# PennyMac Mortgage Investment Trust: Form 10-Q for the period ended Jun 30, 2023

- Company: [PennyMac Mortgage Investment Trust](/companies/pmt.md) (CIK 1464423)
- Form: 10-Q
- Filed: 2023-08-03
- Accepted by EDGAR: Aug 3, 2023, 16:08 ET
- Period: 2023-06-30
- Accession: 0000950170-23-037947
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1464423/000095017023037947/pmt-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1464423/000095017023037947/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $90.5m | us-gaap:RevenuesNetOfInterestExpense |
| Revenue | 6 months, 2023-01-01 to 2023-06-30 | $180.8m | us-gaap:RevenuesNetOfInterestExpense |
| Interest expense | 3 months, 2023-04-01 to 2023-06-30 | $187.4m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2023-01-01 to 2023-06-30 | $366.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $22.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | $333.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $24.6m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | $85.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.16 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | $0.68 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.16 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | $0.73 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 87,269,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 112,374,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | $743.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 6 months, 2023-01-01 to 2023-06-30 | $71.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2023-01-01 to 2023-06-30 | $27.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-06-30 | $238.8m | us-gaap:Cash |
| Total assets | at 2023-06-30 | $13.38bn | us-gaap:Assets |
| Total liabilities | at 2023-06-30 | $11.45bn | us-gaap:Liabilities |
| Long-term debt | at 2023-06-30 | $5.38bn | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-06-30 | $1.93bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 84,096 characters.

The following discussion and analysis of financial condition and results of operations should be read with the consolidated financial statements and the related notes of PennyMac Mortgage Investment Trust (“PMT”) included within this Quarterly Report on Form 10-Q (this “Report”).

Statements contained in this Report 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 heading “Risk Factors,” as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this Report and our other filings with the United States Securities and Exchange Commission (“SEC”). The forward-looking statements contained in this Report are made as of the date hereof and we assume no obligation to update or supplement any forward-looking statements.

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 Report to the words “we,” “us,” “our” and the “Company” refer to PMT and its affiliates.

### Our Company

We are a specialty finance company that invests primarily in mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our investors over the long-term, primarily through dividends and secondarily through capital appreciation. A significant portion of our investment portfolio is comprised of mortgage-related assets that we have created through our correspondent production activities, including mortgage servicing rights (“MSRs”), subordinate mortgage-backed securities (“MBS”), and credit risk transfer (“CRT”) arrangements, which include CRT Agreements (“CRT Agreements”) and CRT strips that absorb credit losses on certain of the loans we sold. We also invest in Agency MBS, subordinate credit-linked MBS and senior non-Agency MBS. We have also historically invested in distressed mortgage assets (distressed loans and real estate acquired in settlement of loans (“REO”)), which we have substantially liquidated.

We are externally managed by PNMAC Capital Management, LLC (“PCM”), an investment adviser that specializes in and focuses on U.S. mortgage assets. Our loans and MSRs are serviced by PennyMac Loan Services, LLC (“PLS”). PCM and PLS are both indirect controlled subsidiaries of PennyMac Financial Services, Inc. (“PFSI”), a publicly-traded mortgage banking and investment management company.

We operate our business in four segments: Credit sensitive strategies, Interest rate sensitive strategies, Correspondent production and our Corporate operations as described below:

- The credit sensitive strategies segment represents our investments in CRT arrangements referencing loans from our own correspondent production, including CRT agreements and other CRT securities (together, “CRT arrangements”) and subordinate mortgage-backed securities (“MBS”).
- The interest rate sensitive strategies segment represents our investments in MSRs, Agency and senior non-Agency MBS and the related interest rate hedging activities.
- The correspondent production segment represents our operations aimed at serving as an intermediary between lenders and the capital markets by purchasing, pooling and reselling newly originated prime credit quality loans either directly or in the form of MBS, using the services of PCM and PLS.

We primarily sell the loans we acquire through our correspondent production activities to government-sponsored entities ("GSEs") such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or to PLS for sale into securitizations guaranteed by the Government National Mortgage Association (“Ginnie Mae”) or the GSEs. Fannie Mae, Freddie Mac and Ginnie Mae are each referred to as an “Agency” and, collectively, as the “Agencies.”

- The corporate segment includes management fees, corporate expense amounts and certain interest income and expense.

### Our Investment Activities

#### Credit Sensitive Investments

CRT Arrangements

We held net CRT-related investments (comprised of deposits securing CRT arrangements, CRT derivatives, CRT strips and an interest-only security payable) totaling approximately $1.2 billion at June 30, 2023.

Subordinate Credit-Linked Mortgage-Backed Securities

Subordinate credit-linked MBS provide us with a higher yield than senior securities. However, we retain credit risk in the subordinate credit-linked MBS since they are the first securities to absorb credit losses relating to the underlying loans. We purchased approximately $64.1 million of subordinate credit-linked MBS during the six months ended June 30, 2023. We held subordinate credit-linked MBS with fair values totaling approximately $259.5 million at June 30, 2023.

As the result of the Company’s consolidation of the variable interest entities that issued certain subordinate MBS as described in Note 6 – *Variable Interest Entities – Subordinate Mortgage-Backed Securities* to the consolidated financial statements included in this Report, we include loans underlying these transactions with unpaid principal balances (“UPB”) totaling approximately $1.8 billion on our consolidated balance sheet as of June 30, 2023.

#### Interest Rate Sensitive Investments

Our interest rate sensitive investments include:

- Mortgage servicing rights. During the quarter and six months ended June 30, 2023, we received approximately $90.7 million and $191.4 million, respectively, of MSRs as proceeds from sales of loans acquired for sale. We held approximately $4.0 billion of MSRs at fair value at June 30, 2023.
- REIT-eligible Agency and senior mortgage-backed or mortgage-related securities. We purchased approximately

$350.7 million Agency fixed-rate pass-through securities and non-Agency senior MBS, net of sales during the six months ended June 30, 2023. We held Agency fixed-rate pass-through securities and non-Agency senior MBS with fair values totaling approximately $4.5 billion at June 30, 2023.

#### Correspondent Production

Our correspondent production activities involve the acquisition and sale of newly originated prime credit quality residential loans. Correspondent production has served as the source of our investments in MSRs, private label non-Agency securitizations and CRT arrangements. Our correspondent production and resulting investment activity are summarized below:

*(in thousands)*

| Sales of loans acquired for sale: | Quarter ended June 30, 2023 | 2022 | Six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| To nonaffiliates | $4,881,794 | $10,226,643 | $10,469,060 | $22,212,604 |
| To PennyMac Financial Services, Inc. | 18,636,127 | 10,822,122 | 32,087,158 | 23,982,890 |
|  | $23,517,921 | $21,048,765 | $42,556,218 | $46,195,494 |
| Net gains on loans acquired for sale | $4,446 | $7,671 | $10,919 | $11,624 |
| Investment activities resulting from correspondent production: |  |  |  |  |
| Receipt of MSRs as proceeds from sales of loans | $90,747 | $170,658 | $191,365 | $365,254 |
| Retention of interests in securitizations of loans secured by investment properties, net of associated asset-backed financings | $— | $— | $— | $23,485 |

During the six months ended June 30, 2023, we purchased newly originated prime credit quality residential loans with fair values totaling $41.9 billion as compared to $44.6 billion for the six months ended June 30, 2022, in our correspondent production business. To the extent that we purchase loans that are insured by the U.S. Department of Housing and Urban Development through the Federal Housing Administration, or insured or guaranteed by the U.S. Department of Veterans Affairs or U.S. Department of Agriculture, we and PLS have agreed that PLS will fulfill and purchase such loans, as PLS is a Ginnie Mae approved issuer and we are not. This arrangement has enabled us to compete with other correspondent aggregators that purchase both government and conventional loans. During the six months ended June 30, 2023, we also sold $11.1 billion, in UPB of conventional loans to PLS in order to optimize our use and allocation of capital.

Our purchase volume included $32.1 billion and $24.0 billion of loans we sold to PLS during the six months ended June 30, 2023 and 2022, respectively. We receive a sourcing fee from PLS based on the UPB of each loan that we sell to PLS under such arrangement, and earn interest income on the loan for the period we hold it before the sale to PLS. During the six months ended June 30, 2023, we received sourcing fees totaling $3.2 million, relating to $31.6 billion, in UPB of loans that we sold to PLS.

#### Taxation

We believe we qualify to be taxed as a REIT and as such will not be subject to federal income tax on that portion of our income that is distributed to shareholders as long as we meet applicable REIT asset, income and share ownership tests. If we fail to qualify as a REIT, and do not qualify for certain statutory relief provisions, our profits will be subject to income taxes and we may be precluded from qualifying as a REIT for the four tax years following the year we lose our REIT qualification.

A portion of our activities, including our correspondent production business, is conducted in our taxable REIT subsidiary (“TRS”), which is subject to corporate federal and state income taxes. Accordingly, we make a provision for income taxes with respect to the operations of our TRS. We expect the effective rate for the provision for income taxes may be volatile in future periods. Our goal is to manage the business to take full advantage of the tax benefits afforded to us as a REIT.

We evaluate our deferred tax assets quarterly to determine if valuation allowances are required based on the consideration of all available positive and negative evidence using a “more-likely-than-not” standard with respect to whether deferred tax assets will be realized. Our evaluation considers, among other factors, taxable loss carryback availability, expectations of sufficient future taxable income, trends in earnings, existence of taxable income in recent years, the future reversal of temporary differences, and available tax planning strategies that could be implemented, if required. The ultimate realization of our deferred tax assets depends primarily on our ability to generate future taxable income during the periods in which the related deferred tax assets become deductible.

#### Non-Cash Investment Income

A substantial portion of our net investment income is comprised of non-cash items, including fair value adjustments and recognition of the fair value of assets created and liabilities incurred in loan sale transactions. Because we have elected, or are required by accounting principles generally accepted in the United States (“GAAP”), to record certain of our financial assets (comprised of MBS, loans acquired for sale at fair value, and loans at fair value), our derivatives and CRT strips, our MSRs, and our asset-backed financings and interest-only security payable at fair value, a substantial portion of the income or loss we record with respect to such assets and liabilities results from non-cash changes in fair value.

The amounts of net non-cash investment (loss) income items included in net investment income are as follows:

*(dollars in thousands)*

| Net (losses) gains on investments and financings: | Quarter ended June 30, 2023 | 2022 | Six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Mortgage-backed securities | $(61,621) | $(182,498) | $16,597 | $(369,023) |
| Loans: |  |  |  |  |
| Held in variable interest entities | (18,253) | (122,469) | (7,236) | (219,033) |
| Distressed | (878) | 67 | (427) | 451 |
| CRT arrangements | 43,906 | (64,478) | 76,130 | (133,285) |
| Interest-only security payable at fair value | (855) | (3,112) | (2,135) | (8,892) |
| Asset-backed financings at fair value | 17,794 | 116,667 | 7,634 | 205,841 |
|  | (19,907) | (255,823) | 90,563 | (523,941) |
| Net gains on loans acquired for sale (1) | 89,812 | 180,635 | 220,018 | 284,978 |
| Net loan servicing fees‒MSR valuation adjustments (2) | (20,559) | 20,103 | (194,418) | 367,657 |
|  | $49,346 | $(55,085) | $116,163 | $128,694 |
| Net investment income | $90,452 | $21,500 | $180,818 | $103,339 |
| Non-cash items as a percentage of net investment income | 55% | (256%) | 64% | 125% |

(1) Amount represents MSRs received, liability for representations and warranties incurred in loan sales transactions and changes in fair value of loans, IRLCs and hedging derivatives held at period end.

(2) Includes fair value changes related to MSR derivative hedging instruments.

We receive or pay cash relating to:

- Our investment in mortgage-backed securities through monthly principal and interest payments from the issuer of such securities or from the sale of the investment;
- Loan investments when the investments are paid down, paid off or sold, when payments of principal and interest occur on such loans or when the properties acquired in settlement of loans are sold;
- CRT arrangements through a portion of the interest payments collected on loans in the CRT arrangements’ reference pools, interest payments from the investment of the deposits securing the arrangement in short-term investments and the release to us of the deposits securing the arrangements as principal on such loans is repaid;
- Hedging instruments when we receive or make margin deposits as the fair value of respective instruments change, when the instruments mature or when we effectively cancel the transactions through offsetting trades;
- Our liability for representations and warranties when we repurchase loans or settle loss claims from investors; and
- MSRs in the form of loan servicing fees and placement fees on the deposits we manage on behalf of the borrowers and investors in the loans we service.

### Results of Operations

#### Business Trends

Due to significant inflationary pressures, the U.S. Federal Reserve continued to raise the federal funds rate during the six months ended June 30, 2023 and continues to reduce the federal government’s overall holdings of Treasury and mortgage-backed securities. Higher interest rates and a slowing economy are expected to continue to reduce the size of the mortgage origination market from an estimated $2.3 trillion in 2022 to a projected range of $1.6 trillion to $1.8 trillion for 2023 according to leading economists.

Lower projected mortgage transaction volumes and higher interest rates have caused a decrease in mortgage production activities and increased competition in the mortgage production business, while also leading to a reduction in prepayment speeds in our mortgage servicing portfolio from the same time in the prior year. Higher interest rates have increased the costs of floating rate borrowings and have generated more interest income from our placement fees on deposits and loans held for sale. We have also increased our sales of conventional loans to PLS.

At a macroeconomic level, increasing interest rates may also lead to a reduction in economic activity and slowing home price growth or depreciation, which could lead to increasing mortgage delinquencies or defaults and increased losses. If these effects are realized, they could negatively affect the performance of our credit-sensitive assets such as CRT or subordinate credit-linked notes. However, many of the loans underlying our assets have favorable credit characteristics and low loan-to-value ratios, which are likely to help offset the negative effects of credit performance in an economic downturn.

The competitive landscape for our correspondent business has also been affected by the exit of several large entities, which may present an opportunity for growth of our share in that business. However, we intend to continue to sell a portion of our conventional loans to PLS in the third quarter of 2023 to optimize our use and allocation of capital.

The following is a summary of our key performance measures:

*(dollar amounts in thousands, except per common share amounts)*

|  | Quarter ended June 30, 2023 | 2022 | Six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net investment income | $90,452 | $21,500 | $180,818 | $103,339 |
| Expenses | 43,599 | 61,368 | 95,164 | 125,149 |
| Pretax income (loss) | 46,853 | (39,868) | 85,654 | (21,810) |
| Provision for income taxes | 22,229 | 30,866 | 333 | 68,053 |
| Net income (loss) | 24,624 | (70,734) | 85,321 | (89,863) |
| Dividends on preferred shares | 10,454 | 10,455 | 20,909 | 20,909 |
| Net income (loss) attributable to common shareholders | $14,170 | $(81,189) | $64,412 | $(110,772) |
| Pretax income (loss) by segment: |  |  |  |  |
| Credit sensitive strategies | $71,102 | $(63,713) | $128,426 | $(119,675) |
| Interest rate sensitive strategies | (13,172) | 29,369 | (20,199) | 113,580 |
| Correspondent production | 1,400 | 9,780 | 3,182 | 14,357 |
| Corporate | (12,477) | (15,304) | (25,755) | (30,072) |
|  | $46,853 | $(39,868) | $85,654 | $(21,810) |
| Annualized return on average common shareholders' equity | 4.0% | (20.0)% | 9.0% | (13.1)% |
| Earnings (loss) per common share |  |  |  |  |
| Basic | $0.16 | $(0.88) | $0.73 | $(1.19) |
| Diluted | $0.16 | $(0.88) | $0.68 | $(1.19) |
| Dividends per common share | $0.40 | $0.47 | $0.80 | $0.94 |

|  | June 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Total assets | $13,384,922 | $13,921,564 |
| Book value per common share | $15.81 | $15.78 |
| Closing price per common share | $13.48 | $12.39 |

59

Our results of operations increased by $95.4 million and $175.2 million during the quarter and six months ended June 30, 2023, as compared to the quarter and six months ended June 30, 2022, reflecting the effect of increased gains on MBS and increased valuation of CRT-related investments, offset by the fair value performance of our MSR investments and a tax provision.

The increase in the quarterly pretax results is summarized below:

- Our credit sensitive strategies segment recognized a $102.8 million increase in net gains on our CRT arrangements as credit spreads tightened due to an improving macroeconomic outlook compared to the quarter ended June 30, 2022, in which the market economic outlook was worsening.
- Our interest rate sensitive strategies segment benefited from the slower rise in interest rates during the quarter ended June 30, 2023, as compared to the rapidly increasing interest rates during the quarter ended June 30, 2022, resulting in a $120.9 million decrease in valuation losses on MBS, offset by a $108.5 million decrease in net servicing fees caused by valuation gains in our investment in MSRs.
- Our correspondent production segment recognized a $3.2 million decrease in gains on sales of loans during the quarter ended June 30, 2023, reflecting the effect of reduced volume of sales of loans to nonaffiliates.

The increase in the six months pretax results is summarized below:

- Our credit sensitive strategies segment recognized a $184.7 million increase in net gains on our CRT arrangements as credit spreads tightened due to an improving macroeconomic outlook compared to the effect of credit spread widening on CRT fair values during the six months ended June 30, 2022.
- Our interest rate sensitive strategies segment was affected by the mixed performance of interest rates during the six months ended June 30, 2023, as compared to the significantly increasing interest rates in six months ended June 30, 2022, resulting in a $385.6 million increase in gains on MBS, offset by a $436.4 million decrease in net servicing fees caused by valuation and hedging losses in our investment in MSRs.
- Our correspondent production segment recognized a $700,000 decrease in gains on sales of loans held for sale during the six months ended June 30, 2023, reflecting the effect of decreased sales of loans to nonaffiliates.

### Net Investment Income

Our net investment income is summarized below:

*(in thousands)*

|  | Quarter ended June 30, 2023 | 2022 | Six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net loan servicing fees | $108,833 | $217,313 | $85,140 | $521,491 |
| Net gains on loans acquired for sale | 4,446 | 7,671 | 10,919 | 11,624 |
| Net loan origination fees | 4,295 | 14,428 | 12,001 | 29,202 |
| Net (losses) gains on investments and financings | (2,499) | (230,650) | 123,305 | (459,745) |
| Net interest (expense) income | (24,706) | 12,548 | (50,824) | 97 |
| Other | 83 | 190 | 277 | 670 |
|  | $90,452 | $21,500 | $180,818 | $103,339 |

#### Net Loan Servicing Fees

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

*(in thousands)*

|  | Quarter ended June 30, 2023 | 2022 | Six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Loan servicing fees | $172,325 | $158,328 | $340,482 | $314,327 |
| Effect of MSRs and hedging results | (63,492) | 58,985 | (255,342) | 207,164 |
| Net loan servicing fees | $108,833 | $217,313 | $85,140 | $521,491 |

60

Following is a summary of our loan servicing fees:

*(in thousands)*

|  | Quarter ended June 30, 2023 | 2022 | Six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Contractually-specified servicing fees | $165,499 | $151,149 | $329,713 | $298,034 |
| Ancillary and other fees: |  |  |  |  |
| Late charges | 805 | 609 | 1,564 | 1,221 |
| Other | 6,021 | 6,570 | 9,205 | 15,072 |
|  | 6,826 | 7,179 | 10,769 | 16,293 |
|  | $172,325 | $158,328 | $340,482 | $314,327 |
| Average MSR servicing portfolio | $232,008,151 | $220,402,133 | $231,381,212 | $219,051,445 |

Loan servicing fees relate to our MSRs which are primarily related to servicing we provide for loans included in Agency securitizations. These fees are contractually established at an annualized percentage of the UPB of the loans serviced and we collect these fees from borrower payments. Other loan servicing fees are comprised primarily of borrower-contracted fees such as late charges, reconveyance fees and fees charged to correspondent lenders for loans repaid by the borrower shortly after purchase.

The change in contractually-specified fees during the quarter and six months ended June 30, 2023, as compared to the same periods in 2022 , is due primarily to increased servicing fees resulting from the growth in our loan servicing portfolio.

We have elected to carry our servicing assets 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 inputs used to estimate the fair value of such items. We endeavor to moderate the effects of changes in fair value primarily by entering into derivatives transactions.

Changes in fair value of MSRs and hedging results are summarized below:

*(in thousands)*

| Change in fair value of MSRs | Quarter ended June 30, 2023 | 2022 | Six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Realization of cash flows | $(103,043) | $(86,643) | $(194,716) | $(175,562) |
| Changes in valuation inputs used in valuation model | 15,046 | 220,422 | (30,725) | 613,062 |
|  | (87,997) | 133,779 | (225,441) | 437,500 |
| Hedging results | 23,996 | (78,118) | (30,895) | (241,920) |
| Total change in fair value of mortgage servicing rights and hedging results | (64,001) | 55,661 | (256,336) | 195,580 |
| Recapture income from PFSI | 509 | 3,324 | 994 | 11,584 |
|  | $(63,492) | $58,985 | $(255,342) | $207,164 |
| Average balance of mortgage servicing rights | $3,987,752 | $3,583,083 | $3,986,958 | $3,366,498 |

Changes in realization of cash flows are influenced by changes in the level of servicing assets and liabilities and changes in estimates of remaining cash flows to be realized. During the quarter and six months ended June 30, 2023, realization of cash flows increased primarily due to growth of our investment in MSRs as compared to the same periods in 2022.

Changes in fair value due to changes in valuation inputs used in our valuation model during the quarter and six months ended June 30, 2023, reflect the mixed performance of interest rates during such periods, resulting in a downward fair value adjustment due to higher projected prepayments during the six months ended June 30, 2023, as compared to the sharp increase in interest rates during the same periods in 2022, causing the fair value of MSRs to significantly increase as future prepayment expectations decreased materially.

Hedging results reflect valuation losses in hedges against interest rates during the quarter and six months ended June 30, 2023, during which interest rates decreased, as compared to the same periods in 2022 when hedge losses were attributable to the sharp increase in interest rates and elevated hedge costs. The loss from hedging activities decreased during the quarter and six months ended June 30, 2023, as compared to the same periods in 2022, since interest rates were mixed in 2023 and increased substantially in 2022. The primary driver of the loss in the hedge in the periods ended June 30, 2023 was the cost of the hedge, which was elevated in the periods due to high interest rate volatility and an increasingly inverted yield curve.

The decrease in loan recapture income from PFSI reflects the decrease in refinancing activity in our MSR portfolio during the quarter and six months ended June 30, 2023, as compared to the same periods in 2022. We have an agreement with PFSI that requires that when PFSI refinances a loan for which we held the MSRs, we receive a recapture fee. The MSR recapture agreement is summarized in Note 4 ‒ *Transactions with Related Parties – Operating Activities* to the consolidated financial statements included in this Report.

Following is a summary of our loan servicing portfolio:

*(in thousands)*

|  | June 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| UPB of loans outstanding | $231,556,204 | $229,858,573 |
| Collection status (UPB) |  |  |
| Delinquency: |  |  |
| 30-89 days delinquent | $1,792,985 | $1,903,007 |
| 90 or more days delinquent: |  |  |
| Not in foreclosure | $846,668 | $880,841 |
| In foreclosure | $61,772 | $70,921 |
| Bankruptcy | $153,805 | $123,239 |
| Custodial funds managed by the Company (1) | $2,687,024 | $1,783,157 |

(1) Custodial funds include borrower and investor custodial cash accounts relating to loans serviced under mortgage servicing agreements and are not included on the Company’s consolidated balance sheets. The Company earns placement fees on certain of the custodial funds it manages on behalf of the loans’ borrowers and investors, which are included in *Interest income* in the Company’s consolidated statements of operations.

#### Net Gains on Loans Acquired for Sale

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

*(in thousands)*

| From non-affiliates: Cash losses: | Quarter ended June 30, 2023 | 2022 | Six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Sales of loans | $(116,647) | $(298,024) | $(189,592) | $(737,812) |
| Hedging activities | 29,449 | 123,997 | (22,667) | 462,099 |
|  | (87,198) | (174,027) | (212,259) | (275,713) |
| Non-cash gains: |  |  |  |  |
| Receipt of MSRs in loan sale transactions | 90,747 | 170,658 | 191,365 | 365,254 |
| Provision for losses relating to representations and warranties provided in loan sales: |  |  |  |  |
| Pursuant to loan sales | (738) | (1,129) | (1,678) | (2,446) |
| Reduction in liability due to change in estimate | 2,939 | 1,530 | 3,555 | 2,695 |
|  | 2,201 | 401 | 1,877 | 249 |
| Changes in fair value of financial instruments during the periods: |  |  |  |  |
| Interest rate lock commitments | (9,847) | 21,809 | (820) | (4,107) |
| Loans | 16,766 | (23,955) | 6,279 | (1,937) |
| Hedging derivatives | (10,055) | 11,722 | 21,317 | (74,481) |
|  | (3,136) | 9,576 | 26,776 | (80,525) |
|  | 89,812 | 180,635 | 220,018 | 284,978 |
| Total from nonaffiliates | 2,614 | 6,608 | 7,759 | 9,265 |
| From PFSI—cash | 1,832 | 1,063 | 3,160 | 2,359 |
|  | $4,446 | $7,671 | $10,919 | $11,624 |
| Interest rate lock commitments issued on loans acquired for sale: |  |  |  |  |
| To nonaffiliates | $3,322,313 | $11,079,906 | $10,909,900 | $21,274,224 |
| To PFSI | 7,523,348 | — | 11,304,200 | — |
|  | $10,845,661 | $11,079,906 | $22,214,100 | $21,274,224 |
| Acquisition of loans for sale (UPB): |  |  |  |  |
| To nonaffiliates | $3,029,274 | $10,323,700 | $9,658,083 | $20,092,962 |
| To PFSI | 18,156,517 | 10,649,077 | 31,680,849 | 23,379,407 |
|  | $21,185,791 | $20,972,777 | $41,338,932 | $43,472,369 |

The changes in *Net gains on loans acquired for sale* during the quarter and six months ended June 30, 2023, as compared to the same periods in 2022, reflect decreased sales of loans to nonaffiliates.

Non-cash elements of gain on sale of loans:

Interest Rate Lock Commitments

Our *Net gains on loans acquired for sale* includes our estimates of gains or losses we expect to realize upon the sale of mortgage loans we have committed to purchase but have not yet purchased or sold. Therefore, we recognize a substantial portion of our net gains before we purchase the loans. These gains are reflected on our balance sheet as IRLC derivative assets and liabilities. We adjust the fair value of our IRLCs as the loan acquisition process progresses until we complete the acquisition or the commitment is canceled. Such adjustments are included in our *Net gains on loans acquired for sale*. The fair value of our IRLCs becomes part of the carrying value of our loans when we complete the purchase of the loans. The methods and key inputs we use to measure the fair value of IRLCs are summarized in Note 7 – *Fair value – Valuation Techniques and Inputs* to the consolidated financial statements included in this Report.

The MSRs 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 change as circumstances change, and changes in these estimates are recognized in our results of operations in subsequent periods. Subsequent changes in the fair value of our MSRs significantly affect our results of operations.

Mortgage Servicing Rights

The methods we use to measure and update the measurements of our MSRs as well as the effect of changes in valuation inputs on MSR fair value are detailed in Note 7 – *Fair value – Valuation Techniques and Inputs* to the consolidated financial statements included in this Report.

Liability for Losses Under Representations and Warranties

We recognize a liability for losses we expect to incur relating to the representations and warranties we provide to purchasers in our loan sales transactions. 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.

We recorded a provision for losses relating to representations and warranties relating to current loan sales of $738,000 and $1.7 million, respectively, for the quarter and six months ended June 30, 2023, and $1.1 million and $2.4 million, respectively, for the same periods in 2022. The decrease in the provision relating to current loan sales reflects the decrease of our loan sales volume and reduced default and loss-given default assumptions.

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 investor or insurer against credit losses attributable to the loans with indemnified defects. In such cases, we bear any subsequent credit loss on the loans. Our credit loss may be reduced by any recourse we have to correspondent sellers that, in turn, had 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 those repurchase losses from that correspondent seller.

Following is a summary of the indemnification, repurchase and loss activity and loans subject to representations and warranties:

*(in thousands)*

| Indemnification activity (UPB): | Quarter ended June 30, 2023 | 2022 | Six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Loans indemnified at beginning of period | $10,594 | $2,782 | $8,108 | $2,782 |
| New indemnifications | 1,554 | 1,968 | 4,788 | 1,968 |
| Less: Indemnified loans repaid or refinanced | — | — | 748 | — |
| Loans indemnified at end of period | $12,148 | $4,750 | $12,148 | $4,750 |
| Indemnified loans indemnified by correspondent lenders at end of period |  |  | $3,993 | $1,298 |
| UPB of loans with deposits received from correspondent sellers collateralizing prospective indemnification losses at end of period |  |  | $4,043 | $1,219 |
| Repurchase activity (UPB): |  |  |  |  |
| Loans repurchased | $17,742 | $27,790 | $36,941 | $52,024 |
| Less: |  |  |  |  |
| Loans repurchased by correspondent sellers | 16,413 | 24,528 | 31,680 | 41,372 |
| Loans resold or repaid by borrowers | 5,711 | 3,911 | 9,612 | 15,083 |
| Net loans repurchased (resolved) with losses chargeable to liability to representations and warranties | $(4,382) | $(649) | $(4,351) | $(4,431) |
| Losses charged to liability for representations and warranties | $137 | $383 | $525 | $559 |
| At end of period: |  |  |  |  |
| Loans subject to representations and warranties |  |  | $230,128,231 | $220,982,060 |
| Liability for representations and warranties |  |  | $37,069 | $39,441 |

64

The losses on representations and warranties we have recorded to date have been moderated by our ability to recover most of the losses inherent in the repurchased loans from the correspondent sellers. As the outstanding balance of loans we purchase and sell subject to representations and warranties increases, as the loans sold mature, as our investors’ and guarantors’ loss mitigation strategies change and as our correspondent sellers’ ability and willingness to repurchase loans change, we expect that the level of repurchase activity and associated losses may increase.

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

The amount of the liability for representations and warranties is difficult to estimate and requires considerable judgment. The level of loan repurchase losses is dependent on economic factors, investor loss mitigation strategies, our ability to recover any losses inherent in the repurchased loan from the correspondent seller and other external conditions that change over the lives of the underlying loans. We may be required to incur losses related to such representations and warranties for several periods after the loans are sold or liquidated.

We record adjustments to our liability for losses on representations and warranties as economic fundamentals change, as investor and Agency evaluations of their loss mitigation strategies (including claims under representations and warranties) change and as economic conditions affect our correspondent sellers’ ability or willingness to fulfill their recourse obligations to us. Such adjustments may be material to our financial position and results of operations in future periods.

Adjustments to our liability for representations and warranties are included as a component of our *Net gains on loans acquired for sale at fair value*. We recorded a $2.9 million and $3.6 million reduction in liability for representations and warranties during the quarter and six months ended June 30, 2023, respectively, due to the effects of certain loans reaching specified performance histories identified by the Agencies as sufficient to limit repurchase claims relating to such loans. We recorded a $1.5 million and $2.7 million, respectively, reduction in liability for representations and warranties during the same periods in 2022 due to the effects of certain loans reaching specified performance histories identified by the Agencies as sufficient to limit repurchase claims relating to such loans.

#### Loan Origination Fees

Loan origination fees represent fees we charge correspondent sellers relating to our purchase of loans from those sellers. The decrease in fees during the quarter and six months ended June 30, 2023, as compared to the same periods in 2022, reflects a decrease in our purchases of loans with delivery fees.

#### Net (losses) gains on investments and financings

Net (losses) gains on investments and financings are summarized below:

*(in thousands)*

| From nonaffiliates: | Quarter ended June 30, 2023 | 2022 | Six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Mortgage-backed securities | $(61,621) | $(182,498) | $16,597 | $(369,023) |
| Loans at fair value: |  |  |  |  |
| Held in consolidated variable interest entities | (18,253) | (122,469) | (7,236) | (219,033) |
| Distressed | (877) | 5 | (426) | 448 |
| CRT arrangements | 60,458 | (42,355) | 106,736 | (77,978) |
| Asset-backed financings at fair value | 17,794 | 116,667 | 7,634 | 205,841 |
|  | $(2,499) | $(230,650) | $123,305 | $(459,745) |

The increase in net gains on investments for the quarter and six months ended June 30, 2023, as compared to the same periods in 2022, was primarily due to improved performance from our investments in MBS and CRT arrangements as credit spreads tightened (a decrease in the interest rate premium demanded by investors for instruments over those that are considered “risk free”) while interest rates were mixed in 2023 versus increasing substantially in 2022 .

Mortgage-Backed Securities

During the quarter and six months ended June 30, 2023, we recognized net valuation losses of $61.6 million and gains of $16.6 million, respectively, as compared to valuation losses of $182.5 million and $369.0 million, respectively, for the same periods in 2022. The changes recognized reflect a larger portfolio of assets and mixed interest rate performance along with credit spread tightening during the quarter and six months ended June 30, 2023, as compared to the effect of significantly increasing interest rates and credit spread widening on fair value during the same periods in 2022.

Loans at fair value – Held in VIEs and Asset-Backed Financings at Fair Value

Loans at fair value held in VIEs and Asset-backed financings at fair value recorded net valuation losses of $459,000 and gains of $398,000, respectively, during the quarter and six months ended June 30, 2023, as compared to a net loss of $5.8 million and $13.2 million, respectively, during the same periods in 2022 when interest rates increased significantly. The net losses during the quarter ended June 30, 2023 reflect the effect of slightly increasing interest rates as compared to the same period in 2022. The net gain during the six months ended June 30, 2023, reflects the effect of mixed interest rate performance during the period compared to the same period in 2022 when interest rates increased significantly.

CRT Arrangements

The activity in and balances relating to our CRT arrangements are summarized below:

*(in thousands)*

| Net investment income: Net (losses) gains on investments and financings: CRT Derivatives and strips: CRT derivatives | Quarter ended June 30, 2023 | 2022 | Six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Realized | $5,423 | $9,157 | $8,453 | $30,358 |
| Valuation changes | 9,410 | (14,740) | 17,506 | (41,789) |
|  | 14,833 | (5,583) | 25,959 | (11,431) |
| CRT strips |  |  |  |  |
| Realized | 11,984 | 16,078 | 24,288 | 33,841 |
| Valuation changes | 34,496 | (49,738) | 58,624 | (91,496) |
|  | 46,480 | (33,660) | 82,912 | (57,655) |
| Interest-only security payable at fair value | (855) | (3,112) | (2,135) | (8,892) |
|  | 60,458 | (42,355) | 106,736 | (77,978) |
| Interest income — Deposits securing CRT arrangements | 15,779 | 2,384 | 29,991 | 2,606 |
|  | $76,237 | $(39,971) | $136,727 | $(75,372) |
| Net payments made to settle losses on CRT arrangements | $499 | $4,456 | $1,756 | $20,429 |

*(in thousands)*

| Carrying value of CRT arrangements: Derivative and credit risk transfer strip liabilities, net | June 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| CRT derivatives | $4,394 | $22,098 |
| CRT strips | 78,569 | 137,193 |
|  | 82,963 | 159,291 |
| Deposits securing CRT arrangements | $1,269,558 | $1,325,294 |
| Interest-only security payable at fair value | $24,060 | $21,925 |
| CRT arrangement assets pledged to secure borrowings: |  |  |
| Derivative assets | $4,602 | $1,262 |
| Deposits securing CRT arrangements (1) | $1,269,558 | $1,325,294 |
| UPB of loans underlying CRT arrangements | $24,167,673 | $25,315,524 |
| Collection status (UPB): |  |  |
| Delinquency |  |  |
| Current | $23,614,421 | $24,673,719 |
| 30-89 days delinquent | $362,604 | $409,049 |
| 90-180 days delinquent | $91,047 | $112,286 |
| 180 or more days delinquent | $83,034 | $93,717 |
| Foreclosure | $16,567 | $26,753 |
| Bankruptcy | $60,064 | $54,395 |

66

(1) *Deposits securing credit risk transfer strip liabilities* also secure $87.6 million and $160.6 million in CRT strip and CRT derivative liabilities at June 30, 2023, and December 31, 2022, respectively.

The performance of our investments in CRT arrangements during the quarter and six months ended June 30, 2023 reflects credit spread tightening for CRT securities in the credit markets. This contrasts with CRT investments' fair value losses during the same periods in 2022 , when credit spreads widened.

#### Net interest (expense) income

Net interest (expense) income is summarized below:

*(dollars in thousands)*

| Assets: | Quarter ended June 30, 2023 Interest income/ expense | Average balance | Interest yield/ cost % | Quarter ended June 30, 2022 Interest income/ expense | Average balance | Interest yield/ cost % |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Cash and short-term investments | $6,712 | $566,893 | 4.75% | $1,175 | $324,496 | 1.45% |
| Mortgage-backed securities | 62,542 | 4,628,072 | 5.42% | 40,651 | 3,218,053 | 5.07% |
| Loans acquired for sale at fair value | 25,779 | 1,609,816 | 6.42% | 23,442 | 1,767,327 | 5.32% |
| Loans at fair value: |  |  |  |  |  |  |
| Held by variable interest entities | 13,644 | 1,487,979 | 3.68% | 15,736 | 1,753,381 | 3.60% |
| Distressed | 31 | 3,378 | 3.68% | 14 | 3,996 | 1.41% |
|  | 13,675 | 1,491,357 | 3.68% | 15,750 | 1,757,377 | 3.59% |
| Deposits securing CRT arrangements | 15,779 | 1,286,987 | 4.92% | 2,384 | 1,492,997 | 0.64% |
|  | 124,487 | 9,583,125 | 5.21% | 83,402 | 8,560,250 | 3.91% |
| Placement fees relating to custodial funds | 37,677 |  |  | 7,204 |  |  |
| Other | 520 |  |  | 92 |  |  |
|  | 162,684 | $9,583,125 | 6.81% | 90,698 | $8,560,250 | 4.25% |
| Liabilities: |  |  |  |  |  |  |
| Assets sold under agreements to repurchase | $96,346 | $6,414,368 | 6.02% | $25,048 | $5,293,064 | 1.90% |
| Mortgage loan participation purchase and sale agreements | 413 | 23,767 | 6.97% | 232 | 33,908 | 2.74% |
| Notes payable secured by credit risk transfer and mortgage servicing assets | 66,150 | 3,074,414 | 8.63% | 24,413 | 2,408,122 | 4.07% |
| Exchangeable senior notes | 8,395 | 547,264 | 6.15% | 8,334 | 544,341 | 6.14% |
| Asset-backed financings at fair value | 12,791 | 1,392,667 | 3.68% | 15,016 | 1,646,941 | 3.66% |
|  | 184,095 | 11,452,480 | 6.45% | 73,043 | 9,926,376 | 2.95% |
| Interest shortfall on repayments of loans serviced for Agency securitizations | 1,790 |  |  | 4,430 |  |  |
| Interest on loan impound deposits | 1,315 |  |  | 677 |  |  |
| Other | 190 |  |  | — |  |  |
|  | 187,390 | $11,452,480 | 6.56% | 78,150 | $9,926,376 | 3.16% |
| Net interest (expense) income | $(24,706) |  |  | $12,548 |  |  |

67

*(dollars in thousands)*

| Assets: | Six months ended June 30, 2023 Interest income/ expense | Average balance | Interest yield/ cost % | Six months ended June 30, 2022 Interest income/ expense | Average balance | Interest yield/ cost % |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Cash and short-term investments | $13,023 | $551,776 | 4.76% | $1,578 | $254,431 | 1.25% |
| Mortgage-backed securities | 113,681 | 4,547,445 | 5.04% | 55,051 | 3,018,968 | 3.68% |
| Loans acquired for sale at fair value | 62,767 | 1,992,706 | 6.35% | 42,690 | 1,946,485 | 4.42% |
| Loans at fair value: |  |  |  |  |  |  |
| Held by variable interest entities | 28,810 | 1,497,508 | 3.88% | 28,585 | 1,655,725 | 3.48% |
| Distressed | 24 | 3,428 | 1.41% | 188 | 4,030 | 9.41% |
|  | 28,834 | 1,500,936 | 3.87% | 28,773 | 1,659,755 | 3.50% |
| Deposits securing CRT arrangements | 29,991 | 1,300,258 | 4.65% | 2,606 | 1,561,190 | 0.34% |
|  | 248,296 | 9,893,121 | 5.06% | 130,698 | 8,440,829 | 3.12% |
| Placement fees relating to custodial funds | 66,597 |  |  | 10,914 |  |  |
| Other | 810 |  |  | 149 |  |  |
|  | $315,703 | $9,893,121 | 6.44% | $141,761 | $8,440,829 | 3.39% |
| Liabilities: |  |  |  |  |  |  |
| Assets sold under agreements to repurchase | $196,613 | $6,826,134 | 5.81% | $40,619 | $5,147,290 | 1.59% |
| Mortgage loan participation purchase and sale agreements | 706 | 20,456 | 6.96% | 408 | 34,854 | 2.36% |
| Notes payable secured by credit risk transfer and mortgage servicing assets | 121,097 | 2,939,303 | 8.31% | 44,779 | 2,423,363 | 3.73% |
| Exchangeable senior notes | 16,775 | 546,890 | 6.19% | 16,654 | 536,986 | 6.25% |
| Asset-backed financings at fair value | 25,144 | 1,402,275 | 3.62% | 26,043 | 1,554,290 | 3.38% |
|  | 360,335 | 11,735,058 | 6.19% | 128,503 | 9,696,783 | 2.67% |
| Interest shortfall on repayments of loans serviced for Agency securitizations | 2,819 |  |  | 11,472 |  |  |
| Interest on loan impound deposits | 2,658 |  |  | 1,689 |  |  |
| Other | 715 |  |  | — |  |  |
|  | $366,527 | $11,735,058 | 6.30% | $141,664 | $9,696,783 | 2.95% |
| Net interest (expense) income | $(50,824) |  |  | $97 |  |  |

68

The effects of changes in the yields and costs and composition of our investments on our net interest expense are summarized below:

*(in thousands)*

| Assets: | Quarter ended June 30, 2023 vs. Quarter ended June 30, 2022 Increase (decrease) due to changes in Rate | Volume | Total | Six months ended June 30, 2023 vs. Six months ended June 30, 2022 Increase (decrease) due to changes in Rate | Volume | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Cash and short-term investments | $4,166 | $1,371 | $5,537 | $8,079 | $3,366 | $11,445 |
| Mortgage-backed securities | 3,007 | 18,884 | 21,891 | 24,791 | 33,839 | 58,630 |
| Loans acquired for sale at fair value | 4,556 | (2,219) | 2,337 | 19,040 | 1,037 | 20,077 |
| Loans at fair value: |  |  |  |  |  |  |
| Held by variable interest entities | 335 | (2,427) | (2,092) | 3,099 | (2,874) | 225 |
| Distressed | 19 | (2) | 17 | (139) | (25) | (164) |
|  | 354 | (2,429) | (2,075) | 2,960 | (2,899) | 61 |
| Deposits securing CRT arrangements | 13,768 | (373) | 13,395 | 27,892 | (507) | 27,385 |
|  | 25,851 | 15,234 | 41,085 | 82,762 | 34,836 | 117,598 |
| Placement fees relating to custodial funds |  | 30,473 | 30,473 |  | 55,683 | 55,683 |
| Other |  | 428 | 428 |  | 661 | 661 |
|  | 25,851 | 46,135 | 71,986 | 82,762 | 91,180 | 173,942 |
| Liabilities: |  |  |  |  |  |  |
| Assets sold under agreements to repurchase | 64,967 | 6,331 | 71,298 | $138,898 | $17,096 | $155,994 |
| Mortgage loan participation purchase and sale agreement | 268 | (87) | 181 | 524 | (226) | 298 |
| Notes payable secured by credit risk transfer and mortgage servicing assets | 33,483 | 8,254 | 41,737 | 65,054 | 11,264 | 76,318 |
| Exchangeable senior notes | 16 | 45 | 61 | (184) | 305 | 121 |
| Asset-backed financings at fair value | 110 | (2,335) | (2,225) | 1,752 | (2,651) | (899) |
|  | 98,844 | 12,208 | 111,052 | 206,044 | 25,788 | 231,832 |
| Interest shortfall on repayments of loans serviced for Agency securitizations |  | (2,640) | (2,640) |  | (8,653) | (8,653) |
| Interest on loan impound deposits |  | 638 | 638 |  | 969 | 969 |
| Other |  | 190 | 190 |  | 715 | 715 |
|  | 98,844 | 10,396 | 109,240 | 206,044 | 18,819 | 224,863 |
| Increase in net interest (expense) income | $(72,993) | $35,739 | $(37,254) | $(123,282) | $72,361 | $(50,921) |

The increase in net interest expense during the quarter and six months ended June 30, 2023, as compared to the same periods in 2022, is due to faster repricing of our debt than our interest earning assets.

### Expenses

Our expenses are summarized below:

*(in thousands)*

| Earned by PennyMac Financial Services, Inc.: | Quarter ended June 30, 2023 | 2022 | Six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Loan servicing fees | $20,317 | $20,335 | $40,766 | $41,423 |
| Loan fulfillment fees | 5,441 | 20,646 | 17,364 | 37,400 |
| Management fees | 7,078 | 7,910 | 14,335 | 16,027 |
| Professional services | 1,881 | 1,252 | 3,404 | 5,277 |
| Loan origination | 897 | 2,782 | 3,075 | 5,624 |
| Compensation | 1,279 | 1,549 | 2,818 | 2,986 |
| Safekeeping | 1,124 | 1,021 | 2,240 | 3,416 |
| Loan collection and liquidation | 909 | 1,251 | 1,488 | 4,428 |
| Other | 4,673 | 4,622 | 9,674 | 8,568 |
|  | $43,599 | $61,368 | $95,164 | $125,149 |

Expenses decreased $17.8 million and $30.0 million, or 29% and 24%, respectively, during the quarter and six months ended June 30, 2023, as compared to the same periods in 2022, as discussed below.

#### Loan Servicing Fees

Loan servicing fees payable to PLS are summarized below:

*(in thousands)*

| Loan servicing fees: | Quarter ended June 30, 2023 | 2022 | Six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Loans acquired for sale at fair value | $172 | $258 | $457 | $522 |
| Loans at fair value | 31 | 106 | 151 | 316 |
| MSRs | 20,114 | 19,971 | 40,158 | 40,585 |
|  | $20,317 | $20,335 | $40,766 | $41,423 |
| Average investment in loans: |  |  |  |  |
| Acquired for sale at fair value | $1,609,816 | $1,767,327 | $1,992,706 | $1,946,485 |
| At fair value | $1,491,357 | $1,757,377 | $1,500,936 | $1,659,755 |
| Average MSR portfolio UPB | $232,008,151 | $220,402,133 | $231,381,212 | $219,051,445 |

Loan servicing fees decreased by $18,000 and $657,000 during the quarter and six months ended June 30, 2023, respectively, as compared to the same periods in 2022. We incur loan servicing fees primarily in support of our MSR portfolio. The decrease in loan servicing fees is due to reductions in COVID-19 pandemic-related forbearance and modification activities, partially offset by growth in our MSR portfolio.

#### Loan Fulfillment Fees

Loan fulfillment fees represent fees we pay to PLS for the services it performs on our behalf in connection with our acquisition, packaging and sale of loans. Fulfillment fees decreased $15.2 million and $20.0 million during the quarter and six months ended June 30, 2023, respectively, compared to the same periods in 2022. The decrease was due to a decrease in loan commitment volume. Our loan fulfillment fee structure is described in Note 4 – *Transactions with Related Parties* to the consolidated financial statements included in this Report.

#### Management Fees

Management fees payable to PCM are summarized below:

*(in thousands)*

|  | Quarter ended June 30, 2023 | 2022 | Six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Base | $7,078 | $7,910 | $14,335 | $16,027 |
| Performance incentive | — | — | — | — |
|  | $7,078 | $7,910 | $14,335 | $16,027 |
| Average shareholders' equity amounts used to calculate base management fee expense | $1,892,505 | $2,125,557 | $1,927,305 | $2,168,930 |

Management fees decreased by $832,000 and $1.7 million during the quarter and six months ended June 30, 2023, respectively, as compared to the same periods in 2022. This decrease reflects the decrease in our average shareholders’ equity during the quarter and six months ended June 30, 2023, as compared to the same periods in 2022.

#### Loan origination

Loan origination expenses decreased $1.9 million and $2.5 million, or 68% and 45%, during the quarter and six months ended June 30, 2023, respectively, as compared to the same periods in 2022, primarily reflecting a decrease in our loan originations produced through our correspondent production activities.

#### Other Expenses

Other expenses are summarized below:

*(in thousands)*

|  | Quarter ended June 30, 2023 | 2022 | Six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Common overhead allocation from PFSI | $2,140 | $1,809 | $3,961 | $3,673 |
| Technology | 372 | 615 | 920 | 1,083 |
| Bank service charges | 499 | 625 | 995 | 1,190 |
| Insurance | 587 | 410 | 1,022 | 805 |
| Other | 1,075 | 1,163 | 2,776 | 1,817 |
|  | $4,673 | $4,622 | $9,674 | $8,568 |

#### Income Taxes

We have elected to treat PMC as a TRS. Income from a TRS is only included as a component of REIT taxable income to the extent that the TRS makes dividend distributions of income to us. A TRS is subject to corporate federal and state income tax. Accordingly, a provision for income taxes for PMC is included in the accompanying consolidated statements of operations.

The Company’s effective tax rate was 47.4% and 0.4% with consolidated pretax income of $46.9 million $85.7 million for the quarter and six months ended June 30, 2023. The Company’s TRS recognized a tax expense of $21.2 million on pretax income of $77.9 million and a tax benefit of $0.6 million on a pretax loss of $12.2 million for the quarter and six months ended June 30, 2023. For the same periods in 2022, the TRS recognized tax expense of $32.6 million on pretax income of $147.6 million and tax expense of $70.5 million on pretax income of $420.4 million, respectively. The Company’s reported consolidated pretax loss for the quarter and six months ended June 30, 2022 was $39.9 million and $21.8 million, respectively. The primary difference between the Company’s effective tax rate and the statutory tax rate is generally attributable to nontaxable REIT income resulting from the dividends paid deduction.

The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. On the basis of this evaluation, as of June 30, 2023, the valuation allowance remains zero as a result of cumulative GAAP income at the TRS for the three-year period ended June 30, 2023. The amount of deferred tax assets considered realizable could be adjusted in future periods based on future income.

In general, cash dividends declared by the Company will be considered ordinary income to the shareholders for income tax purposes. Some portion of the dividends may be characterized as capital gain distributions or a return of capital. For tax years beginning after December 31, 2017, the 2017 Tax Cuts and Jobs Act (subject to certain limitations) provides a 20% deduction from taxable income for ordinary REIT dividends.

### Balance Sheet Analysis

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

*(in thousands)*

| Assets | June 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Cash | $238,805 | $111,866 |
| Investments: |  |  |
| Short-term | 242,037 | 252,271 |
| Mortgage-backed securities at fair value | 4,731,341 | 4,462,601 |
| Loans acquired for sale at fair value | 1,080,047 | 1,821,933 |
| Loans at fair value | 1,457,272 | 1,513,399 |
| Derivative assets | 29,012 | 84,940 |
| Deposits securing credit risk transfer arrangements | 1,269,558 | 1,325,294 |
| MSRs | 3,977,938 | 4,012,737 |
|  | 12,787,205 | 13,473,175 |
| Other | 358,912 | 336,523 |
| Total assets | $13,384,922 | $13,921,564 |
| Liabilities |  |  |
| Debt: |  |  |
| Short-term | $5,949,412 | $6,616,528 |
| Long-term | 5,091,342 | 4,787,162 |
|  | 11,040,754 | 11,403,690 |
| Other | 412,672 | 555,059 |
| Total liabilities | 11,453,426 | 11,958,749 |
| Shareholders’ equity | 1,931,496 | 1,962,815 |
| Total liabilities and shareholders’ equity | $13,384,922 | $13,921,564 |

Total assets decreased by approximately $536.6 million, or 4%, during the period from December 31, 2022 through June 30, 2023, primarily due to a decrease of $741.9 million in *Loans acquired for sale at fair value,* decreases in MSRs of $34.8 million and *Deposits securing credit risk transfer arrangements* of $55.7 million, partially offset by a $268.7 million increase in *Mortgage-backed securities at fair value.*

### Asset Acquisitions

Our asset acquisitions are summarized below.

#### Correspondent Production

Following is a summary of our correspondent production acquisitions at fair value:

*(in thousands)*

| Correspondent loan purchases: | Quarter ended June 30, 2023 | 2022 | Six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| GSE eligible — held for sale to nonaffiliates (1) | $10,156,763 | $10,428,922 | $20,911,835 | $20,626,883 |
| Held for sale to PLS (2) | 11,368,846 | 10,837,817 | 21,030,806 | 23,971,277 |
| Advances to home equity lines of credit | 4 | 50 | 50 | 97 |
|  | $21,525,613 | $21,266,789 | $41,942,691 | $44,598,257 |

(1) GSE eligibility refers to the eligibility of loans for sale to Fannie Mae or Freddie Mac. The Company sells or finances a portion of its GSE eligible loan production to other investors, including PLS.

(2) The Company sells a portion of its production to PLS, including all of its loans eligible for inclusion in Ginnie Mae securities. The Company is not approved by Ginnie Mae as an issuer of Ginnie Mae-guaranteed securities which are backed by government-insured or guaranteed loans. The Company earns a sourcing fee for all loans that it purchases from correspondent sellers and subsequently sells to PLS as described in Note 4 – *Transactions with Related Parties – Operating activities – Correspondent Production Activities.*

During the quarter and six months ended June 30, 2023, we purchased for sale $21.5 billion and $41.9 billion, respectively, in fair value of correspondent production loans as compared to $21.3 billion and $44.6 billion during the same periods in 2022.

#### Other Investment Activities

Following is a summary of our acquisitions of mortgage-related investments held in our credit rate sensitive strategies and interest rate sensitive strategies segments:

*(in thousands)*

| Credit sensitive assets: | Quarter ended June 30, 2023 | 2022 | Six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Subordinate credit-linked securities | $51,669 | $125,669 | $64,061 | $125,669 |
| Loans secured by investment properties, net of associated asset-backed financing | — | — | — | 23,485 |
|  | 51,669 | 125,669 | 64,061 | 149,154 |
| Interest rate sensitive assets: |  |  |  |  |
| Agency fixed-rate pass-through securities (net of sales) | 166,082 | 979,457 | 308,742 | 1,526,562 |
| Senior non-Agency securities | 41,974 | (85,850) | 41,974 | 28,819 |
| Mortgage servicing rights received in loan sales | 90,747 | 170,658 | 191,365 | 365,254 |
|  | 298,803 | 1,064,265 | 542,081 | 1,920,635 |
|  | $350,472 | $1,189,934 | $606,142 | $2,069,789 |

Our acquisitions during the quarter and six months ended June 30, 2023 and 2022 were financed through the use of a combination of proceeds from borrowings and liquidations of existing investments. We continue to identify additional means of increasing our investment portfolio through cash flow from our business activities, existing investments, borrowings, and transactions that minimize current cash outlays. However, we expect that, over time, our ability to continue our investment portfolio growth will depend on our ability to raise additional equity capital.

### Investment Portfolio Composition

#### Mortgage-Backed Securities

Following is a summary of our MBS holdings:

*(dollars in thousands)*

|  | June 30, 2023 Fair value | Principal | Average Life (in years) | Coupon | December 31, 2022 Fair value | Principal | Average Life (in years) | Coupon |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Agency pass-through securities | $4,409,581 | $4,491,288 | 7.4 | 5.1% | $4,262,502 | $4,693,045 | 10.1 | 3.5% |
| Subordinate credit-linked securities | 259,464 | 254,113 | 4.9 | 11.9% | 177,898 | 184,620 | 4.6 | 11.2% |
| Senior non-Agency securities | 62,296 | 70,383 | 9.0 | 4.3% | 22,201 | 28,103 | 14.3 | 2.5% |
|  | $4,731,341 | $4,815,784 |  |  | $4,462,601 | $4,905,768 |  |  |

#### Credit Risk Transfer Arrangements

Following is a summary of the composition of the loans underlying our investment in funded CRT arrangements:

*(in thousands)*

| Carrying value of CRT arrangements: Derivative and credit risk transfer strip assets (liabilities), net | June 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| CRT strips | $(78,569) | $(137,193) |
| CRT derivatives | (4,394) | (22,098) |
|  | (82,963) | (159,291) |
| Deposits securing CRT arrangements | 1,269,558 | 1,325,294 |
| Interest-only security payable at fair value | (24,060) | (21,925) |
|  | $1,162,535 | $1,144,078 |
| UPB of loans subject to credit guarantee obligations | $24,167,673 | $25,315,524 |

73

Following is a summary of the composition of the loans underlying our investment in CRT arrangements as of June 30, 2023:

*(in millions)*

| UPB: | Year of origination 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Outstanding | $4,889 | $11,230 | $2,931 | $2,472 | $2,012 | $634 | $24,168 |
| Liquidations: |  |  |  |  |  |  |  |
| Balances | $— | $3.9 | $54.5 | $157.7 | $118.2 | $58.9 | $393.2 |
| Losses | $— | $0.2 | $5.5 | $19.5 | $12.4 | $7.0 | $44.6 |
| Modifications: |  |  |  |  |  |  |  |
| Balances | $66.8 | $540.6 | $298.1 | $— | $— | $— | $905.5 |
| Losses | $0.9 | $10.5 | $8.4 | $— | $— | $— | $19.8 |

*(in millions)*

| Original debt-to income ratio | Year of origination 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| \<25% | $1,008 | $1,682 | $268 | $310 | $300 | $68 | $3,636 |
| 25 - 30% | 786 | 1,420 | 240 | 284 | 273 | 70 | 3,073 |
| 30 - 35% | 862 | 1,720 | 343 | 383 | 346 | 95 | 3,749 |
| 35 - 40% | 845 | 2,010 | 472 | 448 | 382 | 115 | 4,272 |
| 40 - 45% | 844 | 2,426 | 695 | 631 | 528 | 172 | 5,296 |
| \>45% | 544 | 1,972 | 913 | 416 | 183 | 114 | 4,142 |
|  | $4,889 | $11,230 | $2,931 | $2,472 | $2,012 | $634 | $24,168 |
| Weighted average | 33.4% | 35.8% | 39.0% | 36.5% | 35.0% | 31.3% | 35.6% |

*(in millions)*

| Origination FICO credit score | Year of origination 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| 600 - 649 | $34 | $159 | $69 | $29 | $19 | $11 | $321 |
| 650 - 699 | 244 | 1,061 | 619 | 376 | 248 | 126 | 2,674 |
| 700 - 749 | 1,153 | 3,297 | 1,036 | 841 | 633 | 193 | 7,153 |
| 750 or greater | 3,450 | 6,684 | 1,200 | 1,222 | 1,112 | 304 | 13,972 |
| Not available | 8 | 29 | 7 | 4 | — | — | 48 |
|  | $4,889 | $11,230 | $2,931 | $2,472 | $2,012 | $634 | $24,168 |
| Weighted average | 764 | 754 | 736 | 745 | 751 | 742 | 753 |

*(in millions)*

| Origination loan-to value ratio | Year of origination 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| \<80% | $2,306 | $3,974 | $943 | $805 | $819 | $257 | $9,104 |
| 80-85% | 816 | 2,151 | 693 | 703 | 541 | 168 | 5,072 |
| 85-90% | 316 | 633 | 134 | 127 | 110 | 36 | 1,356 |
| 90-95% | 440 | 1,186 | 337 | 300 | 225 | 68 | 2,556 |
| 95-100% | 1,011 | 3,286 | 824 | 537 | 317 | 105 | 6,080 |
|  | $4,889 | $11,230 | $2,931 | $2,472 | $2,012 | $634 | $24,168 |
| Weighted average | 80.7% | 83.3% | 83.5% | 82.4% | 80.6% | 80.9% | 82.4% |

74

*(in millions)*

| Current loan-to value ratio (1) | Year of origination 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| \<80% | $4,867 | $11,165 | $2,912 | $2,472 | $2,012 | $634 | $24,062 |
| 80-85% | 15 | 45 | 12 | — | — | — | 72 |
| 85-90% | 5 | 12 | 3 | — | — | — | 20 |
| 90-95% | 2 | 4 | 2 | — | — | — | 8 |
| 95-100% | — | 2 | 1 | — | — | — | 3 |
| \>100% | — | 2 | 1 | — | — | — | 3 |
|  | $4,889 | $11,230 | $2,931 | $2,472 | $2,012 | $634 | $24,168 |
| Weighted average | 54.2% | 54.0% | 51.4% | 46.3% | 42.2% | 39.6% | 51.6% |

(1) Based on current UPB compared to estimated fair value of the property securing the loan.

*(in millions)*

| Geographic distribution | Year of origination 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| California | $504 | $1,091 | $360 | $260 | $384 | $116 | $2,715 |
| Florida | 539 | 1,088 | 378 | 258 | 215 | 56 | 2,534 |
| Texas | 589 | 977 | 237 | 210 | 253 | 98 | 2,364 |
| Virginia | 257 | 500 | 105 | 117 | 141 | 61 | 1,181 |
| Maryland | 190 | 472 | 132 | 141 | 132 | 35 | 1,102 |
| Other | 2,810 | 7,102 | 1,719 | 1,486 | 887 | 268 | 14,272 |
|  | $4,889 | $11,230 | $2,931 | $2,472 | $2,012 | $634 | $24,168 |

*(in millions)*

| Regional geographic distribution (1) | Year of origination 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Northeast | $456 | $1,384 | $344 | $360 | $257 | $93 | $2,894 |
| Southeast | 1,661 | 3,866 | 1,051 | 850 | 632 | 195 | 8,255 |
| Midwest | 455 | 1,181 | 251 | 235 | 182 | 46 | 2,350 |
| Southwest | 1,281 | 2,492 | 556 | 483 | 377 | 134 | 5,323 |
| West | 1,036 | 2,307 | 729 | 544 | 564 | 166 | 5,346 |
|  | $4,889 | $11,230 | $2,931 | $2,472 | $2,012 | $634 | $24,168 |

(1) Northeast consists of CT, DE, ME, MA, NH, NJ, NY, PA, PR, RI, VT, VI; Southeast consists of AL, DC, FL, GA, KY, MD, MS, NC, SC, TN, VA, WV; Midwest consists of IL, IN, IA, MI, MN, NE, ND, OH, SD, WI; Southwest consists of AZ, AR, CO, KS, LA, MO, NM, OK, TX, UT; and West consists of AK, CA, GU, HI, ID, MT, NV, OR, WA and WY.

*(in millions)*

| Collection status Delinquency | Year of origination 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Current - 89 Days | $4,871 | $11,127 | $2,881 | $2,459 | $2,007 | $633 | $23,978 |
| 90 - 179 Days | 9 | 46 | 23 | 9 | 4 | 1 | 92 |
| 180+ Days | 7 | 50 | 21 | 3 | 1 | — | 82 |
| Foreclosure | 2 | 7 | 6 | 1 | — | — | 16 |
|  | $4,889 | $11,230 | $2,931 | $2,472 | $2,012 | $634 | $24,168 |
| Bankruptcy | $2 | $25 | $18 | $7 | $7 | $1 | $60 |

75

### Cash Flows

Our cash flows for the quarters ended June 30, 2023 and 2022 are summarized below:

*(in thousands)*

|  | Six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: |
| Operating activities | $743,524 | $1,677,551 |
| Investing activities | (132,656) | (785,106) |
| Financing activities | (483,929) | (619,419) |
| Net cash flows | $126,939 | $273,026 |

Our cash flows resulted in a net increase in cash of $126.9 million during the six months ended June 30, 2023, as discussed below.

#### Operating activities

Cash provided by operating activities totaled $743.5 million during the six months ended June 30, 2023, as compared to cash provided by our operating activities of $1.7 billion during the six months ended June 30, 2022. Cash flows from operating activities are most influenced by cash flows from loans acquired for sale as shown below:

*(in thousands)*

| Operating cash flows from: | Six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: |
| Loans acquired for sale | $576,825 | $1,545,213 |
| Other | 166,699 | 132,338 |
|  | $743,524 | $1,677,551 |

Cash flows from loans acquired for sale primarily reflect changes in the level of production inventory from the beginning to end of the periods presented. Our inventory of loans held for sale decreased during both of the six month periods ended June 30, 2023.

#### Investing activities

Net cash used in our investing activities was $132.7 million for the six months ended June 30, 2023, as compared to net cash used in our investing activities of $785.1 million for the six months ended June 30, 2022, primarily due to purchases of our investments in MBS in excess of sales and repayments of such assets and an increase in margin deposits partially offset by repayments from our investments in CRT arrangements.

#### Financing activities

Net cash used in our financing activities was $483.9 million for the six months ended June 30, 2023, as compared to net cash used in our financing activities of $619.4 million for the six months ended June 30, 2022. This change primarily reflects decreased financing requirements relating to loans acquired for sale.

As discussed below in *Liquidity and Capital Resources*, our Manager continually evaluates and pursues additional sources of financing to provide us with future investing capacity. We do not raise equity or enter into borrowings for the purpose of financing the payment of dividends. We believe that our cash earnings, are adequate to fund our operating expenses and dividend payment requirements. However, we manage our liquidity in the aggregate and are reinvesting our cash flows in new investments as well as using such cash to fund our dividend requirements.

### Liquidity and Capital Resources

Our liquidity reflects our ability to meet our current obligations (including the purchase of loans from correspondent sellers, our operating expenses and, when applicable, retirement of, and margin calls relating to, our debt and derivatives positions), make investments as our Manager identifies them, pursue our share repurchase program and make distributions to our shareholders. We generally need to distribute at least 90% of our taxable income each year (subject to certain adjustments) to our shareholders to qualify as a REIT under the Internal Revenue Code. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital to support our activities.

We expect our primary sources of liquidity to be cash flows from our investment portfolio, including cash earnings on our investments, cash flows from business activities, liquidation of existing investments and proceeds from borrowings and/or additional equity offerings. When we finance a particular asset, the amount borrowed is less than the asset’s fair value and we must provide the cash in the amount of such difference. Our ability to continue making investments is dependent on our ability to invest the cash representing such difference.

Debt Financing

Our current debt financing strategy is to finance our assets where we believe such borrowing is prudent, appropriate and available. We make collateralized borrowings in the form of sales of assets under agreements to repurchase, loan participation purchase and sale agreements and notes payable, including secured term financing for our MSRs and our CRT arrangements that has allowed us to more closely match the term of our borrowings to the expected lives of the assets securing those borrowings.

Our debt financing is summarized below:

*(in thousands)*

| Financing Borrowings Short term | Assets financed MBS | Loans acquired for sale | Loans at fair value | CRT assets | MSRs (1) | REO | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Assets sold under agreements to repurchase | $4,561,722 | $958,274 | $64,301 | $46,410 | $283,918 | $— | $5,914,625 |
| Mortgage loan participation purchase and sale agreements | — | 34,787 | — | — | — | — | 34,787 |
| **Long term** |  |  |  |  |  |  |  |
| Notes payable secured by CRT arrangements and MSRs | — | — | — | 788,774 | 2,369,633 | — | 3,158,407 |
| Asset-backed financings at fair value | — | — | 1,361,108 | — | — | — | 1,361,108 |
| Interest-only security payable | — | — | — | 24,060 | — | — | 24,060 |
| Total secured borrowings | 4,561,722 | 993,061 | 1,425,409 | 859,244 | 2,653,551 | — | 10,492,987 |
| Exchangeable senior notes |  |  |  |  |  |  | 547,767 |
| Total borrowings | $4,561,722 | $993,061 | $1,425,409 | $859,244 | $2,653,551 | $— | 11,040,754 |
| **Shareholders' equity** |  |  |  |  |  |  | 1,931,496 |
| Total financing |  |  |  |  |  |  | $12,972,250 |
| Assets pledged to secure borrowings | $4,731,341 | $1,061,550 | $1,454,798 | $1,274,160 | $3,984,504 | $2,866 | $12,509,219 |
| Debt-to-equity ratio: |  |  |  |  |  |  |  |
| Excluding non-recourse debt |  |  |  |  |  |  | 5.0:1 |
| Total |  |  |  |  |  |  | 5.7:1 |

(1) Amounts pledged to secure borrowings include pledged servicing advances.

Sales of Assets Under Agreements to Repurchase

Our repurchase agreements represent the sales of assets together with agreements for us to buy back the assets at a later date. Following is a summary of the activities in our repurchase agreements financing:

*(in thousands)*

| Assets sold under agreements to repurchase | Quarter ended June 30, 2023 | 2022 | Six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Average balance outstanding | $6,414,368 | $5,293,064 | $6,826,134 | $5,147,290 |
| Maximum daily balance outstanding | $8,499,053 | $6,543,551 | $9,330,819 | $8,187,913 |
| Ending balance |  |  | $5,914,625 | $5,646,402 |

The difference between the maximum and average daily amounts outstanding is primarily due to timing of loan purchases and sales in our correspondent production business. The total facility size of our assets sold under agreements to repurchase was approximately $11.6 billion at June 30, 2023.

Because a significant portion of our current debt facilities consists of short-term borrowings, we expect to either 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.

As discussed above, all of our repurchase agreements, and mortgage loan participation purchase and sale agreements have short-term maturities:

- The transactions relating to loans and REO under agreements to repurchase generally provide for terms of approximately one to two years;
- The transactions relating to loans under mortgage loan participation purchase and sale agreements provide for terms of approximately one year; and
- The transactions relating to assets under notes payable provide for terms ranging from two to five years.

Debt Covenants

Our debt financing agreements require us and certain of our subsidiaries to comply with various financial covenants. As of the filing of this Report, these financial covenants include the following:

- a minimum of $75 million in unrestricted cash and cash equivalents among the Company and/or our subsidiaries; a minimum of $75 million in unrestricted cash and cash equivalents among our Operating Partnership and its consolidated subsidiaries; a minimum of $25 million in unrestricted cash and cash equivalents between PMC and PennyMac Holdings, LLC (“PMH”); a minimum of $25 million in unrestricted cash and cash equivalents at PMC; and a minimum of $10 million in unrestricted cash and cash equivalents at PMH;
- a minimum tangible net worth for the Company of $1.25 billion; a minimum tangible net worth for our Operating Partnership of $1.25 billion; a minimum tangible net worth for PMH of $250 million; and a minimum tangible net worth for PMC of $300 million;
- a maximum ratio of total liabilities to tangible net worth of less than 10:1 for PMC and PMH and 7:1 for the Company and our Operating Partnership; and
- at least two warehouse or repurchase facilities that finance amounts and assets similar to those being financed under our existing debt financing agreements.

Although these financial covenants limit the amount of indebtedness we may incur and impact 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.

PLS is also subject to various financial covenants, both as a borrower under its own financing arrangements and as our servicer under certain of our debt financing agreements. The most significant of these 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.

Many of our debt financing agreements contain a condition precedent to obtaining additional funding that requires us to maintain positive net income for at least one (1) of the previous two consecutive quarters, or other similar measures. For the most recent fiscal quarter, the Company is compliant with all such conditions. However, we may be required to obtain waivers from certain lenders in the future if this condition precedent is not met.

Our debt financing 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 decline in the market value (as determined by the applicable lender) of the assets subject to the related financing agreement, although in some instances we may agree with the lender upon certain thresholds (in dollar amounts or percentages based on the market value of the assets) that must be exceeded before a margin deficit will arise. 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.

Regulatory Capital and Liquidity Requirements

In addition to the financial covenants imposed upon us and PLS under our debt financing agreements, we and/or PLS, as applicable, are also subject to liquidity and net worth requirements established by the Federal Housing Finance Agency (“FHFA”) for Agency sellers/servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established minimum liquidity and net worth requirements for approved non-depository single-family sellers/servicers in the case of FHFA, and for approved single-family issuers in the case of Ginnie Mae, as summarized below:

- A minimum net worth of a base of $2.5 million plus 25 basis points of UPB for total 1-4 unit residential loans serviced;
- A tangible net worth/total assets ratio greater than or equal to 6%;
- A liquidity requirement 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 pandemic related 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;
- In the case of PLS, liquidity equal to the greater of $1.0 million or 0.10% (10 basis points) of its outstanding Ginnie Mae single-family securities, which must be met with cash and cash equivalents; and
- In the case of PLS, net worth equal to $2.5 million plus 0.35% (35 basis points) of its outstanding Ginnie Mae single-family obligations.

We believe that we and PLS 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 seller/servicers of mortgage loans to Fannie Mae and Freddie Mac and issuers of Ginnie Mae securities. We believe that we and PLS were in compliance with the applicable Agencies’ revised requirements as of June 30, 2023.

Our Manager continues to explore a variety of additional means of financing our business, including debt financing through bank warehouse lines of credit, repurchase agreements, term financing, securitization transactions and additional equity offerings. However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing will take or that such efforts will be successful.

### Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

#### Off-Balance Sheet Arrangements

As of June 30, 2023, we have not entered into any off-balance sheet arrangements.

All debt financing arrangements that matured between June 30, 2023 and the date of this Report have been renewed, extended or replaced.

The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to our assets sold under agreements to repurchase is summarized by counterparty below as of June 30, 2023:

*(in thousands)*

| Counterparty | Amount at risk |
| --- | ---: |
| Barclays Capital Inc. | 61,160 |
| Goldman Sachs & Co. LLC | 58,766 |
| Atlas Securitized Products, L.P. | 55,203 |
| Bank of America, N.A. | 53,126 |
| Citibank, N.A. | 47,728 |
| JPMorgan Chase & Co. | 45,064 |
| Wells Fargo Securities, LLC | 27,319 |
| Daiwa Capital Markets America Inc. | 9,768 |
| RBC Capital Markets, L.P. | 7,388 |
| Amherst Pierpont Securities LLC | 7,051 |
| Nomura Holdings America, Inc. | 3,336 |
| Morgan Stanley & Co. LLC | 3,258 |
| Mizuho Financial Group | 1,706 |
| BNP Paribas Corporate & Institutional Banking | 1,407 |
|  | $382,280 |

### 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, 2022 contains a discussion of our critical accounting policies, which utilize relevant critical accounting estimates.

## Market risk

As filed, 4,165 characters.

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 real estate risk, credit risk, interest rate risk, prepayment risk, inflation risk and market value risk.

Our primary trading asset is our inventory of loans acquired for sale. We believe that such assets’ fair values respond primarily to changes in the market interest rates for comparable recently-originated loans. Our other market-risk assets are a substantial portion of our investments and are primarily comprised of MSRs, CRT arrangements and MBS. We believe that the fair values of MSRs and MBS also respond primarily to changes in the market interest rates for comparable loans or yields on MBS. Changes in interest rates are reflected in the prepayment speeds underlying these investments and in the pricing spread (an element of the discount rate) used in their valuation. We believe that the primary market risks to the fair values of our investment in CRT arrangements are changes in market credit spreads and the fair value of the real estate securing the loans underlying such arrangements.

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 assumptions used; and do not incorporate other factors that would affect our overall financial performance in such scenarios, including operational adjustments made by management to account for changing circumstances. For these reasons, the following estimates should not be viewed as earnings forecasts.

#### Mortgage-backed securities at fair value

The following table summarizes the estimated change in fair value of our mortgage-backed securities as of June 30, 2023, given several hypothetical (instantaneous) changes in interest rates and parallel shifts in the yield curve:

|  |  |  |  |  |  |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Interest rate shift in basis points** | **-200** | **-75** | **-50** | **50** | **75** | **200** |
|  | **(in thousands)** |  |  |  |  |  |
| Change in fair value | $246,699 | $102,604 | $70,165 | $(78,893) | $(121,782) | $(371,533) |

80

#### Mortgage Servicing Rights

The following tables summarize the estimated change in fair value of MSRs as of June 30, 2023, given several shifts in pricing spread, prepayment speeds and annual per-loan cost of servicing:

|  |  |  |  |  |  |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Change in fair value attributable to shift in:** | **-20%** | **-10%** | **-5%** | **+5%** | **+10%** | **+20%** |
|  | **(in thousands)** |  |  |  |  |  |
| Pricing spread | $198,915 | $97,088 | $47,971 | $(46,861) | $(92,648) | $(181,131) |
| Prepayment speed | $233,186 | $112,117 | $55,006 | $(53,019) | $(104,163) | $(201,226) |
| Annual per-loan cost of servicing | $68,786 | $34,393 | $17,196 | $(17,196) | $(34,393) | $(68,786) |

#### CRT Arrangements

Following is a summary of the effect on fair value of various changes to the pricing spread input used to estimate the fair value of our CRT arrangements given several shifts in pricing spread:

|  |  |  |  |  |  |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Pricing spread shift in basis points** | **-100** | **-50** | **-25** | **25** | **50** | **100** |
|  | **(in thousands)** |  |  |  |  |  |
| Change in fair value | $44,768 | $22,025 | $10,928 | $(10,736) | $(21,311) | $(41,960) |

Following is a summary of the effect on fair value of various instantaneous changes in home values from those used to estimate the fair value of our CRT arrangements given several shifts:

|  |  |  |  |  |  |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Property value shift in %** | **-15%** | **-10%** | **-5%** | **5%** | **10%** | **15%** |
|  | **(in thousands)** |  |  |  |  |  |
| Change in fair value | $(36,208) | $(20,967) | $(9,228) | $7,367 | $13,283 | $18,052 |

## Controls and procedures

As filed, 2,135 characters.

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

### Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 204 characters.

There are 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, 2022, filed with the SEC on February 24, 2023.

Filed Aug 3, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-037947. Last ingested by Listed: Nov 4, 2026, 20:12 ET. No prices; not investment advice.