Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-38727
PennyMac Financial Services, Inc.
(formerly known as New PennyMac Financial Services, Inc.)
(Exact name of registrant as specified in its charter)
Delaware
83-1098934
(State or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification No.)
3043 Townsgate Road, Westlake Village, California
91361
(Address of principal executive offices)
(Zip Code)
(818) 224-7442
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value
PFSI
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Class
Outstanding at November 1, 2019
78,448,596
PENNYMAC FINANCIAL SERVICES, INC.
FORM 10-Q
September 30, 2019
TABLE OF CONTENTS
Page
Special Note Regarding Forward-Looking Statements
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited):
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
2
SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Report”) contains certain forward‑looking statements that are subject to various risks and uncertainties. Forward‑looking statements are generally identifiable by use of forward‑looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” “continue,” “plan” or other similar words or expressions.
Forward‑looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward‑looking information. Examples of forward‑looking statements include the following:
·
projections of our revenues, income, earnings per share, capital structure or other financial items;
descriptions of our plans or objectives for future operations, products or services;
forecasts of our future economic performance, interest rates, profit margins and our share of future markets; and
descriptions of assumptions underlying or relating to any of the foregoing expectations regarding the timing of generating any revenues.
Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward‑looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward‑looking statements. There are a number of factors, many of which are beyond our control that could cause actual results to differ significantly from management’s expectations. Some of these factors are discussed below.
You should not place undue reliance on any forward‑looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on March 5, 2019.
Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:
the continually changing federal, state and local laws and regulations applicable to the highly regulated industry in which we operate;
lawsuits or governmental actions if we do not comply with the laws and regulations applicable to our businesses;
the mortgage lending and servicing-related regulations promulgated by the Consumer Financial Protection Bureau (“CFPB”) and its enforcement of these regulations;
our dependence on U.S. government‑sponsored entities and changes in their current roles or their guarantees or guidelines;
changes to government mortgage modification programs;
certain banking regulations that may limit our business activities;
foreclosure delays and changes in foreclosure practices;
the licensing and operational requirements of states and other jurisdictions applicable to our businesses, to which our bank competitors are not subject;
our ability to manage third-party service providers and vendors and their compliance with laws, regulations and investor requirements;
changes in macroeconomic and U.S. real estate market conditions;
difficulties inherent in growing loan production volume;
3
difficulties inherent in adjusting the size of our operations to reflect changes in business levels;
any required additional capital and liquidity to support business growth that may not be available on acceptable terms, if at all;
changes in prevailing interest rates;
increases in loan delinquencies and defaults;
our reliance on PennyMac Mortgage Investment Trust (“PMT”) as a significant source of financing for, and revenue related to, our mortgage banking business;
our obligation to indemnify third‑party purchasers or repurchase loans if loans that we originate, acquire, service or assist in the fulfillment of, fail to meet certain criteria or characteristics or under other circumstances;
our exposure to counterparties that are unwilling or unable to honor contractual obligations, including their obligation to indemnify us or repurchase defective mortgage loans;
our ability to realize the anticipated benefit of potential future acquisitions of mortgage servicing rights (“MSRs”);
our obligation to indemnify PMT if our services fail to meet certain criteria or characteristics or under other circumstances;
decreases in the returns on the assets that we select and manage for our clients, and our resulting management and incentive fees;
the extensive amount of regulation applicable to our investment management segment;
conflicts of interest in allocating our services and investment opportunities among ourselves and PMT;
the effect of public opinion on our reputation;
our recent growth;
our ability to effectively identify, manage, monitor and mitigate financial risks;
our initiation of new business activities or expansion of existing business activities;
our ability to detect misconduct and fraud;
our ability to effectively deploy new information technology applications and infrastructure;
our ability to mitigate cybersecurity risks and cyber incidents;
our exposure to risks of loss resulting from adverse weather conditions and man-made or natural disasters; and
our organizational structure and certain requirements in our charter documents.
Other factors that could also cause results to differ from our expectations may not be described in this Report or any other document. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.
4
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30,
December 31,
2019
2018
(in thousands, except share amounts)
ASSETS
Cash (includes $101,773 and $108,174 pledged to creditors)
$
201,268
155,289
Short-term investments at fair value
90,663
117,824
Loans held for sale at fair value (includes $4,481,210 and $2,478,858 pledged to creditors)
4,522,971
2,521,647
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors
107,678
131,025
Derivative assets
232,948
96,347
Servicing advances, net (includes valuation allowance of $73,024 and $70,582; $181,747 and $162,895 pledged to creditors)
271,501
313,197
Mortgage servicing rights at fair value (includes $2,550,602 and $2,807,333 pledged to creditors)
2,556,253
2,820,612
Real estate acquired in settlement of loans
20,328
2,250
Operating lease right-of-use assets
53,384
—
Furniture, fixtures, equipment and building improvements, net (includes $22,172 and $16,281 pledged to creditors)
32,221
33,374
Capitalized software, net (includes $14,090 and $1,017 pledged to creditors)
57,975
39,748
Investment in PennyMac Mortgage Investment Trust at fair value
1,667
1,397
Receivable from PennyMac Mortgage Investment Trust
39,744
33,464
Loans eligible for repurchase
892,631
1,102,840
Other
221,967
109,559
Total assets
9,303,199
7,478,573
LIABILITIES
Assets sold under agreements to repurchase
3,538,889
1,933,859
Mortgage loan participation purchase and sale agreements
514,625
532,251
Obligations under capital lease
23,881
6,605
Notes payable
1,293,625
1,292,291
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value
183,141
216,110
Derivative liabilities
14,035
3,064
Operating lease liabilities
72,160
Accounts payable and accrued expenses
215,379
156,212
Mortgage servicing liabilities at fair value
34,294
8,681
Payable to PennyMac Mortgage Investment Trust
61,862
104,631
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement
46,537
Income taxes payable
480,559
400,546
Liability for loans eligible for repurchase
Liability for losses under representations and warranties
19,968
21,155
Total liabilities
7,391,586
5,824,782
Commitments and contingencies – Note 14
STOCKHOLDERS’ EQUITY
Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 78,434,556 and 77,494,332 shares, respectively
8
Additional paid-in capital
1,328,166
1,310,648
Retained earnings
583,439
343,135
Total stockholders' equity
1,911,613
1,653,791
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter ended September 30,
Nine months ended September 30,
(in thousands, except earnings per share)
Revenues
Net gains on loans held for sale at fair value:
From non-affiliates
175,070
38,349
345,045
143,396
From PennyMac Mortgage Investment Trust
60,662
18,565
122,996
45,878
235,732
56,914
468,041
189,274
Loan origination fees:
45,212
24,366
100,721
70,607
4,222
2,119
9,567
4,869
49,434
26,485
110,288
75,476
Fulfillment fees from PennyMac Mortgage Investment Trust
45,149
26,256
102,313
52,759
Net loan servicing fees:
Loan servicing fees:
185,967
147,182
533,510
421,536
12,964
10,071
35,102
30,521
From Investment Funds
Other fees
26,018
17,009
74,043
44,817
224,949
174,262
642,655
496,877
Change in fair value of mortgage servicing rights and mortgage servicing liabilities
(162,584)
(63,450)
(448,240)
(147,670)
Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust
3,864
(1,109)
11,519
(9,026)
(158,720)
(64,559)
(436,721)
(156,696)
Net loan servicing fees
66,229
109,703
205,934
340,181
Net interest income:
Interest income:
81,925
59,152
207,670
152,997
1,527
1,812
5,015
5,686
83,452
60,964
212,685
158,683
Interest expense:
To non-affiliates
54,089
35,035
138,723
96,552
To PennyMac Mortgage Investment Trust
2,291
3,740
8,124
11,584
56,380
38,775
146,847
108,136
Net interest income
27,072
22,189
65,838
50,547
Management fees, net:
10,098
6,482
26,178
17,906
(11)
6,471
17,910
Carried Interest from Investment Funds
(17)
(365)
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust
66
129
377
419
Results of real estate acquired in settlement of loans
188
194
1,205
179
2,379
2,605
6,855
7,048
Total net revenues
436,347
250,929
987,029
733,428
Expenses
Compensation
141,132
103,364
362,449
303,917
Servicing
47,909
40,797
107,210
95,586
Loan origination
34,851
7,203
72,419
14,462
Technology
20,385
15,273
52,431
45,047
Occupancy and equipment
7,257
7,117
21,075
20,001
Professional services
9,682
21,876
18,442
8,934
8,361
23,491
26,582
Total expenses
270,150
189,232
660,951
524,037
Income before provision for income taxes
166,197
61,697
326,078
209,391
Provision for income taxes
44,724
5,545
85,774
17,908
Net income
121,473
56,152
240,304
191,483
Less: Net income attributable to noncontrolling interest
41,663
142,538
Net income attributable to PennyMac Financial Services, Inc. common stockholders
14,489
48,945
Earnings per share
Basic
1.55
0.58
3.08
1.99
Diluted
1.51
0.57
3.01
1.94
Weighted average shares outstanding
78,361
25,125
78,119
24,644
80,382
78,913
79,821
78,954
Dividend declared per share of Class A common stock
0.40
6
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Quarter ended September 30, 2019
Additional
Total
Number of
Par
paid-in
Retained
stockholders'
shares
value
capital
earnings
equity
(in thousands)
Balance, June 30, 2019
78,305
1,317,023
461,966
1,778,997
Stock-based compensation
128
11,095
Issuance of common stock in settlement of directors' fees
48
Balance, September 30, 2019
78,435
Quarter ended September 30, 2018
Class A common stock
Noncontrolling
interest in Private
National Mortgage
Acceptance
Company, LLC
Balance, June 30, 2018
25,009
229,941
299,951
1,332,049
1,861,944
Stock and unit-based compensation
55
2,944
6,472
9,416
Class A common stock dividends ($0.40 per share)
(10,054)
Issuance of Class A common stock in settlement of directors' fees
28
57
85
Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.
131
4,377
(4,377)
Tax effect of exchange of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.
(833)
Balance, September 30, 2018
25,195
236,457
304,386
1,375,864
1,916,710
7
Nine months ended September 30, 2019
Balance, December 31, 2018
77,494
984
18,390
184
Repurchase of common stock
(51)
(1,056)
Nine months ended September 30, 2018
Balance, December 31, 2017
23,530
204,103
265,306
1,250,263
1,719,674
Cumulative effect of change in accounting principle – accounting for all existing classes of mortgage servicing rights at fair value
189
587
776
Balance, January 1, 2018
265,495
1,250,850
1,720,450
285
7,400
18,084
25,484
79
166
245
Repurchase of Class A common stock
(236)
(1,554)
(3,272)
(4,826)
1,616
1
32,501
(32,502)
(6,072)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cash flow from operating activities
Adjustments to reconcile net income to net cash used in operating activities:
Net gains on loans held for sale at fair value
(468,041)
(189,274)
Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread
436,721
156,696
Capitalization of interest on loans held for sale at fair value
(56,800)
(67,025)
Accrual of interest on excess servicing spread financing
Amortization of net debt issuance (premiums) and costs
(6,601)
(19,198)
365
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust
(270)
(313)
Results of real estate acquired in settlement in loans
(1,205)
(179)
Stock-based compensation expense
19,124
20,766
Provision for servicing advance losses
19,973
24,046
Depreciation and amortization
10,650
9,046
Amortization of right-of-use assets
7,258
Purchase of loans held for sale from PennyMac Mortgage Investment Trust
(32,619,639)
(28,584,762)
Origination of loans held for sale
(7,249,762)
(3,640,045)
Purchase of loans held for sale from nonaffiliates
(1,132,749)
(409,546)
Purchase of loans from Ginnie Mae securities and early buyout investors for modification and subsequent sale
(4,172,281)
(3,342,029)
Sale to non-affiliates and principal payments of loans held for sale
39,084,441
34,208,217
Sale of loans held for sale to PennyMac Mortgage Investment Trust
4,095,079
2,336,162
Repurchase of loans subject to representations and warranties
(15,427)
(24,891)
Settlement of repurchase agreement derivatives
31,993
19,460
(Increase) decrease in servicing advances
(9,871)
35,813
Sale of real estate acquired in settlement of loans
17,141
3,004
Increase in receivable from PennyMac Mortgage Investment Trust
(9,598)
(2,825)
(Increase) decrease in other assets
(22,415)
9,291
Decrease in operating lease liabilities
(9,234)
Increase in accounts payable and accrued expenses
78,800
14,021
Decrease in payable to PennyMac Mortgage Investment Trust
(45,869)
(46,731)
Increase in income taxes payable
80,013
19,448
Net cash (used in) provided by operating activities
(1,690,141)
732,584
Cash flow from investing activities
Decrease in short-term investments
27,161
24,604
Net change in assets purchased from PMT under agreement to resell
23,347
11,000
Net settlement of derivative financial instruments used for hedging
542,139
(182,402)
Purchase of mortgage servicing rights
(227,445)
(180,139)
Purchase of furniture, fixtures, equipment and leasehold improvements
(5,534)
(8,919)
Acquisition of capitalized software
(22,190)
(13,091)
Increase in margin deposits
(168,062)
(836)
Net cash provided by (used in) investing activities
169,416
(349,783)
Cash flow from financing activities
Sale of assets under agreements to repurchase
41,296,345
31,318,277
Repurchase of assets sold under agreements to repurchase
(39,692,086)
(31,960,304)
Issuance of mortgage loan participation purchase and sale certificates
17,498,589
19,398,281
Repayment of mortgage loan participation purchase and sale certificates
(17,516,431)
(19,401,301)
Advance of obligations under capital lease
25,123
Repayment of obligations under capital lease
(7,847)
(11,341)
Advance on notes payable
1,300,000
Repayment of notes payable
(900,000)
Repayment of excess servicing spread financing
(30,901)
(35,852)
Payment of debt issuance costs
(4,489)
(15,320)
Issuance of common stock pursuant to exercise of stock options
3,900
4,718
Payment of withholding taxes relating to stock-based compensation
(4,634)
Payment of dividend to Class A common stockholders
Net cash provided by (used in) financing activities
1,566,513
(317,722)
Net increase in cash and restricted cash
45,788
65,079
Cash and restricted cash at beginning of period
155,924
38,173
Cash and restricted cash at end of period
201,712
103,252
Cash and restricted cash at end of period are comprised of the following:
Cash
102,627
Restricted cash included in Other assets
444
625
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1—Organization
PennyMac Financial Services, Inc. (“PFSI” or the “Company”) is a holding corporation and its primary assets are direct and indirect equity interests in Private National Mortgage Acceptance Company, LLC (“PennyMac”). The Company is the managing member of PennyMac, and it operates and controls all of the businesses and affairs of PennyMac, and consolidates the financial results of PennyMac and its subsidiaries.
PennyMac is a Delaware limited liability company which, through its subsidiaries, engages in mortgage banking and investment management activities. PennyMac’s mortgage banking activities consist of residential mortgage and home equity loan production and loan servicing. PennyMac’s investment management activities and a portion of its loan servicing activities are conducted on behalf of an investment vehicle that invests in residential mortgage and home equity loans and related assets. PennyMac’s primary wholly owned subsidiaries are:
PNMAC Capital Management, LLC (“PCM”)—a Delaware limited liability company registered with the Securities and Exchange Commission (“SEC”) as an investment adviser under the Investment Advisers Act of 1940, as amended. PCM enters into investment management agreements with entities that invest in residential mortgage loans and related assets.
Presently, PCM has a management agreement with PennyMac Mortgage Investment Trust (“PMT”), a publicly held real estate investment trust. Previously, PCM had management agreements with PNMAC Mortgage Opportunity Fund, LLC and PNMAC Mortgage Opportunity Fund, L.P. an affiliate of these registered funds, and PNMAC Mortgage Opportunity Fund Investors, LLC (collectively, the “Investment Funds”). The Investment Funds were dissolved during 2018.
PennyMac Loan Services, LLC (“PLS”) — a Delaware limited liability company that services portfolios of residential mortgage and home equity loans on behalf of non-affiliates and PMT, purchases, originates and sells new prime credit quality residential mortgage and home equity loans and engages in other mortgage banking activities for its own account and the account of PMT.
PLS is approved as a seller/servicer of mortgage loans by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and as an issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”). PLS is a licensed Federal Housing Administration (“FHA”) Nonsupervised Title II Lender with the U.S. Department of Housing and Urban Development (“HUD”) and a lender/servicer with the Veterans Administration (“VA”) and U.S. Department of Agriculture (“USDA”) (each an “Agency” and collectively the “Agencies”).
On November 1, 2018, the Company completed a corporate reorganization (the “Reorganization”) by which it changed its equity structure to create a single class of common stock held by all stockholders at a new top-level publicly traded parent holding corporation, as opposed to the two classes of common stock, Class A and Class B, that were in place before the Reorganization. The predecessor holding company became a consolidated subsidiary of the Company and is considered the predecessor of the Company for accounting purposes. Accordingly, the predecessor holding company's historical consolidated financial statements remain the Company’s historical financial statements. The details of the Reorganization are more fully described in Note 1 – Organization to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
10
Note 2—Basis of Presentation and Recently Issued Accounting Pronouncements
Basis of Presentation
The accompanying consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) for interim financial information and with the SEC’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements and notes do not include all of the information required by GAAP for complete financial statements. This interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, income, and cash flows for the interim periods, but are not necessarily indicative of income to be anticipated for the full year ending December 31, 2019. Intercompany accounts and transactions have been eliminated.
Preparation of financial statements in compliance with GAAP requires management to make judgments and estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results will likely differ from those estimates.
Accounting Change
Effective January 1, 2019, the Company adopted FASB Accounting Standards Update 2016-02, Leases (Topic 842), as amended (“ASU 2016-02”), using the modified retrospective approach. As the result of this adoption, the Company recorded a $58.6 million right-of-use asset, a corresponding lease liability and reclassified $20.7 million of deferred rent from accrued liabilities to the lease liability for a total lease liability of $79.3 million. The Company did not adjust amounts reported in the prior comparative period. The adoption of ASU 2016-02 did not have any effect on the Company’s consolidated statements of income, stockholder’s equity or cash flows.
As part of its adoption of ASU 2016-02, the Company made the following accounting policy elections:
to retain its existing classification of existing leases; and
to exclude from its consolidated balance sheet leases with initial terms that are less than or equal to 12 months.
The Company determines if an arrangement is a lease at inception. Operating leases are included in Operating lease right-of-use assets and Operating lease liabilities in its consolidated balance sheet. Operating lease right-of-use assets represent the Company’s right to use the underlying assets and operating lease liabilities represent its obligation to make the payments required by the leases.
As most of the Company’s leases do not provide an implicit discount rate, PFSI uses its incremental borrowing rate based on information available at the lease commencement date to determine the present value of its lease payment obligations. The operating lease right-of-use assets also reflect any lease payments made and are reduced by lease incentives. Lease expense is recognized on the straight-line basis over the lease term.
The Company has lease agreements that include both lease and non-lease components (such as common area maintenance), which are generally included in the lease and are accounted for together with the lease as a single lease component. Detailed lease disclosures are included in Note 10‒Leases.
Note 3—Concentration of Risk
A substantial portion of the Company’s activities relate to PMT. Revenues generated from PMT (generally comprised of gains on loans held for sale, loan servicing fees, loan origination fees, fulfillment fees, change in fair value of excess servicing spread financing (“ESS”), net interest, management fees, and change in fair value of investment in and dividends received from PMT) totaled 32% and 25% of total net revenue for the quarters ended September 30, 2019 and 2018, respectively, and 31% and 19% for the nine months ended September 30, 2019 and 2018, respectively.
11
Note 4—Transactions with Affiliates
Transactions with PMT
Operating Activities
Mortgage Loan Production Activities and MSR Recapture
The Company sells newly originated loans to PMT under a mortgage loan purchase agreement. Historically, the Company has used the mortgage loan purchase agreement for the purpose of selling to PMT prime jumbo residential mortgage loans. In the third quarter of 2017, the Company began selling conventional conforming balance mortgage loans to PMT under the agreement.
Pursuant to the terms of an MSR recapture agreement by and between the Company and PMT, which was amended and restated effective September 12, 2016, if the Company refinances mortgage loans for which PMT previously held the MSRs, the Company is generally required to transfer and convey to PMT cash in an amount equal to 30% of the fair market value of the MSRs related to all such mortgage loans. The MSR recapture agreement expires on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.
Pursuant to a mortgage banking services agreement, which was amended and restated effective September 12, 2016, the Company provides PMT with certain mortgage banking services, including fulfillment and disposition-related services, for which it receives a fulfillment fee. Pursuant to the terms of the mortgage banking services agreement, the monthly fulfillment fee is an amount that shall equal (a) no greater than the product of (i) 0.35% and (ii) the aggregate initial unpaid principal balance (the “Initial UPB”) of all mortgage loans purchased in such month, plus (b) in the case of all mortgage loans other than mortgage loans sold to or securitized through Fannie Mae or Freddie Mac, no greater than the product of (i) 0.50% and (ii) the aggregate Initial UPB of all such mortgage loans sold and securitized in such month; provided, however, that no fulfillment fee shall be due or payable to the Company with respect to any mortgage loans underwritten to the Ginnie Mae Mortgage‑Backed Securities (“MBS”) Guide. PMT does not hold the Ginnie Mae approval required to issue Ginnie Mae MBS and act as a servicer. Accordingly, under the agreement, the Company currently purchases mortgage loans underwritten in accordance with the Ginnie Mae MBS Guide “as is” and without recourse of any kind from PMT at PMT’s cost less an administrative fee plus accrued interest and a sourcing fee ranging from two to three and one-half basis points, generally based on the average number of calendar days mortgage loans are held by PMT before being purchased by the Company.
Following is a summary of loan production activities, including MSR recapture between the Company and PMT:
Net gains on loans held for sale to PMT
62,558
19,722
127,423
49,396
Mortgage servicing rights and excess servicing spread recapture incurred
(1,896)
(1,157)
(4,427)
(3,518)
Sale of loans held for sale to PMT
1,876,358
908,525
Tax service fees earned from PMT included in Loan origination fees
Fulfillment fee revenue
Unpaid principal balance of loans fulfilled for PMT subject to fulfillment fees
16,647,172
7,517,883
35,523,802
17,139,884
Sourcing fees paid to PMT
4,206
2,689
9,355
8,221
Unpaid principal balance of loans purchased from PMT
14,022,222
8,916,654
31,183,950
27,404,022
12
Mortgage Loan Servicing
The Company and PMT have entered into a loan servicing agreement (the “Servicing Agreement”), which was amended and restated effective September 12, 2016 and pursuant to which the Company provides servicing for PMT’s portfolio of residential mortgage loans and subservicing for its portfolio of MSRs. The Servicing Agreement provides for servicing fees of per‑loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced loan or the real estate acquired in settlement of loans (“REO”). The Company also remains entitled to customary ancillary income and market-based fees and charges relating to loans it services for PMT. These include boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and a percentage of late charges.
The base servicing fee rates for distressed whole loans range from $30 per month for current loans up to $85 per month for loans where the borrower has declared bankruptcy. The base servicing fee rate for REO is $75 per month.
To the extent the Company facilitates rentals of PMT's REO under its REO rental program, the Company collects an REO rental fee of $30 per month per REO, an REO property lease renewal fee of $100 per lease renewal, and a property management fee in an amount equal to the Company’s cost if property management services and/or any related software costs are outsourced to a third-party property management firm or 9% of gross rental income if the Company provides property management services directly. The Company is also entitled to retain any tenant paid application fees and late rent fees and seek reimbursement for certain third-party vendor fees.
Except as otherwise provided in the MSR recapture agreement, when the Company effects a refinancing of a loan on behalf of PMT and not through a third-party lender and the resulting mortgage loan is readily saleable, or the Company originates a loan to facilitate the disposition of a REO, the Company is entitled to receive from PMT market-based fees and compensation consistent with pricing and terms the Company offers unaffiliated parties on a retail basis.
Because PMT has a small number of employees and limited infrastructure, the Company is required to provide a range of services and activities significantly greater in scope than the services provided in connection with a customary servicing arrangement. For these services, the Company receives a supplemental servicing fee of $25 per month for each distressed loan. The Company is entitled to reimbursement for all customary, good faith reasonable and necessary out-of-pocket expenses incurred by the Company in performance of its servicing obligations.
The Company is entitled to retain any incentive payments made to it and to which it is entitled under the U.S. Department of Treasury’s Home Affordable Modification Plan; provided, however, that with respect to any such incentive payments paid to the Company in connection with a loan modification for which PMT previously paid the Company a modification fee, the Company is required to reimburse PMT an amount equal to the incentive payments.
The Company is also entitled to certain activity-based fees for distressed whole loans that are charged based on the achievement of certain events. These fees range from $750 for a streamline modification to $1,750 for a full modification or liquidation and $500 for a deed-in-lieu of foreclosure. The Company is not entitled to earn more than one liquidation fee, reperformance fee or modification fee per loan in any 18-month period.
The base servicing fees for non-distressed mortgage loans are calculated through a monthly per-loan dollar amount, with the actual dollar amount for each loan based on whether the loan is a fixed-rate or adjustable-rate loan. The base servicing fee rates are $7.50 per month for fixed-rate loans and $8.50 per month for adjustable-rate loans.
The Servicing Agreement expires on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.
13
Following is a summary of loan servicing and property management fees earned from PMT:
Loans acquired for sale at fair value
507
316
1,131
739
Loans at fair value
858
1,271
1,938
5,528
Mortgage servicing rights
11,599
8,484
32,033
24,254
Property management fees received from PMT included in Other income
70
122
295
333
Investment Management Activities
The Company has a management agreement with PMT (“Management Agreement”), which was amended and restated effective September 12, 2016. Pursuant to the Management Agreement, the Company oversees PMT’s business affairs in conformity with the investment policies that are approved and monitored by its board of trustees, for which it collects a base management fee and may collect a performance incentive fee. The Management Agreement provides that:
The base management fee is calculated quarterly and is equal to the sum of (i) 1.5% per year of PMT’s average shareholders’ equity up to $2 billion, (ii) 1.375% per year of PMT’s average shareholders’ equity in excess of $2 billion and up to $5 billion, and (iii) 1.25% per year of PMT’s average shareholders’ equity in excess of $5 billion.
The performance incentive fee is calculated quarterly at a defined annualized percentage of the amount by which PMT’s “net income,” on a rolling four‑quarter basis and before deducting the incentive fee, exceeds certain levels of return on “equity.”
The performance incentive fee is equal to the sum of: (a) 10% of the amount by which PMT’s “net income” for the quarter exceeds (i) an 8% return on equity plus the “high watermark,” up to (ii) a 12% return on PMT’s equity; plus (b) 15% of the amount by which PMT’s “net income” for the quarter exceeds (i) a 12% return on PMT’s equity plus the “high watermark,” up to (ii) a 16% return on PMT’s equity; plus (c) 20% of the amount by which PMT’s “net income” for the quarter exceeds a 16% return on equity plus the “high watermark.”
For the purpose of determining the amount of the performance incentive fee:
“Net income” is defined as net income or loss attributable to PMT’s common shares of beneficial interest computed in accordance with GAAP adjusted for certain other non‑cash charges determined after discussions between the Company and PMT’s independent trustees and approval by a majority of PMT’s independent trustees.
“Equity” is the weighted average of the issue price per common share of all of PMT’s public offerings, multiplied by the weighted average number of common shares outstanding (including restricted share units) in the rolling four‑quarter period.
14
The “high watermark” is the quarterly adjustment that reflects the amount by which the “net income” (stated as a percentage of return on “equity”) in that quarter exceeds or falls short of the lesser of 8% and the average Fannie Mae 30‑year MBS yield (the “Target Yield”) for the four quarters then ended. If the “net income” is lower than the Target Yield, the high watermark is increased by the difference. If the “net income” is higher than the Target Yield, the high watermark is reduced by the difference. Each time a performance incentive fee is earned, the high watermark returns to zero. As a result, the threshold amounts required for the Company to earn a performance incentive fee are adjusted cumulatively based on the performance of PMT’s “net income” over (or under) the Target Yield, until the “net income” in excess of the Target Yield exceeds the then‑current cumulative high watermark amount, and a performance incentive fee is earned.
The base management fee and the performance incentive fee are both receivable quarterly in arrears. The performance incentive fee may be paid in cash or a combination of cash and PMT’s common shares (subject to a limit of no more than 50% paid in common shares), at PMT’s option.
The Management Agreement expires on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement. In the event of termination of the Management Agreement between PMT and the Company, the Company may be entitled to a termination fee in certain circumstances. The termination fee is equal to three times the sum of (a) the average annual base management fee, and (b) the average annual performance incentive fee earned by the Company, in each case during the 24-month period immediately preceding the date of termination.
Following is a summary of the base management and performance incentive fees earned from PMT:
Base management
7,914
5,799
20,862
17,223
Performance incentive
2,184
683
5,316
Expense Reimbursement
Under the Management Agreement, PMT reimburses the Company for its organizational and operating expenses, including third-party expenses, incurred on PMT’s behalf, it being understood that the Company and its affiliates shall allocate a portion of their personnel’s time to provide certain legal, tax and investor relations services for the direct benefit of PMT. With respect to the allocation of the Company’s and its affiliates’ personnel compensation, the Company shall be reimbursed $120,000 per fiscal quarter, such amount to be reviewed annually and not preclude reimbursement for any other services performed by the Company or its affiliates.
PMT is also required to pay its pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Company and its affiliates required for PMT’s and its subsidiaries’ operations. These expenses will be allocated based on the ratio of PMT’s proportion of gross assets compared to all remaining gross assets managed by the Company as calculated at each fiscal quarter end.
15
The Company received reimbursements from PMT for expenses as follows:
Reimbursement of:
Common overhead incurred by the Company included in Other revenue
1,543
1,210
4,055
3,387
Compensation included in Other revenue
120
360
Expenses incurred on PMT's behalf, net
1,942
527
3,001
586
3,605
1,857
7,416
4,333
Payments and settlements during the period (1)
68,191
21,650
111,411
45,265
(1)
Payments and settlements include payments for management fees and correspondent production activities itemized in the preceding tables and netting settlements made pursuant to master netting agreements between the Company and PMT.
Conditional Reimbursement of Underwriting Fees
In connection with its initial public offering of common shares of beneficial interest on August 4, 2009 (“IPO”), PMT conditionally agreed to reimburse the Company up to $2.9 million for underwriting fees paid to the IPO underwriters by the Company on PMT’s behalf. In the event a termination fee is payable to the Company under the Management Agreement, and the Company has not received the full amount of the reimbursements and payments under the reimbursement agreement, such amount will be paid in full. On February 1, 2019, the term of the reimbursement agreement was extended to February 1, 2023. The Company received $219,000 in reimbursement of underwriting fees from PMT during the nine months ended September 30, 2019.
Investing Activities
Master Repurchase Agreement
On December 19, 2016, the Company, through PLS, entered into a master repurchase agreement with one of PMT’s wholly-owned subsidiaries, PennyMac Holdings, LLC (“PMH”) (the “PMH Repurchase Agreement”), pursuant to which PMH may borrow from the Company for the purpose of financing PMH’s participation certificates representing beneficial ownership in ESS. PLS then re-pledges such participation certificates to PNMAC GMSR ISSUER TRUST (the “Issuer Trust”) under a master repurchase agreement by and among PLS, the Issuer Trust and PennyMac, as guarantor (the “PC Repurchase Agreement”). The Issuer Trust was formed for the purpose of allowing PLS to finance MSRs and ESS relating to such MSRs (the “GNMA MSR Facility”).
In connection with the GNMA MSR Facility, PLS pledges and/or sells to the Issuer Trust participation certificates representing beneficial interests in MSRs and ESS pursuant to the terms of the PC Repurchase Agreement. In return, the Issuer Trust (a) has issued to PLS, pursuant to the terms of an indenture, the Series 2016-MSRVF1 Variable Funding Note, dated December 19, 2016, known as the “PNMAC GMSR ISSUER TRUST MSR Collateralized Notes, Series 2016-MSRVF1” (the “VFN”), and (b) has issued and may, from time to time pursuant to the terms of any supplemental indenture, issue to institutional investors additional term notes (“Term Notes”), in each case secured on a pari passu basis by the participation certificates relating to the MSRs and ESS. The maximum principal balance of the VFN is $1,000,000,000.
The principal amount paid by PLS for the participation certificates under the PMH Repurchase Agreement is based upon a percentage of the market value of the underlying ESS. Upon PMH’s repurchase of the participation certificates, PMH is required to repay PLS the principal amount relating thereto plus accrued interest (at a rate reflective of the current market and consistent with the weighted average note rate of the VFN and any outstanding Term Notes) to the date of such repurchase. PLS is then required to repay the Issuer Trust the corresponding amount under the PC Repurchase Agreement.
16
The Company holds an investment in PMT in the form of 75,000 common shares of beneficial interest.
Following is a summary of investing activities between the Company and PMT:
Interest income relating to Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell
Common shares of beneficial interest of PennyMac Mortgage Investment Trust:
Dividends received
36
35
107
106
Change in fair value of investment
30
94
270
313
Assets purchased from PennyMac Mortgage Investment Trust under agreements to
resell
Fair value
Number of shares
75
Financing Activities
Spread Acquisition and MSR Servicing Agreements
On December 19, 2016, the Company amended and restated a master spread acquisition and MSR servicing agreement with PMT (the “Spread Acquisition Agreement”), pursuant to which the Company may sell to PMT, from time to time, the right to receive participation certificates representing beneficial ownership in ESS arising from Ginnie Mae MSRs acquired by the Company, in which case the Company generally would be required to service or subservice the related mortgage loans for Ginnie Mae. The primary purpose of the amendment and restatement was to facilitate the continued financing of the ESS owned by PMT in connection with the parties’ participation in the GNMA MSR Facility.
To the extent the Company refinances any of the mortgage loans relating to the ESS it has issued, the Spread Acquisition Agreement also contains recapture provisions requiring that the Company transfer to PMT, at no cost, the ESS relating to a certain percentage of the unpaid principal balance of the newly originated mortgage loans. However, under the Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae mortgage loans is not equal to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the refinanced mortgage loans, the Company is also required to transfer additional ESS or cash in the amount of such shortfall. Similarly, in any month where the transferred ESS relating to modified Ginnie Mae mortgage loans is not equal to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the modified mortgage loans, the Spread Acquisition Agreement contains provisions that require the Company to transfer additional ESS or cash in the amount of such shortfall. To the extent the fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, the Company may, at its option, settle its obligation to PMT in cash in an amount equal to such fair market value in lieu of transferring such ESS.
17
Following is a summary of financing activities between the Company and PMT:
Excess servicing spread financing:
Issuance pursuant to recapture agreement
499
1,327
1,983
Repayment
9,819
11,543
30,901
35,852
Gain (loss) recognized
Interest expense
Recapture incurred pursuant to refinancings by the Company of mortgage loans subject to excess servicing spread financing included in Net gains on loans held for sale at fair value
429
597
1,311
1,951
Excess servicing spread financing at fair value
Receivable from and Payable to PMT
Amounts receivable from and payable to PMT are summarized below:
Receivable from PMT:
Fulfillment fees
14,409
10,006
Management fees
10,230
6,559
Correspondent production fees
5,501
2,071
Servicing fees
4,768
4,841
Allocated expenses and expenses incurred on PMT's behalf
4,166
9,066
Conditional Reimbursement
582
801
Interest on assets purchased under agreements to resell
88
Payable to PMT:
Deposits made by PMT to fund servicing advances
56,869
100,554
Mortgage servicing rights recapture payable
162
4,831
3,898
Exchanged Private National Mortgage Acceptance Company, LLC Unitholders
On May 8, 2013, the Company entered into a tax receivable agreement with certain former owners of PennyMac that provides for the payment from time to time by the Company to PennyMac’s exchanged unitholders of an amount equal to 85% of the amount of the net tax benefits, if any, that the Company is deemed to realize as a result of (i) increases in tax basis of PennyMac’s assets resulting from exchanges of ownership interests in PennyMac and (ii) certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.
Although the Reorganization eliminated the potential for unitholders to exchange any additional units subject to this tax receivable agreement, the Company continues to be subject to the agreement and will be required to make payments, to the extent any of the tax benefits specified above are deemed to be realized, under the tax receivable agreement to those certain prior owners of PennyMac who effected exchanges of ownership interests in PennyMac for the Company’s common stock prior to the closing of the Reorganization in November 2018.
18
Based on the PennyMac unitholder exchanges to date, the Company has recorded a $46.5 million Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement as of September 30, 2019 and December 31, 2018. The Company did not make any payments under the tax receivable agreement during the nine months ended September 30, 2019 and 2018.
.
Note 5—Loan Sales and Servicing Activities
The Company originates or purchases and sells loans in the secondary mortgage market without recourse for credit losses. However, the Company maintains continuing involvement with the loans in the form of servicing arrangements and the liability under representations and warranties it makes to purchasers and insurers of the loans.
The following table summarizes cash flows between the Company and transferees as a result of the sale of loans in transactions where the Company maintains continuing involvement with the loans as servicer:
Cash flows:
Sales proceeds
17,897,693
11,375,408
Servicing fees received (1)
149,210
123,626
426,774
354,535
Net servicing advances (recoveries)
8,605
4,147
(23,583)
(20,572)
Net of guarantee fees paid to the Agencies.
The following table summarizes unpaid principal balance (the “UPB”) of the loans sold by the Company in which it maintains continuing involvement:
Unpaid principal balance of loans outstanding
159,638,921
145,224,596
Delinquencies:
30-89 days
7,828,087
6,222,864
90 days or more:
Not in foreclosure
2,480,348
2,208,083
In foreclosure
1,199,933
720,894
Foreclosed
11,369
24,243
Bankruptcy
1,339,983
970,329
19
The following tables summarize the UPB of the Company’s loan servicing portfolio:
Contract
servicing and
rights owned
subservicing
loans serviced
Investor:
Non-affiliated entities:
Originated
Purchased
63,904,759
223,543,680
PennyMac Mortgage Investment Trust
120,608,076
Loans held for sale
4,323,252
227,866,932
348,475,008
Delinquent loans:
30 days
8,114,297
879,366
8,993,663
60 days
2,432,250
147,325
2,579,575
3,043,663
181,330
3,224,993
1,518,946
87,284
1,606,230
13,372
110,821
124,193
15,122,528
1,406,126
16,528,654
1,872,679
124,619
1,997,298
Custodial funds managed by the Company (1)
6,976,614
3,018,131
9,994,745
Custodial funds include cash accounts holding funds on behalf of borrowers and investors relating to loans serviced under servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns placement fees on certain of 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 income.
20
December 31, 2018
56,990,486
202,215,082
94,658,154
2,420,636
204,635,718
299,293,872
Subserviced for the Company (1)
414,219
6,677,179
525,989
7,203,168
1,983,381
113,238
2,096,619
3,102,492
217,115
3,319,607
1,027,493
127,025
1,154,518
33,493
176,377
209,870
12,824,038
1,159,744
13,983,782
1,415,106
107,083
1,522,189
Custodial funds managed by the Company (2)
3,033,658
970,328
4,003,986
Certain of the loans for which the Company has purchased the MSRs are subserviced on the Company’s behalf by other loan servicers on an interim basis when servicing of the loans has not yet been transferred to the Company’s loan servicing platform.
(2)
Following is a summary of the geographical distribution of loans included in the Company’s loan servicing portfolio for the top five and all other states as measured by UPB:
State
California
55,400,197
51,377,441
Florida
27,435,384
22,650,926
Texas
26,509,926
23,648,042
Virginia
21,056,414
19,011,950
Maryland
15,968,754
13,774,011
All other states
202,104,333
168,831,502
21
Note 6—Fair Value
Most of the Company’s assets and certain of its liabilities are measured at or based on their fair values. The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the inputs used to determine fair value. These levels are:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Prices determined or determinable using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of the Company.
Level 3— Prices determined using significant unobservable inputs. In situations where observable inputs are unavailable, unobservable inputs may be used. Unobservable inputs reflect the Company’s own judgments about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances.
As a result of the difficulty in observing certain significant valuation inputs affecting “Level 3” fair value assets and liabilities, the Company is required to make judgments regarding these items’ fair values. Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs to be applied in valuing these assets and liabilities and their fair values. Such differences may result in significantly different fair value measurements. Likewise, due to the general illiquidity of some of these assets and liabilities, subsequent transactions may be at values significantly different from those reported.
Fair Value Accounting Elections
The Company identified all of its MSRs, its mortgage servicing liabilities (“MSLs”) and all of its non-cash financial assets other than Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell, to be accounted for at fair value so changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance. The Company has also identified its ESS financing to be accounted for at fair value as a means of hedging the related MSRs’ fair value risk.
22
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Following is a summary of assets and liabilities that are measured at fair value on a recurring basis:
Level 1
Level 2
Level 3
Assets:
Short-term investments
Loans held for sale at fair value
4,437,954
85,017
Derivative assets:
Interest rate lock commitments
147,400
Repurchase agreement derivatives
8,187
Forward purchase contracts
17,943
Forward sales contracts
6,141
MBS put options
10,040
Put options on interest rate futures purchase contracts
6,266
Call options on interest rate futures purchase contracts
2,414
Total derivative assets before netting
8,680
34,124
155,587
198,391
Netting
34,557
Total derivative assets
Mortgage servicing rights at fair value
Investment in PennyMac Mortgage Investment Trust
101,010
4,472,078
2,796,857
7,404,502
Liabilities:
Derivative liabilities:
2,276
51,585
34,498
Total derivative liabilities before netting
86,083
88,359
(74,324)
Total derivative liabilities
219,711
231,470
23
2,261,639
260,008
50,507
26,770
35,916
437
720
MBS call options
2,135
866
5,965
6,831
39,208
77,277
123,316
(26,969)
126,052
2,300,847
3,157,897
5,557,827
1,169
215
26,762
26,977
28,146
(25,082)
225,960
227,855
24
As shown above, all or a portion of the Company’s loans held for sale, Interest Rate Lock Commitments (“IRLCs”), repurchase agreement derivatives, MSRs, ESS and MSLs are measured using Level 3 fair value inputs. Following are roll forwards of these items for each of the quarter and nine month periods ended September 30, 2019 and 2018:
Net interest
Repurchase
Mortgage
Loans held
rate lock
agreement
servicing
Assets
for sale
commitments (1)
derivatives
rights
217,998
111,776
16,015
2,720,335
3,066,124
Purchases and issuances, net
1,861,769
199,274
1,502
46
2,062,591
Sales and repayments
(1,582,564)
(9,422)
(1,591,986)
Mortgage servicing rights resulting from loan sales
246,757
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk
4,252
Other factors
92,138
92
(410,885)
(318,655)
(314,403)
Transfers from Level 3 to Level 2
(416,062)
Transfers to real estate acquired in settlement of loans
(376)
Transfers of interest rate lock commitments to loans held for sale
(258,064)
145,124
2,794,581
Changes in fair value recognized during the quarter relating to assets still held at September 30, 2019
(2,328)
41
(268,048)
For the purpose of this table, the IRLC asset and liability positions are shown net.
Excess
spread
Liabilities
financing
liabilities
194,156
12,948
207,104
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust
Accrual of interest
Repayments
(9,819)
Mortgage servicing liabilities resulting from loan sales
19,501
Changes in fair value included in income
(3,864)
1,845
(2,019)
217,435
Changes in fair value recognized during the quarter relating to liabilities still outstanding at September 30, 2019
25
334,166
55,689
25,781
2,486,157
2,901,793
1,008,662
41,721
12,903
163,511
1,226,797
(231,921)
(11,982)
(243,903)
149,000
84
10,696
(227)
(12,704)
(2,235)
(2,151)
(744,324)
(1,364)
(70,943)
365,303
37,163
26,475
2,785,964
3,214,905
Changes in fair value recognized during the quarter relating to assets still held at September 30, 2018
(4,811)
19,648
229,470
10,253
239,723
(11,543)
1,741
1,109
(2,225)
(1,116)
223,275
9,769
233,044
Changes in fair value recognized during the quarter relating to liabilities still outstanding at September 30, 2018
26
49,338
3,156,728
3,537,177
376,137
15,019
227,445
4,155,778
(2,414,899)
(31,994)
(2,446,893)
545,839
(2,025)
248,889
(1,608)
(1,037,643)
(790,362)
(792,387)
(1,292,824)
(2,420)
(529,240)
Changes in fair value recognized during the period relating to assets still held at September 30, 2019
(2,478)
165
(894,832)
224,791
27,133
(11,519)
(1,520)
(13,039)
Changes in fair value recognized during the period relating to liabilities still outstanding at September 30, 2019
27
782,211
58,272
10,656
638,010
1,489,149
Reclassification of mortgage servicing rights previously accounted for under the amortization method pursuant to adoption of the fair value method of accounting
1,482,426
2,120,436
2,971,575
2,480,523
157,649
36,624
193,640
2,868,436
(1,122,448)
(19,460)
(1,141,908)
448,604
(4,944)
(28,627)
(1,345)
23,284
(6,688)
(11,632)
(1,765,854)
(4,185)
(150,131)
Changes in fair value recognized during the period relating to assets still held at September 30, 2018
(4,912)
55,535
236,534
14,120
250,654
5,548
9,026
(9,899)
(873)
Changes in fair value recognized during the period relating to liabilities still outstanding at September 30, 2018
The information used in the preceding roll forwards represents activity for any assets and liabilities measured at fair value on a recurring basis and identified as using “Level 3” significant fair value inputs at either the beginning or the end of the periods presented. The Company had transfers among the fair value levels arising from transfers of IRLCs to loans held for sale at fair value upon purchase or funding of the respective loans and from the return to salability in the active secondary market of certain loans held for sale.
Assets and Liabilities Measured at Fair Value under the Fair Value Option
Net changes in fair values included in income for assets and liabilities carried at fair value as a result of management’s election of the fair value option by income statement line item are summarized below:
Net
Net gains on
loan
loans held
for sale at
fees
fair value
263,339
67,709
(147,546)
55,005
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust
Mortgage servicing liabilities
(1,845)
2,225
2,019
1,116
538,086
118,452
(499,557)
141,736
1,520
9,899
13,039
873
Following are the fair value and related principal amounts due upon maturity of loans held for sale accounted for under the fair value option:
Principal
amount
Fair
due upon
maturity
Difference
Current through 89 days delinquent
4,478,965
4,275,981
202,984
2,324,203
2,220,371
103,832
90 days or more delinquent:
20,972
22,145
(1,173)
143,631
144,011
(380)
23,034
25,126
(2,092)
53,813
56,254
(2,441)
199,719
101,011
29
Assets Measured at Fair Value on a Nonrecurring Basis
Following is a summary of assets that were measured at fair value on a nonrecurring basis:
8,575
2,150
The following table summarizes the total gains (losses) on assets measured at fair value on a nonrecurring basis:
139
(41)
(72)
Fair Value of Financial Instruments Carried at Amortized Cost
The Company’s Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell, Assets sold under agreements to repurchase, Mortgage loan participation purchase and sale agreements, Notes payable and Obligations under capital lease are carried at amortized cost.
These assets and liabilities are classified as “Level 3” fair value items due to the Company’s reliance on unobservable inputs to estimate their fair values. The Company has concluded that the fair values of these assets and liabilities other than the Term Notes included in Notes payable approximate their carrying values due to their short terms and/or variable interest rates.
The fair value of the Term Notes at September 30, 2019 was based on non-affiliate broker indications of fair value. The fair value of Term Notes at December 31, 2018 was estimated using a discounted cash flow approach using indications of market pricing spreads provided by non-affiliate brokers to develop an appropriate discount rate. The fair value and carrying value of the Term Notes are summarized below:
Term Notes
1,306,828
1,285,894
Carrying value
Valuation Governance
Most of the Company’s financial assets, and all of its MSRs, ESS, derivative liabilities and MSLs, are carried at fair value with changes in fair value recognized in current period income. Certain of the Company’s financial assets and all of its MSRs, ESS and MSLs are “Level 3” fair value assets and liabilities which are measured using of unobservable inputs that are significant to the estimation of the items’ fair values. Unobservable inputs reflect the Company’s own judgments about the factors that market participants use in pricing an asset or liability, and are based on the best information available under the circumstances.
Due to the difficulty in estimating the fair values of “Level 3” fair value assets and liabilities, the Company has assigned the responsibility for estimating the fair value of these items to specialized staff and subjects the valuation process to significant senior management oversight. The Company’s Financial Analysis and Valuation group (the “FAV group”) is the Company’s specialized staff responsible for estimating the fair values of “Level 3” fair value assets and liabilities other than IRLCs.
With respect to the non-IRLC “Level 3” valuations, the FAV group reports to the Company’s senior management valuation committee, which oversees the valuations. The FAV group monitors the models used for valuation of the Company’s “Level 3” fair value assets and liabilities, including the models’ performance versus actual results, and reports those results to the Company’s senior management valuation committee. The Company’s senior management valuation committee includes the Company’s executive chairman, chief executive, chief financial, chief risk and deputy chief financial officers.
The FAV group is responsible for reporting to the Company’s senior management valuation committee on the changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the valuation and any changes in model methods and inputs. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation of changes to the significant inputs to the models.
The Company has assigned responsibility for developing the fair values of IRLCs to its Capital Markets Risk Management staff. The fair values developed by the Capital Markets Risk Management staff are reviewed by the Company’s Capital Markets Operations group.
Valuation Techniques and Inputs
Following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” fair value assets and liabilities:
Loans Held for Sale
Most of the Company’s loans held for sale at fair value are saleable into active markets and are therefore categorized as “Level 2” fair value assets. The fair values of “Level 2” fair value loans are determined using their contracted selling price or quoted market price or market price equivalent.
Certain of the Company’s loans held for sale are not saleable into active markets and are therefore categorized as “Level 3” fair value assets. Loans held for sale categorized as “Level 3” fair value assets include:
Certain delinquent government guaranteed or insured loans purchased by the Company from Ginnie Mae guaranteed pools in its loan servicing portfolio. The Company’s right to purchase delinquent government guaranteed or insured loans arises as the result of the borrower’s failure to make payments for at least three consecutive months preceding the month of repurchase by the Company and provides an alternative to the Company’s obligation to continue advancing principal and interest at the coupon rate of the related Ginnie Mae security. Such repurchased loans may be resold to investors and thereafter may be repurchased to the extent eligible for resale into a new Ginnie Mae guaranteed security. Such eligibility occurs when the repurchased loans become current either through the borrower’s reperformance or through completion of a modification of the loan’s terms.
Certain of the Company’s loans held for sale that are not saleable into active markets due to identification of a defect by the Company or to the repurchase by the Company of a loan with an identified defect.
The Company uses a discounted cash flow model to estimate the fair value of its “Level 3” fair value loans held for sale. The significant unobservable inputs used in the fair value measurement of the Company’s “Level 3” fair value loans held for sale are discount rates, home price projections, voluntary prepayment/resale speeds and total prepayment speeds. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment speeds.
31
Following is a quantitative summary of key “Level 3” fair value inputs used in the valuation of loans held for sale:
Carrying value (in thousands)
Key inputs (1):
Discount rate:
Range
3.2% – 9.2%
2.8% – 9.2%
Weighted average
3.4%
2.9%
Twelve-month projected housing price index change:
2.6% – 3.2%
2.2% – 5.0%
3.5%
Voluntary prepayment/resale speed (2):
0.3% – 19.2%
0.1% – 21.8%
15.8%
20.1%
Total prepayment speed (3):
0.6% – 34.8%
0.1% – 40.5%
29.6%
37.7%
Weighted average inputs are based on the fair value of loans.
Voluntary prepayment/resale speed is measured using Life Voluntary Conditional Prepayment Rate (“CPR”).
(3)
Total prepayment speed is measured using Life Total CPR.
Changes in fair value attributable to changes in instrument specific credit risk are measured by reference to the change in the respective loan’s delinquency status and performance history at period end from the later of the beginning of the period or acquisition date. Changes in fair value of loans held for sale are included in Net gains on loans held for sale at fair value in the Company’s consolidated statements of income.
Derivative Financial Instruments
Interest Rate Lock Commitments
The Company categorizes IRLCs as “Level 3” fair value assets or liabilities. The Company estimates the fair value of IRLCs based on quoted Agency MBS prices, its estimate of the fair value of the MSRs it expects to receive in the sale of the loans and the probability that the loan will be funded or purchased (the “pull-through rate”).
The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the MSR component of the Company’s estimate of the fair value of the loans it has committed to purchase. Significant changes in the pull-through rate or the MSR component of the IRLCs, in isolation, could result in significant changes in the IRLCs’ fair value measurement. The financial effects of changes in these inputs are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of IRLC fair value, but increase the pull-through rate for the loan principal and interest payment cash flow component, which decreases in fair value.
Changes in fair value of IRLCs are included in Net gains on loans held for sale at fair value and may be allocated to Net loan servicing fees – Change in fair value of mortgage servicing rights and mortgage servicing liabilities as an economic hedge of the fair value of MSRs in the consolidated statements of income when IRLCs are included as a component of the Company’s MSR hedging strategy.
32
Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:
Carrying value (in thousands) (1)
Key inputs (2):
Pull-through rate:
12.2% – 100%
16.6% – 100%
85.6%
84.1%
Mortgage servicing rights value expressed as:
Servicing fee multiple:
1.4 – 5.7
1.5 – 5.5
4.0
3.8
Percentage of unpaid principal balance:
0.3% – 2.9%
0.4% – 3.2%
1.6%
1.5%
For purpose of this table, IRLC asset and liability positions are shown net.
Weighted average inputs are based on the committed amounts.
Hedging Derivatives
Fair value of exchange-traded hedging derivative financial instruments are categorized by the Company as “Level 1” fair value assets and liabilities. Fair value of hedging derivative financial instruments based on observable MBS prices or interest rate volatilities in the MBS market are categorized as “Level 2” fair value assets and liabilities.
Changes in the fair value of hedging derivatives are included in Net gains on loans acquired for sale at fair value, or Net mortgage loan servicing fees – Change in fair value of mortgage servicing rights and mortgage servicing liabilities, as applicable, in the consolidated statements of income.
Repurchase Agreement Derivatives
Through August 21, 2019, the Company had a master repurchase agreement that included incentives for financing mortgage loans approved for satisfying certain consumer relief characteristics. These incentives are classified for financial reporting purposes as embedded derivatives and are separated for reporting purposes from the master repurchase agreement. The Company classifies repurchase agreement derivatives as “Level 3” fair value assets. The significant unobservable inputs into the valuation of repurchase agreement derivative assets are the discount rate and the Company’s expected approval rate of the mortgage loans financed under the master repurchase agreement. The resulting ratio included in the Company’s fair value estimate were 99.0% and 97.0% at September 30, 2019 and December 31, 2018, respectively.
Mortgage Servicing Rights
MSRs are categorized as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the estimation of the fair value of MSRs include the applicable pricing spread (discount rate), prepayment rates of the underlying loans, and annual per-loan cost to service the loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key inputs are not necessarily directly related. Changes in the fair value of MSRs are included in Net loan servicing fees—Change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.
33
Following are the key inputs used in determining the fair value of MSRs received by the Company when it retains the obligation to service the mortgage loans it sells:
(Amount recognized and unpaid principal balance of underlying loans in thousands)
MSR and pool characteristics:
Amount recognized
Unpaid principal balance of underlying loans
15,709,249
10,790,398
35,532,425
32,095,458
Weighted average servicing fee rate (in basis points)
43
37
42
Pricing spread (2)
5.5% – 16.2%
7.3% – 13.6%
7.3% – 14.1%
8.3%
10.1%
8.6%
10.2%
Annual total prepayment speed (3)
8.8% – 32.1%
4.4% – 55.7%
7.7% – 32.8%
3.9% – 61.8%
15.7%
11.8%
15.0%
10.6%
Life (in years)
2.7 – 7.5
0.5 – 11.3
2.6 – 7.8
0.5 – 11.6
5.5
6.9
5.8
7.5
Per-loan annual cost of servicing
$78 – $100
$78 – $98
$97
$92
$90
Weighted average inputs are based on the UPB of the underlying loans.
Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar London Interbank Offered Rate (“LIBOR”)/swap curve for purposes of discounting cash flows relating to MSRs.
Prepayment speed is measured using Life Total CPR.
34
Following is a quantitative summary of key inputs used in the valuation and assessment for the Company’s MSRs and the effect on the fair value from adverse changes in those inputs:
(Carrying value, unpaid principal balance of underlying
loans and effect on fair value amounts in thousands)
$ 2,556,253
$ 2,820,612
$ 221,215,993
$ 201,054,144
Weighted average note interest rate
4.0%
Pricing spread (2):
5.9% – 15.8%
5.8% – 16.1%
8.5%
8.7%
Effect on fair value of:
5% adverse change
($35,830)
($45,268)
10% adverse change
($70,578)
($89,073)
20% adverse change
($137,016)
($172,556)
Prepayment speed (3):
9.8% – 33.0%
8.4% – 32.6%
15.6%
9.9%
Average life (in years):
1.4 – 7.2
1.5 – 7.9
5.2
7.2
($64,047)
($47,687)
($124,892)
($93,626)
($237,822)
($180,623)
Annual per-loan cost of servicing:
$77 – $100
$78 – $99
$96
$93
($21,731)
($22,944)
($43,462)
($45,888)
($86,925)
($91,775)
The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to MSRs.
The preceding sensitivity analyses are limited in that they were performed as of a particular date; only contemplate the movements in the indicated inputs; do not incorporate changes to other inputs; are subject to the accuracy of the models and inputs used; and do not incorporate other factors that would affect the Company’s overall financial performance in such events, including operational adjustments made by management to account for changing circumstances. For these reasons, the preceding estimates should not be viewed as earnings forecasts.
Excess Servicing Spread Financing at Fair Value
The Company categorizes ESS as a “Level 3” fair value liability. Because the ESS is a claim to a portion of the cash flows from MSRs, the fair value measurement of the ESS is similar to that of MSRs. The Company uses the same discounted cash flow approach to measuring the ESS as it uses to measure MSRs except that certain inputs relating to the cost to service the loans underlying the MSR and certain ancillary income are not included as these cash flows do not accrue to the holder of the ESS. The key inputs used in the estimation of ESS fair value include pricing spread (discount rate) and prepayment speed. Significant changes to either of those inputs in isolation could result in a significant change in the fair value of ESS. Changes in these key inputs are not necessarily directly related.
ESS is generally subject to fair value increases when mortgage interest rates increase. Increasing mortgage interest rates normally discourage mortgage refinancing activity. Decreased refinancing activity increases the life of the loans underlying the ESS, thereby increasing its fair value. Changes in the fair value of ESS are included in Net loan servicing fees—Change in fair value of excess servicing spread payable to PennyMac Mortgage Investment Trust in the consolidated statements of income.
Following are the key inputs used in determining the fair value of ESS financing:
$ 183,141
$ 216,110
ESS and pool characteristics:
Unpaid principal balance of underlying loans (in thousands)
$ 20,794,571
$ 23,196,033
Average servicing fee rate (in basis points)
Average excess servicing spread (in basis points)
3.0% – 3.3%
2.8% – 3.2%
3.2%
3.1%
Annualized prepayment speed (3):
8.9% – 15.0%
8.2% – 29.5%
11.7%
9.7%
2.8 – 7.1
1.6 – 7.6
5.9
6.8
The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to ESS.
Mortgage Servicing Liabilities
MSLs are categorized as “Level 3” fair value liabilities. The Company uses a discounted cash flow approach to estimate the fair value of MSLs. This approach consists of projecting net servicing cash flows discounted at a rate that the Company believes market participants would use in their determinations of fair value. The key inputs used in the estimation of the fair value of MSLs include the applicable pricing spread (discount rate), the prepayment rates of the underlying loans, and the per-loan annual cost to service the respective loans. Changes in the fair value of MSLs are included in Net servicing fees—Change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.
Following are the key inputs used in determining the fair value of MSLs:
MSL and pool characteristics:
Servicing fee rate (in basis points)
Key inputs:
Pricing spread (1)
Prepayment speed (2)
Average life (in years)
Annual per-loan cost of servicing
The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to MSLs.
Note 7—Loans Held for Sale at Fair Value
Loans held for sale at fair value include the following:
Loan type
Government-insured or guaranteed
4,148,681
2,116,126
Conventional conforming
289,273
144,872
Jumbo
641
Home equity lines of credit
Purchased from Ginnie Mae pools serviced by the Company
76,105
250,585
Repurchased pursuant to representations and warranties
8,898
9,423
Fair value of loans pledged to secure:
3,939,161
1,923,857
542,049
555,001
4,481,210
2,478,858
Note 8—Derivative Financial Instruments
The Company holds and issues derivative financial instruments in connection with its operating activities. Derivative financial instruments are created as a result of certain of the Company’s operations and when the Company enters into derivative transactions as part of its interest rate risk management activities. Derivative financial instruments created as a result of the Company’s operations include:
IRLCs that are created when the Company commits to purchase or originate a mortgage loan for sale.
Derivatives that are embedded in a master repurchase agreement that provides for the Company to receive incentives for financing mortgage loans that satisfy certain consumer relief characteristics under the master repurchase agreement.
The Company also engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by changes in market interest rates. To manage this fair value risk resulting from interest rate risk, the Company uses derivative financial instruments acquired with the intention of reducing the risk that changes in market interest rates will result in unfavorable changes in the fair value of the Company’s IRLCs, inventory of loans held for sale and the portion of its MSRs not financed with ESS.
The Company does not designate and qualify any of its derivatives for hedge accounting. The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.
Derivative Notional Amounts and Fair Value of Derivatives
The Company had the following derivative financial instruments recorded on its consolidated balance sheets:
Notional
Derivative
Instrument
assets
Not subject to master netting arrangements:
8,311,786
2,805,400
Used for hedging purposes:
15,829,825
6,657,026
15,116,810
6,890,046
10,050,000
4,635,000
1,450,000
4,350,000
3,085,000
600,000
1,512,500
Treasury futures purchase contracts
1,408,500
835,000
Treasury futures sale contracts
1,132,500
Interest rate swap futures purchase contracts
3,910,000
625,000
Total derivatives before netting
Collateral placed with (received from) derivative counterparties
108,881
(1,887)
The following table summarizes notional amount activity for derivative contracts used in the Company’s hedging activities:
beginning of
Dispositions/
end of
quarter
Additions
expirations
19,497,698
100,139,970
(103,807,843)
Forward sale contracts
14,276,156
122,174,329
(121,333,675)
12,775,000
29,575,000
(32,300,000)
2,250,000
(2,250,000)
2,835,000
9,850,000
(8,335,000)
3,687,500
1,750,000
(4,837,500)
Put options on interest rate futures sale contracts
8,335,000
Call options on interest rate futures sale contracts
4,837,500
486,100
5,132,000
(4,209,600)
1,550,000
3,792,100
2,900,000
1,800,000
(790,000)
Interest rate swap futures sales contracts
790,000
38
6,617,888
47,038,415
(46,540,682)
7,115,621
7,107,202
58,521,199
(58,917,204)
6,711,197
2,675,000
8,375,000
(6,900,000)
4,150,000
1,250,000
1,852,500
4,922,300
(4,549,800)
2,225,000
800,000
950,000
(1,350,000)
400,000
4,849,800
300,000
1,350,000
2,557,100
(2,557,100)
465,000
420,000
(885,000)
885,000
(260,000)
period
237,370,321
(228,197,522)
275,749,351
(267,522,587)
77,185,000
(71,770,000)
6,750,000
(8,200,000)
19,422,500
(18,157,500)
13,127,800
(14,040,300)
27,297,800
(27,297,800)
11,943,400
(11,369,900)
11,052,400
4,075,000
Interest rate swap futures sale contracts
4,920,883
140,158,865
(137,964,127)
5,204,796
174,562,881
(173,056,480)
4,925,000
17,250,000
(18,025,000)
12,375,000
(11,125,000)
2,125,000
16,624,800
(16,524,800)
100,000
2,400,000
(2,100,000)
16,824,800
2,100,000
7,453,300
(6,718,300)
8,829,600
(7,379,600)
1,400,000
(2,285,000)
2,285,000
(1,660,000)
39
Derivative Balances and Netting of Financial Instruments
The Company has elected to present net derivative asset and liability positions, and cash collateral obtained from (or posted to) its counterparties when subject to a master netting arrangement that is legally enforceable on all counterparties in the event of default. The derivatives that are not subject to a master netting arrangement are IRLCs and repurchase agreement derivatives.
Offsetting of Derivative Assets
Following are summaries of derivative assets and related netting amounts:
Gross
Gross amount
Net amount
amount of
offset in the
of assets in the
recognized
consolidated
balance sheet
Derivatives not subject to master netting arrangements:
Derivatives subject to master netting arrangements:
42,804
77,361
46,039
19,070
40
Derivative Assets, Financial Instruments, and Cash Collateral Held by Counterparty
The following table summarizes by significant counterparty the amount of derivative asset positions after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance qualifying for netting.
Gross amount not
Financial
collateral
instruments
received
JPMorgan Chase Bank, N.A.
32,450
1,399
Citibank, N.A.
15,951
2,488
Morgan Stanley Bank, N.A.
11,842
RJ O'Brien
Deutsche Bank
Wells Fargo Bank, N.A.
5,728
3,707
Goldman Sachs
2,252
Bank of America, N.A.
2,781
Others
458
1,864
Offsetting of Derivative Liabilities and Financial Liabilities
Following is a summary of net derivative liabilities and assets sold under agreements to repurchase and related netting amounts. Assets sold under agreements to repurchase do not qualify for netting.
of liabilities
in the
Derivatives not subject to master netting arrangements – Interest rate lock commitments
Derivatives subject to a master netting arrangement:
11,759
1,895
Total derivatives
Assets sold under agreements to repurchase:
Amount outstanding
3,539,459
1,935,200
Unamortized debt issuance premiums and costs, net
(570)
(1,341)
3,627,248
3,552,924
1,962,005
1,936,923
Derivative Liabilities, Financial Instruments, and Collateral Held by Counterparty
The following table summarizes by significant counterparty the amount of derivative liabilities and assets sold under agreements to repurchase after considering master netting arrangements and financial instruments or cash pledged that do not qualify under the accounting guidance for netting. All assets sold under agreements to repurchase are secured by sufficient collateral or have fair value that exceeds the liability amount recorded on the consolidated balance sheets.
Gross amounts
not offset in the
pledged
Credit Suisse First Boston Mortgage Capital LLC
1,000,098
(999,713)
385
691,030
(690,766)
264
506,553
(497,335)
9,218
170,820
(170,820)
711,619
(711,619)
54,326
(54,326)
551,027
(551,027)
77,687
(77,687)
461,496
(461,496)
14,960
(14,960)
BNP Paribas
192,534
(192,534)
149,675
(149,482)
193
Royal Bank of Canada
125,735
(125,735)
35,181
(35,181)
741,978
(741,978)
Federal National Mortgage Association
685
1,471
1,438
3,553,494
(3,539,459)
1,938,264
(1,935,200)
Following are the gains (losses) recognized by the Company on derivative financial instruments and the income statement lines where such gains and losses are included:
Derivative activity
Income statement line
33,347
(18,526)
95,785
(21,109)
Hedged item:
Interest rate lock commitments and loans held for sale
(55,540)
10,820
(157,362)
100,422
Net loan servicing fees–Change in fair value of mortgage servicing rights and mortgage servicing liabilities
250,146
(52,971)
587,883
(180,853)
Note 9—Mortgage Servicing Rights and Mortgage Servicing Liabilities
Mortgage Servicing Rights at Fair Value
The activity in MSRs is as follows:
Balance at beginning of period
Balance after reclassification
Additions:
Resulting from loan sales
Purchases
246,803
312,511
773,284
642,244
Change in fair value due to:
Changes in inputs used in valuation model (1)
(286,880)
64,293
(704,967)
239,538
Other changes in fair value (2)
(124,005)
(76,997)
(332,676)
(216,254)
Total change in fair value
Balance at end of period
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable
2,550,602
2,807,333
Principally reflects changes in discount rate and prepayment speed inputs, primarily due to changes in market interest rates.
Represents changes due to realization of cash flows.
Mortgage Servicing Liabilities at Fair Value
The activity in MSLs is summarized below:
Changes in fair value due to:
Changes in valuation inputs used in valuation model (1)
8,630
3,410
14,687
8,590
(6,785)
(5,635)
(16,207)
(18,489)
Principally reflects changes in expected borrower performance and servicer losses given default.
Contractual servicing fees relating to MSRs and MSLs are recorded in Net loan servicing fees—Loan servicing fees—From non-affiliates on the consolidated statements of income; other fees relating to MSRs and MSLs are recorded in Net loan servicing fees—Loan servicing fees—Other on the Company’s consolidated statements of income. Such amounts are summarized below:
Contractual servicing fees
Other fees:
Late charges
12,430
5,087
31,258
19,595
4,846
1,244
9,119
4,620
203,243
153,513
573,887
445,751
Note 10—Leases
The Company has operating lease agreements relating to its facilities. The Company’s operating lease agreements have remaining terms ranging from less than one year to ten years; some of these operating lease agreements include options to extend the term for up to five years. None of the Company’s operating lease agreements require the Company to make variable lease payments.
The Company’s lease agreements are summarized below:
Quarter ended
Nine months ended
(dollars in thousands)
Lease expense:
Operating leases
3,356
9,817
Short-term leases
213
644
Sublease income
(35)
(94)
Net lease expense included in Occupancy and equipment
3,534
10,367
Other information:
Cash payments for operating leases
4,063
11,793
Operating lease right-of-use assets recognized
Upon adoption of ASU 2016-02
58,713
New leases
1,929
60,642
Period end:
Weighted averages:
Remaining lease term (in years)
Discount rate
The maturities of the Company’s operating lease liabilities are summarized below:
Twelve months ended September 30,
2020
17,246
2021
14,754
2022
12,170
2023
11,580
2024
9,123
Thereafter
17,628
Total lease payments
82,501
Less imputed interest
(10,341)
44
As of September 30, 2019, the Company had one operating lease that has not yet commenced with an undiscounted minimum payment commitment totaling $1.5 million. The lease is expected to commence in May 2020.
Note 11—Borrowings
The borrowing facilities described throughout this Note 11 contain various covenants, including financial covenants governing the Company’s net worth, debt-to-equity ratio, profitability and liquidity. Management believes that the Company was in compliance with these covenants as of September 30, 2019.
Assets Sold Under Agreements to Repurchase
The Company has multiple borrowing facilities in the form of asset sales under agreements to repurchase. These borrowing facilities are secured by loans held for sale at fair value or participation certificates backed by MSRs. Eligible loans and participation certificates backed by MSRs are sold at advance rates based on the fair value (as determined by the lender) of the assets sold. Interest is charged at a rate based on the lender’s overnight cost of funds rate or on LIBOR depending on the terms of the respective agreements. Loans and MSRs financed under these agreements may be re-pledged by the lenders.
Assets sold under agreements to repurchase are summarized below:
Average balance of assets sold under agreements to repurchase
2,098,208
1,563,053
1,861,086
1,618,008
Weighted average interest rate (1)
3.66
%
3.91
4.08
3.72
Total interest expense (2)
19,429
4,676
47,709
15,943
Maximum daily amount outstanding
2,201,880
2,380,121
Carrying value:
Unpaid principal balance
Weighted average interest rate
3.53
4.22
Available borrowing capacity (3):
Committed
2,665
695,767
Uncommitted
1,292,876
2,354,033
1,295,541
3,049,800
Fair value of assets securing repurchase agreements:
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell
Servicing advances (4)
181,747
162,895
Mortgage servicing rights (4)
2,532,369
Margin deposits placed with counterparties (5)
5,000
3,750
Excludes the effect of amortization of net issuance costs and premiums totaling $0.2 million and $9.2 million for the quarter and nine months ended September 30, 2019, respectively, and net premiums totaling $10.9 million and $29.7 million for the quarter and nine months ended September 30, 2018, respectively.
In 2017, PFSI entered into a master repurchase agreement that provides the Company with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. The Company included $1.6 million and $12.8 million of such incentives as reductions in Interest expense during the quarters ended September 30, 2019 and 2018, respectively, and $14.7 million and $35.5 million during the nine
45
months ended September 30, 2019 and 2018, respectively. The master repurchase agreement expired on August 21, 2019.
The amount the Company is able to borrow under asset repurchase agreements is tied to the fair value of unencumbered assets eligible to secure those agreements and the Company’s ability to fund the agreements’ margin requirements relating to the assets financed.
(4)
Beneficial interests in the Ginnie Mae MSRs and servicing advances are pledged to the Issuer Trust and together serve as the collateral backing the VFN, 2018-GT1 Notes and 2018-GT2 Notes described in Notes Payable. The VFN financing is included in Assets sold under agreements to repurchase and 2018-GT1 Notes and 2018-GT2 Notes are included in Notes payable on the Company's consolidated balance sheet.
(5)
Margin deposits are included in Other assets on the Company’s consolidated balance sheet.
Following is a summary of maturities of outstanding advances under repurchase agreements by maturity date:
Remaining maturity at September 30, 2019
Balance
Within 30 days
276,113
Over 30 to 90 days
3,041,052
Over 90 to 180 days
122,294
Over 180 days to one year
Total assets sold under agreements to repurchase
Weighted average maturity (in months)
2.5
The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and interest payable) relating to the Company’s assets sold under agreements to repurchase is summarized by counterparty below as of September 30, 2019:
maturity of advances
under repurchase
Counterparty
Amount at risk
Facility maturity
1,313,083
April 26, 2020
231,656
December 2, 2019
April 24, 2020
82,942
October 28, 2019
JP Morgan Chase Bank, N.A.
79,142
October 9, 2019
October 11, 2019
41,279
December 17, 2019
August 4, 2020
40,511
December 16, 2019
August 21, 2020
12,363
July 31, 2020
9,804
December 31, 2019
The Company is subject to margin calls during the period the repurchase agreements are outstanding and therefore may be required to repay a portion of the borrowings before the respective agreements mature if the fair value (as determined by the applicable lender) of the assets securing those agreements decreases.
Mortgage Loan Participation Purchase and Sale Agreements
Certain of the borrowing facilities secured by loans held for sale are in the form of mortgage loan participation purchase and sale agreements. Participation certificates, each of which represents an undivided beneficial ownership interest in mortgage loans that have been pooled with Fannie Mae, Freddie Mac or Ginnie Mae, are sold to a lender pending the securitization of the mortgage loans and sale of the resulting securities. A commitment to sell the securities resulting from the pending securitization between the Company and a non-affiliate is also assigned to the lender at the time a participation certificate is sold.
The purchase price paid by the lender for each participation certificate is based on the trade price of the security, plus an amount of interest expected to accrue on the security to its anticipated delivery date, minus a present value adjustment, any related hedging costs and a holdback amount that is based on a percentage of the purchase price. The holdback amount is not required to be paid to the Company until the settlement of the security and its delivery to the lender.
The mortgage loan participation purchase and sale agreements are summarized below:
Average balance
258,169
289,008
249,023
250,599
3.36
3.31
3.55
3.14
Total interest expense
2,304
2,533
7,034
6,450
524,095
722,611
548,038
Excludes the effect of amortization of facility fees totaling $135,000 and $92,000 for the quarters ended September 30, 2019 and 2018, respectively, and $405,000 and $475,000 for the nine months ended September 30, 2019 and 2018, respectively.
532,466
Unamortized debt issuance costs
(215)
3.27
3.77
Fair value of loans pledged to secure mortgage loan participation purchase and sale agreements
Notes Payable
On February 28, 2018, the Company, through the Issuer Trust, issued an aggregate principal amount of $650 million in Term Notes (the “2018-GT1 Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The 2018-GT1 Notes bear interest at a rate equal to one-month LIBOR plus 2.85% per annum. The 2018-GT1 Notes will mature on February 25, 2023 or, if extended pursuant to the terms of the related indenture supplement, February 25, 2025 (unless earlier redeemed in accordance with their terms). Concurrent with issuance of the 2018-GT1 Notes, the Company also redeemed certain notes previously issued by the Issuer Trust.
On August 10, 2018, the Company, through the Issuer Trust, issued an aggregate principal amount of $650 million in Term Notes (the “2018-GT2 Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The 2018-GT2 Notes bear interest at a rate equal to one-month LIBOR plus 2.65% per annum. The 2018-GT2 Notes will mature on August 25, 2023 or, if extended pursuant to the terms of the related indenture supplement, August 25, 2025 (unless earlier redeemed in accordance with their terms). Concurrent with the issuance of the 2018-GT2 Notes, the Company also redeemed certain notes previously issued by the Issuer Trust.
All of the Term Notes rank pari passu with each other and with the VFN issued by the Issuer Trust to PLS and are secured by certain participation certificates relating to Ginnie Mae MSRs and ESS that are financed pursuant to the GNMA MSR Facility.
47
Corporate Revolving Line of Credit
On November 1, 2018, the Company, through its subsidiary, PennyMac (the “Borrower”), entered into amendments (the "Amendments") to that certain (i) amended and restated credit agreement, dated as of November 18, 2016, by and among the Borrower, the lenders that are parties thereto and Credit Suisse AG, as administrative agent and collateral agent, and Credit Suisse Securities (USA) LLC, as sole bookrunner and sole lead arranger (the “Credit Agreement”); and (ii) amended and restated collateral and guaranty agreement, dated as of November 18, 2016, by and among the Borrower, as grantor, Credit Suisse AG, Cayman Islands Branch (“CS Cayman”), as collateral agent, and PNMAC Holdings, Inc. (formerly known as PennyMac Financial Services, Inc.) and certain of its subsidiaries, PCM, PLS and PNMAC Opportunity Fund Associates, LLC (“Associates”), as guarantors and grantors (“the “Guaranty”).
Pursuant to the Credit Agreement, the lenders have agreed to make revolving loans to the Borrower in an amount not to exceed $150 million. Interest on the loans shall accrue at a per annum rate of interest equal to, at the election of the Borrower, either LIBOR plus the applicable margin or an alternate base rate (as defined in the Credit Agreement). During the existence of certain events of default, interest shall accrue at a higher default rate. The proceeds of the loans are to be used solely for working capital and general corporate purposes of the Borrower and its subsidiaries.
The primary purposes of the Amendments were to (i) extend the maturity date of the Credit Agreement to October 31, 2019; (ii) name the Company as an additional guarantor under the Credit Agreement; and (iii) release Associates from its obligations as a guarantor under the Credit Agreement. Accordingly, the obligations of the Borrower under the Credit Agreement are now guaranteed by PFSI, PNMAC Holdings, Inc., PCM and PLS, and secured by a grant by each of the referenced grantors of its respective right, title and interest in and to limited and otherwise unencumbered (other than specified permitted encumbrances) specified contract rights, specified deposit accounts, all documents and instruments related to such specified contract rights and specified deposit accounts, and any and all proceeds and products thereof. All other terms and conditions of the Credit Agreement and Guaranty remain the same in all material respects.
MSR Note Payable
On February 1, 2018, the Company issued a note payable in favor of CS Cayman that is secured by Fannie Mae and Freddie Mac MSRs. Interest is charged at a rate based on LIBOR plus the applicable contract margin. The facility expires on February 1, 2020. The maximum amount that the Company may borrow under the note payable is $400 million, less any amount outstanding under the agreement to repurchase pursuant to which the Company finances the VFN. The Company did not borrow under this note payable during the quarter and nine months ended September 30, 2019 or 2018.
Notes payable are summarized below:
1,234,783
1,125,458
5.11
5.07
5.21
5.29
17,525
21,369
53,559
55,939
Excludes the effect of amortization of debt issuance costs and non-utilization fees totaling $0.9 million and $2.0 million for the quarters ended September 30, 2019 and 2018, respectively, and $2.7 million and $2.8 million for the nine months ended September 30, 2019 and 2018, respectively, as well as unamortized debt issuance costs of $3.4 million and $8.0 million, recognized in Interest expense due to repayments of certain previously issued notes during the quarter and nine months ended September 30, 2018, respectively.
(6,375)
(7,709)
4.90
Unused amount
150,000
Assets pledged to secure notes payable:
101,773
108,174
Servicing advances (1)
Mortgage servicing rights (1)
2,489,481
Beneficial interests in the Ginnie Mae MSRs and servicing advances are pledged to the Issuer Trust and together serve as the collateral backing the VFN, 2018-GT1 Notes and 2018-GT2 Notes. The VFN financing is included in Assets sold under agreements to repurchase and 2018-GT1 Notes and 2018-GT2 Notes are included in Notes payable on the Company's consolidated balance sheet.
Obligations Under Capital Lease
The Company has a capital lease transaction secured by certain fixed assets and capitalized software. The capital lease matures on June 13, 2022 and bears interest at a spread over one-month LIBOR.
Obligations under capital lease are summarized below:
25,812
11,615
13,380
15,187
4.47
4.09
4.48
3.87
274
476
28,295
13,032
20,971
4.45
4.46
Assets pledged to secure obligations under capital lease:
Furniture, fixtures and equipment
22,172
16,281
Capitalized software
14,090
1,017
In conjunction with its purchase from non-affiliates of certain MSRs on pools of Agency-backed residential mortgage loans, the Company has entered into sale and assignment agreements with PMT. Under these agreements, the Company sold to PMT the right to receive ESS cash flows relating to certain MSRs. The Company retained a fixed base servicing fee and all ancillary income associated with servicing the loans. The Company continues to be the servicer of the mortgage loans and retains all servicing obligations, including responsibility to make servicing advances.
49
Following is a summary of ESS:
Issuances of excess servicing spread to PennyMac Mortgage Investment Trust pursuant to recapture agreement
Change in fair value
Note 12—Liability for Losses Under Representations and Warranties
Following is a summary of the Company’s liability for losses under representations and warranties:
18,709
20,587
20,053
Provision for losses on loans sold:
Resulting from sales of loans
2,508
1,842
5,222
4,550
Reduction in liability due to change in estimate
(1,175)
(1,155)
(6,305)
(3,627)
(Recoveries) incurred losses, net
(74)
(252)
(104)
21,022
Unpaid principal balance of loans subject to representations and warranties at end of period
166,541,153
139,315,779
Note 13—Income Taxes
The Company’s effective income tax rates were 26.9% and 9.0% for the quarters ended September 30, 2019 and 2018, respectively, and 26.3% and 8.6% for the nine months ended September 30, 2019 and 2018, respectively. Beginning November 1, 2018, the Company’s income subject to income tax includes the portion of its income formerly attributed to the noncontrolling interest, which was not subject to income tax at the parent Company level before the Reorganization. As a result, the Company reported a higher effective tax rate for the quarter and nine months ended September 30, 2019 than for the quarter and nine months ended September 30, 2018.
Note 14—Commitments and Contingencies
Litigation
From time to time, the Company may be a party to legal proceedings, lawsuits and other claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on the financial condition, results of operations, or cash flows of the Company.
50
Regulatory Matters
The Company and/or its subsidiaries are subject to various state and federal regulations related to its loan production and servicing operations by the various states it operates in as well as federal agencies such as the Consumer Financial Protection Bureau, HUD, and the FHA and is subject to the requirements of the Agencies to which it sells loans and for which it performs loan servicing activities. As a result, the Company may become involved in information-gathering requests, reviews, investigations and proceedings (both formal and informal) by such various federal, state and local regulatory bodies.
Commitments to Purchase and Fund Mortgage Loans
The Company’s commitments to purchase and fund loans totaled $8.3 billion as of September 30, 2019.
Note 15—Stockholders’ Equity
In June 2017, the Company’s board of directors authorized a stock repurchase program under which the Company may repurchase up to $50 million of its outstanding common stock. Following is a summary of activity under the stock repurchase program:
Cumulative
total (1)
Shares of common stock repurchased
51
236
816
Cost of shares of common stock repurchased
1,056
4,826
14,948
Amounts represent the total shares of common stock repurchased under the stock repurchase program through September 30, 2019.
Note 16—Noncontrolling Interest
As a result of the Reorganization, noncontrolling interest unitholders contributed their Class A units of PNMAC in exchange for shares of the Company’s common stock without any cash consideration on a one-for-one basis. Consequently, the noncontrolling interest was reclassified to the Company’s paid-in capital accounts, net of deferred income taxes attributable to the noncontrolling interests.
Net income attributable to the Company’s common stockholders and the effects of changes in noncontrolling ownership interest in PennyMac are summarized below:
September 30, 2018
Increase in the Company's paid-in capital accounts for exchanges of Class A units of Private National Mortgage Acceptance Company, LLC to Class A common stock of PennyMac Financial Services, Inc.
Shares of Class A common stock of PennyMac Financial Services, Inc. issued pursuant to exchange of Class A units of Private National Mortgage Acceptance Company, LLC by noncontrolling interest unitholders and issued as equity compensation
Note 17—Net Gains on Loans Held for Sale
Net gains on loans held for sale at fair value is summarized below:
From non-affiliates:
Cash loss:
Loans
(22,838)
(107,414)
(77,659)
(399,457)
Hedging activities
(148,128)
(2,507)
(230,200)
89,322
(170,966)
(109,921)
(307,859)
(310,135)
Non-cash gain:
Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales
227,256
147,259
518,706
443,056
Provision for losses relating to representations and warranties:
Pursuant to loan sales
(2,508)
(1,842)
(5,222)
(4,550)
1,175
1,155
6,305
3,627
Change in fair value of loans and derivatives held at period end:
(5,822)
6,897
(35,508)
21,407
Hedging derivatives
92,588
13,327
72,838
11,100
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Note 18—Net Interest Income
Net interest income is summarized below:
Cash and short-term investments
2,894
814
7,533
2,001
35,800
34,941
101,509
95,982
Placement fees relating to custodial funds
43,231
23,397
98,628
55,014
From PennyMac Mortgage Investment Trust—Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell
To non-affiliates:
Assets sold under agreements to repurchase (1)
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations
12,453
4,883
24,978
14,259
Interest on mortgage loan impound deposits
2,104
1,452
4,967
3,517
To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value
In 2017, the Company entered into a master repurchase agreement that provides the Company with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. The Company included $1.6 million and $12.8 million of such incentives as reductions of Interest expense during the quarter ended September 30, 2019 and 2018, respectively, and $14.7 million and $35.5 million during the nine months ended September 30, 2019 and 2018, respectively. The master repurchase agreement expired on August 21, 2019.
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Note 19—Stock-based Compensation
As of September 30, 2019, the Company had one stock-based compensation plan. Following is a summary of the stock-based compensation activity:
Grants:
Units:
Performance-based RSUs
665
524
Stock options
344
674
Time-based RSUs
334
321
Grant date fair value:
15,253
12,791
2,965
6,147
102
100
7,647
7,803
25,865
26,741
Vestings and exercises:
Performance-based RSUs vested
648
774
Stock options exercised
127
Time-based RSUs vested
294
Compensation expense
8,941
8,532
Note 20—Earnings Per Share of Common Stock
Basic earnings per share of common stock is determined using net income attributable to the Company’s common stockholders divided by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock is determined by dividing net income attributable to the Company’s common stockholders by the weighted average number of shares of common stock outstanding, assuming all dilutive shares of common stock were issued.
Potentially dilutive shares of common stock include non-vested stock-based compensation awards and, before the Reorganization, PennyMac Class A units. The Company applies the treasury stock method to determine the diluted weighted average shares of common stock outstanding based on the outstanding stock-based compensation awards. As a result of the Reorganization, all PNMAC Class A units converted into shares of the Company’s common stock on a one-for-one basis.
54
The following table summarizes the basic and diluted earnings per share calculations:
(in thousands, except per share amounts)
Basic earnings per share of common stock:
Net income attributable to common stockholders
Weighted average shares of common stock outstanding
Basic earnings per share of common stock
Diluted earnings per share of common stock:
Net income attributable to dilutive stock-based compensation units
552
2,435
Net income attributable to PennyMac Class A units exchangeable to Class A common stock, net of income taxes
29,580
101,921
Net income attributable to common stockholders for diluted earnings per share
44,621
153,301
Weighted average shares of common stock outstanding applicable to basic earnings per share
Effect of dilutive shares:
Common shares issuable under stock-based compensation plan
2,021
1,476
1,702
1,818
PennyMac Class A units exchangeable to Class A common stock
52,312
52,492
Weighted average shares of common stock applicable to diluted earnings per share
Diluted earnings per share of common stock
Calculations of diluted earnings per share require certain potentially dilutive shares to be excluded when their inclusion in the diluted earnings per share calculation would be anti-dilutive. The following table summarizes the anti-dilutive weighted-average number of outstanding performance-based restricted share units (“RSUs”), time-based RSUs, and stock options excluded from the calculation of diluted earnings per share:
(in thousands except for weighted-average exercise price)
Performance-based RSUs (1)
1,157
1,172
985
1,060
86
68
Stock options (2)
566
1,208
888
705
Total anti-dilutive shares and units
1,723
2,466
1,873
1,833
Weighted average exercise price of anti-dilutive stock options (2)
23.50
17.79
23.98
Certain performance-based RSUs were outstanding but not included in the computation of earnings per share because the performance thresholds included in such RSUs have not been achieved.
Certain stock options were outstanding but not included in the computation of diluted earnings per share because the weighted-average exercise prices were above the average stock prices for the period.
Note 21—Supplemental Cash Flow Information
Cash paid for interest
125,987
123,622
Cash paid (refunds received) for income taxes , net
5,761
(1,541)
Non-cash investing activity:
Unsettled portion of MSR acquisitions
13,501
Operating right-of-use assets recognized
Non-cash financing activity:
Issuance of Excess servicing spread payable to PennyMac Mortgage Investment Trust pursuant to a recapture agreement
Issuance of common stock and Class A common stock in settlement of director fees
Note 22—Regulatory Capital and Liquidity Requirements
The Company, through PLS and PennyMac, is required to maintain specified levels of capital and liquidity to remain a seller/servicer in good standing with the Agencies. Such capital and liquid asset requirements generally are tied to the size of the Company’s loan servicing portfolio or loan origination volume.
The Company is subject to financial eligibility requirements for sellers/servicers eligible to sell or service mortgage loans with Fannie Mae and Freddie Mac. The eligibility requirements include tangible net worth of $2.5 million plus 25 basis points of the Company’s total 1-4 unit servicing portfolio, excluding mortgage loans subserviced for others and a liquidity requirement equal to 3.5 basis points of the aggregate UPB serviced for the Agencies plus 200 basis points of total nonperforming Agency servicing UPB in excess of 600 basis points.
The Company is also subject to financial eligibility requirements for Ginnie Mae single-family issuers. The eligibility requirements include net worth of $2.5 million plus 35 basis points of PLS' outstanding Ginnie Mae single-family obligations and a liquidity requirement equal to the greater of $1.0 million or 10 basis points of PLS' outstanding Ginnie Mae single-family securities.
The Agencies’ capital and liquidity requirements, the calculations of which are specified by each Agency, are summarized below:
Agency–company subject to requirement
Actual (1)
Requirement (1)
Capital
Fannie Mae & Freddie Mac – PLS
2,062,630
572,167
1,788,430
514,089
Ginnie Mae – PLS
1,718,072
852,256
1,535,826
733,342
Ginnie Mae – PennyMac
2,006,339
937,482
1,786,430
806,676
HUD – PLS
2,500
Liquidity
282,056
78,240
271,802
70,775
211,021
189,592
Tangible net worth / Total assets ratio
Calculated in compliance with the respective Agency’s requirements.
Noncompliance with an Agency’s requirements can result in such Agency taking various remedial actions up to and including terminating PennyMac’s ability to sell loans to and service loans on behalf of the respective Agency.
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Note 23—Segments
The Company operates in three segments: production, servicing and investment management.
Two of the segments are in the mortgage banking business: production and servicing. The production segment performs loan origination, acquisition and sale activities. The servicing segment performs servicing of loans, execution and management of early buyout loan transactions and servicing of loans sourced and managed by the investment management segment for PMT, including executing the loan resolution strategy identified by the investment management segment relating to distressed mortgage loans.
The investment management segment represents the activities of the Company’s investment manager, which include sourcing, performing diligence, bidding and closing investment asset acquisitions and managing the acquired assets and correspondent production activities for PMT.
Financial performance and results by segment are as follows:
Mortgage Banking
Investment
Production
Management
Revenue: (1)
216,132
19,600
Loan origination fees
Net interest income (expense):
Interest income
22,445
61,007
18,423
37,936
56,359
4,022
23,071
27,093
(21)
324
567
891
1,742
2,633
Total net revenue
315,061
109,467
424,528
11,819
135,777
127,581
263,358
6,792
179,284
(18,114)
161,170
5,027
Segment assets at quarter end
4,850,741
4,433,177
9,283,918
19,281
All revenues are from external customers.
34,947
21,967
17,013
43,935
60,948
1,274
37,491
38,765
15,739
6,444
22,183
645
805
1,450
1,478
2,928
104,072
138,919
242,991
7,938
78,405
105,346
183,751
5,481
25,667
33,573
59,240
2,457
Segment assets at quarter end (2)
2,168,126
4,812,898
6,981,024
11,996
6,993,020
Excludes parent Company assets, which consist of $1.8 million of cash and includes receivable from parent Company of $2.3 million.
407,713
60,328
55,714
156,971
36,236
110,572
146,808
19,478
46,399
65,877
(39)
929
2,664
3,593
4,844
8,437
640,721
315,325
956,046
30,983
316,187
324,949
641,136
19,815
324,534
(9,624)
314,910
11,168
Segment assets at period end
58
105,111
84,163
48,135
110,532
158,667
4,401
103,694
108,095
43,734
6,838
50,572
(25)
1,497
1,928
3,425
4,221
7,646
278,577
433,110
711,687
21,741
216,722
290,094
506,816
17,221
61,855
143,016
204,871
4,520
Segment assets at period end (2)
Note 24—Subsequent Events
Management has evaluated all events and transactions through the date the Company issued these consolidated financial statements. During this period, on October 31, 2019, the Company announced that it has initiated a quarterly dividend for common shareholders and that the board of directors declared a cash dividend of $0.12 per common share. The dividend will be paid on November 29, 2019 to common shareholders of record as of November 15, 2019.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
The following discussion and analysis of financial condition and results of operations should be read with the consolidated financial statements including the related notes of PennyMac Financial Services, Inc. (“PFSI”) included within this Quarterly Report on Form 10-Q.
Statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those expressed or implied in such statements. You can identify these forward-looking statements by words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors,” as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and our other filings with the United States Securities and Exchange Commission (“SEC”). The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date hereof and we assume no obligation to update or supplement any forward-looking statements.
Overview
The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to the words “we,” “us,” “our” and the “Company” refer to PFSI.
Our Company
We are a specialty financial services firm with a comprehensive mortgage platform and integrated business primarily focused on the production and servicing of U.S. residential mortgage and home equity loans (activities which we refer to as mortgage banking) and the management of investments related to the U.S. mortgage market. We believe that our operating capabilities, specialized expertise, access to long-term investment capital, and our management’s experience across all aspects of the mortgage business will allow us to profitably grow these activities and capitalize on other related opportunities as they arise in the future.
We operate and control all of the business and affairs and consolidate the financial results of Private National Mortgage Acceptance Company, LLC (“PennyMac”). PennyMac was founded in 2008 by members of our executive leadership team and two strategic partners, BlackRock Mortgage Ventures, LLC and HC Partners, LLC, formerly known as Highfields Capital Investments, LLC, together with its affiliates.
We were formed as a Delaware corporation on July 2, 2018. We became the top-level parent holding company for the consolidated PennyMac business pursuant to a corporate reorganization (the “Reorganization”) that was consummated on November 1, 2018. Before the Reorganization, PNMAC Holdings, Inc. (formerly known as PennyMac Financial Services, Inc.) (“PNMAC Holdings”) was our top-level parent holding company and our public company registrant.
One result of the consummation of the Reorganization was that our equity structure was changed to create a single class of publicly-held common stock as opposed to the two classes that were in place before the Reorganization. For tax purposes, the Reorganization is to be treated as an integrated transaction that qualifies as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code and/or a transfer described in Section 351(a) of the Internal Revenue Code. PNMAC Holdings’ financial statements remain our historical financial statements.
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We conduct our business in three segments: production, servicing (together, production and servicing comprise our mortgage banking activities) and investment management.
The production segment performs loan origination, acquisition and sale activities.
The servicing segment performs loan servicing for both newly originated loans we are holding for sale and loans we service for others, including for PMT.
The investment management segment represents our investment management activities, which include the activities associated with investment asset acquisitions and dispositions such as sourcing, due diligence, negotiation and settlement.
Our principal mortgage banking subsidiary, PennyMac Loan Services, LLC (“PLS”), is a non-bank producer and servicer of mortgage and home equity loans in the United States. PLS is a seller/servicer for the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), each of which is a government‑sponsored entity (“GSE”). PLS is also an approved issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”), a lender of the Federal Housing Administration (“FHA”), and a lender/servicer of the Veterans Administration (“VA”) and the U.S. Department of Agriculture (“USDA”). We refer to each of Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA and USDA as an “Agency” and collectively as the “Agencies.” PLS is able to service loans in all 50 states, the District of Columbia, Guam and the U.S. Virgin Islands, and originate loans in 49 states and the District of Columbia, either because PLS is properly licensed in a particular jurisdiction or exempt or otherwise not required to be licensed in that jurisdiction.
Our investment management subsidiary is PNMAC Capital Management, LLC (“PCM”), a Delaware limited liability company registered with the Securities and Exchange Commission (“SEC”) as an investment adviser under the Investment Advisers Act of 1940 (the “Advisers Act”), as amended. PCM manages PennyMac Mortgage Investment Trust (“PMT”), a mortgage real estate investment trust listed on the New York Stock Exchange under the ticker symbol PMT. PCM previously managed PNMAC Mortgage Opportunity Fund, LLC, PNMAC Mortgage Opportunity Fund, LP, an affiliate of these funds and PNMAC Mortgage Opportunity Fund Investors, LLC. We refer to these funds collectively as our Investment Funds. The Investment Funds were dissolved during 2018.
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Results of Operations
Our results of operations are summarized below:
(dollars in thousands, except per share amounts)
Revenues:
2,911
7,281
Annualized return on average common stockholders' equity
26.2
10.8
18.2
12.7
Income before provision for income taxes by segment:
Mortgage banking:
Total mortgage banking
Investment management
During the period:
Interest rate lock commitments issued
22,423,177
11,130,611
49,291,237
33,843,166
At end of period:
Unpaid principal balance of loan servicing portfolio:
Owned:
221,215,993
193,659,378
2,327,687
1,265,461
2,352,771
197,277,610
Subserviced for PMT
87,226,461
284,504,071
Net assets of PennyMac Mortgage Investment Trust
2,219,611
1,558,563
Book value per share
24.37
21.47
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For the quarter and nine months ended September 30, 2019, income before provision for income taxes increased $104.5 million and $116.7 million, respectively, compared to the same periods in 2018. The increases were primarily due to:
increases in production income (Net gains on loans held for sale at fair value, Loan origination fees and Fulfillment fees from PennyMac Mortgage Investment Trust), partially offset by;
decreases in Net loan servicing fees;
and increases in total expenses.
The increases in production income reflect higher production volume and improved profit margins. The decreases in Net loan servicing fees were mainly due to the effect of lower interest rates on the fair value of our MSRs that resulted in fair value losses net of hedging results, compared to the same periods in 2018. The increases in total expenses were mainly due to increases in loan origination and compensation expenses, reflecting the continuing growth of our mortgage banking activities.
These increases in pretax income were offset by increases in the provision for income taxes resulting from an increase in the effective income tax rate resulting from the Reorganization.
Net Loan Servicing Fees
Following is a summary of our net loan servicing fees:
Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing net of hedging results
Average loan servicing portfolio
341,369,904
274,420,615
325,658,620
261,586,617
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Change in fair value of mortgage servicing rights and excess servicing spread are summarized below:
Realization of cash flows
(117,220)
(71,362)
(316,469)
(197,765)
Other changes in fair value of mortgage servicing rights and mortgage servicing liabilities
(295,510)
60,883
(719,654)
230,948
Change in fair value of excess servicing spread
Hedging results
Total change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread
Average balances:
2,601,069
2,634,026
2,757,948
2,302,713
23,997
9,961
14,649
10,920
Excess servicing spread financing
187,088
225,926
199,911
232,694
At period end:
Following is a summary of our loan servicing portfolio:
Loans serviced
Prime servicing:
157,437,101
144,296,544
Acquired
63,778,892
56,757,600
201,054,144
1,160,938
120,460,120
94,276,938
Total prime servicing
348,327,052
298,912,656
Special servicing – Subserviced for PMT
147,956
381,216
Total loans serviced
Net loan servicing fees decreased $43.5 million and $134.2 million during the quarter and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The decreases were primarily due to an increase of $94.2 million and $280.0 million in losses in fair value of MSRs and mortgage servicing liabilities (“MSLs”), net of hedging results, during the quarter and nine months ended September 30, 2019, respectively, resulting from the effect of decreasing interest rates on mortgage servicing asset and liability fair values. The increased losses were partially offset by increases of $50.7 million and $145.8 million in loan servicing fees for the quarter and nine months ended September 30, 2019, respectively, resulting from an increase in our average servicing portfolio of 24% for the quarter and nine months ended September 30, 2019 compared to the same periods in 2018.
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Net Gains on Loans Held for Sale at Fair Value
Most of our loan production consists of government-insured or guaranteed mortgage loans that we source primarily through PMT. PMT is not approved by Ginnie Mae as an issuer of Ginnie Mae-guaranteed securities which are backed by government-insured or guaranteed mortgage loans. We purchase such loans that PMT acquires through its correspondent production activities and pay PMT a sourcing fee ranging from two to three and one-half basis points on the UPB of such mortgage loans.
During the quarter and nine months ended September 30, 2019, we recognized Net gains on loans held for sale at fair value totaling $235.7 million and $468.0 million, respectively, an increase of $178.8 million and $278.8 million, respectively, compared to the same periods in 2018. The increases were primarily due to an increase in loan production volume and an improvement in profit margins in our mortgage production business, reflecting increased demand for mortgage loans during 2019 as compared to 2018.
Our net gains on loans held for sale are summarized below:
Change in fair value of loans and derivative financial instruments outstanding at period end:
120,113
1,698
133,115
11,398
225,923
146,572
519,789
442,133
346,036
148,270
652,904
453,531
Interest rate lock commitments issued:
Government-insured or guaranteed mortgage loans
19,383,044
9,869,209
42,574,349
30,382,616
Conventional mortgage loans
3,031,076
1,236,912
6,686,393
3,399,365
Jumbo mortgage loans
6,087
24,490
23,452
61,185
2,970
7,043
2,416,955
Commitments to fund and purchase mortgage loans
3,388,437
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Our gain on sale of loans held for sale includes both cash and non-cash elements. We receive proceeds on sale that include our estimate of the fair value of MSRs and we incur liabilities for mortgage servicing liabilities (which represents the fair value of the costs we expect to incur in excess of the fees we receive for early buyout of delinquent loans (“EBO loans”) we have resold) and for the fair value of our estimate of the losses we expect to incur relating to the representation and warranties we provide in our loan sale transactions.
Non-cash elements of gain on sale of loans
The MSRs, MSLs, and liability for representations and warranties we recognize represent our estimate of the fair value of future benefits and costs we will realize for years in the future. These estimates represented approximately 96% and 111% of our gain on sale of loans at fair value for the quarter and nine months ended September 30, 2019, as compared to 258% and 234% for the quarter and nine months ended September 30, 2018. How we measure and update our measurements of MSRs and MSLs is detailed in Note 6 – Fair value – Valuation Techniques and Inputs to the consolidated financial statements included in this Quarterly Report.
Our agreements with the purchasers and insurers include representations and warranties related to the loans we sell. The representations and warranties require adherence to purchaser and insurer origination and underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.
In the event of a breach of our representations and warranties, we may be required to either repurchase the loans with the identified defects or indemnify the purchaser or insurer. In such cases, we bear any subsequent credit loss on the loans. Our credit loss may be reduced by any recourse we have to correspondent originators that sold such loans to us and breached similar or other representations and warranties. In such event, we have the right to seek a recovery of related repurchase losses from that correspondent seller.
The method used to estimate our losses on representations and warranties is a function of our estimate of future defaults, loan repurchase rates, the severity of loss in the event of default, if applicable, and the probability of reimbursement by the correspondent loan seller. We establish a liability at the time loans are sold and review our liability estimate on a periodic basis.
We recorded provisions for losses under representations and warranties relating to current loan sales as a component of Net gains on loans held for sale at fair value totaling $2.5 million and $5.2 million for the quarter and nine months ended September 30, 2019, respectively, compared to $1.8 million and $4.6 million during the quarter and nine months ended September 30, 2018, respectively. We also recorded reductions in the liability of $1.2 million and $6.3 million during the quarter and nine months ended September 30, 2019, respectively, compared to $1.2 million and $3.6 million during the quarter and nine months ended September 30, 2018, respectively. The reductions in the liability resulted from previously sold loans meeting performance criteria established by the Agencies which significantly limits the likelihood of certain repurchase or indemnification claims.
Following is a summary of loan repurchase activity and the UPB of loans subject to representations and warranties:
Indemnification activity:
Loans indemnified by PFSI at beginning of period
12,928
10,334
8,899
7,579
New indemnifications
5,582
932
9,848
4,110
Less indemnified loans sold, repaid or refinanced
1,587
1,519
1,824
Loans indemnified by PFSI at end of period
16,923
9,747
Repurchase activity:
Total loans repurchased by PFSI
4,115
11,910
15,427
24,895
Less:
Loans repurchased by correspondent lenders
2,677
5,332
16,237
Loans repaid by borrowers or resold with defects resolved
1,663
590
4,258
1,156
Net loans repurchased with losses chargeable to liability for representations and warranties
(225)
5,988
7,502
Net losses charged (recoveries credited) to liability for representations and warranties
74
252
104
(46)
Unpaid principal balance of loans subject to representations and warranties
Liability for representations and warranties
21,002
During the quarter and nine months ended September 30, 2019, we repurchased loans totaling $4.1 million and $15.4 million in UPB, respectively. We recorded losses of $104,000 net of recoveries, during the nine months ended September 30, 2019. If the outstanding balance of loans we purchase and sell subject to representations and warranties increases, the loans sold continue to season, economic conditions change or investor and insurer loss mitigation strategies are adjusted, the level of repurchase activity may increase.
The level of the liability for losses under representations and warranties is difficult to estimate and requires considerable judgment. The level of loan repurchase losses is dependent on economic factors, purchaser or insurer loss mitigation strategies, and other external conditions that may change over the lives of the underlying loans. Our estimate of the liability for representations and warranties is developed by our credit administration staff and approved by our senior management credit committee which includes our senior executives and senior management in our loan production, loan servicing and credit risk management areas.
Our representations and warranties are generally not subject to stated limits of exposure. However, we believe that the current UPB of mortgage loans sold by us and subject to representation and warranty liability to date represents the maximum exposure to repurchases related to representations and warranties.
Loan origination fees increased $22.9 million and $34.8 million during the quarter and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The increase was primarily due to an increase in volume of loans we produced.
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Fulfillment fees from PMT represent fees we collect for services we perform on behalf of PMT in connection with the acquisition, packaging and sale of loans. The fulfillment fees are calculated as a percentage of the UPB of the loans we fulfill for PMT.
Following is a summary of our fulfillment fees:
Unpaid principal balance of loans fulfilled subject to fulfillment fees
Average fulfillment fee rate (in basis points)
Fulfillment fees increased $18.9 million and $49.6 million during the quarter and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The increases were primarily due to an increase in PMT’s loan production volume, partially offset by an increase in discretionary reductions in the fulfillment fee rate during the quarter and nine months ended September 30, 2019, compared to the same periods in 2018.
Net Interest Income
Net interest income increased $4.9 million and $15.3 million during the quarter and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The increases were primarily due to:
increases in placement fees we receive relating to custodial funds that we manage, reflecting the growth of our servicing portfolio and higher earnings rates in 2019 compared to 2018, partially offset by;
increases in interest shortfall on repayments of loans serviced for Agency securitizations, reflecting increased loan payoffs as a result of the lower interest rates in 2019 as compared to 2018; and
increases in interest expense on repurchase agreements, reflecting the substantial curtailment of financing incentives we received from one of our lenders and an increase in average borrowing balances during the quarter and nine months ended September 30, 2019 to fund a higher volume of loan inventory compared to the same periods in 2018.
We entered into a master repurchase agreement in 2017 that provided us with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. We recorded $1.6 million and $12.8 million of such incentives as reductions in Interest expense during the quarters ended September 30, 2019 and 2018, respectively, and $14.7 million and $35.5 million during the nine month periods ended September 30, 2019 and 2018, respectively. The loan volumes targeted by the master repurchase agreement were achieved during the second quarter of 2019, and the master repurchase agreement expired on August 21, 2019.
Management fees and Carried Interest
Management fees and Carried Interest are summarized below:
Management fees:
PennyMac Mortgage Investment Trust:
Investment Funds
Total management fees
Carried Interest
Total management fees and Carried Interest
6,454
17,545
Net assets of PennyMac Mortgage Investment Trust at end of period
Management fees increased $3.6 million and $8.3 million during the quarter and nine months ended September 30, 2019, respectively, compared to the same periods in 2018, reflecting the combined effect of the performance incentive fees arising from PMT’s increased profitability and the increase in PMT’s average shareholders’ equity upon which its base management fees are based. The increase in average shareholders’ equity was primarily due to the issuance of new common shares by PMT during the quarter and nine months ended September 30, 2019.
Our compensation expense is summarized below:
Salaries and wages
77,748
64,367
212,135
190,856
Incentive compensation
39,824
17,831
86,587
54,345
Taxes and benefits
14,619
12,634
44,603
37,950
Head count:
Average
3,751
3,361
3,591
3,301
Quarter end
3,907
3,383
Compensation expense increased $37.8 million and $58.5 million during the quarter and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The increases were primarily due to increases in incentive compensation resulting from performance-based incentives in our mortgage banking business and higher than expected attainment of profitability targets along with increases in salaries and wages due to increased average headcounts resulting from the growth in our mortgage banking activities.
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Servicing expenses increased $7.1 million and $11.6 million during the quarter and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The increases were primarily due to increased purchases of EBO loans from Ginnie Mae guaranteed pools for the quarter and nine months ended September 30, 2019 compared to the same periods in 2018. During the nine months ended September 30, 2019, we purchased $2.6 billion in UPB of EBO loans, compared to $1.6 billion during the same period in 2018.
The EBO program reduces the ongoing cost of servicing defaulted loans that have been sold into Ginnie Mae MBS when we purchase and either sell the defaulted loans or finance them with debt at interest rates below the Ginnie Mae MBS pass-through rates. While the EBO program reduces the ultimate cost of servicing such loan pools, it results in loss recognition when the loans are purchased. We recognize the loss because purchasing the mortgage loans from their Ginnie Mae pools causes us to write off accumulated non-reimbursable interest advances, net of interest receivable from the loans’ insurer or guarantor at the debenture rate of interest we receive from the insurer or guarantor while the loan is in default.
Loan origination expense increased $27.6 million and $58.0 million during the quarter and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The increases were primarily due to increases in wholesale brokerage fees and loan file compilation expenses, resulting from increased consumer and broker direct lending activities, as well as an increase in lender paid fees due to the mix of production volume shifting toward a higher proportion of VA-guaranteed loans during the quarter and nine months ended September 30, 2019 as compared to the same periods during 2018.
Provision for Income Taxes
Our effective income tax rates were 26.9% and 26.3% during the quarter and nine months ended September 30, 2019, respectively, compared to 9.0% and 8.6% during the quarter and nine months ended September 30, 2018, respectively. Beginning November 1, 2018, PFSI’s income subject to income tax includes the portion of its income formerly attributed to the noncontrolling interest, which was not subject to income tax at the PFSI level before the Reorganization. As a result, we reported higher effective tax rates for the quarter and nine months ended September 30, 2019, respectively, as compared to the same periods in 2018.
Balance Sheet Analysis
Following is a summary of key balance sheet items as of the dates presented:
291,931
273,113
Servicing advances, net
Investments in and advances to affiliates
149,089
165,886
618,823
281,278
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt
4,053,514
2,332,143
Long-term debt
1,500,647
1,648,973
944,794
740,826
Stockholders' equity
Total liabilities and stockholders' equity
Total assets increased $1.8 billion from $7.5 billion at December 31, 2018 to $9.3 billion at September 30, 2019. The increase was primarily due to increases in loans held for sale at fair value resulting from an increase in loan production volume.
Total liabilities increased $1.6 billion from $5.8 billion at December 31, 2018 to $7.4 billion at September 30, 2019. The increase was primarily attributable to an increase in borrowings required to finance a larger inventory of loans held for sale combined with a $72.1 million increase in other liabilities due to recognition of operating lease liabilities effective January 1, 2019, as the result of our adoption of the Financial Accounting Standards Board’s Accounting Standards Update 2016-02, Leases (Topic 842), which requires us to recognize our contractual lease rights and obligations on our consolidated balance sheet.
Cash Flows
Our cash flows for the nine months ended September 30, 2019 and 2018 are summarized below:
Change
Operating
(2,422,725)
Investing
519,199
Financing
1,884,235
(19,291)
Our cash flows resulted in a net increase in cash and restricted cash of $45.8 million during the nine months ended September 30, 2019 as discussed below.
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Operating activities
Net cash used in operating activities totaled $1.7 billion during nine months ended September 30, 2019 and net cash provided by operating activities totaled $732.6 million during the same period in 2018. Our cash flows from operating activities are primarily influenced by changes in the levels of our inventory of mortgage loans as shown below:
Cash flows from:
(2,010,338)
543,106
Other operating sources
320,197
189,478
Investing activities
Net cash provided by investing activities during the nine months ended September 30, 2019 totaled $169.4 million primarily due to $542.1 million in net settlement of derivative financial instruments used to hedge our investment in MSRs, partially offset by the purchase of MSRs totaling $227.4 million and increase in margin deposit of $168.1 million. Net cash used in investing activities during the nine months ended September 30, 2018 totaled $349.8 million was primarily due to funds used for net settlement of derivative financial instruments used to hedge our investment in MSRs and purchase of MSRs totaling $180.1 million.
Financing activities
Net cash provided by financing activities totaled $1.6 billion during the nine months ended September 30, 2019, primarily to finance the growth in our inventory of mortgage loans held for sale and our investments in MSRs. Net cash used in financing activities totaled $317.7 million during the nine months ended September 30, 2018 primarily due to net repurchases of assets sold under agreements to repurchase, reflecting a reduction in our financing of loans held for sale.
Liquidity and Capital Resources
Our liquidity reflects our ability to meet our current obligations (including our operating expenses and, when applicable, the retirement of, and margin calls relating to, our debt, and margin calls relating to hedges on our commitments to purchase or originate mortgage loans and on our MSR investments), fund new originations and purchases, and make investments as we identify them. We expect our primary sources of liquidity to be through cash flows from business activities, proceeds from bank borrowings, proceeds from and issuance of ESS and/or equity or debt offerings. We believe that our liquidity is sufficient to meet our current liquidity needs.
Our current borrowing strategy is to finance our assets where we believe such borrowing is prudent, appropriate and available. Our borrowing activities are in the form of sales of assets under agreements to repurchase, sales of mortgage loan participation purchase and sale certificates, ESS financing, notes payable (including a revolving credit agreement) and a capital lease. Most of our borrowings have short-term maturities and provide for terms of approximately one year. Because a significant portion of our current debt facilities consists of short-term borrowings, we expect to renew these facilities in advance of maturity in order to ensure our ongoing liquidity and access to capital or otherwise allow ourselves sufficient time to replace any necessary financing.
Our repurchase agreements represent the sales of assets together with agreements for us to buy back the respective assets at a later date. The table below presents the average, maximum daily and ending balances:
Maximum daily balance
Balance at period end
1,738,839
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The differences between the average and maximum daily balances on our repurchase agreements reflect the fluctuations throughout the month of our inventory as we fund and pool mortgage loans for sale in guaranteed mortgage securitizations.
Our secured financing agreements at PLS require us to comply with various financial covenants. The most significant financial covenants currently include the following:
positive net income during each calendar quarter;
a minimum in unrestricted cash and cash equivalents of $40 million;
a minimum tangible net worth of $500 million;
a maximum ratio of total liabilities to tangible net worth of 10:1; and
at least one other warehouse or repurchase facility that finances amounts and assets that are similar to those being financed under certain of our existing secured financing agreements.
With respect to servicing performed for PMT, PLS is also subject to certain covenants under PMT’s debt agreements. Covenants in PMT’s debt agreements are equally, or sometimes less, restrictive than the covenants described above.
In addition to the covenants noted above, PennyMac’s revolving credit agreement and capital lease contain additional financial covenants including, but not limited to,
a minimum of cash equal to the amount borrowed under the revolving credit agreement;
a minimum of unrestricted cash and cash equivalents equal to $25 million;
a minimum of tangible net worth of $500 million;
a minimum asset coverage ratio (the ratio of the total asset amount to the total commitment) of 2.5; and
a maximum ratio of total indebtedness to tangible net worth ratio of 5:1.
Although these financial covenants limit the amount of indebtedness that we may incur and affect our liquidity through minimum cash reserve requirements, we believe that these covenants currently provide us with sufficient flexibility to successfully operate our business and obtain the financing necessary to achieve that purpose.
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. 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.
We are also subject to liquidity and net worth requirements established by the Federal Housing Finance Agency (“FHFA”) for Agency seller/servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established minimum liquidity requirements and revised their net worth requirements for their approved non-depository single-family sellers/servicers in the case of Fannie Mae, Freddie Mac, and Ginnie Mae for its approved single-family issuers, as summarized below:
FHFA liquidity requirement is equal to 0.035% (3.5 basis points) of total Agency servicing UPB plus an incremental 200 basis points of the amount by which total nonperforming Agency servicing UPB 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
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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;
FHFA net worth requirement is a minimum net worth of $2.5 million plus 0.25% (25 basis points) of UPB for total 1-4 unit residential mortgage loans serviced and a tangible net worth/total assets ratio greater than or equal to 6%;
Ginnie Mae single-family issuer minimum liquidity requirement is equal to the greater of $1.0 million or 0.10% (10 basis points) of the issuer’s outstanding Ginnie Mae single-family securities, which must be met with cash and cash equivalents; and
Ginnie Mae net worth requirement is equal to $2.5 million plus 0.35% (35 basis points) of the issuer’s outstanding Ginnie Mae single-family obligations.
We believe that we are currently in compliance with the applicable Agency requirements.
We have purchased portfolios of MSRs and have financed them in part through the sale to PMT of the right to receive ESS. The outstanding amount of the ESS is based on the current fair value of such ESS and amounts received on the underlying mortgage loans.
In June 2017, our board of directors approved a stock repurchase program that allows us to repurchase up to $50 million of our common stock using open market stock purchases or privately negotiated transactions in accordance with applicable rules and regulations. The stock repurchase program does not have an expiration date and the authorization does not obligate us to acquire any particular amount of common stock. We intend to finance the stock repurchase program through cash on hand. From inception through September 30, 2019, we have repurchased $14.9 million of shares under our stock repurchase program.
We continue to explore a variety of means of financing our continued growth, including debt financing through bank warehouse lines of credit, bank loans, repurchase agreements, securitization transactions and corporate debt. However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing will take or whether such efforts will be successful.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Off-Balance Sheet Arrangements and Guarantees
As of September 30, 2019, we have not entered into any off-balance sheet arrangements.
Contractual Obligations
As of September 30, 2019 we had contractual obligations aggregating $14.3 billion, comprised of borrowings, commitments to purchase and originate mortgage loans and a payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under a tax receivable agreement. We also lease our office facilities and license certain software to support our loan servicing operations.
Payment obligations under these agreements are summarized below:
Payments due by year
Less than
1-3
3-5
More than
Contractual obligations
1 year
years
5 years
Commitments to purchase and originate loans
4,054,084
1,507,022
9,226
14,655
Interest on long-term debt
282,034
72,343
141,501
50,674
17,516
Office leases
84,001
17,334
27,959
20,954
17,754
14,285,464
12,464,773
184,115
1,371,628
264,948
Debt Obligations
As described further above in “Liquidity and Capital Resources,” we currently finance certain of our assets through borrowings with major financial institution counterparties in the form of sales of assets under agreements to repurchase, mortgage loan participation purchase and sale agreements, notes payable (including a revolving credit agreement), ESS and a capital lease. The borrower under each of these facilities is PLS or the Issuer Trust with the exception of the revolving credit agreement and the capital lease, in each case where the borrower is PennyMac. All PLS obligations as previously noted are guaranteed by PennyMac.
Under the terms of these agreements, PLS is required to comply with certain financial covenants, as described further above in “Liquidity and Capital Resources,” and various non-financial covenants customary for transactions of this nature. As of September 30, 2019, we believe we were in compliance in all material respects with these covenants.
The agreements also contain margin call provisions that, upon notice from the applicable lender, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.
In addition, the agreements contain events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, servicer termination events and defaults, material adverse changes, bankruptcy or insolvency proceedings and other events of default customary for these types of transactions. The remedies for such events of default are also customary for these types of transactions and include the acceleration of the principal amount outstanding under the agreements and the liquidation by our lenders of the mortgage loans or other collateral then subject to the agreements.
The borrowings have maturities as follows:
Outstanding
Lender
indebtedness (1)
facility size (2)
facility (2)
Maturity date (2)
(dollar amounts in thousands)
Credit Suisse First Boston Mortgage Capital LLC (3)
899,713
1,100,000
1,000,000
50,000
497,335
500,000
700,000
200,000
135,000
20,000
550,000
GMSR 2018-GT1 Term Note
650,000
February 25, 2023
GMSR 2018-GT2 Term Note
August 25, 2023
Credit Suisse AG
October 31, 2019
Credit Suisse AG (3)
February 1, 2020
Banc of America Leasing and Capital LLC
25,000
June 13, 2022
Outstanding indebtedness as of September 30, 2019.
Total facility size, committed facility and maturity date include contractual changes through the date of this Report.
The borrowing of $100 million with Credit Suisse First Boston Mortgage Capital LLC is in the form of a sale of a variable funding note under an agreement to repurchase up to a maximum of $400 million, less any amount utilized under the Credit Suisse AG note payable and an agreement to repurchase relating to the financing of Fannie Mae MSRs.
The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to our assets sold under agreements to repurchase is summarized by counterparty below as of September 30, 2019:
maturity of
advances under
repurchase agreement
Credit Suisse First Boston Mortgage Capital LLC (1)
Credit Suisse First Boston Mortgage Capital LLC (2)
The borrowing facility with Credit Suisse First Boston Mortgage Capital LLC is in the form of a sale of a variable funding note under an agreement to repurchase.
The borrowing facility with Credit Suisse First Boston Mortgage Capital LLC is in the form of an asset sale under agreement to repurchase.
All debt financing arrangements that matured between September 30, 2019 and the date of this Report have been renewed or extended and are described in Note 11—Borrowings to the accompanying consolidated financial statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, real estate values and other market based risks. The primary market risks that we are exposed to are credit risk, interest rate risk, prepayment risk, inflation risk and fair value risk.
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.
The following tables summarize the estimated change in fair value of MSRs as of September 30, 2019, given several shifts in pricing spreads, prepayment speed and annual per loan cost of servicing:
Pricing spread shift in %
-20%
-10%
-5%
+5%
+10%
+20%
2,711,416
2,631,356
2,593,213
2,520,423
2,485,674
2,419,237
Change in fair value:
155,164
75,104
36,960
(35,830)
(70,578)
(137,016)
6.1
2.9
1.4
(1.4)
(2.8)
(5.4)
Prepayment speed shift in %
2,849,511
2,694,915
2,623,737
2,492,206
2,431,360
2,318,431
293,259
138,663
67,484
(64,047)
(124,892)
(237,822)
11.5
5.4
2.6
(2.5)
(4.9)
(9.3)
Per-loan servicing cost shift in %
2,643,178
2,599,715
2,577,984
2,534,521
2,512,790
2,469,328
86,925
43,462
21,731
(21,731)
(43,462)
(86,925)
3.4
1.7
0.9
(0.9)
(1.7)
(3.4)
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Excess Servicing Spread Financing
The following tables summarize the estimated change in fair value of our ESS accounted for using the fair value method as of September 30, 2019, given several shifts in pricing spreads and prepayment speed (decrease in the liabilities’ values increases net income):
188,259
185,666
184,396
181,904
180,682
178,285
5,117
2,525
1,254
(1,238)
(2,460)
(4,856)
2.8
0.7
(0.7)
(1.3)
(2.7)
203,530
192,865
187,893
178,597
174,248
166,091
20,389
9,724
4,752
(4,544)
(8,893)
(17,051)
11.1
5.3
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. However, no matter how well a control system is designed and operated, it can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports.
Our management has conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report as required by paragraph (b) of Rule 13a-15 under the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this Report, to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
In the ordinary course of business, we review our system of internal control over financial reporting and make changes that we believe will improve the efficiency and effectiveness of controls, ensure sufficient precision of controls, and appropriately mitigate the risk of material misstatement in the financial statements.
Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, whether any changes in our internal control over financial reporting that occurred during our last fiscal quarter have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Below we describe changes in our internal control over financial reporting since June 30, 2019 that management believes have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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During the quarter ended September 30, 2019, we substantially completed the implementation of an internally-developed loan servicing system. In connection with this implementation and related business process changes, we updated the design of multiple internal controls over financial reporting that were previously considered effective to reflect the design of the loan servicing system and associated data sources, and implemented controls to replace controls previously addressed by certain service organization SOC 1 Reports (System and Organization Controls Reports). We adopted this system and the related processes and controls during the quarter ended September 30, 2019. Therefore, the use of this system was included in the preparation of our financial statements for the quarter ended September 30, 2019. We continue to monitor and test these controls for adequate design and operating effectiveness.
Item 1. Legal Proceedings
From time to time, the Company may be involved in various legal and regulatory proceedings, lawsuits and other claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on the financial condition, results of operations, or cash flows of the Company. Set forth below are material updates to legal proceedings of the Company.
As previously disclosed, on December 20, 2018, a purported shareholder of the Company filed a complaint in a putative class and derivative action in the Court of Chancery of the State of Delaware, captioned Robert Garfield v. BlackRock Mortgage Ventures, LLC et al., Case No. 2018-0917-KSJM (the “Garfield Action”). The Garfield Action alleges, among other things, that certain current directors and officers of the Company breached their fiduciary duties to the Company and its shareholders by, among other things, agreeing to and entering into the Reorganization without ensuring that the Reorganization was entirely fair to the Company or public shareholders. The Reorganization was approved by 99.8% of voting shareholders on October 24, 2018. On March 1, 2019, the Company and its directors and officers named in the Garfield Action filed a motion to dismiss the complaint. The motion to dismiss has been fully briefed, orally argued, and is pending a ruling by the court.
Item 1A. Risk Factors
There have been no material changes from the risk factors set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 5, 2019 and our Quarterly Reports on Form 10-Q filed thereafter.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered equity securities during the quarter ended September 30, 2019.
There were no common stock repurchases during the quarter ended September 30, 2019.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None
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Item 6. Exhibits
Incorporated by Referencefrom the Below-Listed Form(Each Filed under SECFile Number 15‑68669 or001‑38727)
Exhibit No.
Exhibit Description
Form
Filing Date
3.1
Amended and Restated Certificate of Incorporation of New PennyMac Financial Services, Inc.
8‑K12B
November 1, 2018
3.1.1
Certificate of Amendment to Amended and Restated Certificate of Incorporation of New PennyMac Financial Services, Inc.
3.2
Amended and Restated Bylaws of New PennyMac Financial Services, Inc.
3.2.1
Bylaws Amendment of PennyMac Financial Services, Inc., formerly known as New PennyMac Financial Services, Inc.
*
10.1†
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Subject to Continued Service Award Agreement (Net Share Withholding) (2020).
10.2†
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Subject to Continued Service Award Agreement (Sale to Cover) (2020).
10.3†
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Subject to Performance Components Award Agreement (Net Share Withholding) (2020).
10.4†
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Subject to Performance Components Award Agreement (Sale to Cover) (2020).
10.5†
Omnibus Amendment to PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Restricted Stock Unit Award Agreements (Net Share Withholding) (2017-2019).
10.6†
Omnibus Amendment to PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Restricted Stock Unit Award Agreements (Sale to Cover) (2017-2019).
10.7
Sixth Amendment to Master Repurchase Agreement, dated as of July 23, 2019, by and between JPMorgan Chase Bank, N.A. and PennyMac Loan Services, LLC.
8‑K
July 25, 2019
Amendment Number Nine to the Amended and Restated Master Repurchase Agreement, dated as of August 6, 2019, by and between Citibank, N.A. and PennyMac Loan Services, LLC.
10.9
Amendment Number Fourteen to the Master Repurchase Agreement, dated as of August 23, 2019, by and between PennyMac Loan Services, LLC, Morgan Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.
10.10
Amendment No. 7 to the Third Amended and Restated Master Repurchase Agreement, dated as of September 11, 2019, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, PennyMac Loan Services, LLC, and Private National Mortgage Acceptance Company, LLC.
81
10.11
Master Repurchase Agreement, dated as of September 11, 2019, by and among Credit Suisse AG, Cayman Islands Branch, Credit Suisse First Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.
10.12
Seventh Amendment to Master Repurchase Agreement, dated as of October 11, 2019, between JPMorgan Chase Bank, N.A. and PennyMac Loan Services, LLC.
10.13
First Amendment to Guaranty, dated as of October 11, 2019, by Private National Mortgage Acceptance Company, LLC in favor of JPMorgan Chase Bank, N.A.
10.14
Amendment No. 2 to Master Repurchase Agreement, dated as of October 28, 2019, by and among PennyMac Loan Services, LLC, Private National Mortgage Acceptance Company, LLC and Bank of America, N.A.
10.15
Amendment No. 10 to Mortgage Loan Participation Purchase and Sale Agreement, dated as of October 28, 2019, by and among Bank of America, N.A., PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.
31.1
Certification of David A. Spector pursuant to Rule 13a‑14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Andrew S. Chang pursuant to Rule 13a‑14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of David A. Spector pursuant to Rule 13a‑14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**
32.2
Certification of Andrew S. Chang pursuant to Rule 13a‑14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
Interactive data files pursuant to Rule 405 of Regulation S‑T: (i) the Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 (ii) the Consolidated Statements of Income for the quarters ended September 30, 2019 and September 30, 2018, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended September 30, 2019 and September 30, 2018, (iv) the Consolidated Statements of Cash Flows for the quarters ended September 30, 2019 and September 30, 2018 and (v) the Notes to the Consolidated Financial Statements.
*Filed herewith.
**The certifications attached hereto as Exhibits 32.1 and 32.2 are furnished to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.
†Indicates management contract or compensatory plan or arrangement.
82
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant)
Dated: November 4, 2019
By:
/s/ DAVID A. SPECTOR
David A. Spector
President and Chief Executive Officer
/s/ ANDREW S. CHANG
Andrew S. Chang
Senior Managing Director and
Chief Financial Officer
83