PennyMac Financial Services(PFSI) - 2021 Q2 - Quarterly Report

Special Note Regarding Forward-Looking Statements This section outlines forward-looking statements, their inherent risks, and factors that could cause actual results to differ materially Forward-Looking Statements Overview This overview details forward-looking statements, their inherent risks, and factors that could cause actual results to differ materially - Forward-looking statements are based on assumptions and discuss future expectations, plans, strategies, and financial projections; actual results may differ materially due to various factors[9][10] - Key risk factors include exposure to adverse weather/disasters/pandemics (like COVID-19), failure to manage early buyout loans, changing federal/state/local regulations, lawsuits, dependence on government-sponsored entities, interest rate changes, indebtedness, loan delinquencies, reliance on PMT, indemnification obligations, and cybersecurity risks[13][15] PART I. FINANCIAL INFORMATION This part presents unaudited financial statements, management's analysis, market risk disclosures, and controls and procedures Item 1. Financial Statements (Unaudited) This item presents PennyMac Financial Services, Inc.'s unaudited consolidated financial statements and comprehensive notes Consolidated Balance Sheets This section presents the Company's consolidated balance sheet, detailing assets, liabilities, and equity at specific dates Consolidated Balance Sheet Data (in thousands) | Metric | June 30, 2021 (in thousands) | December 31, 2020 (in thousands) | Change (in thousands) | | :--------------------------------- | :----------------------------- | :------------------------------- | :-------------------- | | Total assets | $23,880,138 | $31,597,795 | $(7,717,657) | | Total liabilities | $20,366,309 | $28,208,407 | $(7,842,098) | | Total stockholders' equity | $3,513,829 | $3,389,388 | $124,441 | | Cash | $324,158 | $532,716 | $(208,558) | | Loans held for sale at fair value | $10,884,506 | $11,616,400 | $(731,894) | | Mortgage servicing rights at fair value | $3,412,648 | $2,581,174 | $831,474 | | Loans eligible for repurchase | $7,613,244 | $14,625,447 | $(7,012,203) | | Unsecured senior notes | $1,288,769 | $645,820 | $642,949 | Consolidated Statements of Income This section presents the Company's consolidated statements of income, detailing revenues, expenses, and net income over periods Consolidated Statements of Income Data (in thousands) | Metric | Quarter ended June 30, 2021 (in thousands) | Quarter ended June 30, 2020 (in thousands) | Change (in thousands) | Six months ended June 30, 2021 (in thousands) | Six months ended June 30, 2020 (in thousands) | Change (in thousands) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :---------------------------------------- | :---------------------------------------- | :-------------------- | | Total net revenues | $742,252 | $821,634 | $(79,382) | $1,686,938 | $1,543,459 | $143,479 | | Total expenses | $462,737 | $341,272 | $121,465 | $901,415 | $648,367 | $253,048 | | Income before provision for income taxes | $279,515 | $480,362 | $(200,847) | $785,523 | $895,092 | $(109,569) | | Net income | $204,229 | $352,677 | $(148,448) | $581,097 | $658,920 | $(77,823) | | Basic EPS | $3.10 | $4.53 | $(1.43) | $8.61 | $8.42 | $0.19 | | Diluted EPS | $2.94 | $4.39 | $(1.45) | $8.16 | $8.11 | $0.05 | | Dividend declared per share | $0.20 | $0.12 | $0.08 | $0.40 | $0.24 | $0.16 | Consolidated Statements of Changes in Stockholders' Equity This section presents changes in stockholders' equity, including net income, stock-based compensation, and share repurchases Consolidated Statements of Changes in Stockholders' Equity Data (in thousands) | Metric (in thousands) | Six months ended June 30, 2021 | Six months ended June 30, 2020 | Change (in thousands) | | :--------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | | Balance, December 31 | $3,389,388 | $2,061,507 | $1,327,881 | | Net income | $581,097 | $658,920 | $(77,823) | | Stock-based compensation | $14,622 | $19,491 | $(4,869) | | Repurchase of common stock | $(443,439) | $(241,283) | $(202,156) | | Common stock dividends | $(27,940) | $(19,538) | $(8,402) | | Balance, June 30 | $3,513,829 | $2,479,193 | $1,034,636 | Consolidated Statements of Cash Flows This section presents the Company's consolidated statements of cash flows, detailing operating, investing, and financing activities Consolidated Statements of Cash Flows Data (in thousands) | Metric (in thousands) | Six months ended June 30, 2021 | Six months ended June 30, 2020 | Change (in thousands) | | :--------------------------------- | :----------------------------- | :----------------------------- | :-------------------- | | Net cash provided by operating activities | $1,331,598 | $365,597 | $966,001 | | Net cash (used in) provided by investing activities | $(145,239) | $986,137 | $(1,131,376) | | Net cash used in financing activities | $(1,394,954) | $(629,923) | $(765,031) | | Net (decrease) increase in cash and restricted cash | $(208,595) | $721,811 | $(930,406) | | Cash and restricted cash at end of period | $324,186 | $910,389 | $(586,203) | Notes to Consolidated Financial Statements This section provides detailed notes explaining the accounting policies and specific financial line items within the statements Note 1—Organization This note describes the Company's corporate structure, primary operations, and key subsidiaries - PFSI is a holding corporation that operates and controls PennyMac, consolidating its financial results[27] - PennyMac's activities include residential mortgage loan production and servicing, and investment management, with a portion of activities conducted for PennyMac Mortgage Investment Trust (PMT)[28] - Key subsidiaries are PennyMac Loan Services, LLC (PLS), a seller/servicer for Agencies (Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA, USDA), and PNMAC Capital Management, LLC (PCM), an SEC-registered investment adviser to PMT[28] Note 2—Basis of Presentation and Recently Adopted Accounting Pronouncement This note outlines the basis of financial statement presentation and the impact of recently adopted accounting pronouncements - Financial statements are unaudited and prepared under GAAP for interim reporting, reflecting normal recurring adjustments[29][30] - Management's judgments and estimates are integral to the financial statements, and actual results may differ[31][32] Note 3—Concentration of Risk This note details the Company's concentration of risk, particularly regarding revenues derived from PMT Revenues from PMT as Percentage of Total Net Revenue | Metric | Quarter ended June 30, 2021 | Quarter ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :--------------------------------- | :-------------------------- | :-------------------------- | :----------------------------- | :----------------------------- | | Revenues from PMT as % of total net revenue | 11% | 9% | 10% | 15% | Note 4—Related Party Transactions This note describes transactions and agreements between the Company and its related parties, primarily PMT - The Company sells newly originated loans to PMT and has MSR recapture agreements, which were amended in July 2020 to a tiered recapture fee structure[34][35][36] - Fulfillment fees from PMT for mortgage banking services were revised effective July 1, 2020, based on the number of loan commitments and purchased loans, with specific rates for different loan types[37][38][41] - Loan servicing fees from PMT are based on per-loan monthly amounts, varying by delinquency status, and include additional fees for distressed loans and COVID-19 related forbearance activities[42][45][46] - Management fees from PMT include a base management fee (tiered based on PMT's average shareholders' equity) and a performance incentive fee (based on PMT's net income exceeding certain return on equity thresholds and a 'high watermark')[48][53] Related Party Transaction Revenues and Gains (in thousands) | Metric (in thousands) | Quarter ended June 30, 2021 | Quarter ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :--------------------------------- | :-------------------------- | :-------------------------- | :----------------------------- | :----------------------------- | | Net gains on loans held for sale to PMT | $(11,548) | $(5,592) | $(25,796) | $72,324 | | Fulfillment fee revenue | $54,020 | $52,815 | $114,855 | $94,755 | | Loan servicing fees from PMT | $20,015 | $15,533 | $39,108 | $30,054 | | Management fees from PMT | $11,913 | $8,288 | $20,362 | $17,343 | | Reimbursement of expenses from PMT | $9,237 | $3,143 | $11,309 | $6,074 | - The Company repurchased Excess Servicing Spread (ESS) from PMT and repaid outstanding ESS financing during Q1 2021, effectively terminating related borrowing arrangements[59][63] Related Party Balances (in thousands) | Metric (in thousands) | June 30, 2021 | December 31, 2020 | | :--------------------------------- | :-------------- | :---------------- | | Receivable from PMT | $61,883 | $87,005 | | Payable to PMT | $136,660 | $140,306 | - The Company continues to be subject to a tax receivable agreement with former PennyMac owners, with a liability of $31.8 million as of June 30, 2021, and made $3.4 million in payments during the six months ended June 30, 2021[66][67][68] Note 5—Loan Sales and Servicing Activities This note details the Company's activities related to loan sales, servicing, and associated risks and revenues - The Company sells loans without recourse for credit losses but maintains involvement through servicing and representation/warranty liabilities[71] Loan Sales and Servicing Activity Data (in thousands) | Metric (in thousands) | Quarter ended June 30, 2021 | Quarter ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :--------------------------------- | :-------------------------- | :-------------------------- | :----------------------------- | :----------------------------- | | Sales proceeds | $41,739,700 | $21,188,988 | $79,007,900 | $40,526,005 | | Servicing fees received (net of guarantee fees) | $201,866 | $158,871 | $397,648 | $325,427 | Loan Servicing Portfolio Data (in thousands) | Metric (in thousands) | June 30, 2021 | December 31, 2020 | Change | | :--------------------------------- | :-------------- | :---------------- | :------- | | UPB of loans outstanding (servicing rights owned) | $227,560,336 | $199,655,361 | $27,904,975 | | Total UPB of loans serviced | $473,224,046 | $426,750,830 | $46,473,216 | | Delinquent loans in COVID-19 forbearance (30-89 days) | $1,383,601 | $2,626,617 | $(1,243,016) | | Delinquent loans in COVID-19 forbearance (90+ days) | $9,019,414 | $12,181,174 | $(3,161,760) | - Custodial funds managed by the Company totaled $15.2 billion as of June 30, 2021, generating placement fees included in interest income[75][76] Note 6—Fair Value This note provides information on fair value measurements, including categorization into levels and valuation methodologies - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (significant unobservable inputs), with Level 3 requiring significant judgment[77][79] - The Company elects fair value accounting for MSRs, MSLs, and non-cash financial assets (excluding assets purchased from PMT under agreements to resell) to reflect fair value changes in income[78] Fair Value Measurements (in thousands) | Metric (in thousands) | June 30, 2021 (Total) | December 31, 2020 (Total) | | :--------------------------------- | :-------------------- | :------------------------ | | Total assets measured at fair value | $14,673,723 | $14,925,134 | | Total liabilities measured at fair value | $144,001 | $219,712 | | Loans held for sale at fair value (Level 3) | $3,818,261 | $4,675,169 | | Mortgage servicing rights at fair value (Level 3) | $3,412,648 | $2,581,174 | | Interest rate lock commitments (Level 3) | $344,128 | $679,961 | | Mortgage servicing liabilities at fair value (Level 3) | $100,091 | $45,324 | - Loans held for sale not saleable in active markets are Level 3, valued using discounted cash flow models with unobservable inputs like discount rates, home price projections, and prepayment speeds[104][105] - IRLCs are Level 3, valued based on Agency MBS prices, estimated MSR fair value, and pull-through rates; changes in pull-through rate or MSR component can significantly impact fair value[107][108][110] - MSRs are Level 3, valued using a discounted cash flow approach with key unobservable inputs including pricing spread (discount rate), prepayment rates, and annual per-loan servicing cost[115][117][120] - MSLs are Level 3, valued using a discounted cash flow approach with key inputs including pricing spread, prepayment speed, and annual per-loan servicing cost[127][130] Sensitivity of Fair Value to Unobservable Inputs (in thousands) | Change in fair value attributable to shift in: (in thousands) | -20% | -10% | -5% | +5% | +10% | +20% | | :---------------------------------------------------------- | :----- | :----- | :----- | :----- | :----- | :----- | | Pricing spread | $245,747 | $118,589 | $58,275 | $(56,330) | $(110,804) | $(214,519) | | Prepayment speed | $317,347 | $152,504 | $74,793 | $(72,028) | $(141,434) | $(272,904) | | Annual per-loan cost of servicing | $124,790 | $62,395 | $31,198 | $(31,198) | $(62,395) | $(124,790) | Note 7—Loans Held for Sale at Fair Value This note provides a breakdown of loans held for sale, categorized by type and fair value Loans Held for Sale by Type (in thousands) | Loan type (in thousands) | June 30, 2021 | December 31, 2020 | | :--------------------------------- | :-------------- | :---------------- | | Government-insured or guaranteed | $5,115,678 | $5,683,786 | | Conventional conforming | $1,950,567 | $1,257,445 | | Purchased from Ginnie Mae pools serviced by the Company | $3,789,022 | $4,661,378 | | Repurchased pursuant to representations and warranties | $29,239 | $13,791 | | Total Loans held for sale | $10,884,506 | $11,616,400 | | Fair value of loans pledged to creditors | $10,451,126 | $11,457,678 | Note 8—Derivative Financial Instruments This note describes the Company's use of derivative financial instruments to manage interest rate risk - Derivatives are used to manage interest rate risk on IRLCs, loans held for sale, and MSRs, aiming to moderate the effect of market interest rate changes[133][134] - The Company does not apply hedge accounting; all derivatives are recorded at fair value with changes recognized in current period income[135] Derivative Financial Instruments Fair Values (in thousands) | Derivative Type (in thousands) | June 30, 2021 (Fair Value Assets) | June 30, 2021 (Fair Value Liabilities) | December 31, 2020 (Fair Value Assets) | December 31, 2020 (Fair Value Liabilities) | | :--------------------------------- | :-------------------------------- | :----------------------------------- | :------------------------------------ | :------------------------------------- | | Interest rate lock commitments | $344,128 | $518 | $679,961 | $2,935 | | Forward purchase contracts | $55,765 | $23,274 | $133,267 | $1,276 | | Forward sales contracts | $39,597 | $68,347 | $1,451 | $251,149 | | MBS put options | $13,106 | — | $14,302 | — | | Swaption purchase contracts | $11,041 | — | $11,939 | — | | Total derivative assets (net) | $371,269 | — | $711,238 | — | | Total derivative liabilities (net) | — | $43,910 | — | $42,638 | - The Company presents net derivative asset and liability positions when subject to legally enforceable master netting arrangements[138] Note 9—Mortgage Servicing Rights and Mortgage Servicing Liabilities This note details the changes in fair value and balances of mortgage servicing rights (MSRs) and mortgage servicing liabilities (MSLs) Mortgage Servicing Rights and Liabilities Activity (in thousands) | Metric (in thousands) | Quarter ended June 30, 2021 | Quarter ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :--------------------------------- | :-------------------------- | :-------------------------- | :----------------------------- | :----------------------------- | | MSRs Balance at beginning of period | $3,268,910 | $2,193,697 | $2,581,174 | $2,926,790 | | MSRs Additions from loan sales | $483,362 | $225,534 | $953,895 | $507,849 | | MSRs Total change in fair value | $(339,624) | $(205,692) | $(122,421) | $(1,246,860) | | MSRs Balance at end of period | $3,412,648 | $2,213,539 | $3,412,648 | $2,213,539 | | MSLs Balance at beginning of period | $46,026 | $29,761 | $45,324 | $29,140 | | MSLs Additions from loan sales | $57,421 | — | $64,383 | $6,576 | | MSLs Total change in fair value | $(3,356) | $97 | $(9,616) | $(5,858) | | MSLs Balance at end of period | $100,091 | $29,858 | $100,091 | $29,858 | - Contractual servicing fees and other fees related to MSRs and MSLs are recorded in net loan servicing fees[150] Note 10—Leases This note provides details on the Company's lease arrangements, including lease expenses and obligations Lease Expense Data (in thousands) | Metric (in thousands) | Quarter ended June 30, 2021 | Quarter ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :--------------------------------- | :-------------------------- | :-------------------------- | :----------------------------- | :----------------------------- | | Operating leases expense | $4,508 | $4,034 | $8,874 | $7,966 | | Short-term leases expense | $420 | $224 | $470 | $480 | | Total net lease expense | $4,928 | $4,258 | $9,344 | $8,446 | Operating Lease Obligations | Metric (in thousands) | June 30, 2021 | | :--------------------------------- | :-------------- | | Total operating lease payments (undiscounted) | $107,070 | | Operating lease liability (discounted) | $96,463 | | Weighted average remaining lease term | 5.9 years | | Weighted average discount rate | 4.1% | Note 11—Other Assets This note provides a breakdown of other assets, including margin deposits and capitalized software Other Assets Details (in thousands) | Metric (in thousands) | June 30, 2021 | December 31, 2020 | Change | | :--------------------------------- | :-------------- | :---------------- | :------- | | Margin deposits | $103,863 | $116,881 | $(13,018) | | Capitalized software, net | $91,712 | $81,434 | $10,278 | | Deposits securing Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets | $49,934 | $153,054 | $(103,120) | | Total Other assets | $612,273 | $692,169 | $(79,896) | Note 12—Short-Term Borrowings This note describes the Company's short-term borrowing facilities, including repurchase agreements and their terms - The Company uses asset sales under agreements to repurchase, secured by loans held for sale, assets purchased from PMT, or participation certificates backed by mortgage servicing assets, as primary borrowing facilities[155] - A new Fannie Mae MSR Facility was established in April 2021, allowing financing of Fannie Mae MSRs and ESS, with a maximum principal balance of $1 billion; no borrowings were made under this facility in Q2 2021[156][157] - The Ginnie Mae MSR Facility and GMSR Servicing Advance Notes provide financing secured by MSRs, ESS, and servicing advances, with a shared borrowing capacity of $600 million for servicing advances[159][160][161][162] Repurchase Agreement Activity (in thousands) | Metric (in thousands) | Quarter ended June 30, 2021 | Quarter ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :--------------------------------- | :-------------------------- | :-------------------------- | :----------------------------- | :----------------------------- | | Average balance of assets sold under agreements to repurchase | $7,571,340 | $2,529,217 | $7,999,580 | $2,833,444 | | Total interest expense (repurchase agreements) | $44,623 | $17,487 | $96,802 | $43,171 | | Maximum daily amount outstanding (repurchase agreements) | $10,856,677 | $3,769,495 | $10,856,677 | $3,769,495 | Repurchase Agreement Balances and Capacity (in thousands) | Metric (in thousands) | June 30, 2021 | December 31, 2020 | | :--------------------------------- | :-------------- | :---------------- | | Carrying value of assets sold under agreements to repurchase | $8,254,543 | $9,654,797 | | Available borrowing capacity (committed + uncommitted) | $7,362,748 | $2,536,005 | | Fair value of assets securing repurchase agreements | $13,138,477 | $13,541,791 | - The weighted average maturity of advances under repurchase agreements was 2.2 months as of June 30, 2021, with most maturities within 90 days[165] - The Company is subject to margin calls on repurchase agreements if the fair value of securing assets decreases[166] - Mortgage loan participation purchase and sale agreements are also used, with average balances of $254.3 million and $265.4 million for the quarter and six months ended June 30, 2021, respectively[167][170] Note 13—Long-Term Debt This note provides details on the Company's long-term debt obligations, including notes payable and unsecured senior notes - Obligations under capital lease decreased, with a remaining principal balance of $7.68 million as of June 30, 2021, maturing in June 2022[173][175] - The Company has $1.3 billion in Term Notes secured by Ginnie Mae MSRs, with stated interest rates of 2.85% and 2.65% over one-month LIBOR, maturing in February and August 2023, respectively[176][177] - Unsecured senior notes totaled $1.3 billion as of June 30, 2021, including new notes issued in February 2021 with a 4.25% coupon maturing in February 2029, and existing notes with a 5.38% coupon maturing in October 2025[180][182][186] Long-Term Debt Details (in thousands) | Metric (in thousands) | June 30, 2021 | December 31, 2020 | | :--------------------------------- | :-------------- | :---------------- | | Notes payable secured by mortgage servicing assets (carrying value) | $1,296,731 | $1,295,840 | | Unsecured senior notes (carrying value) | $1,288,769 | $645,820 | | Total long-term debt (unpaid principal balance) | $2,607,677 | $1,950,000 | - The Unsecured Notes contain covenants limiting the Company's and its restricted subsidiaries' ability to pay dividends, incur debt, create liens, and engage in certain transactions[181][184][303][304][305] Note 14—Liability for Losses Under Representations and Warranties This note details the Company's liability for losses arising from representations and warranties on sold loans Liability for Losses Under Representations and Warranties Activity (in thousands) | Metric (in thousands) | Quarter ended June 30, 2021 | Quarter ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :--------------------------------- | :-------------------------- | :-------------------------- | :----------------------------- | :----------------------------- | | Balance at beginning of period | $38,428 | $23,202 | $32,688 | $21,446 | | Provision for losses on loans sold | $10,304 | $4,189 | $20,357 | $7,901 | | Reduction in liability due to change in estimate | $(3,640) | $(1,270) | $(7,325) | $(2,946) | | Losses incurred, net | $(757) | $(212) | $(1,385) | $(492) | | Balance at end of period | $44,335 | $25,909 | $44,335 | $25,909 | - The unpaid principal balance of loans subject to representations and warranties increased to $234.3 billion as of June 30, 2021[188] - The increase in provision for losses is due to increased loan sales and higher loss assumptions for reperforming early buyout loan securitizations[261] Note 15—Income Taxes This note provides information on the Company's effective income tax rate and its primary drivers Effective Income Tax Rate | Metric | Quarter ended June 30, 2021 | Quarter ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :--------------------------------- | :-------------------------- | :-------------------------- | :----------------------------- | :----------------------------- | | Effective income tax rate | 26.9% | 26.6% | 26.0% | 26.4% | - The difference in effective tax rates is primarily due to an increase in tax deductions related to equity compensation in Q1 2021[190] Note 16—Commitments and Contingencies This note outlines the Company's significant commitments and contingent liabilities, including legal proceedings - The Company is a party to a lawsuit filed by Black Knight Servicing Technologies alleging breach of contract and misappropriation of trade secrets, which is pending arbitration[193][344] - The CFPB is considering legal action against PennyMac Loan Services for alleged violations of the Real Estate Settlement Procedures Act and Truth in Lending Act from 2015-2016, which the Company believes were remediated[196][345] - Commitments to purchase and fund loans totaled $13.9 billion as of June 30, 2021[197] Note 17—Stockholders' Equity This note details changes in stockholders' equity, including common stock repurchases and dividend declarations - The common stock repurchase program was increased from $500 million to $1 billion in February 2021, and further to $2 billion in August 2021[198][225][310] Common Stock Repurchase Program Activity (in thousands) | Metric (in thousands) | Quarter ended June 30, 2021 | Quarter ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | Cumulative total (through June 30, 2021) | | :--------------------------------- | :-------------------------- | :-------------------------- | :----------------------------- | :----------------------------- | :-------------------------------------- | | Shares of common stock repurchased | 2,574 | 6,975 | 7,227 | 7,213 | 16,933 | | Cost of shares of common stock repurchased | $154,920 | $237,162 | $443,439 | $241,283 | $795,866 | Note 18—Net Gains on Loans Held for Sale This note provides a breakdown of net gains on loans held for sale, distinguishing between cash and non-cash components Net Gains on Loans Held for Sale (in thousands) | Metric (in thousands) | Quarter ended June 30, 2021 | Quarter ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :--------------------------------- | :-------------------------- | :-------------------------- | :----------------------------- | :----------------------------- | | Net gains on loans held for sale at fair value | $582,648 | $682,173 | $1,336,989 | $1,026,455 | | Total cash gains (from non-affiliates) | $61,654 | $275,403 | $880,591 | $264,494 | | Total non-cash gains (from non-affiliates) | $532,542 | $412,362 | $482,194 | $689,637 | | Interest rate lock commitments issued | $34,271,160 | $25,964,546 | $70,389,873 | $50,769,540 | - Non-cash elements (MSRs, MSLs, and representation/warranty liabilities) represented approximately 72% and 66% of gain on sale for the quarter and six months ended June 30, 2021, respectively[255] - Provisions for losses under representations and warranties increased due to higher loan sales and increased loss assumptions for reperforming early buyout loan securitizations[261] Note 19—Net Interest (Expense) Income This note details the components of net interest (expense) income and the factors influencing its changes Net Interest (Expense) Income (in thousands) | Metric (in thousands) | Quarter ended June 30, 2021 | Quarter ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :--------------------------------- | :-------------------------- | :-------------------------- | :----------------------------- | :----------------------------- | | Interest income | $80,797 | $47,318 | $162,878 | $119,882 | | Interest expense | $102,431 | $53,207 | $210,144 | $114,719 | | Net interest (expense) income | $(21,634) | $(5,889) | $(47,266) | $5,163 | - Key drivers of increased net interest expense include decreased placement fees from custodial funds, increased interest shortfall on Agency securitization repayments, and interest on unsecured notes issued in late 2020 and early 2021[272][274] Note 20—Stock-based Compensation This note provides information on stock-based compensation expense and related metrics Stock-based Compensation Data (in thousands) | Metric (in thousands) | Quarter ended June 30, 2021 | Quarter ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :--------------------------------- | :-------------------------- | :-------------------------- | :----------------------------- | :----------------------------- | | Total grant date fair value | $— | $150 | $33,419 | $28,381 | | Compensation expense | $8,894 | $6,757 | $19,771 | $19,125 | | Average head count | 7,151 | 4,937 | 7,008 | 4,635 | Note 21—Earnings Per Share of Common Stock This note presents the calculation of basic and diluted earnings per share for common stock Earnings Per Share Data (in thousands, except per share amounts) | Metric (in thousands, except per share amounts) | Quarter ended June 30, 2021 | Quarter ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :--------------------------------- | :-------------------------- | :-------------------------- | :----------------------------- | :----------------------------- | | Net income | $204,229 | $352,677 | $581,097 | $658,920 | | Basic EPS | $3.10 | $4.53 | $8.61 | $8.42 | | Diluted EPS | $2.94 | $4.39 | $8.16 | $8.11 | | Weighted average basic shares outstanding | 65,890 | 77,790 | 67,493 | 78,240 | | Weighted average diluted shares outstanding | 69,399 | 80,424 | 71,248 | 81,241 | - Anti-dilutive performance-based RSUs and stock options were excluded from diluted EPS calculations[207][210] Note 22—Supplemental Cash Flow Information This note provides additional cash flow information, including cash paid for interest and income taxes Supplemental Cash Flow Information (in thousands) | Metric (in thousands) | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :--------------------------------- | :----------------------------- | :----------------------------- | | Cash paid for interest | $208,015 | $127,806 | | Cash paid for income taxes, net | $257,074 | $3,871 | | Non-cash investing: MSRs from loan sales | $953,895 | $507,849 | | Non-cash financing: MSLs from loan sales | $64,383 | $6,576 | Note 23—Regulatory Capital and Liquidity Requirements This note outlines the regulatory capital and liquidity requirements the Company must meet as a seller/servicer - The Company must maintain specified capital and liquidity levels to remain a seller/servicer in good standing with Agencies[209] - FHFA requirements include a tangible net worth of $2.5 million plus 25 basis points of total 1-4 unit servicing UPB and a liquidity requirement based on Agency servicing UPB and nonperforming loans[211] - Ginnie Mae requirements include a net worth of $2.5 million plus 35 basis points of outstanding Ginnie Mae single-family obligations and a liquidity requirement of the greater of $1.0 million or 10 basis points of outstanding Ginnie Mae single-family securities[213] Regulatory Capital and Liquidity Compliance (in thousands) | Agency – Company subject to requirement (in thousands) | June 30, 2021 (Actual) | June 30, 2021 (Requirement) | December 31, 2020 (Actual) | December 31, 2020 (Requirement) | | :----------------------------------------------------- | :--------------------- | :-------------------------- | :------------------------- | :------------------------------ | | Fannie Mae & Freddie Mac – PLS Capital | $5,243,429 | $658,510 | $4,454,680 | $633,331 | | Ginnie Mae – PLS Capital | $4,785,193 | $977,600 | $3,794,112 | $1,058,641 | | Fannie Mae & Freddie Mac – PLS Liquidity | $317,877 | $88,189 | $506,096 | $84,444 | | Ginnie Mae – PLS Liquidity | $317,877 | $217,186 | $506,096 | $215,722 | | Ginnie Mae – PLS Adjusted net worth / Total assets ratio | 20% | 6% | 12% | 6% | | Fannie Mae & Freddie Mac – PLS Tangible net worth / Total assets ratio | 22% | 6% | 14% | 6% | Note 24—Segments This note provides financial information segmented by the Company's three primary business operations: production, servicing, and investment management - The Company operates in three segments: production (loan origination, acquisition, sale), servicing (loan servicing, early buyout transactions), and investment management (sourcing, diligence, managing assets for PMT)[216][217][218] Segment Financial Performance (in thousands) | Metric (in thousands) | Quarter ended June 30, 2021 (Production) | Quarter ended June 30, 2021 (Servicing) | Quarter ended June 30, 2021 (Investment Management) | Six months ended June 30, 2021 (Production) | Six months ended June 30, 2021 (Servicing) | Six months ended June 30, 2021 (Investment Management) | | :--------------------------------- | :--------------------------------------- | :--------------------------------------- | :----------------------------------------------- | :---------------------------------------- | :---------------------------------------- | :----------------------------------------------- | | Total net revenue | $566,151 | $162,603 | $13,498 | $1,239,042 | $424,810 | $23,086 | | Total expenses | $321,709 | $131,679 | $9,349 | $631,705 | $252,142 | $17,568 | | Income before provision for income taxes | $244,442 | $30,924 | $4,149 | $607,337 | $172,668 | $5,518 | | Segment assets at quarter/year end | $7,670,877 | $16,185,956 | $23,305 | $7,670,877 | $16,185,956 | $23,305 | Note 25—Subsequent Events This note discloses significant events that occurred after the reporting period but before the financial statements were issued - On August 4, 2021, the board approved increasing the common stock repurchase program from $1 billion to $2 billion and declared a $0.20 cash dividend per common share[225] - On July 30, 2021, the Company syndicated two variable funding note repurchase agreements, adding Citibank as a syndicate buyer and increasing the maximum purchase price for GMSR Servicing Spread Agreement from $400 million to $500 million[225][224] - The FHFA eliminated a 50 basis point adverse market refinance fee on Fannie Mae and Freddie Mac mortgage refinance transactions, effective August 1, 2021[226] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, highlighting revenue, expense, liquidity, and capital trends - The Company is a specialty financial services firm focused on U.S. residential mortgage loan production and servicing, and mortgage market investment management[230] - The COVID-19 pandemic has had a mixed effect, increased servicing costs due to forbearance but also leading to gains from modifying and reselling delinquent government loans[245][246] - Gain on sale margins in the production segment moderated in Q2 2021 due to increased industry capacity and competitive pressures, despite strong demand[247] Key Financial Performance Indicators (in thousands, except per share amounts) | Metric (in thousands, except per share amounts) | Quarter ended June 30, 2021 | Quarter ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :---------------------------------------------- | :-------------------------- | :-------------------------- | :----------------------------- | :----------------------------- | | Total net revenue | $742,252 | $821,634 | $1,686,938 | $1,543,459 | | Net income | $204,229 | $352,677 | $581,097 | $658,920 | | Basic EPS | $3.10 | $4.53 | $8.61 | $8.42 | | Diluted EPS | $2.94 | $4.39 | $8.16 | $8.11 | | Annualized return on average common stockholders' equity | 23.3% | 56.0% | 33.2% | 56.0% | | Adjusted EBITDA | $471,440 | $616,550 | $1,145,748 | $918,872 | - Income before taxes decreased by $200.8 million in Q2 2021 YoY, primarily due to lower net gains on loans held for sale and a $121.5 million increase in total expenses, partially offset by higher origination fees[249] - For the six months, income before taxes decreased by $109.6 million YoY, driven by increased expenses and decreased net loan servicing fees, partially offset by higher production revenue[250] - Net gains on loans held for sale decreased by $99.5 million in Q2 2021 YoY due to lower gain-on-sale margins but increased by $310.5 million for the six months YoY due to higher production volume[251] - Net loan servicing fees decreased by $7.5 million in Q2 2021 YoY and $225.6 million for the six months YoY, primarily due to fair value losses on MSRs, MSLs, and ESS, net of hedging results[270][271] - Net interest expense increased due to decreased placement fees from custodial funds, increased interest shortfall on Agency securitization repayments, and interest on new unsecured notes[272][274] - Compensation expenses increased significantly due to headcount growth supporting loan production and servicing; servicing expenses decreased due to a reversal of the provision for estimated servicing advances losses[275][278] - Total assets decreased by $7.7 billion, and total liabilities decreased by $7.8 billion, primarily due to a decrease in loans eligible for repurchase[282][283] - Net cash provided by operating activities increased significantly to $1.3 billion for the six months ended June 30, 2021, while net cash used in investing and financing activities also increased[284][287][288][289] - The Company's liquidity is supported by cash flows, bank borrowings, and equity/debt offerings; it has expanded borrowing capacity for EBO loans and Fannie Mae MSRs[290][295][297] - The Company is in compliance with financial covenants for its secured financing agreements and Unsecured Notes, including minimum unrestricted cash, tangible net worth, and debt-to-equity ratios[302][307][309][319] Item 3. Quantitative and Qualitative Disclosures About Market Risk This item discusses the Company's exposure to market risks, primarily fair value, interest rate, and prepayment risks, and its mitigation strategies - Primary market risks include fair value risk, interest rate risk, and prepayment risk, which impact IRLCs, mortgage loans held for sale, MSRs, and MSLs[326][327] - Rising interest rates generally negatively affect IRLCs and loans held for sale but positively affect MSRs, while also influencing prepayment speeds[329] - Prepayment risk affects the carrying value of MSRs and MSLs; an increase in prepayment expectations decreases MSR fair value but is partially offset by a reduction in MSL and ESS fair value[332] - Risk management activities use derivative financial instruments (MBS forward sale contracts, MBS put options, Treasury/interest rate swap futures, options, swaptions) to mitigate interest rate and prepayment exposure on MSRs, IRLCs, and loans held for sale[333][334] Sensitivity of Fair Value to Unobservable Inputs (in thousands) | Change in fair value attributable to shift in: (in thousands) | -20% | -10% | -5% | +5% | +10% | +20% | | :---------------------------------------------------------- | :----- | :----- | :----- | :----- | :----- | :----- | | Pricing spread | $245,747 | $118,589 | $58,275 | $(56,330) | $(110,804) | $(214,519) | | Prepayment speed | $317,347 | $152,504 | $74,793 | $(72,028) | $(141,434) | $(272,904) | | Annual per-loan cost of servicing | $124,790 | $62,395 | $31,198 | $(31,198) | $(62,395) | $(124,790) | Item 4. Controls and Procedures Management concluded that the Company's disclosure controls and procedures were effective as of June 30, 2021, with no material changes in internal control over financial reporting - Disclosure controls and procedures are designed to ensure timely and accurate reporting of information required under the Exchange Act[338] - The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2021[339] - No material changes in internal control over financial reporting occurred during the three months ended June 30, 2021[340] PART II. OTHER INFORMATION This part includes legal proceedings, risk factors, equity security sales, defaults, and exhibits Item 1. Legal Proceedings The Company is involved in ongoing legal and regulatory matters, including a lawsuit by Black Knight Servicing Technologies and a CFPB investigation - The Company is defending against a lawsuit by Black Knight Servicing Technologies for alleged breach of contract and misappropriation of trade secrets, which is currently in arbitration[344] - The CFPB is considering legal action against PennyMac Loan Services for alleged RESPA and TILA violations from 2015-2016, which the Company states were self-identified and remediated[345] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2020 - No material changes to risk factors from the Annual Report on Form 10-K for December 31, 2020[347] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities during Q2 2021, and the Company repurchased 2.57 million shares for $154.9 million as part of its program - No unregistered sales of equity securities occurred during the quarter ended June 30, 2021[348] Common Stock Repurchase Program Details | Period | Total shares purchased | Average price paid per share | Approximate dollar value of shares that may yet be purchased under the plans or program | | :----------------------------- | :--------------------- | :--------------------------- | :----------------------------------------------------------------------------------- | | April 1, 2021 – April 30, 2021 | 269,832 | $59.12 | $343,212,099 | | May 1, 2021 – May 31, 2021 | 1,290,187 | $60.23 | $266,551,209 | | June 1, 2021 – June 30, 2021 | 1,014,097 | $62.01 | $204,133,351 | | Total (Q2 2021) | 2,574,116 | $60.50 | $204,133,351 | - The common stock repurchase program was increased to $2 billion in August 2021[348] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the period - No defaults upon senior securities[349] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Not applicable[350] Item 5. Other Information No other information was reported in this item - No other information[351] Item 6. Exhibits This item lists all exhibits filed with the Form 10-Q, including organizational documents, indentures, repurchase agreements, and certifications - The exhibits include the Amended and Restated Certificate of Incorporation and Bylaws, various Master Repurchase Agreements, Guaranties, Indenture Supplements, and certifications under the Sarbanes-Oxley Act[352][353][355]