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Results of Operations

Our results of operations are summarized below:


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(dollars in thousands, except per share amounts)
Revenues:
Net gains on loans held for sale at fair value	$	168,694	$	626,754	$	689,720	$	1,963,743
Loan origination fees		34,037		94,581		141,840		295,909
Fulfillment fees from PennyMac Mortgage Investment Trust		18,407		43,922		55,807		158,777
Net loan servicing fees		243,742		33,630		768,498		88,221
Net interest income (expense)		29		(22,399)		(44,659)		(69,665)
Management fees		7,731		8,520		23,758		28,882
Other		3,650		1,604		10,345		7,683
Total net revenues		476,290		786,612		1,645,309		2,473,550
Expenses:
Compensation		157,793		249,183		601,532		773,079
Loan origination		28,356		80,932		148,620		243,999
Technology		35,647		32,406		105,054		100,314
Servicing		20,399		27,892		22,204		78,365
Other		48,623		56,650		170,381		152,721
Total expenses		290,818		447,063		1,047,791		1,348,478
Income before provision for income taxes		185,472		339,549		597,518		1,125,072
Provision for income taxes		50,338		90,239		159,628		294,665
Net income	$	135,134	$	249,310	$	437,890	$	830,407
Earnings per share
Basic	$	2.59	$	4.02	$	8.10	$	12.65
Diluted	$	2.46	$	3.80	$	7.69	$	11.98
Annualized return on average stockholders' equity		15.6%		28.6%		16.9%		31.7%
Dividend declared per share	$	0.20	$	0.20	$	0.60	$	0.60
Income before provision for income taxes by segment:
Mortgage banking:
Production	$	38,572	$	330,566	$	57,496	$	937,903
Servicing		145,283		7,954		538,061		180,622
Total mortgage banking		183,855		338,520		595,557		1,118,525
Investment management		1,617		1,029		1,961		6,547
	$	185,472	$	339,549	$	597,518	$	1,125,072
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") (1)	$	152,878	$	524,524	$	486,631	$	1,670,272
During the period:
Interest rate lock commitments issued	$	18,019,364	$	37,431,969	$	61,017,443	$	107,821,842
At end of period:
Interest rate lock commitments outstanding	$	7,070,065	$	15,804,462
Unpaid principal balance of loan servicing portfolio:
Owned:
Mortgage servicing rights and liabilities	$	303,835,369	$	268,106,733
Loans held for sale		4,287,585		9,295,126
		308,122,954		277,401,859
Subserviced for PMT		230,978,819		218,013,788
	$	539,101,773	$	495,415,647

Net assets of PennyMac Mortgage Investment Trust	$	2,017,331	$	2,479,327
Book value per share	$	68.26	$	58.00

(1)

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

We define “Adjusted EBITDA” as net income plus provision for income taxes, depreciation and amortization, excluding decrease (increase) in fair value of mortgage servicing rights (“MSRs”) net of mortgage servicing liabilities (“MSLs”), due to changes in the valuation inputs we use in our valuation models, increase (decrease) in

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fair value of excess servicing spread (“ESS”) payable to PMT, hedging losses (gains) associated with MSRs, stock-based compensation and interest expense on corporate debt or corporate revolving credit facilities and capital lease.

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

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

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

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

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

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

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


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
Net income	$	135,134	$	249,310	$	437,890	$	830,407
Provision for income taxes		50,338		90,239		159,628		294,665
Income before provision for income taxes		185,472		339,549		597,518		1,125,072
Depreciation and amortization		9,434		6,762		23,809		21,729
(Increase) decrease in fair value of MSRs net of MSLs due to changes in valuation inputs used in valuation models		(237,192)		65,452		(795,084)		9,923
Increase in fair value of ESS payable to PennyMac Mortgage Investment Trust		—		—		—		1,037
Hedging losses associated with MSRs		164,749		86,459		558,614		437,492
Stock‑based compensation		6,466		8,824		30,689		28,595
Interest expense on corporate debt or corporate revolving credit facilities and capital lease		23,949		17,478		71,085		46,424
Adjusted EBITDA	$	152,878	$	524,524	$	486,631	$	1,670,272

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Business Trends

Due to significant inflationary pressures, the U.S. Federal Reserve raised the federal funds rate during the nine months ended September 30, 2022 and is expected to further increase interest rates in the near term, as well as reduce the federal government’s overall holdings of Treasury and mortgage-backed securities. Increasing interest rates are expected to reduce the size of the mortgage origination market from an estimated $4.4 trillion in 2021 to a current forecast of $2.4 trillion for 2022 according to leading economists.

Lower projected mortgage transaction volumes and increasing interest rates are expected to cause a decrease in all mortgage production activities, reduce gains from the redelivery of loans bought out from Ginnie Mae securities and increase competition in the mortgage production business, while also leading to a reduction in prepayment speeds in our mortgage servicing portfolio from the elevated levels experienced in 2021. Rising interest rates will increase the costs of certain floating rate borrowings, as well as provide greater interest income from our placement fees on deposits and loans held for sale. We have reduced and expect to continue to reduce business expenses to align with the lower projected mortgage production activities for the remainder of the year.

Income Before Provisions for Income Taxes

For the quarter ended September 30, 2022, income before provision for income taxes decreased $154.1 million compared to the same period in 2021. The decrease was primarily due to a $458.1 million decrease in Net gains on loans held for sale at fair value, a $60.5 million decrease in Loan origination fees and a $25.5 million decrease in fulfillment fees from PMT due to lower production and redelivery volumes and overall gain on sale margins during the quarter ended September 30, 2022 compared to the same period in 2021, partially offset by a $210.1 million increase in Net loan servicing fees reflecting improved valuation results in our MSRs, net of hedging results and a $156.2 million decrease in total expenses, primarily due to reductions in compensation, loan origination and servicing expenses.

For the nine months ended September 30, 2022, income before provision for income taxes decreased $527.6 million compared to the same period in 2021. The decrease was primarily due to a $1.3 billion decrease in Net gains on loans held for sale at fair value, a $154.1 million decrease in Loan origination fees and a $103.0 million decrease in fulfillment fees from PMT due to lower production and redelivery volumes and gain on sale margins during the nine months ended September 30, 2022 compared to the same period in 2021, partially offset by a $680.3 million increase in Net loan servicing fees reflecting improved valuation results in our MSRs, net of hedging results and a $300.7 million decrease in total expenses.

Net Gains on Loans Held for Sale at Fair Value

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

During the quarter and nine months ended September 30, 2022, we recognized Net gains on loans held for sale at fair value totaling $168.7 million and $689.7 million, respectively, a decrease of $458.1 million and $1.3 billion, respectively, compared to the same periods in 2021. The decreases were primarily due to lower production volumes and decreases in early buyout (“EBO”) loan redelivery gains as a result of lower volumes and modifications during the quarter and nine months ended September 30, 2022 compared to the same periods in 2021.

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


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
From non-affiliates:
Cash (losses) gains:
Loans	$	(587,659)	$	135,841	$	(1,983,051)	$	605,858
Hedging activities		570,864		(9,788)		1,543,568		400,786
Total cash gains		(16,795)		126,053		(439,483)		1,006,644
Non-cash gains:
Change in fair value of loans and derivative financial instruments outstanding at end of period:
Interest rate lock commitments		(121,353)		17,313		(378,396)		(316,103)
Loans		170,887		109,411		347,968		164,311
Hedging derivatives		(207,592)		(9,506)		(183,227)		(125,276)
		(158,058)		117,218		(213,655)		(277,068)
Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales		345,077		398,665		1,359,632		1,288,177
Provisions for losses relating to representations and warranties:
Pursuant to loan sales		(1,651)		(6,561)		(7,887)		(26,918)
Reductions in liability due to change in estimate		1,769		4,355		7,165		11,680
Total non-cash gains		187,137		513,677		1,145,255		995,871
Total gains on sale from non-affiliates		170,342		639,730		705,772		2,002,515
From PennyMac Mortgage Investment Trust (primarily cash)		(1,648)		(12,976)		(16,052)		(38,772)
	$	168,694	$	626,754	$	689,720	$	1,963,743
During the period:
Interest rate lock commitments issued:
By loan type:
Government-insured or guaranteed loans	$	14,861,276	$	24,061,473	$	45,660,671	$	72,605,976
Conventional conforming loans		3,128,087		13,370,496		15,276,045		35,215,866
Jumbo loans		20,483		—		71,209		—
Home equity loans		9,518		—		9,518		—
	$	18,019,364	$	37,431,969	$	61,017,443	$	107,821,842
By production channel:
Consumer direct	$	3,803,865	$	16,326,210	$	17,241,831	$	43,818,001
Broker direct		1,864,659		4,876,142		7,611,018		15,053,295
Correspondent		12,350,840		16,229,617		36,164,594		48,950,546
	$	18,019,364	$	37,431,969	$	61,017,443	$	107,821,842
At end of period:
Loans held for sale at fair value					$	4,149,726	$	9,659,695
Commitments to fund and purchase loans					$	7,070,065	$	15,804,462

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

Our gains on loans held for sale include both cash and non-cash elements. We recognize a significant portion of our gains on loans held for sale when we make commitments to purchase or fund mortgage loans. We recognize this gain in the form of interest rate lock commitments (“IRLC”). We adjust our initial gain amount as the loan purchase or origination process progresses until the loan is either funded or cancelled. We also receive non-cash proceeds on sale that include our estimate of the fair value of MSRs and we incur liabilities for mortgage servicing liabilities (which represent the fair value of the costs we expect to incur in excess of the fees we receive for EBO loans we have resold to third party investors) and for the fair value of our estimate of the losses we expect to incur relating to the representations and warranties we provide in our loan sale transactions.

The MSRs, MSLs, and liability for representations and warranties we recognize represent our estimate of the fair value of future benefits and costs we will realize for years in the future. These estimates represented approximately 205% and 197% of our gains on sales of loans held for sale at fair value for the quarter and nine months ended September 30, 2022, respectively, as compared to 63% and 65% for the quarter and nine months ended September 30, 2021, respectively. These estimates change as circumstances change and changes in these estimates are recognized in income in subsequent periods. Subsequent changes in the fair value of our MSRs significantly affect our results of operations.

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

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

Representations and Warranties

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

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

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

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

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

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We recorded provisions for losses under representations and warranties relating to current loan sales as a component of Net gains on loans held for sale at fair value totaling $1.7 million and $7.9 million for the quarter and nine months ended September 30, 2022, respectively, compared to $6.6 million and $26.9 million for the quarter and nine months ended September 30, 2021, respectively. The decreases in the provision relating to current loan sales are primarily attributable to a reduction in loan sales.

We also recorded reductions in the liability of $1.8 million and $7.2 million during the quarter and nine months ended September 30, 2022, respectively, compared to $4.4 million and $11.7 million during the quarter and nine months ended September 30, 2021, respectively. The reductions in the liability resulted from previously sold loans meeting performance criteria established by the Agencies which significantly limit the likelihood of certain repurchase or indemnification claims.

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


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
During the period:
Indemnification activity:
Loans indemnified at beginning of period	$	25,061	$	16,534	$	15,079	$	13,788
New indemnifications		7,441		2,058		18,807		9,313
Less indemnified loans sold, repaid or refinanced		870		3,104		2,254		7,613
Loans indemnified at end of period	$	31,632	$	15,488	$	31,632	$	15,488
Repurchase activity:
Total loans repurchased	$	31,666	$	31,109	$	77,215	$	75,023
Less:
Loans repurchased by correspondent lenders		4,192		7,857		20,041		30,309
Loans repaid by borrowers or resold with defects resolved		39,652		6,508		53,312		11,084
Net loans (resolved) repurchased with losses chargeable to liability for representations and warranties	$	(12,178)	$	16,744	$	3,862	$	33,630
Losses charged to liability for representations and warranties	$	2,031	$	735	$	7,056	$	2,120

At end of period:
Unpaid principal balance of loans subject to representations and warranties					$	285,532,190	$	245,528,045
Liability for representations and warranties					$	37,187	$	45,806

During the quarter and nine months ended September 30, 2022, we repurchased loans totaling $31.7 million and $77.2 million, respectively. We charged losses of $2.0 million and $7.1 million to the liability during the quarter and nine months ended September 30, 2022, respectively. Our losses arising from representations and warranties have historically been minimized by our ability to either recover most of the losses from our correspondent sellers or from our ability to profitably refinance and resell repurchased loans.

The recent increases in market interest rates may affect certain of our correspondent sellers’ ability to honor their obligations to repurchase defective loans. Furthermore, these market factors and expected economic slowdown may increase the level of borrower defaults, increasing the level of repurchases we are required to make and making it more difficult to minimize losses on repurchased loans. We expect these developments will increase the losses we incur in relation to our representations and warranties compared to our historical experience. However, we believe our recorded liability is presently adequate to absorb such losses.

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Loan Origination Fees

Loan origination fees decreased $60.5 million and $154.1 million during the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The decreases were primarily due to a decrease in the volume of loans we produced.

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 $25.5 million and $103.0 million during the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The decreases were primarily due to a decrease in loan production volume.

Net Loan Servicing Fees

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


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
Loan servicing fees	$	313,080	$	267,758	$	906,688	$	787,224
Effects of MSRs and MSLs		(69,338)		(234,128)		(138,190)		(699,003)
Net loan servicing fees	$	243,742	$	33,630	$	768,498	$	88,221

Loan servicing fees

Following is a summary of our loan servicing fees:


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
Loan servicing fees:
From non-affiliates	$	270,336	$	216,592	$	774,483	$	635,620
From PennyMac Mortgage Investment Trust		20,247		20,703		61,670		59,811
Other
Late charges		12,518		8,779		35,830		25,681
Other		9,979		21,684		34,705		66,112
		22,497		30,463		70,535		91,793
	$	313,080	$	267,758	$	906,688	$	787,224
Average loan servicing portfolio
MSRs and MSLs	$	300,421,134	$	263,358,691	$	293,092,214	$	253,881,852
Subserviced for PMT	$	228,697,367	$	211,094,125	$	225,042,046	$	196,232,751

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

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

Mortgage Servicing Rights and Mortgage Servicing Liabilities

We have elected to carry our servicing assets and liabilities at fair value. Changes in fair value have two components: changes due to realization of the contractual servicing fees and changes due to changes in market inputs used to estimate the fair value of MSRs and MSLs. We endeavor to moderate the effects of changes in fair value by entering into derivatives transactions and, until March 2021, by financing certain of our purchases of MSRs with the sale of a portion of the MSR assets’ cash flows to PMT in the form of ESS.

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


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
MSR and MSL valuation changes:
Realization of cash flows	$	(141,781)	$	(82,217)	$	(374,660)	$	(250,551)
Other changes in fair value of mortgage servicing rights and mortgage servicing liabilities		237,192		(65,452)		795,084		(9,923)
		95,411		(147,669)		420,424		(260,474)
Change in fair value of excess servicing spread		—		—		—		(1,037)
Hedging results		(164,749)		(86,459)		(558,614)		(437,492)
Total change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing net of hedging results	$	(69,338)	$	(234,128)	$	(138,190)	$	(699,003)
Average balances:
Mortgage servicing rights	$	5,370,855	$	3,466,325	$	4,889,181	$	3,229,798
Mortgage servicing liabilities	$	2,285	$	101,021	$	2,472	$	69,059
Excess servicing spread financing	$	—	$	—	$	—	$	28,830
At end of period:
Mortgage servicing rights					$	5,661,672	$	3,611,120
Mortgage servicing liabilities					$	2,214	$	47,567

Changes in realization of cash flows are influenced by changes in the level of servicing assets and liabilities and changes in estimates of the remaining cash flows to be realized. During the quarter and nine months ended September 30, 2022, realization of cash flows increased primarily due to the growth in our investment in MSRs.

Other changes in fair value of MSRs increased during the quarter and nine months ended September 30, 2022 compared to the same period in 2021 due to significant increases in interest rates and resulting decreases in expected future prepayment speeds in 2022.

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

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Following is a summary of our loan servicing portfolio:



	September 30,		December 31,
	2022		2021

	(in thousands)
Loans serviced
Prime servicing:
Owned:
Mortgage servicing rights and liabilities
Originated	$	283,653,037	$	254,524,015
Acquired		20,182,332		23,861,358
		303,835,369		278,385,373
Loans held for sale		4,287,585		9,430,766
		308,122,954		287,816,139
Subserviced for PMT		230,959,804		221,864,120
Total prime servicing		539,082,758		509,680,259
Special servicing subserviced for PMT		19,015		28,022
Total loans serviced	$	539,101,773	$	509,708,281
Delinquencies:
Owned servicing (1):
30-89 days	$	10,052,445	$	6,943,327
90 days or more		6,796,999		9,838,648
	$	16,849,444	$	16,781,975
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days	$	1,548,082	$	1,111,151
90 days or more		2,813,468		2,732,089
	$	4,361,550	$	3,843,240
Subserviced for PMT (1):
30-89 days	$	1,550,059	$	1,164,782
90 days or more		865,515		1,810,910
	$	2,415,574	$	2,975,692
Delinquent loans in COVID-19 pandemic-related forbearance:
30-89 days	$	232,329	$	171,114
90 days or more		435,609		638,703
	$	667,938	$	809,817

(1)	Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment relief in accordance with the Coronavirus Aid, Relief and Economic Security (“CARES”) Act.

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Following is a summary of characteristics of our MSR and MSL servicing portfolio as of September 30, 2022:


				Average
Loan type		UPB	Loan count	Note rate	Seasoning	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	$	114,201,560	601	3.59%	41	322	$	190	675	93%	65%	4.94%
VA		110,219,930	413	3.03%	25	334	$	267	724	89%	69%	2.03%
USDA		21,306,839	144	3.54%	42	321	$	148	698	98%	67%	5.07%
Agency:
Fannie Mae		28,153,018	103	3.17%	22	305	$	274	760	68%	54%	0.35%
Freddie Mac		29,338,132	105	3.21%	14	315	$	281	753	70%	58%	0.31%
Other:
Other (3)		615,890	2	3.66%	12	337	$	310	766	65%	57%	0.10%
	$	303,835,369	1,368	3.31%	31	324	$	222	710	88%	65%	3.01%

(1)	Loan-to-Value

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

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

Net Interest Income (Expense)

We generated net interest income of $29,000 during the quarter ended September 30, 2022, compared to net interest expense of $22.4 million in the same period in 2021. The increase in net interest income was primarily due to:

●

an increase of $32.5 million in placement fees we receive relating to custodial funds that we manage due to increased earning rates, partially offset by lower average balances of custodial funds held;

●

a decrease of $19.3 million in interest shortfall on repayments of loans serviced for Agency securitizations, reflecting decreased loan payoffs as a result of lower borrower refinancing activity due to the higher interest rate environment;

●

an increase of $7.0 million in interest income from cash balances; partially offset by

●

a decrease of $24.8 million in interest income from loans held for sale reflecting lower average levels of inventory; and

●

an increase of $11.0 million in interest expense on borrowings due to the higher interest rate environment.

Net interest expense decreased $25.0 million during the nine months ended September 30, 2022 compared to the same period in 2021. The decrease in net interest expense was primarily due to:

●

a decrease of $48.1 million in interest shortfall on repayments of loans serviced for Agency securitizations, reflecting decreased loan payoffs as a result of lower borrower refinancing activity due to the higher interest rate environment;

●

an increase of $39.9 million in placement fees we receive relating to custodial funds that we manage due to increased earning rates, partially offset by lower average balances of custodial funds held;

●

a decrease of $21.0 million in interest expense on borrowing due to lower average assets sold under agreements to repurchase balances, partially offset by higher interest expense from long term debts;

●

an increase of $6.2 million interest income from cash balances; partially offset by

●

a decrease of $90.2 million in interest income from loans held for sale due to lower average inventory balances.

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Management Fees from PennyMac Mortgage Investment Trust

Management fees from PMT summarized below:


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
Base management	$	7,731	$	8,778	$	23,758	$	25,875
Performance incentive (adjustment)		—		(258)		—		3,007
	$	7,731	$	8,520	$	23,758	$	28,882
Net assets of PMT at end of period					$	2,017,331	$	2,479,327

Management fees decreased $789,000 and $5.1 million during the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The decreases were primarily due to the non-recurrence of $3.0 million of performance incentive fees earned during the nine months ended September 30, 2021, as result of PMT’s profitability during the measurement period ended September 30, 2021, on which its performance incentive fee was based, in addition to a decrease in PMT’s shareholders’ equity which is the basis for the base management fees.

Expenses

Compensation

Compensation expenses are summarized below:


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
Salaries and wages	$	97,992	$	148,203	$	356,060	$	446,225
Severance		1,105		72		13,696		156
Incentive compensation		31,471		63,715		125,014		208,258
Taxes and benefits		20,759		28,369		76,073		89,845
Stock and unit-based compensation		6,466		8,824		30,689		28,595
	$	157,793	$	249,183	$	601,532	$	773,079
Head count:
Average		4,911		7,247		5,877		7,081
Period end						4,732		7,261

Compensation expense decreased $91.4 million and $171.5 million during the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The decreases were primarily due to work force reductions necessitated by reductions in loan production in 2022 and decreased incentive compensation accruals due to reduced staffing levels and lower achievement of profitability targets.

Loan origination

Loan origination expense decreased $52.6 million and $95.4 million during the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The decreases were primarily due to decreased lending activities during the quarter and nine months ended September 30, 2022 compared to the same periods during 2021.

Servicing

Servicing expenses decreased $7.5 million and $56.2 million during the quarter and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. These decreases were primarily due to a larger reversal of the provision for estimated servicing advance losses recorded in prior periods than during the quarter and nine months ended September 30, 2022 and decreased purchases of EBO loans from Ginnie Mae guaranteed pools. The reduction reflects the improvements in the performance of our servicing portfolio due to the resolution of delinquent

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loans relating to the COVID-19 pandemic.

Professional services

Professional expenses decreased $8.2 million and $5.4 million during the quarter and nine months ended September 30, 2022 compared to the same periods in 2021. The decreases were primarily due to a decrease in consulting expenses related to technology infrastructure.

Marketing and advertising

Marketing and advertising expense decreased $3.8 million during the quarter ended September 30, 2022 compared to the same period in 2021. The decrease is primarily due to decrease in marketing expenses for consumer direct lending. Marketing and advertising expense increased $14.8 million during the nine months ended September 30, 2022 compared to the same period in 2021. The increase was primarily attributable to the launch of our new brand marketing campaign in early 2022.

Provision for Income Taxes

Our effective income tax rates were 27.1% and 26.7% during the quarter and nine months ended September 30, 2022, respectively, compared to 26.6% and 26.2% during the same periods in 2021. The increases in the effective income tax rates for the quarter and nine month ended September 30, 2022, as compared to the same periods in 2021, were primarily attributable to an increase in nondeductible compensation.

The Inflation Reduction Act was signed into law on August 16, 2022 ("Act"), effective for tax years beginning after December 31, 2022. The Inflation Reduction Act imposes a 15% Alternative Minimum Tax ("AMT") on the adjusted financial statement income ("AFSI") of applicable corporations. Applicable corporations generally include any corporation whose 3-year average AFSI exceeds $1 billion. Based on the current legislation and the definition of AFSI, we do not expect the Company will be subject to this corporate minimum tax.

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Balance Sheet Analysis

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


	September 30,		December 31,
	2022		2021

	(in thousands)
ASSETS
Cash and short-term investments	$	1,594,777	$	346,942
Loans held for sale at fair value		4,149,726		9,742,483
Derivative assets		164,160		333,695
Servicing advances, net		455,083		702,160
Investments in and advances to affiliates		33,190		41,391
Mortgage servicing rights		5,661,672		3,878,078
Loans eligible for repurchase		3,757,538		3,026,207
Other		545,665		705,656
Total assets	$	16,361,811	$	18,776,612

LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt	$	3,854,808	$	7,772,580
Long-term debt		3,572,960		3,077,330
		7,427,768		10,849,910
Liability for loans eligible for repurchase		3,757,538		3,026,207
Income taxes payable		964,307		685,262
Other		730,108		796,908
Total liabilities		12,879,721		15,358,287
Stockholders' equity		3,482,090		3,418,325
Total liabilities and stockholders' equity	$	16,361,811	$	18,776,612
Leverage ratios:
Total debt / Stockholders' equity		2.1		3.2
Total debt / Tangible stockholders' equity		2.2		3.3

Total assets decreased $2.4 billion from $18.8 billion at December 31, 2021 to $16.4 billion at September 30, 2022. The decrease was primarily due to decreases of $5.6 billion in loans held for sale at fair value, partially offset by an increase of $1.8 billion in MSRs and $1.2 billion in cash. The decrease in loans held for sale at fair value was primarily due to lower origination volume during the nine months ended September 30, 2022.

Total liabilities decreased $2.5 billion from $15.4 billion at December 31, 2021 to $12.9 billion at September 30, 2022. The decrease was primarily due to a decrease of $3.9 billion in short-term debt, partially offset by an increase of $0.7 billion of liability for loans eligible for repurchase, $0.5 billion in long-term debt and $0.3 billion of income tax payable. The decrease in short-term debt reflects decreased borrowing requirements relating to our inventory of loans held for sale. As a result of our reduced inventory financing requirements, our leverage ratios decreased significantly during the nine months ended September 30, 2022.

Cash Flows

Our cash flows are summarized below:


	Nine months ended September 30,
	2022		2021		Change

	(in thousands)
Operating	$	5,543,826	$	2,770,083	$	2,773,743
Investing		(483,567)		(301,458)		(182,109)
Financing		(3,841,670)		(2,524,885)		(1,316,785)
Net increase (decrease) in cash and restricted cash	$	1,218,589	$	(56,260)	$	1,274,849

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Our cash flows resulted in a net increase in cash and restricted cash of $1.2 billion during the nine months ended September 30, 2022 as discussed below.

Operating activities

Net cash provided by operating activities totaled $5.5 billion during the nine months ended September 30, 2022 compared with net cash provided in operating activities of $2.8 billion during the same period in 2021. Our cash flows from operating activities are primarily influenced by changes in the levels of our inventory of mortgage loans held for sale as shown below:


	Nine months ended September 30,
	2022		2021

	(in thousands)
Cash flows from:
Loans held for sale	$	5,206,560	$	3,030,122
Other operating sources		337,266		(260,039)
	$	5,543,826	$	2,770,083

Investing activities

Net cash used in investing activities during the nine months ended September 30, 2022 totaled $483.6 million, primarily due to $810.7 million in net settlement of derivative financial instruments used to hedge our investment in MSRs and $59.6 million used in acquisition of capitalized software, partially offset by a $425.6 million decrease in margin deposits. Net cash used in investing activities during the nine months ended September 30, 2021 totaled $301.5 million, primarily due to $471.3 million in net settlement of derivative financial instruments used to hedge our investment in MSRs, partially offset by a $117.1 million decrease in margin deposits.

Financing activities

Net cash used in financing activities totaled $3.8 billion during the nine months ended September 30, 2022, primarily due to a decrease of $3.9 billion in short-term borrowings and $354.8 million of common stock repurchases, partially offset by issuance of a $500 million term note. The reduction in borrowings reflects reduced inventory of loans held for sale. Net cash used in financing activities totaled $2.5 billion during the nine months ended September 30, 2021, primarily due to a decrease of $1.6 billion in borrowings, $700.8 million of repurchase of our common stock and $134.6 million of repayment of ESS financing.

Liquidity and Capital Resources

Our liquidity reflects our ability to meet our current obligations (including our operating expenses and, when applicable, the retirement of, and margin calls relating to, our debt, and margin calls relating to hedges on our commitments to purchase or originate mortgage loans and on our MSR investments), fund new originations and purchases, and make investments as we identify them. We expect our primary sources of liquidity to be through cash flows from business activities, proceeds from bank borrowings and proceeds from and issuance of equity or debt offerings. In addition, we utilized existing borrowings to increase our cash balances to nearly $1.6 billion in the third quarter of 2022.

The effect of the COVID-19 pandemic on our operations, liquidity and capital resources remain uncertain and difficult to predict, for further discussion of the potential impacts of the COVID-19 pandemic please also see the section entitled “Risk Factors” in Part II. Item 1A and in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 23, 2022.

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

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


	Quarter ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands)
Average balance	$	1,949,452	$	6,031,491	$	2,622,581	$	7,336,341
Maximum daily balance	$	3,490,082	$	8,044,148	$	7,289,147	$	10,969,029
Balance at period end					$	3,490,082	$	6,903,302

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

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

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

●

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

●

a minimum tangible net worth of $1.25 billion;

●

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

●

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

With respect to servicing performed for PMT, PLS is also subject to certain covenants under PMT’s debt agreements. Covenants in PMT’s debt agreements are equally, or sometimes less, restrictive than the covenants described above.

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

●

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

●

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

●

incur liens on assets;

●

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

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●

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

●

enter into transactions with affiliates; and

●

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

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

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

●

The FHFA liquidity requirement is equal to 0.035% (3.5 basis points) of total Agency servicing UPB plus an incremental 200 basis points of the amount by which total nonperforming Agency servicing UPB (reduced by 70% of the UPB of nonperforming Agency loans that are in COVID-19 payment forbearance and were current when they entered such forbearance) exceeds 6% of the applicable Agency servicing UPB; allowable assets to satisfy liquidity requirement include cash and cash equivalents (unrestricted), certain investment-grade securities that are available for sale or held for trading including Agency mortgage-backed securities, obligations of Fannie Mae or Freddie Mac, and U.S. Treasury obligations, and unused and available portions of committed servicing advance lines;

●

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

●

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

●

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

We believe that we are currently in compliance with the applicable Agency requirements. In August 2022, the Agencies issued revised capital and liquidity requirements. The requirements will be effective at various dates beginning September 30, 2023, for issuers of securities guaranteed by Ginnie Mae and seller/servicers of mortgage loans to Fannie Mae and Freddie Mac. We believe that we are in compliance with Agencies’ revised requirements as currently interpreted as of September 30, 2022.

On August 4, 2021, our Board of Directors increased our common stock repurchase program from $1 billion to $2 billion. Share repurchases may be effected through open market purchases or privately negotiated transactions in accordance with applicable rules and regulations. The stock repurchase program does not have an expiration date and the authorization does not obligate us to acquire any particular amount of common stock. From inception through September 30, 2022, we have repurchased approximately $1.7 billion of common shares under our stock repurchase program.

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

Off-Balance Sheet Arrangements and Guarantees

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

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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 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.

Under the terms of these financing agreements, PLS is required to comply with certain financial covenants, as described further above in “Liquidity and Capital Resources,” and various non-financial covenants customary for transactions of this nature. As of September 30, 2022, we believe we were in compliance in all material respects with these covenants.

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

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

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

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

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Our debt obligations have the following size and maturities:


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

	(dollar amounts in thousands)
Assets sold under agreements to repurchase
Credit Suisse First Boston Mortgage Capital LLC	$	1,066,343	$	2,950,000	$	1,200,000	May 31, 2024
Credit Suisse First Boston Mortgage Capital LLC and Citibank, N.A. (3)	$	100,000	$	100,000	$	100,000	May 31, 2024
Bank of America, N.A.	$	995,818	$	1,425,000	$	380,000	June 5, 2024
Morgan Stanley Bank, N.A.	$	269,997	$	500,000	$	200,000	January 3, 2024
BNP Paribas	$	241,058	$	600,000	$	300,000	July 31, 2023
Royal Bank of Canada	$	198,400	$	1,000,000	$	225,000	September 14, 2023
Wells Fargo Bank, N.A.	$	187,153	$	500,000	$	200,000	November 17, 2023
Barclays Bank PLC	$	161,390	$	500,000	$	150,000	November 3, 2022
JP Morgan Chase Bank, N.A. (warehouse facility)	$	125,079	$	500,000	$	50,000	June 17, 2024
JP Morgan Chase Bank, N.A. (EBO facility)	$	14,126	$	500,000	$	—	June 6, 2024
Citibank, N.A.	$	107,702	$	950,000	$	600,000	April 26, 2024
Goldman Sachs Bank USA	$	23,016	$	100,000	$	100,000	December 23, 2023
Mortgage loan participation purchase and sale agreements
Bank of America, N.A.	$	367,997	$	550,000	$	—	June 7, 2023
Notes payable
GMSR 2018-GT1 Notes	$	650,000	$	650,000			February 25, 2023
GMSR 2018-GT2 Notes	$	650,000	$	650,000			August 25, 2023
GMSR 2022-GT1 Notes	$	500,000		500,000			May 25, 2027
Unsecured Senior Notes - 5.375%	$	650,000	$	650,000			October 15, 2025
Unsecured Senior Notes - 4.25%	$	650,000	$	650,000			February 15, 2029
Unsecured Senior Notes - 5.75%	$	500,000	$	500,000			September 15, 2031

(1)	Outstanding indebtedness as of September 30, 2022.

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

(3)

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

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The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to our assets sold under agreements to repurchase is summarized by counterparty below as of September 30, 2022:


			Weighted average
			maturity of
			advances under
Counterparty	Amount at risk		repurchase agreement	Facility maturity
	(in thousands)
Credit Suisse First Boston Mortgage Capital LLC and Citibank, N.A. (1)	$	3,451,397	May 31, 2024	May 31, 2024
JP Morgan Chase Bank, N.A. (warehouse facility)	$	77,947	December 4, 2022	June 17, 2024
JP Morgan Chase Bank, N.A. (EBO facility)	$	39,006	August 16, 2023	June 6, 2024
Credit Suisse First Boston Mortgage Capital LLC (2)	$	39,317	November 13, 2022	May 31, 2024
Royal Bank of Canada	$	24,518	January 13, 2023	September 14, 2023
Morgan Stanley Bank, N.A.	$	23,564	December 10, 2022	January 3, 2024
BNP Paribas	$	13,192	December 16, 2022	July 31, 2023
Barclays Bank PLC	$	11,178	November 3, 2022	November 3, 2022
Citibank, N.A. (2)	$	7,062	December 16, 2022	April 26, 2024
Bank of America, N.A.	$	5,367	December 15, 2022	June 5, 2024
Goldman Sachs	$	414	December 11, 2022	December 23, 2023
Wells Fargo Bank, N.A.	$	—	September 30, 2022	November 17, 2023

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

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

All debt financing arrangements that matured between September 30, 2022 and the date of this Report have been renewed or extended and are described in Note 12—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, 2021 contains a discussion of our critical accounting policies, which utilize relevant critical accounting estimates.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Fair Value Risk

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

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Interest Rate Risk

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

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

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

Prepayment Risk

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

Risk Management Activities

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

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

Fair Value Sensitivities

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

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Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs as of September 30, 2022, given several shifts in pricing spreads, prepayment speed and annual per loan cost of servicing:


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

	(in thousands)
Prepayment speed	$	326,407	$	157,681	$	77,529	$	(75,034)	$	(147,692)	$	(286,318)
Pricing spread	$	347,974	$	168,827	$	83,175	$	(80,798)	$	(159,312)	$	(309,839)
Annual per-loan cost of servicing	$	152,531	$	76,265	$	38,133	$	(38,133)	$	(76,265)	$	(152,531)

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 September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Company may be involved in various legal and regulatory proceedings, lawsuits and other claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on the financial condition, results of operations, or cash flows of the Company. See Note 16 — Commitments and Contingencies, to the financial statements contained in this report for a discussion of legal 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. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 23, 2022.

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

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

Stock Repurchase Program

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


	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or program (1)		Approximate dollar value of shares that may yet be purchased under the plans or program (1)
July 1, 2022 – July 31, 2022		477,946	$	48.21		477,946	$	411,278,900
August 1, 2022 – August 31, 2022		531,733	$	56.18		531,733	$	381,407,291
September 1, 2022 – September 30, 2022		939,346	$	49.81		939,346	$	334,619,773
Total		1,949,025	$	51.15		1,949,025	$	334,619,773

(1)

In August 2021, the Company’s board of directors approved an increase to the Company’s common stock repurchase program from $1 billion to $2 billion. The stock repurchase program does not require the Company to purchase a specific number of shares, and the timing and amount of any shares repurchased are based on market conditions and other factors, including price, regulatory requirements and capital availability. Stock repurchases may be effected through privately negotiated transactions or open market purchases, including pursuant to a trading plan implemented pursuant to Rule 10b5-1 of the 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.

Item 5. Other Information

None

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Item 6. Exhibits


		Incorporated by Reference from the Below-Listed Form (Each Filed under SEC File Number 001-35916 or 001-38727)

Exhibit No.	Exhibit Description	Form	Filing Date

2.1	Contribution Agreement and Plan of Merger, dated as of August 2, 2018, by and among PennyMac Financial Services, Inc., New PennyMac Financial Services, Inc., New PennyMac Merger Sub, LLC, Private National Mortgage Acceptance Company, LLC, and the Contributors.	8-K12B	November 1, 2018

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

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

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

3.2.1	Amendment to Amended and Restated Bylaws of PennyMac Financial Services, Inc. (formerly known as New PennyMac Financial Services, Inc.).	10-Q	November 4, 2019

10.1

Amendment No. 2 to Second Amended and Restated Mortgage Banking Services Agreement, dated as of September 28, 2022, by and between PennyMac Loan Services, LLC and PennyMac Corp., and effective as of October 1, 2022.

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 September 30, 2022 and December 31, 2021 (ii) the Consolidated Statements of Operation for the quarter ended September 30, 2022 and September 30, 2021, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarter ended September 30, 2022 and September 30, 2021, (iv) the Consolidated Statements of Cash Flows for the quarter ended September 30, 2022 and September 30, 2021 and (v) the Notes to the Consolidated Financial Statements.	*

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		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

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: November 2, 2022	By:	/s/ DAVID A. SPECTOR
		David A. Spector
		Chairman and Chief Executive Officer (Principal Executive Officer)

Dated: November 2, 2022	By:	/s/ DANIEL S. PEROTTI
		Daniel S. Perotti
		Senior Managing Director and Chief Financial Officer (Principal Financial Officer)

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PennyMac Financial Services (PFSI) 10-Q2022 Q3 Quarterly report

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