PennyMac Financial Services Inc

Previous wording

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.

Current wording

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

Previous wording

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

Current wording

Due to ongoing inflationary pressures, over the last several quarters, the U.S. Federal Reserve has maintained the federal funds rate at its highest level since the great financial crisis of 2007 and has continued to reduce the federal government’s overall holdings of Treasury and mortgage-backed securities. Elevated interest rates are expected to constrain growth in the size of the mortgage origination market from $1.5 trillion in 2023 to an estimated $1.7 trillion in 2024 according to mortgage lending industry economists but this estimate may decline if interest rates remain elevated for longer than expected.

Previous wording

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

Current wording

The limited size of the mortgage origination market and interest rates at sustained higher levels continue to impact our mortgage production activities and gains from the redelivery of loans bought out from Ginnie Mae securities. Higher interest rates have also increased the costs of floating rate borrowings, increased interest income from placement fees we receive relating to custodial funds that we manage on deposits and loans held for sale as compared to the same period in the prior year, and have led to prepayment speeds below historical averages in our mortgage servicing portfolio. We continued our acquisition of conventional loans from PMT during the six months ended June 30, 2024 and expect to purchase conventional loans from PMT during the remainder of 2024 at a reduced rate.

Previous wording

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

Current wording

For the six months ended June 30, 2024, income before provision for income taxes increased $66.7 million compared to the same period in 2023. The increase was primarily due to a $92.7 million increase inNet gains on loans held for sale at fair value due to higher volume across all production channels, an $8.1 million increase inLoan origination fees and a $14.3 million increase in other income primarily resulting from a non-cash gain related to a non-recurring transaction in Townsgate Closing Services, LLC, a joint venture, partially offset by a $26.4 million decrease inNet loan servicing fees resulting from increases in net MSR valuation losses in excess of growth in servicing fees, an $8.9 million decrease inFulfillment fees from PennyMac Mortgage Investment Trust, a $7.4 million increase inNet interest expense and a $5.7 million increase in total expenses.

Previous wording

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

Current wording

In our production segment, revenues reflect the effects of market adjustments to higher interest rates continuing during the quarter and six months ended June 30, 2024 compared to the same periods in 2023.

Previous wording

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

Current wording

During the quarter ended June 30, 2024, we recognizedNet gains on loans held for sale at fair value totaling $176.1 million, an increase of $34.6 million compared to the same period in 2023. The increase was primarily due to higher margins in the direct lending channels and an increase in loan production volume across all production channels during the quarter ended June 30, 2024 compared to the same period in 2023.

Previous wording

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

Current wording

We also receive non-cash proceeds on sale that include our estimate of the fair value of MSRs and we incur mortgage servicing liabilities (“MSLs”) (which represent the fair value of the costs we expect to incur in excess of the fees we receive for delinquent loans we have bought out of Ginnie Mae guaranteed securities we service and 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.

Previous wording

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

Current wording

The MSRs, MSLs, and liabilities for representations and warranties we recognize represent our estimate of the fair value of future benefits and costs we will realize for years in the future. These estimates represented approximately 307% and 282% of our gains on sales of loans held for sale at fair value for the quarter and six months ended June 30, 2024, respectively, as compared to 397% and 345% for the same periods in 2023. These estimates change as circumstances change and changes in these estimates are recognized in income in subsequent periods. Subsequent changes in the fair value of our MSRs may significantly affect our income.

Previous wording

We recorded provisions for losses under representations and warranties relating to current loan sales as a component ofNet gains on loans held for sale at fair value totaling $4.0 million for the quarter ended March 31, 2024, compared to $1.7 million for the same period in 2023. The increase in the provision relating to current loan sales was primarily attributable to a change in the mix between government guaranteed and conventional loans sold for the quarter ended March 31, 2024 compared to the same period in 2023.

Current wording

We recorded provisions for losses under representations and warranties relating to current loan sales as a component ofNet gains on loans held for sale at fair value totaling $4.1 million and $8.1 million for the quarter and six months ended June 30, 2024, respectively, compared to $3.1 million and $4.9 million for the same periods in 2023. The increases in the provision relating to current loan sales were primarily attributable to an increase in production volume for the quarter and six months ended June 30, 2024 compared to the same periods in 2023.

Previous wording

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

Current wording

We also recorded reductions in the liability of $4.1 million and $7.4 million for the quarter and six months ended June 30, 2024, respectively, compared to $2.0 million and $3.5 million for the same periods in 2023. The reductions in the liability resulted from previously sold loans meeting performance criteria established by the Agencies which significantly limit the likelihood of certain repurchase or indemnification claims.

Previous wording

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

Current wording

During the quarter and six months ended June 30, 2024, we repurchased loans totaling $23.5 million and $44.9 million, respectively. We charged losses of $1.3 million and $2.8 million to the liability during the quarter and six months ended June 30, 2024, 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.

Previous wording

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

Current wording

Loan origination fees increased $3.1 million and $8.1 million during the quarter and six months ended June 30, 2024, respectively, compared to the same periods in 2023 primarily due to an increase in production volume.

Previous wording

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

Current wording

Loan servicing fees from non-affiliates and other fees increased during the quarter and six months ended June 30, 2024 compared to the same periods in 2023. The increase was primarily due to growth of our loan servicing portfolio. Other servicing fees increased due to growth in our MSR portfolio combined with increased incentives received for loss mitigation activities and recovery of servicing premiums from correspondent sellers for loans that paid off within a short period after origination.

Previous wording

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.

Current wording

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

Previous wording

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

Current wording

Changes in fair value of MSRs attributable to changes in fair value inputs decreased during the quarter ended June 30, 2024 and increased during the six months ended June 30, 2024, compared to the same periods in 2023, respectively. The decrease was due to a less significant increase in interest rates during the quarter ended June 30, 2024 compared to the same period in 2023. Increasing interest rates reduce the rate of prepayments of the underlying loans, which increases the cash flows expected from the servicing rights, while decreasing interest rates have the opposite effect.

Previous wording

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

Current wording

Hedging results reflect valuation losses attributable to the effects of interest rate increases on the fair value of the hedging instruments as well as increased net exposure to interest rate volatility to limit elevated hedge costs during the quarter and six months ended June 30, 2024 and in the same periods in 2023.

Previous wording

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

Current wording

Changes in realization of cash flows are influenced by changes in the level of servicing assets and liabilities and changes in estimates of the remaining cash flows to be realized. During the quarter and six months ended June 30, 2024, realization of cash flows increased compared to the same periods in 2023, primarily due to the growth in our investment in MSRs.

Previous wording

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

Current wording

Net interest expenses increased $1.4 million and $7.4 million during the quarter and six months ended June 30, 2024 compared to the same periods in 2023. The increases were primarily due to increase in interest expense on borrowings due to the higher interest rate environment and to growth in our balance sheet, partially offset by an increase in placement fees we receive relating to custodial funds that we manage due to increased earning rates.

Previous wording

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

Current wording

Management fees increased $55,000 during the quarter ended June 30, 2024 compared to the same period in 2023 due to an increase in average PMT’s shareholders’ equity which is the basis for the base management fees. Management fees decreased $14,000 during the six months ended June 30, 2024, compared to the same period in 2023 due to a decrease in average PMT’s shareholders’ equity.

Previous wording

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

Current wording

Compensation expenses increased $5.0 million and $3.4 million during the quarter and six months ended June 30, 2024, respectively, compared to the same periods in 2023. The increases were primarily due to an increase in incentive compensation due to increases in production bonuses resulting from higher production volumes, partially offset by decreases in stock-based compensation due to lower expectations of achieving the performance goals on performance-based RSUs and reduced severance expenses.

Previous wording

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

Current wording

Servicing expenses increased $8.3 million and $11.7 million during the quarter and six months ended June 30, 2024, respectively, compared to the same periods in 2023. The increases were primarily due to an increase in provision for losses on servicing advances resulting from higher outstanding servicing advance balances during the quarter and six months ended June 30, 2024 compared to the same periods in 2023.

Previous wording

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

Current wording

Professional expenses decreased $8.5 million and $20.2 million during the quarter and six months ended June 30, 2024, respectively, compared to the same periods in 2023. The decrease was primarily due to decreased legal expenses related to the Black Knight litigation discussed in Note 18 –Commitments and Contingencies to the consolidated financial statements included in this Quarterly Report.

Previous wording

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

Current wording

Total assets increased $2.7 billion from $18.8 billion at December 31, 2023 to $21.6 billion at June 30, 2024. The increase was primarily due to an increase of $1.8 billion in loans held for sale at fair value, an increase of $914.2 million in principal-only stripped MBS at fair value and an increase of $823.7 million in MSRs, partially offset by a decrease in cash and short-term investments of $164.5 million, a decrease in servicing advances of $279.8 million, and a decrease in loans eligible for repurchase of $329.9 million.

Previous wording

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

Current wording

Total liabilities increased $2.6 billion from $15.3 billion at December 31, 2023 to $17.9 billion at June 30, 2024. The increase was primarily due to an increase of $3.2 billion in borrowings to fund our inventory of loans held for sale, MBS and MSRs, partially offset by a decrease of $329.9 million in liability for loans eligible for repurchase and $155.1 million in accounts payable and accrued expenses. As a result of our increased inventory financing requirements, our leverage ratios increased during the quarter ended June 30, 2024 from December 31, 2023.

Previous wording

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

Current wording

The net decrease in cash of $343.0 million during the six months ended June 30, 2024 is discussed below.

Previous wording

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

Current wording

Net cash used in operating activities totaled $2.0 billion during the six months ended June 30, 2024 compared with net cash used in operating activities of $1.0 billion during the same period in 2023. Our cash flows from operating activities are primarily influenced by changes in the levels of our inventory of mortgage loans held for sale as shown below:

Previous wording

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

Current wording

Net cash used in investing activities during the six months ended June 30, 2024 totaled $1.5 billion, primarily due to $935.4 million in purchase of principal-only stripped MBS, $391.5 million in net settlement of derivative financial instruments used to hedge our investment in MSRs and a $178.5 million increase in short-term investment. Net cash used in investing activities during the six months ended June 30, 2023 totaled $186.5 million, primarily due to a $150.7 million increase in margin deposits, $20.2 million in net settlement of derivative financial instruments used to hedge our investment in MSRs, and $19.2 million used in acquisition of capitalized software.

Previous wording

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

Current wording

Net cash provided by financing activities totaled $3.2 billion during the six months ended June 30, 2024, primarily due to an increase of $3.2 billion in borrowings. The increase in borrowings primarily reflects the increase in inventory of loans held for sale and our investment in MSRs. Net cash provided by financing activities totaled $1.4 billion during the six months ended June 30, 2023, primarily due to an increase of $1.5 billion in borrowings. The increase in borrowings primarily reflects the increase in inventory of loans held for sale and our investment in MSRs.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

The differences between the average and maximum daily balances on our repurchase agreements reflect both the effect of increasing loan inventory levels during the quarter and six months ended June 30, 2024 and the fluctuations throughout the periods of our inventory as we fund and pool mortgage loans for sale in guaranteed mortgage securitizations.

Previous wording

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

Current wording

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

Previous wording

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

Current wording

We have a common stock repurchase program which allows us to repurchase common shares of up to $2 billion. Share repurchases may be effected through open market purchases or privately negotiated transactions in accordance with applicable rules and regulations. The stock repurchase program does not have an expiration date and the authorization does not obligate us to acquire any particular amount of common stock. From inception through June 30, 2024, we have repurchased approximately $1.8 billion of common shares under our stock repurchase program.

Previous wording

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

Current wording

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