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PennyMac Financial Services, Inc. - Quarter Report: 2019 September (Form 10-Q)

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

Common Stock, $0.0001 par value

 

78,448,596

 

 

 

 

 

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PENNYMAC FINANCIAL SERVICES, INC.

 

FORM 10-Q

September 30, 2019

 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

Special Note Regarding Forward-Looking Statements 

3

 

 

 

PART I. FINANCIAL INFORMATION 

5

 

 

 

Item 1. 

Financial Statements (Unaudited):

5

 

Consolidated Balance Sheets

5

 

Consolidated Statements of Income

6

 

Consolidated Statements of Changes in Stockholders’ Equity

7

 

Consolidated Statements of Cash Flows

9

 

Notes to Consolidated Financial Statements

10

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

60

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

77

Item 4. 

Controls and Procedures

78

 

 

 

PART II. OTHER INFORMATION 

80

 

 

 

Item 1. 

Legal Proceedings

80

Item 1A. 

Risk Factors

80

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

80

Item 3. 

Defaults Upon Senior Securities

80

Item 4. 

Mine Safety Disclosures

80

Item 5. 

Other Information

80

Item 6. 

Exhibits

81

 

 

 

2

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SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS

 

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

 

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

·

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

·

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

·

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

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·

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

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC FINANCIAL SERVICES, INC.

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

 

 

46,537

Income taxes payable

 

 

480,559

 

 

400,546

Liability for loans eligible for repurchase

 

 

892,631

 

 

1,102,840

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

 

 

 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

 

 $

9,303,199

 

 $

7,478,573

 

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

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

  

Nine months ended September 30, 

 

 

2019

 

2018

  

2019

 

2018

 

 

(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:

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

 

45,212

 

 

24,366

 

 

100,721

 

 

70,607

From PennyMac Mortgage Investment Trust

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

 

185,967

 

 

147,182

 

 

533,510

 

 

421,536

From PennyMac Mortgage Investment Trust

 

 

12,964

 

 

10,071

 

 

35,102

 

 

30,521

From Investment Funds

 

 

 —

 

 

 —

 

 

 —

 

 

 3

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:

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

 

81,925

 

 

59,152

 

 

207,670

 

 

152,997

From PennyMac Mortgage Investment Trust

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

From PennyMac Mortgage Investment Trust

 

 

10,098

 

 

6,482

 

 

26,178

 

 

17,906

From Investment Funds

 

 

 —

 

 

(11)

 

 

 —

 

 

 4

 

 

 

10,098

 

 

6,471

 

 

26,178

 

 

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

Other

 

 

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

 

 

7,117

 

 

21,876

 

 

18,442

Other

 

 

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

 

$

121,473

 

$

14,489

 

$

240,304

 

$

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

78,361

 

 

25,125

 

 

78,119

 

 

24,644

Diluted

 

 

80,382

 

 

78,913

 

 

79,821

 

 

78,954

Dividend declared per share of Class A common stock

 

$

 —

 

$

0.40

 

$

 —

 

$

0.40

 

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

 

 

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 2019

 

 

 

 

 

 

Additional

 

 

 

Total

 

 

Number of

 

Par

 

paid-in

 

Retained

 

stockholders'

 

    

shares

    

value

    

capital

    

earnings

    

equity

 

 

(in thousands)

Balance, June 30, 2019

 

78,305

 

$

 8

 

$

1,317,023

 

$

461,966

 

$

1,778,997

Net income

 

 —

 

 

 —

 

 

 —

 

 

121,473

 

 

121,473

Stock-based compensation

 

128

 

 

 —

 

 

11,095

 

 

 —

 

 

11,095

Issuance of common stock in settlement of directors' fees

 

 2

 

 

 —

 

 

48

 

 

 —

 

 

48

Balance, September 30, 2019

 

78,435

 

$

 8

 

$

1,328,166

 

$

583,439

 

$

1,911,613

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 2018

 

 

Class A common stock

 

 

 

 

Noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

interest in Private

 

 

 

 

 

 

 

 

Additional

 

 

 

National Mortgage

 

Total

 

 

Number of

 

Par

 

paid-in

 

Retained

 

Acceptance

 

stockholders'

 

    

shares

    

value

    

capital

    

earnings

    

Company, LLC

    

equity

 

 

(in thousands)

Balance, June 30, 2018

 

25,009

 

$

 3

 

$

229,941

 

$

299,951

 

$

1,332,049

 

$

1,861,944

Net income

 

 —

 

 

 —

 

 

 —

 

 

14,489

 

 

41,663

 

 

56,152

Stock and unit-based compensation

 

55

 

 

 —

 

 

2,944

 

 

 —

 

 

6,472

 

 

9,416

Class A common stock dividends ($0.40 per share)

 

 —

 

 

 —

 

 

 —

 

 

(10,054)

 

 

 —

 

 

(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)

 

 

 —

 

 

 —

 

 

(833)

Balance, September 30, 2018

 

25,195

 

$

 3

 

$

236,457

 

$

304,386

 

$

1,375,864

 

$

1,916,710

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2019

 

 

 

 

 

 

Additional

 

 

 

Total

 

 

Number of

 

Par

 

paid-in

 

Retained

 

stockholders'

 

    

shares

    

value

    

capital

    

earnings

    

equity

 

 

(in thousands)

Balance, December 31, 2018

 

77,494

 

$

 8

 

$

1,310,648

 

$

343,135

 

$

1,653,791

Net income

 

 —

 

 

 —

 

 

 —

 

 

240,304

 

 

240,304

Stock-based compensation

 

984

 

 

 —

 

 

18,390

 

 

 —

 

 

18,390

Issuance of common stock in settlement of directors' fees

 

 8

 

 

 —

 

 

184

 

 

 —

 

 

184

Repurchase of common stock

 

(51)

 

 

 —

 

 

(1,056)

 

 

 —

 

 

(1,056)

Balance, September 30, 2019

 

78,435

 

$

 8

 

$

1,328,166

 

$

583,439

 

$

1,911,613

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

 

Class A common stock

 

Noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

interest in Private

 

 

 

 

 

 

 

 

Additional

 

 

 

National Mortgage

 

Total

 

 

Number of

 

Par

 

paid-in

 

Retained

 

Acceptance

 

stockholders'

 

    

shares

    

value

    

capital

    

earnings

    

Company, LLC

    

equity

 

 

(in thousands)

Balance, December 31, 2017

 

23,530

 

$

 2

 

$

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

 

23,530

 

 

 2

 

 

204,103

 

 

265,495

 

 

1,250,850

 

 

1,720,450

Net income

 

 —

 

 

 —

 

 

 —

 

 

48,945

 

 

142,538

 

 

191,483

Stock and unit-based compensation

 

285

 

 

 —

 

 

7,400

 

 

 —

 

 

18,084

 

 

25,484

Class A common stock dividends ($0.40 per share)

 

 —

 

 

 —

 

 

 —

 

 

(10,054)

 

 

 —

 

 

(10,054)

Issuance of Class A common stock in settlement of directors' fees

 

 —

 

 

 —

 

 

79

 

 

 —

 

 

166

 

 

245

Repurchase of Class A common stock

 

(236)

 

 

 —

 

 

(1,554)

 

 

 —

 

 

(3,272)

 

 

(4,826)

Exchange of Class A units of Private  National Mortgage Acceptance Company,  LLC to Class A common stock of PennyMac Financial Services, Inc.

 

1,616

 

 

 1

 

 

32,501

 

 

 —

 

 

(32,502)

 

 

 —

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.

 

 —

 

 

 —

 

 

(6,072)

 

 

 —

 

 

 —

 

 

(6,072)

Balance, September 30, 2018

 

25,195

 

$

 3

 

$

236,457

 

$

304,386

 

$

1,375,864

 

$

1,916,710

 

 

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

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 PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

    

2019

    

2018

 

 

(in thousands)

Cash flow from operating activities

 

 

 

 

 

 

Net income

 

$

240,304

 

$

191,483

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

 

 

8,124

 

 

11,584

Amortization of net debt issuance (premiums) and costs

 

 

(6,601)

 

 

(19,198)

Carried Interest from Investment Funds

 

 

 —

 

 

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

Repurchase of common stock

 

 

(1,056)

 

 

(4,826)

Payment of withholding taxes relating to stock-based compensation

 

 

(4,634)

 

 

 —

Payment of dividend to Class A common stockholders

 

 

 —

 

 

(10,054)

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

 

$

201,268

 

$

102,627

Restricted cash included in Other assets

 

 

444

 

 

625

 

 

$

201,712

 

$

103,252

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

 

 

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PENNYMAC FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1—Organization

 

PennyMac Financial Services, Inc. (“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.

 

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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.

 

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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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

   

2019

    

2018

 

 

(in thousands)

Net gains on loans held for sale at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

$

60,662

 

$

18,565

 

$

122,996

 

$

45,878

Sale of loans held for sale to PMT

 

$

1,876,358

 

$

908,525

 

$

4,095,079

 

$

2,336,162

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax service fees earned from PMT included in Loan origination fees

 

$

4,222

 

$

2,119

 

$

9,567

 

$

4,869

 

 

 

 

 

 

 

 

 

 

 

 

 

Fulfillment fee revenue

    

$

45,149

    

$

26,256

    

$

102,313

 

$

52,759

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

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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.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

    

2019

   

2018

 

 

(in thousands)

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

 

 

$

12,964

 

$

10,071

 

$

35,102

 

$

30,521

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.

 

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Table of Contents

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

    

2019

   

2018

 

 

(in thousands)

Base management

 

$

7,914

 

$

5,799

 

$

20,862

    

$

17,223

Performance incentive

 

 

2,184

 

 

683

 

 

5,316

 

 

683

 

 

$

10,098

 

$

6,482

 

$

26,178

 

$

17,906

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

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Table of Contents

The Company received reimbursements from PMT for expenses as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

   

2019

   

2018

 

 

(in thousands)

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

 

 

120

 

 

360

 

 

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.

 

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Table of Contents

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

 

    

2019

    

2018

    

2019

    

2018

 

 

 

(in thousands)

Interest income relating to Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell

 

$

1,527

 

$

1,812

 

$

5,015

 

$

5,686

 

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

 

 

 

$

66

 

$

129

 

$

377

 

$

419

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

 

 

(in thousands)

Assets purchased from PennyMac Mortgage Investment Trust under agreements to

 resell

 

$

107,678

 

$

131,025

Common shares of beneficial interest of PennyMac Mortgage Investment Trust:

 

 

 

 

 

 

Fair value

 

$

1,667

 

$

1,397

Number of shares

 

 

75

 

 

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.

 

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Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

   

2019

   

2018

 

 

(in thousands)

Excess servicing spread financing:

 

 

 

 

 

 

 

 

 

 

 

 

Issuance pursuant to recapture agreement

 

$

377

 

$

499

    

$

1,327

    

$

1,983

Repayment

 

$

9,819

 

$

11,543

 

$

30,901

 

$

35,852

Gain (loss) recognized

 

$

3,864

 

$

(1,109)

 

$

11,519

 

$

(9,026)

Interest expense

 

$

2,291

 

$

3,740

 

$

8,124

 

$

11,584

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31,

 

 

 

 

 

 

2019

 

2018

 

 

 

 

(in thousands)

Excess servicing spread financing at fair value

 

 

 

 

 

 

 

$

183,141

 

$

216,110

 

Receivable from and Payable to PMT

 

Amounts receivable from and payable to PMT are summarized below:

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

 

 

(in thousands)

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

 

 

120

 

 

$

39,744

 

$

33,464

Payable to PMT:

 

 

 

 

 

 

Deposits made by PMT to fund servicing advances

 

$

56,869

 

$

100,554

Mortgage servicing rights recapture payable

 

 

162

 

 

179

Other

 

 

4,831

 

 

3,898

 

 

$

61,862

 

$

104,631

 

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.

 

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Table of Contents

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(in thousands)

Cash flows:

   

 

 

   

 

 

 

 

 

   

 

 

Sales proceeds

 

$

17,897,693

 

$

11,375,408

 

$

39,084,441

 

$

34,208,217

Servicing fees received (1)

 

$

149,210

 

$

123,626

 

$

426,774

 

$

354,535

Net servicing advances (recoveries)

 

$

8,605

 

$

4,147

 

$

(23,583)

 

$

(20,572)


(1)

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:

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31,

 

    

2019

   

2018

 

 

(in thousands)

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

 

 

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Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

 

 

Contract

 

 

 

 

Servicing

 

 servicing and

 

Total

 

    

rights owned

    

subservicing

    

loans serviced

 

 

(in thousands)

Investor:

 

 

 

 

 

 

 

 

 

Non-affiliated entities:

    

 

 

 

 

 

 

 

 

Originated

 

$

159,638,921

    

$

 —

    

$

159,638,921

Purchased

 

 

63,904,759

 

 

 —

 

 

63,904,759

 

 

 

223,543,680

 

 

 —

 

 

223,543,680

PennyMac Mortgage Investment Trust

 

 

 —

 

 

120,608,076

 

 

120,608,076

Loans held for sale

 

 

4,323,252

 

 

 —

 

 

4,323,252

 

 

$

227,866,932

 

$

120,608,076

 

$

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

90 days or more:

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

3,043,663

 

 

181,330

 

 

3,224,993

In foreclosure

 

 

1,518,946

 

 

87,284

 

 

1,606,230

Foreclosed

 

 

13,372

 

 

110,821

 

 

124,193

 

 

$

15,122,528

 

$

1,406,126

 

$

16,528,654

Bankruptcy

 

$

1,872,679

 

$

124,619

 

$

1,997,298

Custodial funds managed by the Company (1)

 

$

6,976,614

 

$

3,018,131

 

$

9,994,745


(1)

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

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

Contract

 

 

 

 

Servicing

 

servicing and

 

Total

 

    

rights owned

    

subservicing

    

loans serviced

 

 

(in thousands)

Investor:

 

 

 

 

 

 

 

 

 

Non-affiliated entities:

 

 

 

 

 

 

 

 

 

Originated

 

$

145,224,596

 

$

 —

 

$

145,224,596

Purchased

 

 

56,990,486

 

 

 —

 

 

56,990,486

 

 

 

202,215,082

 

 

 —

 

 

202,215,082

PennyMac Mortgage Investment Trust

 

 

 —

 

 

94,658,154

 

 

94,658,154

Loans held for sale

 

 

2,420,636

 

 

 —

 

 

2,420,636

 

 

$

204,635,718

 

$

94,658,154

 

$

299,293,872

Subserviced for the Company (1)

 

$

414,219

 

$

 —

 

$

414,219

Delinquent loans:

 

 

 

 

 

 

 

 

 

30 days

 

$

6,677,179

 

$

525,989

 

$

7,203,168

60 days

 

 

1,983,381

 

 

113,238

 

 

2,096,619

90 days or more:

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

3,102,492

 

 

217,115

 

 

3,319,607

In foreclosure

 

 

1,027,493

 

 

127,025

 

 

1,154,518

Foreclosed

 

 

33,493

 

 

176,377

 

 

209,870

 

 

$

12,824,038

 

$

1,159,744

 

$

13,983,782

Bankruptcy

 

$

1,415,106

 

$

107,083

 

$

1,522,189

Custodial funds managed by the Company (2)

 

$

3,033,658

 

$

970,328

 

$

4,003,986


(1)

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)

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.

 

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

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

State

    

2019

    

2018

 

 

 

(in thousands)

 

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

 

 

 

$

348,475,008

 

$

299,293,872

 

 

 

 

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Table of Contents

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.

 

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Table of Contents

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

(in thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

90,663

 

$

 —

 

$

 —

 

$

90,663

Loans held for sale at fair value

 

 

 —

 

 

4,437,954

 

 

85,017

 

 

4,522,971

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

 —

 

 

 —

 

 

147,400

 

 

147,400

Repurchase agreement derivatives

 

 

 —

 

 

 —

 

 

8,187

 

 

8,187

Forward purchase contracts

 

 

 —

 

 

17,943

 

 

 —

 

 

17,943

Forward sales contracts

 

 

 —

 

 

6,141

 

 

 —

 

 

6,141

MBS put options

 

 

 —

 

 

10,040

 

 

 —

 

 

10,040

Put options on interest rate futures purchase contracts

 

 

6,266

 

 

 —

 

 

 —

 

 

6,266

Call options on interest rate futures purchase contracts

 

 

2,414

 

 

 —

 

 

 —

 

 

2,414

Total derivative assets before netting

 

 

8,680

 

 

34,124

 

 

155,587

 

 

198,391

Netting

 

 

 —

 

 

 —

 

 

 —

 

 

34,557

Total derivative assets

 

 

8,680

 

 

34,124

 

 

155,587

 

 

232,948

Mortgage servicing rights at fair value

 

 

 —

 

 

 —

 

 

2,556,253

 

 

2,556,253

Investment in PennyMac Mortgage Investment Trust

 

 

1,667

 

 

 —

 

 

 —

 

 

1,667

 

 

$

101,010

 

$

4,472,078

 

$

2,796,857

 

$

7,404,502

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value

 

$

 —

 

$

 —

 

$

183,141

 

$

183,141

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

 —

 

 

 —

 

 

2,276

 

 

2,276

Forward purchase contracts

 

 

 —

 

 

51,585

 

 

 —

 

 

51,585

Forward sales contracts

 

 

 —

 

 

34,498

 

 

 —

 

 

34,498

Total derivative liabilities before netting

 

 

 —

 

 

86,083

 

 

2,276

 

 

88,359

Netting

 

 

 —

 

 

 —

 

 

 —

 

 

(74,324)

Total derivative liabilities

 

 

 —

 

 

86,083

 

 

2,276

 

 

14,035

Mortgage servicing liabilities at fair value

 

 

 —

 

 

 —

 

 

34,294

 

 

34,294

 

 

$

 —

 

$

86,083

 

$

219,711

 

$

231,470

 

23

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

(in thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

117,824

 

$

 —

 

$

 —

 

$

117,824

Loans held for sale at fair value

 

 

 —

 

 

2,261,639

 

 

260,008

 

 

2,521,647

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

 —

 

 

 —

 

 

50,507

 

 

50,507

Repurchase agreement derivatives

 

 

 —

 

 

 —

 

 

26,770

 

 

26,770

Forward purchase contracts

 

 

 —

 

 

35,916

 

 

 —

 

 

35,916

Forward sales contracts

 

 

 —

 

 

437

 

 

 —

 

 

437

MBS put options

 

 

 —

 

 

720

 

 

 —

 

 

720

MBS call options

 

 

 —

 

 

2,135

 

 

 —

 

 

2,135

Put options on interest rate futures purchase contracts

 

 

866

 

 

 —

 

 

 —

 

 

866

Call options on interest rate futures purchase contracts

 

 

5,965

 

 

 —

 

 

 —

 

 

5,965

Total derivative assets before netting

 

 

6,831

 

 

39,208

 

 

77,277

 

 

123,316

Netting

 

 

 —

 

 

 —

 

 

 —

 

 

(26,969)

Total derivative assets

 

 

6,831

 

 

39,208

 

 

77,277

 

 

96,347

Mortgage servicing rights at fair value

 

 

 —

 

 

 —

 

 

2,820,612

 

 

2,820,612

Investment in PennyMac Mortgage Investment Trust

 

 

1,397

 

 

 —

 

 

 —

 

 

1,397

 

 

$

126,052

 

$

2,300,847

 

$

3,157,897

 

$

5,557,827

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value

 

$

 —

 

$

 —

 

$

216,110

 

$

216,110

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

 —

 

 

 —

 

 

1,169

 

 

1,169

Forward purchase contracts

 

 

 —

 

 

215

 

 

 —

 

 

215

Forward sales contracts

 

 

 —

 

 

26,762

 

 

 —

 

 

26,762

Total derivative liabilities before netting

 

 

 —

 

 

26,977

 

 

1,169

 

 

28,146

Netting

 

 

 —

 

 

 —

 

 

 —

 

 

(25,082)

Total derivative liabilities

 

 

 —

 

 

26,977

 

 

1,169

 

 

3,064

Mortgage servicing liabilities at fair value

 

 

 —

 

 

 —

 

 

8,681

 

 

8,681

 

 

$

 —

 

$

26,977

 

$

225,960

 

$

227,855

 

24

Table of Contents

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 2019

 

 

 

 

 

Net interest 

 

Repurchase

 

Mortgage 

 

 

 

 

 

 

Loans held

 

rate lock

 

agreement

 

servicing 

 

 

 

 

Assets

    

for sale

    

commitments (1)

    

derivatives

    

rights

    

Total

 

 

 

(in thousands)

 

Balance, June 30, 2019

 

$

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

 

 

246,757

 

Changes in fair value included in income arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument-specific credit risk

 

 

4,252

 

 

 —

 

 

 —

 

 

 —

 

 

4,252

 

Other factors

 

 

 —

 

 

92,138

 

 

92

 

 

(410,885)

 

 

(318,655)

 

 

 

 

4,252

 

 

92,138

 

 

92

 

 

(410,885)

 

 

(314,403)

 

Transfers from Level 3 to Level 2

 

 

(416,062)

 

 

 —

 

 

 —

 

 

 —

 

 

(416,062)

 

Transfers to real estate acquired in settlement of loans

 

 

(376)

 

 

 —

 

 

 —

 

 

 —

 

 

(376)

 

Transfers of interest rate lock commitments to loans held for sale

 

 

 —

 

 

(258,064)

 

 

 —

 

 

 —

 

 

(258,064)

 

Balance, September 30, 2019

 

$

85,017

 

$

145,124

 

$

8,187

 

$

2,556,253

 

$

2,794,581

 

Changes in fair value recognized during the quarter relating to assets still held at September 30, 2019

 

$

(2,328)

 

$

145,124

 

$

41

 

$

(410,885)

 

$

(268,048)

 


(1)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 2019

 

 

 

Excess

 

 

 

 

 

 

 

 

servicing

 

Mortgage

 

 

 

 

 

 

spread

 

servicing

 

 

 

 

Liabilities

    

financing

    

liabilities

    

Total

  

 

 

(in thousands)

 

Balance, June 30, 2019

 

$

194,156

 

$

12,948

 

$

207,104

 

Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust

 

 

377

 

 

 —

 

 

377

 

Accrual of interest

 

 

2,291

 

 

 —

 

 

2,291

 

Repayments

 

 

(9,819)

 

 

 —

 

 

(9,819)

 

Mortgage servicing liabilities resulting from loan sales

 

 

 —

 

 

19,501

 

 

19,501

 

Changes in fair value included in income

 

 

(3,864)

 

 

1,845

 

 

(2,019)

 

Balance, September 30, 2019

 

$

183,141

 

$

34,294

 

$

217,435

 

Changes in fair value recognized during the quarter relating to liabilities still outstanding at September 30, 2019

 

$

(3,864)

 

$

1,845

 

$

(2,019)

 

 

 

 

 

 

 

 

 

 

 

 

25

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 2018

 

 

 

 

 

 

 

Net interest 

 

Repurchase

 

Mortgage

 

 

 

 

 

 

 

 

Loans held

 

rate lock

 

agreement

 

servicing

 

 

 

 

 

 

Assets

 

for sale

    

commitments (1)

    

derivatives

    

rights

    

 

Total

 

 

 

 

(in thousands)

 

 

 

Balance, June 30, 2018

    

$

334,166

 

$

55,689

 

$

25,781

 

$

2,486,157

 

$

2,901,793

 

 

 

Purchases and issuances, net

 

 

1,008,662

 

 

41,721

 

 

12,903

 

 

163,511

 

 

1,226,797

 

 

 

Sales and repayments

 

 

(231,921)

 

 

 —

 

 

(11,982)

 

 

 —

 

 

(243,903)

 

 

 

Mortgage servicing rights resulting from loan sales

 

 

 —

 

 

 —

 

 

 —

 

 

149,000

 

 

149,000

 

 

 

Changes in fair value included in income arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument-specific credit risk

 

 

84

 

 

 —

 

 

 —

 

 

 —

 

 

84

 

 

 

Other factors

 

 

 —

 

 

10,696

 

 

(227)

 

 

(12,704)

 

 

(2,235)

 

 

 

 

 

 

84

 

 

10,696

 

 

(227)

 

 

(12,704)

 

 

(2,151)

 

 

 

Transfers from Level 3 to Level 2

 

 

(744,324)

 

 

 —

 

 

 —

 

 

 —

 

 

(744,324)

 

 

 

Transfers to real estate acquired in settlement of loans

 

 

(1,364)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,364)

 

 

 

Transfers of interest rate lock commitments to loans held for sale

 

 

 —

 

 

(70,943)

 

 

 —

 

 

 —

 

 

(70,943)

 

 

 

Balance, September 30, 2018

 

$

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)

 

$

37,163

 

$

 —

 

$

(12,704)

 

$

19,648

 

 

 


(1)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 2018

 

 

Excess

 

 

 

 

 

 

 

servicing

 

Mortgage 

 

 

 

 

 

spread

 

servicing

 

 

 

Liabilities

    

financing

    

liabilities

    

Total

 

 

(in thousands)

Balance, June 30, 2018

 

$

229,470

 

$

10,253

 

$

239,723

Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust

 

 

499

 

 

 —

 

 

499

Accrual of interest

 

 

3,740

 

 

 —

 

 

3,740

Repayments

 

 

(11,543)

 

 

 —

 

 

(11,543)

Mortgage servicing liabilities resulting from loan sales

 

 

 —

 

 

1,741

 

 

1,741

Changes in fair value included in income

 

 

1,109

 

 

(2,225)

 

 

(1,116)

Balance, September 30, 2018

 

$

223,275

 

$

9,769

 

$

233,044

Changes in fair value recognized during the quarter relating to liabilities still outstanding at September 30, 2018

 

$

1,109

 

$

(2,225)

 

$

(1,116)

 

 

26

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2019

 

 

 

 

 

Net interest 

 

Repurchase

 

Mortgage 

 

 

 

 

 

 

Loans held

 

rate lock

 

agreement

 

servicing 

 

 

 

 

Assets

 

for sale

  

commitments (1)

  

derivatives

  

rights

  

Total

 

 

    

(in thousands)

 

Balance, December 31, 2018

 

$

260,008

 

$

49,338

 

$

26,770

 

$

2,820,612

 

$

3,156,728

 

Purchases and issuances, net

 

 

3,537,177

 

 

376,137

 

 

15,019

 

 

227,445

 

 

4,155,778

 

Sales and repayments

 

 

(2,414,899)

 

 

 —

 

 

(31,994)

 

 

 —

 

 

(2,446,893)

 

Mortgage servicing rights resulting from loan sales

 

 

 —

 

 

 —

 

 

 —

 

 

545,839

 

 

545,839

 

Changes in fair value included in income arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument-specific credit risk

 

 

(2,025)

 

 

 —

 

 

 —

 

 

 —

 

 

(2,025)

 

Other factors

 

 

 —

 

 

248,889

 

 

(1,608)

 

 

(1,037,643)

 

 

(790,362)

 

 

 

 

(2,025)

 

 

248,889

 

 

(1,608)

 

 

(1,037,643)

 

 

(792,387)

 

Transfers from Level 3 to Level 2

 

 

(1,292,824)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,292,824)

 

Transfers to real estate acquired in settlement of loans

 

 

(2,420)

 

 

 —

 

 

 —

 

 

 —

 

 

(2,420)

 

Transfers of interest rate lock commitments to loans held for sale

 

 

 —

 

 

(529,240)

 

 

 —

 

 

 —

 

 

(529,240)

 

Balance, September 30, 2019

 

$

85,017

 

$

145,124

 

$

8,187

 

$

2,556,253

 

$

2,794,581

 

Changes in fair value recognized during the period relating to assets still held at September 30, 2019

 

$

(2,478)

 

$

145,124

 

$

165

 

$

(1,037,643)

 

$

(894,832)

 


(1)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2019

 

 

Excess

 

 

 

 

 

 

 

servicing

 

Mortgage

 

 

 

 

 

spread

 

servicing

 

 

 

Liabilities

 

financing

 

liabilities

 

Total

 

 

(in thousands)

Balance, December 31, 2018

    

$

216,110

    

$

8,681

    

$

224,791

Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust

 

 

1,327

 

 

 —

 

 

1,327

Accrual of interest

 

 

8,124

 

 

 —

 

 

8,124

Repayments

 

 

(30,901)

 

 

 —

 

 

(30,901)

Mortgage servicing liabilities resulting from loan sales

 

 

 —

 

 

27,133

 

 

27,133

Changes in fair value included in income

 

 

(11,519)

 

 

(1,520)

 

 

(13,039)

Balance, September 30, 2019

 

$

183,141

 

$

34,294

 

$

217,435

Changes in fair value recognized during the period relating to liabilities still outstanding at September 30, 2019

 

$

(11,519)

 

$

(1,520)

 

$

(13,039)

 

27

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

 

 

 

Net interest 

 

Repurchase

 

Mortgage

 

 

 

 

 

Loans held

 

rate lock

 

agreement

 

servicing

 

 

 

Assets

    

for sale

    

commitments (1)

    

derivatives

    

rights

    

Total

 

 

(in thousands)

Balance, December 31, 2017

    

$

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

 

 

1,482,426

Balance, January 1, 2018

 

 

782,211

 

 

58,272

 

 

10,656

 

 

2,120,436

 

 

2,971,575

Purchases and issuances, net

 

 

2,480,523

 

 

157,649

 

 

36,624

 

 

193,640

 

 

2,868,436

Sales and repayments

 

 

(1,122,448)

 

 

 —

 

 

(19,460)

 

 

 —

 

 

(1,141,908)

Mortgage servicing rights resulting from loan sales

 

 

 —

 

 

 —

 

 

 —

 

 

448,604

 

 

448,604

Changes in fair value included in income arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument-specific credit risk

 

 

(4,944)

 

 

 —

 

 

 —

 

 

 —

 

 

(4,944)

Other factors

 

 

 —

 

 

(28,627)

 

 

(1,345)

 

 

23,284

 

 

(6,688)

 

 

 

(4,944)

 

 

(28,627)

 

 

(1,345)

 

 

23,284

 

 

(11,632)

Transfers from Level 3 to Level 2

 

 

(1,765,854)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,765,854)

Transfers to real estate acquired in settlement of loans

 

 

(4,185)

 

 

 —

 

 

 —

 

 

 —

 

 

(4,185)

Transfers of interest rate lock commitments to loans held for sale

 

 

 —

 

 

(150,131)

 

 

 —

 

 

 —

 

 

(150,131)

Balance, September 30, 2018

 

$

365,303

 

$

37,163

 

$

26,475

 

$

2,785,964

 

$

3,214,905

Changes in fair value recognized during the period relating to assets still held at September 30, 2018

 

$

(4,912)

 

$

37,163

 

$

 —

 

$

23,284

 

$

55,535


(1)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

 

Excess

 

 

 

 

 

 

 

 

servicing

 

Mortgage 

 

 

 

 

 

spread

 

servicing

 

 

 

Liabilities

    

financing

    

liabilities

    

Total

 

 

(in thousands)

Balance, December 31, 2017

 

$

236,534

 

$

14,120

    

$

250,654

Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust

 

 

1,983

 

 

 —

 

 

1,983

Accrual of interest

 

 

11,584

 

 

 —

 

 

11,584

Repayments

 

 

(35,852)

 

 

 —

 

 

(35,852)

Mortgage servicing liabilities resulting from loan sales

 

 

 —

 

 

5,548

 

 

5,548

Changes in fair value included in income

 

 

9,026

 

 

(9,899)

 

 

(873)

Balance, September 30, 2018

 

$

223,275

 

$

9,769

 

$

233,044

Changes in fair value recognized during the period relating to liabilities still outstanding at September 30, 2018

 

$

9,026

 

$

(9,899)

 

$

(873)

 

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.

 

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Table of Contents

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

 

 

2019

 

2018

 

 

 

Net

 

Net gains on 

 

 

 

Net

 

Net gains on 

 

 

 

 

 

loan

 

loans held

 

 

 

loan

 

loans held

 

 

 

 

 

servicing

 

for sale at 

 

 

 

servicing

 

for sale at 

 

 

 

 

 

fees

 

fair value

 

Total

 

fees

 

fair value

 

Total

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale 

 

$

 —

 

$

263,339

 

$

263,339

 

$

 —

 

$

67,709

 

$

67,709

 

Mortgage servicing rights

 

 

(410,885)

 

 

 —

 

 

(410,885)

 

 

(12,704)

 

 

 —

 

 

(12,704)

 

 

 

$

(410,885)

 

$

263,339

 

$

(147,546)

 

$

(12,704)

 

$

67,709

 

$

55,005

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Excess servicing spread financing payable to PennyMac Mortgage Investment Trust

 

$

3,864

 

$

 —

 

$

3,864

 

$

(1,109)

 

$

 —

 

$

(1,109)

 

Mortgage servicing liabilities

 

 

(1,845)

 

 

 —

 

 

(1,845)

 

 

2,225

 

 

 —

 

 

2,225

 

 

 

$

2,019

 

$

 —

 

$

2,019

 

$

1,116

 

$

 —

 

$

1,116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

2019

 

2018

 

 

 

Net

 

Net gains on 

 

 

 

 

Net

 

Net gains on 

 

 

 

 

 

 

loan

 

loans held

 

 

 

 

loan

 

loans held

 

 

 

 

 

 

servicing

 

for sale at 

 

 

 

 

servicing

 

for sale at 

 

 

 

 

 

    

fees

    

fair value

    

Total

    

fees

    

fair value

    

Total

 

 

 

(in thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale 

 

$

 —

 

$

538,086

 

$

538,086

 

$

 —

 

$

118,452

 

$

118,452

 

Mortgage servicing rights

 

 

(1,037,643)

 

 

 —

 

 

(1,037,643)

 

 

23,284

 

 

 —

 

 

23,284

 

 

 

$

(1,037,643)

 

$

538,086

 

$

(499,557)

 

$

23,284

 

$

118,452

 

$

141,736

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Excess servicing spread financing payable to PennyMac Mortgage Investment Trust

 

$

11,519

 

$

 —

 

$

11,519

 

$

(9,026)

 

$

 —

 

$

(9,026)

 

Mortgage servicing liabilities

 

 

1,520

 

 

 —

 

 

1,520

 

 

9,899

 

 

 —

 

 

9,899

 

 

 

$

13,039

 

$

 —

 

$

13,039

 

$

873

 

$

 —

 

$

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

 

 

 

 

Principal

 

 

 

 

 

Principal

 

 

 

 

 

 

amount

 

 

 

 

 

amount

 

 

 

 

Fair

 

 due upon 

 

 

 

Fair

 

 due upon 

 

 

Loans held for sale

    

value

    

maturity

    

Difference

    

value

    

maturity

    

Difference

 

 

(in thousands)

Current through 89 days delinquent

 

$

4,478,965

 

$

4,275,981

 

$

202,984

 

$

2,324,203

 

$

2,220,371

 

$

103,832

90 days or more delinquent:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

20,972

 

 

22,145

 

 

(1,173)

 

 

143,631

 

 

144,011

 

 

(380)

In foreclosure

 

 

23,034

 

 

25,126

 

 

(2,092)

 

 

53,813

 

 

56,254

 

 

(2,441)

 

 

$

4,522,971

 

$

4,323,252

 

$

199,719

 

$

2,521,647

 

$

2,420,636

 

$

101,011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents

Assets Measured at Fair Value on a Nonrecurring Basis

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate acquired in settlement of loans

 

Level 1

    

Level 2

    

Level 3

    

Total

 

    

(in thousands)

September 30, 2019

 

$

 —

 

$

 —

 

$

8,575

 

$

8,575

December 31, 2018

 

$

 —

 

$

 —

 

$

2,150

 

$

2,150

 

The following table summarizes the total gains (losses) on assets measured at fair value on a nonrecurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(in thousands)

Real estate acquired in settlement of loans

 

$

139

 

$

(41)

 

$

162

 

$

(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

    

September 30, 2019

    

December 31, 2018

 

 

(in thousands)

Fair value

 

$

1,306,828

 

$

1,285,894

Carrying value

 

$

1,293,625

 

$

1,292,291

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.

 

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Table of Contents

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.

 

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Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2019

    

December 31, 2018

Carrying value (in thousands)

 

$

85,017

 

$

260,008

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:

 

 

 

 

 

 

Range

 

 

2.6% – 3.2%

 

 

2.2% – 5.0%

Weighted average

 

 

2.9%

 

 

3.5%

Voluntary prepayment/resale speed (2):

 

 

 

 

 

 

Range

 

 

0.3% – 19.2%

 

 

0.1% – 21.8%

Weighted average

 

 

15.8%

 

 

20.1%

Total prepayment speed (3):

 

 

 

 

 

 

Range

 

 

0.6% – 34.8%

 

 

0.1% – 40.5%

Weighted average

 

 

29.6%

 

 

37.7%


(1)

Weighted average inputs are based on the fair value of loans.

 

(2)

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

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2019

    

December 31, 2018

Carrying value (in thousands) (1)

 

$

145,124

 

$

49,338

Key inputs (2):

 

 

 

 

 

 

Pull-through rate:

 

 

 

 

 

 

Range

 

 

12.2% – 100%

 

 

16.6% – 100%

Weighted average

 

 

85.6%

 

 

84.1%

Mortgage servicing rights value expressed as:

 

 

 

 

 

 

Servicing fee multiple:

 

 

 

 

 

 

Range

 

 

1.4 – 5.7

 

 

1.5 – 5.5

Weighted average

 

 

4.0

 

 

3.8

Percentage of unpaid principal balance:

 

 

 

 

 

 

Range

 

 

0.3% – 2.9%

 

 

0.4% – 3.2%

Weighted average

 

 

1.6%

 

 

1.5%


(1)

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

(2)

Weighted average inputs are based on the committed amounts.

 

Hedging Derivatives

 

Fair 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 feesChange in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.

 

33

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

 

2019

 

2018

  

2019

 

2018

 

 

(Amount recognized and unpaid principal balance of underlying loans in thousands)

MSR and pool characteristics:

 

 

 

    

 

 

 

 

 

    

 

 

Amount recognized

 

$

246,757

 

$

149,000

 

$

545,839

 

$

448,604

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

 

 

36

Key inputs (1):

 

 

 

 

 

 

 

 

 

 

 

 

Pricing spread (2) 

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

 

5.5% – 16.2%

 

 

7.3% – 13.6%

 

 

5.5% – 16.2%

 

 

7.3% – 14.1%

Weighted average

 

 

8.3%

 

 

10.1%

 

 

8.6%

 

 

10.2%

Annual total prepayment speed (3) 

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

 

8.8% – 32.1%

 

 

4.4% – 55.7%

 

 

7.7% – 32.8%

 

 

3.9% – 61.8%

Weighted average

 

 

15.7%

 

 

11.8%

 

 

15.0%

 

 

10.6%

Life (in years)

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

 

2.7 – 7.5

 

 

0.5 – 11.3

 

 

2.6 – 7.8

 

 

0.5 – 11.6

Weighted average

 

 

5.5

 

 

6.9

 

 

5.8

 

 

7.5

Per-loan annual cost of servicing

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

 

$78 – $100

 

 

$78 – $98

 

 

$78 – $100

 

 

$78 – $98

Weighted average

 

 

$97

 

 

$92

 

 

$97

 

 

$90


(1)

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

 

(2)

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.

(3)

Prepayment speed is measured using Life Total CPR.

 

 

34

Table of Contents

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:

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

 

 

(Carrying value, unpaid principal balance of underlying 

 

 

 loans and effect on fair value amounts in thousands)

MSR and pool characteristics:

 

 

 

 

Carrying value

 

$    2,556,253

 

$    2,820,612

Unpaid principal balance of underlying loans

 

$    221,215,993

 

$    201,054,144

Weighted average note interest rate

 

4.0%

 

4.0%

Weighted average servicing fee rate (in basis points)

 

34

 

33

Key inputs (1):

 

 

 

 

Pricing spread (2):

 

 

 

 

Range

 

5.9% – 15.8%

 

5.8% – 16.1%

Weighted average

 

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):

 

 

 

 

Range

 

9.8% – 33.0%

 

8.4% – 32.6%

Weighted average

 

15.6%

 

9.9%

Average life (in years):

 

 

 

 

Range

 

1.4 – 7.2

 

1.5 – 7.9

Weighted average

 

5.2

 

7.2

Effect on fair value of:

 

 

 

 

5% adverse change

 

($64,047)

 

($47,687)

10% adverse change

 

($124,892)

 

($93,626)

20% adverse change

 

($237,822)

 

($180,623)

Annual per-loan cost of servicing:

 

 

 

 

Range

 

$77 – $100

 

$78 – $99

Weighted average

 

$96

 

$93

Effect on fair value of:

 

 

 

 

5% adverse change

 

($21,731)

 

($22,944)

10% adverse change

 

($43,462)

 

($45,888)

20% adverse change

 

($86,925)

 

($91,775)


(1)

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

(2)

The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to MSRs.

(3)

Prepayment speed is measured using Life Total CPR.

 

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.

 

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Table of Contents

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:

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

   

2018

Carrying value (in thousands)

 

$    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)

 

34

 

34

Average excess servicing spread (in basis points)

 

19

 

19

Key inputs (1):

 

 

 

 

Pricing spread (2):

 

 

 

 

Range

 

3.0% – 3.3%

 

2.8% – 3.2%

Weighted average

 

3.2%

 

3.1%

Annualized prepayment speed (3):

 

 

 

 

Range

 

8.9% – 15.0%

 

8.2% – 29.5%

Weighted average

 

11.7%

 

9.7%

Average life (in years):

 

 

 

 

Range

 

2.8 – 7.1

 

1.6 – 7.6

Weighted average

 

5.9

 

6.8


(1)

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

(2)

The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to ESS.

(3)

Prepayment speed is measured using Life Total CPR.

 

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 feesChange in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.

 

 

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Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

 

December 31, 

 

 

 

2019

 

 

2018

MSL and pool characteristics:

 

 

 

 

    

 

Carrying value (in thousands)

 

$

34,294

 

$

8,681

Unpaid principal balance of underlying loans (in thousands)

 

$

2,327,687

 

$

1,160,938

Servicing fee rate (in basis points)

 

 

25

 

 

25

Key inputs:

 

 

 

 

 

 

Pricing spread (1)

 

 

8.0%

 

 

7.3%

Prepayment speed (2) 

 

 

31.6%

 

 

32.2%

Average life (in years)

 

 

3.3

 

 

3.8

Annual per-loan cost of servicing

 

$

338

 

$

373

(1)

The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to MSLs.

(2)

Prepayment speed is measured using Life Total CPR.

 

 

Note 7—Loans Held for Sale at Fair Value

 

Loans held for sale at fair value include the following:

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

Loan type

    

2019

    

2018

 

 

(in thousands)

Government-insured or guaranteed

 

$

4,148,681

 

$

2,116,126

Conventional conforming

 

 

289,273

 

 

144,872

Jumbo

 

 

 —

 

 

641

Home equity lines of credit

 

 

14

 

 

 —

Purchased from Ginnie Mae pools serviced by the Company

 

 

76,105

 

 

250,585

Repurchased pursuant to representations and warranties

 

 

8,898

 

 

9,423

 

 

$

4,522,971

 

$

2,521,647

Fair value of loans pledged to secure:

 

 

 

 

 

 

Assets sold under agreements to repurchase

 

$

3,939,161

 

$

1,923,857

Mortgage loan participation purchase and sale agreements

 

 

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.

 

37

Table of Contents

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

 

 

 

 

Fair value

 

 

 

Fair value

 

 

Notional

 

Derivative

 

Derivative

 

Notional

 

Derivative

 

Derivative

Instrument

    

amount

    

assets

    

liabilities

    

amount

    

assets

    

liabilities

 

 

(in thousands)

Not subject to master netting arrangements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

8,311,786

 

$

147,400

 

$

2,276

 

2,805,400

 

$

50,507

 

$

1,169

Repurchase agreement derivatives

 

 

 

 

8,187

 

 

 —

 

 

 

 

26,770

 

 

 —

Used for hedging purposes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward purchase contracts

 

15,829,825

 

 

17,943

 

 

51,585

 

6,657,026

 

 

35,916

 

 

215

Forward sales contracts

 

15,116,810

 

 

6,141

 

 

34,498

 

6,890,046

 

 

437

 

 

26,762

MBS put options

 

10,050,000

 

 

10,040

 

 

 —

 

4,635,000

 

 

720

 

 

 —

MBS call options

 

 —

 

 

 —

 

 

 —

 

1,450,000

 

 

2,135

 

 

 —

Put options on interest rate futures purchase contracts

 

4,350,000

 

 

6,266

 

 

 —

 

3,085,000

 

 

866

 

 

 —

Call options on interest rate futures purchase contracts

 

600,000

 

 

2,414

 

 

 —

 

1,512,500

 

 

5,965

 

 

 —

Treasury futures purchase contracts

 

1,408,500

 

 

 —

 

 

 —

 

835,000

 

 

 —

 

 

 —

Treasury futures sale contracts

 

1,132,500

 

 

 —

 

 

 —

 

1,450,000

 

 

 —

 

 

 —

Interest rate swap futures purchase contracts

 

3,910,000

 

 

 —

 

 

 —

 

625,000

 

 

 —

 

 

 —

Total derivatives before netting

 

 

 

 

198,391

 

 

88,359

 

 

 

 

123,316

 

 

28,146

Netting

 

 

 

 

34,557

 

 

(74,324)

 

 

 

 

(26,969)

 

 

(25,082)

 

 

 

 

$

232,948

 

$

14,035

 

 

 

$

96,347

 

$

3,064

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:

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 2019

 

 

Notional

 

 

 

 

 

Notional

 

 

amount

 

 

 

 

 

amount

 

 

beginning of

 

 

 

Dispositions/

 

end of

Instrument

    

quarter

    

Additions

    

expirations

    

quarter

 

 

(in thousands)

Forward purchase contracts

 

19,497,698

 

100,139,970

 

(103,807,843)

 

15,829,825

Forward sale contracts

 

14,276,156

 

122,174,329

 

(121,333,675)

 

15,116,810

MBS put options

 

12,775,000

 

29,575,000

 

(32,300,000)

 

10,050,000

MBS call options

 

2,250,000

 

 —

 

(2,250,000)

 

 —

Put options on interest rate futures purchase contracts

 

2,835,000

 

9,850,000

 

(8,335,000)

 

4,350,000

Call options on interest rate futures purchase contracts

 

3,687,500

 

1,750,000

 

(4,837,500)

 

600,000

Put options on interest rate futures sale contracts

 

 —

 

8,335,000

 

(8,335,000)

 

 —

Call options on interest rate futures sale contracts

 

 —

 

4,837,500

 

(4,837,500)

 

 —

Treasury futures purchase contracts

 

486,100

 

5,132,000

 

(4,209,600)

 

1,408,500

Treasury futures sale contracts

 

1,550,000

 

3,792,100

 

(4,209,600)

 

1,132,500

Interest rate swap futures purchase contracts

 

2,900,000

 

1,800,000

 

(790,000)

 

3,910,000

Interest rate swap futures sales contracts

 

 —

 

790,000

 

(790,000)

 

 —

 

38

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 2018

 

 

Notional

 

 

 

 

 

Notional

 

 

amount

 

 

 

 

 

amount

 

 

beginning of

 

 

 

Dispositions/

 

end of

Instrument

    

quarter

    

Additions

    

expirations

    

quarter

 

 

(in thousands)

Forward purchase contracts

 

6,617,888

 

47,038,415

 

(46,540,682)

 

7,115,621

Forward sale contracts

 

7,107,202

 

58,521,199

 

(58,917,204)

 

6,711,197

MBS put options

 

2,675,000

 

8,375,000

 

(6,900,000)

 

4,150,000

MBS call options

 

 —

 

1,250,000

 

 —

 

1,250,000

Put options on interest rate futures purchase contracts

 

1,852,500

 

4,922,300

 

(4,549,800)

 

2,225,000

Call options on interest rate futures purchase contracts

 

800,000

 

950,000

 

(1,350,000)

 

400,000

Put options on interest rate futures sale contracts

 

 —

 

4,849,800

 

(4,549,800)

 

300,000

Call options on interest rate futures sale contracts

 

 —

 

1,350,000

 

(1,350,000)

 

 —

Treasury futures purchase contracts

 

835,000

 

2,557,100

 

(2,557,100)

 

835,000

Treasury futures sale contracts

 

1,450,000

 

2,557,100

 

(2,557,100)

 

1,450,000

Interest rate swap futures purchase contracts

 

465,000

 

420,000

 

(885,000)

 

 —

Interest rate swap futures sales contracts

 

 —

 

885,000

 

(260,000)

 

625,000

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2019

 

 

Notional

 

                            

 

                            

 

Notional

 

 

amount

 

 

 

 

 

amount

 

 

beginning of

 

 

 

Dispositions/

 

end of

Instrument

    

period

    

Additions

    

expirations

    

period

 

 

(in thousands)

Forward purchase contracts

 

6,657,026

 

237,370,321

 

(228,197,522)

 

15,829,825

Forward sale contracts

 

6,890,046

 

275,749,351

 

(267,522,587)

 

15,116,810

MBS put options

 

4,635,000

 

77,185,000

 

(71,770,000)

 

10,050,000

MBS call options

 

1,450,000

 

6,750,000

 

(8,200,000)

 

 —

Put options on interest rate futures purchase contracts

 

3,085,000

 

19,422,500

 

(18,157,500)

 

4,350,000

Call options on interest rate futures purchase contracts

 

1,512,500

 

13,127,800

 

(14,040,300)

 

600,000

Put options on interest rate futures sale contracts

 

 —

 

27,297,800

 

(27,297,800)

 

 —

Call options on interest rate futures sale contracts

 

 —

 

4,837,500

 

(4,837,500)

 

 —

Treasury futures purchase contracts

 

835,000

 

11,943,400

 

(11,369,900)

 

1,408,500

Treasury futures sale contracts

 

1,450,000

 

11,052,400

 

(11,369,900)

 

1,132,500

Interest rate swap futures purchase contracts

 

625,000

 

4,075,000

 

(790,000)

 

3,910,000

Interest rate swap futures sale contracts

 

 —

 

790,000

 

(790,000)

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

 

Notional

 

                            

 

                            

 

Notional

 

 

amount

 

 

 

 

 

amount

 

 

beginning of

 

 

 

Dispositions/

 

end of

Instrument

    

period

    

Additions

    

expirations

    

period

 

 

(in thousands)

Forward purchase contracts

 

4,920,883

 

140,158,865

 

(137,964,127)

 

7,115,621

Forward sale contracts

 

5,204,796

 

174,562,881

 

(173,056,480)

 

6,711,197

MBS put options

 

4,925,000

 

17,250,000

 

(18,025,000)

 

4,150,000

MBS call options

 

 —

 

12,375,000

 

(11,125,000)

 

1,250,000

Put options on interest rate futures purchase contracts

 

2,125,000

 

16,624,800

 

(16,524,800)

 

2,225,000

Call options on interest rate futures purchase contracts

 

100,000

 

2,400,000

 

(2,100,000)

 

400,000

Put options on interest rate futures sale contracts

 

 —

 

16,824,800

 

(16,524,800)

 

300,000

Call options on interest rate futures sale contracts

 

 —

 

2,100,000

 

(2,100,000)

 

 —

Treasury futures purchase contracts

 

100,000

 

7,453,300

 

(6,718,300)

 

835,000

Treasury futures sale contracts

 

 —

 

8,829,600

 

(7,379,600)

 

1,450,000

Interest rate swap futures purchase contracts

 

1,400,000

 

885,000

 

(2,285,000)

 

 —

Interest rate swap futures sales contracts

 

 —

 

2,285,000

 

(1,660,000)

 

625,000

 

 

39

Table of Contents

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

 

 

Gross

 

Gross amount

 

Net amount

 

Gross

 

Gross amount

 

Net amount

 

 

amount of

 

offset in the

 

of assets in the

 

amount of

 

offset in the

 

of assets in the

 

 

recognized

 

consolidated

 

consolidated

 

recognized

 

consolidated

 

consolidated

 

    

assets

    

balance sheet

    

balance sheet

    

assets

    

balance sheet

    

balance sheet

 

 

(in thousands)

Derivatives not subject to master netting arrangements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

$

147,400

 

$

 —

 

$

147,400

 

$

50,507

 

$

 —

 

$

50,507

Repurchase agreement derivatives

 

 

8,187

 

 

 —

 

 

8,187

 

 

26,770

 

 

 —

 

 

26,770

 

 

 

155,587

 

 

 —

 

 

155,587

 

 

77,277

 

 

 —

 

 

77,277

Derivatives subject to master netting arrangements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward purchase contracts

 

 

17,943

 

 

 —

 

 

17,943

 

 

35,916

 

 

 —

 

 

35,916

Forward sale contracts

 

 

6,141

 

 

 —

 

 

6,141

 

 

437

 

 

 —

 

 

437

MBS put options

 

 

10,040

 

 

 —

 

 

10,040

 

 

720

 

 

 —

 

 

720

MBS call options

 

 

 —

 

 

 —

 

 

 —

 

 

2,135

 

 

 —

 

 

2,135

Put options on interest rate futures purchase contracts

 

 

6,266

 

 

 —

 

 

6,266

 

 

866

 

 

 —

 

 

866

Call options on interest rate futures purchase contracts

 

 

2,414

 

 

 —

 

 

2,414

 

 

5,965

 

 

 —

 

 

5,965

Netting

 

 

 —

 

 

34,557

 

 

34,557

 

 

 —

 

 

(26,969)

 

 

(26,969)

 

 

 

42,804

 

 

34,557

 

 

77,361

 

 

46,039

 

 

(26,969)

 

 

19,070

 

 

$

198,391

 

$

34,557

 

$

232,948

 

$

123,316

 

$

(26,969)

 

$

96,347

 

40

Table of Contents

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

 

 

 

 

Gross amount not 

 

 

 

 

 

Gross amount not

 

 

 

 

 

 

offset in the

 

 

 

 

 

offset in the

 

 

 

 

 

 

consolidated 

 

 

 

 

 

consolidated 

 

 

 

 

Net amount

 

balance sheet

 

 

 

Net amount

 

balance sheet

 

 

 

 

of assets in the

 

 

 

Cash

 

 

 

of assets in the

 

 

 

Cash

 

 

 

 

consolidated

 

Financial

 

collateral

 

Net

 

consolidated

 

Financial

 

collateral

 

Net

 

    

balance sheet

    

instruments

    

received

    

amount

    

balance sheet

    

instruments

    

received

    

amount

 

 

(in thousands)

Interest rate lock commitments

 

$

147,400

 

$

 —

 

$

 —

 

$

147,400

 

$

50,507

 

$

 —

 

$

 —

 

$

50,507

JPMorgan Chase Bank, N.A.

 

 

32,450

 

 

 —

 

 

 —

 

 

32,450

 

 

1,399

 

 

 —

 

 

 —

 

 

1,399

Citibank, N.A.

 

 

15,951

 

 

 —

 

 

 —

 

 

15,951

 

 

2,488

 

 

 —

 

 

 —

 

 

2,488

Morgan Stanley Bank, N.A.

 

 

11,842

 

 

 —

 

 

 —

 

 

11,842

 

 

 —

 

 

 

 

 

 —

 

 

 —

RJ O'Brien

 

 

8,680

 

 

 —

 

 

 —

 

 

8,680

 

 

6,831

 

 

 —

 

 

 —

 

 

6,831

Deutsche Bank

 

 

8,187

 

 

 —

 

 

 —

 

 

8,187

 

 

26,770

 

 

 —

 

 

 —

 

 

26,770

Wells Fargo Bank, N.A.

 

 

5,728

 

 

 —

 

 

 —

 

 

5,728

 

 

3,707

 

 

 —

 

 

 —

 

 

3,707

Goldman Sachs

 

 

2,252

 

 

 —

 

 

 —

 

 

2,252

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Bank of America, N.A.

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,781

 

 

 —

 

 

 —

 

 

2,781

Others

 

 

458

 

 

 —

 

 

 —

 

 

458

 

 

1,864

 

 

 —

 

 

 —

 

 

1,864

 

 

$

232,948

 

$

 —

 

$

 —

 

$

232,948

 

$

96,347

 

$

 —

 

$

 —

 

$

96,347

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

 

 

 

 

 

 

Net

 

 

 

 

 

Net

 

 

 

 

 

 

amount

 

 

 

 

 

amount

 

 

Gross

 

Gross amount

 

of liabilities

 

Gross

 

Gross amount

 

of liabilities

 

 

amount of

 

offset in the

 

in the

 

amount of

 

offset in the

 

in the

 

 

recognized

 

consolidated

 

consolidated

 

recognized

 

consolidated

 

consolidated

 

    

liabilities

    

balance sheet

    

balance sheet

    

liabilities

    

balance sheet

    

balance sheet

 

 

(in thousands)

Derivatives not subject to master netting arrangements Interest rate lock commitments

 

$

2,276

 

$

 —

 

$

2,276

 

$

1,169

 

$

 —

 

$

1,169

Derivatives subject to a master netting arrangement:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward purchase contracts

 

 

51,585

 

 

 —

 

 

51,585

 

 

215

 

 

 —

 

 

215

Forward sale contracts

 

 

34,498

 

 

 —

 

 

34,498

 

 

26,762

 

 

 —

 

 

26,762

Netting

 

 

 —

 

 

(74,324)

 

 

(74,324)

 

 

 —

 

 

(25,082)

 

 

(25,082)

 

 

 

86,083

 

 

(74,324)

 

 

11,759

 

 

26,977

 

 

(25,082)

 

 

1,895

Total derivatives

 

 

88,359

 

 

(74,324)

 

 

14,035

 

 

28,146

 

 

(25,082)

 

 

3,064

Assets sold under agreements to repurchase:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount outstanding

 

 

3,539,459

 

 

 —

 

 

3,539,459

 

 

1,935,200

 

 

 —

 

 

1,935,200

Unamortized debt issuance premiums and costs, net

 

 

(570)

 

 

 —

 

 

(570)

 

 

(1,341)

 

 

 —

 

 

(1,341)

 

 

 

3,538,889

 

 

 —

 

 

3,538,889

 

 

1,933,859

 

 

 —

 

 

1,933,859

 

 

$

3,627,248

 

$

(74,324)

 

$

3,552,924

 

$

1,962,005

 

$

(25,082)

 

$

1,936,923

 

41

Table of Contents

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

 

 

 

 

Gross amounts

 

 

 

 

 

Gross amounts

 

 

 

 

 

 

not offset in the

 

 

 

 

 

not offset in the

 

 

 

 

Net amount

 

consolidated 

 

 

 

Net amount

 

consolidated 

 

 

 

 

of liabilities

 

balance sheet

 

 

 

of liabilities

 

balance sheet

 

 

 

 

in the

 

 

 

Cash

 

 

 

in the

 

 

 

Cash

 

 

 

 

consolidated

 

Financial

 

 collateral 

 

Net

 

consolidated

 

Financial

 

collateral

 

Net

 

 

balance sheet

 

instruments

 

pledged

 

amount

 

balance sheet

 

instruments

 

pledged

 

amount

 

 

(in thousands)

Interest rate lock commitments

 

$

2,276

 

$

 —

 

$

 —

 

$

2,276

 

$

1,169

 

$

 —

 

$

 —

 

$

1,169

Credit Suisse First Boston Mortgage Capital LLC

 

 

1,000,098

 

 

(999,713)

 

 

 —

 

 

385

 

 

691,030

 

 

(690,766)

 

 

 —

 

 

264

Bank of America, N.A.

 

 

506,553

 

 

(497,335)

 

 

 —

 

 

9,218

 

 

170,820

 

 

(170,820)

 

 

 —

 

 

 —

JPMorgan Chase Bank, N.A.

 

 

711,619

 

 

(711,619)

 

 

 —

 

 

 —

 

 

54,326

 

 

(54,326)

 

 

 —

 

 

 —

Morgan Stanley Bank, N.A.

 

 

551,027

 

 

(551,027)

 

 

 —

 

 

 —

 

 

77,687

 

 

(77,687)

 

 

 —

 

 

 —

Citibank, N.A.

 

 

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)

 

 

 —

 

 

 —

Deutsche Bank

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

741,978

 

 

(741,978)

 

 

 —

 

 

 —

Federal National Mortgage Association

 

 

685

 

 

 —

 

 

 —

 

 

685

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Others

 

 

1,471

 

 

 —

 

 

 —

 

 

1,471

 

 

1,438

 

 

 —

 

 

 —

 

 

1,438

 

 

$

3,553,494

 

$

(3,539,459)

 

$

 —

 

$

14,035

 

$

1,938,264

 

$

(1,935,200)

 

$

 —

 

$

3,064

 

 

Following are the gains (losses) recognized by the Company on derivative financial instruments and the income statement lines where such gains and losses are included:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

Derivative activity

    

Income statement line

    

2019

    

2018

    

2019

    

2018

 

 

 

 

(in thousands)

Interest rate lock commitments

 

Net gains on loans held for sale at fair value

 

$

33,347

 

$

(18,526)

 

$

95,785

 

$

(21,109)

Repurchase agreement derivatives

 

Interest expense 

 

$

 92

 

$

(227)

 

$

 (1,608)

 

$

(1,345)

Hedged item:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments and loans held for sale

 

Net gains on loans held for sale at fair value

 

$

(55,540)

 

$

10,820

 

$

(157,362)

 

$

100,422

Mortgage servicing rights

 

Net loan servicing fees–Change in fair value of mortgage servicing rights and mortgage servicing liabilities

 

$

250,146

 

$

(52,971)

 

$

587,883

 

$

(180,853)

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents

 

Note 9—Mortgage Servicing Rights and Mortgage Servicing Liabilities

 

Mortgage Servicing Rights at Fair Value

 

The activity in MSRs is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

    

2019

 

2018

 

 

(in thousands)

Balance at beginning of period

 

$

2,720,335

 

$

2,486,157

 

$

2,820,612

    

$

638,010

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

Balance after reclassification

 

 

2,720,335

 

 

2,486,157

 

 

2,820,612

 

 

2,120,436

Additions:

 

 

 

 

 

 

 

 

 

 

 

 

Resulting from loan sales

 

 

246,757

 

 

149,000

 

 

545,839

 

 

448,604

Purchases

 

 

46

 

 

163,511

 

 

227,445

 

 

193,640

 

 

 

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

 

 

(410,885)

 

 

(12,704)

 

 

(1,037,643)

 

 

23,284

Balance at end of period

 

$

2,556,253

 

$

2,785,964

 

$

2,556,253

 

$

2,785,964

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31,

 

 

 

 

 

 

 

 

2019

 

2018

 

 

 

 

 

 

 

 

(in thousands)

Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable

 

 

 

 

 

 

 

$

2,550,602

 

$

2,807,333


(1)

Principally reflects changes in discount rate and prepayment speed inputs, primarily due to changes in market interest rates.

 

(2)

Represents changes due to realization of cash flows.

 

 

 

Mortgage Servicing Liabilities at Fair Value

 

The activity in MSLs is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(in thousands)

Balance at beginning of period

 

$

12,948

 

$

10,253

 

$

8,681

 

$

14,120

Mortgage servicing liabilities resulting from loan sales

 

 

19,501

 

 

1,741

 

 

27,133

 

 

5,548

Changes in fair value due to:

 

 

 

 

 

 

 

 

 

 

 

 

Changes in valuation inputs used in valuation model (1)

 

 

8,630

 

 

3,410

 

 

14,687

 

 

8,590

Other changes in fair value (2) 

 

 

(6,785)

 

 

(5,635)

 

 

(16,207)

 

 

(18,489)

Total change in fair value

 

 

1,845

 

 

(2,225)

 

 

(1,520)

 

 

(9,899)

Balance at end of period

 

$

34,294

 

$

9,769

 

$

34,294

 

$

9,769


 

 

(1)

Principally reflects changes in expected borrower performance and servicer losses given default.

 

(2)

Represents changes due to realization of cash flows.

 

43

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(in thousands)

Contractual servicing fees

 

$

185,967

 

$

147,182

 

$

533,510

 

$

421,536

Other fees:

 

 

 

 

 

 

 

 

 

 

 

                  

Late charges

 

 

12,430

 

 

5,087

 

 

31,258

 

 

19,595

Other

 

 

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

 

September 30, 2019

    

September 30, 2019

 

(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

 

 

1,929

 

$

1,929

 

$

60,642

Period end:

 

 

 

 

 

Weighted averages:

 

 

 

 

 

Remaining lease term (in years)

 

 

 

 

5.8

Discount rate

 

 

 

 

4.6%

 

The maturities of the Company’s operating lease liabilities are summarized below:

 

 

 

 

 

Twelve months ended September 30,

 

Operating leases

 

 

(in thousands)

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)

Total

 

$

72,160

 

44

Table of Contents

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

 

    

2019

    

2018

    

2019

    

2018

 

 

 

(dollars in thousands)

 

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

 

$

3,539,459

 

$

2,201,880

 

$

3,539,459

 

$

2,380,121

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

 

December 31, 

 

 

    

 

 

 

 

 

 

2019

    

2018

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Carrying value:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance

 

 

 

 

 

 

 

$

3,539,459

 

$

1,935,200

 

Unamortized debt issuance premiums and costs, net

 

 

 

 

 

 

 

 

(570)

 

 

(1,341)

 

 

 

 

 

 

 

 

 

$

3,538,889

 

$

1,933,859

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

 

 

 

 

 

 

$

3,939,161

 

$

1,923,857

 

Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell

 

 

 

 

 

 

 

$

107,678

 

$

131,025

 

Servicing advances (4)

 

 

 

 

 

 

 

$

181,747

 

$

162,895

 

Mortgage servicing rights (4)

 

 

 

 

 

 

 

$

2,532,369

 

$

2,807,333

 

Margin deposits placed with counterparties (5)

 

 

 

 

 

 

 

$

5,000

 

$

3,750

 


(1)

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.

(2)

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

Table of Contents

months ended September 30, 2019 and 2018, respectively. The master repurchase agreement expired on August 21, 2019.

(3)

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

 

 

(dollars in thousands)

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

 

 

100,000

Total assets sold under agreements to repurchase

 

$

3,539,459

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average

 

 

 

 

 

 

 

maturity of advances  

 

 

 

 

 

 

 

under repurchase

 

 

Counterparty

    

Amount at risk

    

agreement

    

Facility maturity

 

 

(in thousands)

 

 

 

 

Credit Suisse First Boston Mortgage Capital LLC

 

$

1,313,083

 

April 26, 2020

 

April 26, 2020

Credit Suisse First Boston Mortgage Capital LLC

 

$

231,656

 

December 2, 2019

 

April 24, 2020

Bank of America, N.A.

 

$

82,942

 

October 28, 2019

 

October 28, 2019

JP Morgan Chase Bank, N.A.

 

$

79,142

 

October 9, 2019

 

October 11, 2019

Citibank, N.A.

 

$

41,279

    

December 17, 2019

    

August 4, 2020

Morgan Stanley Bank, N.A.

 

$

40,511

 

December 16, 2019

 

August 21, 2020

BNP Paribas

 

$

12,363

 

December 17, 2019

 

July 31, 2020

Royal Bank of Canada

 

$

9,804

 

December 31, 2019

 

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.

 

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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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

 

Nine months ended September 30, 

 

 

    

2019

    

2018

    

 

2019

    

2018

 

 

 

(dollars in thousands)

Average balance

 

$

258,169

 

$

289,008

 

 

$

249,023

 

$

250,599

 

Weighted average interest rate (1)

 

 

3.36

%  

 

3.31

%

 

 

3.55

%  

 

3.14

%  

Total interest expense

 

$

2,304

 

$

2,533

 

 

$

7,034

 

$

6,450

 

Maximum daily amount outstanding

 

$

524,095

 

$

722,611

 

 

$

548,038

 

$

722,611

 


(1)

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

 

 

 

 

 

 

 

 

2019

    

2018

    

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Carrying value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance

 

 

 

 

 

 

 

 

$

514,625

 

$

532,466

 

Unamortized debt issuance costs

 

 

 

 

 

 

 

 

 

 —

 

 

(215)

 

 

 

 

 

 

 

 

 

 

$

514,625

    

$

532,251

 

Weighted average interest rate

 

 

 

 

 

 

 

 

 

3.27

%  

 

3.77

%

Fair value of loans pledged to secure mortgage loan participation purchase and sale agreements

 

 

 

 

 

 

 

 

$

542,049

 

$

555,001

 

 

Notes Payable

 

Term Notes

 

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.

 

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Table of Contents

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

 

    

2019

    

2018

 

2019

    

2018

 

 

 

(dollars in thousands)

 

Average balance

 

$

1,300,000

 

$

1,234,783

 

$

1,300,000

 

$

1,125,458

 

Weighted average interest rate (1)

 

 

5.11

%  

 

5.07

%

 

5.21

%  

 

5.29

%

Total interest expense

 

$

17,525

 

$

21,369

 

$

53,559

 

$

55,939

 

Maximum daily amount outstanding

 

$

1,300,000

 

$

1,300,000

 

$

1,300,000

 

$

1,300,000

 


(1)

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.

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

 

 

 

 

 

 

2019

    

2018

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Carrying value:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance

 

 

 

 

 

 

 

$

1,300,000

    

$

1,300,000

 

Unamortized debt issuance costs

 

 

 

 

 

 

 

 

(6,375)

 

 

(7,709)

 

 

 

 

 

 

 

 

 

$

1,293,625

 

$

1,292,291

 

Weighted average interest rate

 

 

 

 

 

 

 

 

4.90

%

 

5.07

%

Unused amount

 

 

 

 

 

 

 

$

150,000

 

$

150,000

 

Assets pledged to secure notes payable:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

$

101,773

 

$

108,174

 

Servicing advances (1)

 

 

 

 

 

 

 

$

181,747

 

$

162,895

 

Mortgage servicing rights (1)

 

 

 

 

 

 

 

$

2,489,481

 

$

2,807,333

 


(1)

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

 

 

    

2019

    

2018

    

2019

    

2018

 

 

 

 

(dollars in thousands)

 

Average balance

 

$

25,812

 

$

11,615

 

$

13,380

 

$

15,187

 

 

Weighted average interest rate

 

 

4.47

%  

 

4.09

%

 

4.48

%  

 

3.87

%  

 

Total interest expense

 

$

274

 

$

122

 

$

476

 

$

444

 

 

Maximum daily amount outstanding

 

$

28,295

 

$

13,032

 

$

28,295

 

$

20,971

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

 

 

 

 

 

 

 

2019

    

2018

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Unpaid principal balance

 

 

 

 

 

 

 

$

23,881

    

$

6,605

 

Weighted average interest rate

 

 

 

 

 

 

 

 

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

 

 

Excess Servicing Spread Financing at Fair Value

 

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.

 

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Table of Contents

Following is a summary of ESS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(in thousands)

Balance at beginning of period

 

$

194,156

 

$

229,470

 

$

216,110

 

$

236,534

Issuances of excess servicing spread to PennyMac Mortgage Investment Trust pursuant to recapture agreement

 

 

377

 

 

499

 

 

1,327

 

 

1,983

Accrual of interest

 

 

2,291

 

 

3,740

 

 

8,124

 

 

11,584

Repayment

 

 

(9,819)

 

 

(11,543)

 

 

(30,901)

 

 

(35,852)

Change in fair value

 

 

(3,864)

 

 

1,109

 

 

(11,519)

 

 

9,026

Balance at end of period

 

$

183,141

 

$

223,275

 

$

183,141

 

$

223,275

 

 

 

 

Note 12—Liability for Losses Under Representations and Warranties

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(in thousands)

Balance at beginning of period

 

$

18,709

 

$

20,587

 

$

21,155

 

$

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)

 

 

46

Balance at end of period

 

$

19,968

 

$

21,022

 

$

19,968

 

$

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.

 

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Table of Contents

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

Cumulative

 

    

2019

    

2018

    

2019

    

2018

 

total (1)

 

 

(in thousands)

Shares of common stock repurchased

 

 

 —

 

 

 —

 

 

51

 

 

236

 

 

816

Cost of shares of common stock repurchased

 

$

 —

 

$

 —

 

$

1,056

 

$

4,826

 

$

14,948


(1)

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:

 

 

 

 

 

 

 

 

 

 

Quarter ended

 

Nine months ended

 

    

September 30, 2018

 

September 30, 2018

 

 

(in thousands)

Net income attributable to PennyMac Financial Services, Inc. common stockholders

 

$

14,489

 

$

48,945

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.

 

$

4,377

 

$

32,501

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

 

 

131

 

 

1,616

 

 

 

 

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Table of Contents

Note 17—Net Gains on Loans Held for Sale

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(in thousands)

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)

Reduction in liability due to change in estimate

 

 

1,175

 

 

1,155

 

 

6,305

 

 

3,627

Change in fair value of loans and derivatives held at period end:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

33,347

 

 

(18,526)

 

 

95,785

 

 

(21,109)

Loans

 

 

(5,822)

 

 

6,897

 

 

(35,508)

 

 

21,407

Hedging derivatives

 

 

92,588

 

 

13,327

 

 

72,838

 

 

11,100

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents

Note 18—Net Interest Income

 

Net interest income is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(in thousands)

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

 

$

2,894

 

$

814

 

$

7,533

 

$

2,001

Loans held for sale at fair value

 

 

35,800

 

 

34,941

 

 

101,509

 

 

95,982

Placement fees relating to custodial funds

 

 

43,231

 

 

23,397

 

 

98,628

 

 

55,014

 

 

 

81,925

 

 

59,152

 

 

207,670

 

 

152,997

From PennyMac Mortgage Investment Trust—Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell

 

 

1,527

 

 

1,812

 

 

5,015

 

 

5,686

 

 

 

83,452

 

 

60,964

 

 

212,685

 

 

158,683

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

To non-affiliates:

 

 

 

 

 

 

 

 

 

 

 

 

Assets sold under agreements to repurchase (1)

 

 

19,429

 

 

4,676

 

 

47,709

 

 

15,943

Mortgage loan participation purchase and sale agreements

 

 

2,304

 

 

2,533

 

 

7,034

 

 

6,450

Notes payable

 

 

17,525

 

 

21,369

 

 

53,559

 

 

55,939

Obligations under capital lease

 

 

274

 

 

122

 

 

476

 

 

444

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

 

 

 

54,089

 

 

35,035

 

 

138,723

 

 

96,552

To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value

 

 

2,291

 

 

3,740

 

 

8,124

 

 

11,584

 

 

 

56,380

 

 

38,775

 

 

146,847

 

 

108,136

 

 

$

27,072

 

$

22,189

 

$

65,838

 

$

50,547


(1)

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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Table of Contents

 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(in thousands)

Grants:

 

 

 

 

 

 

 

 

 

 

 

 

Units:

 

 

 

 

 

 

 

 

 

 

 

 

Performance-based RSUs

 

 

 —

 

 

 —

 

 

665

 

 

524

Stock options

 

 

 —

 

 

 —

 

 

344

 

 

674

Time-based RSUs

 

 

 4

 

 

 5

 

 

334

 

 

321

Grant date fair value:

 

 

 

 

 

 

 

 

 

 

 

 

Performance-based RSUs

 

$

 —

 

$

 —

 

$

15,253

 

$

12,791

Stock options

 

 

 —

 

 

 —

 

 

2,965

 

 

6,147

Time-based RSUs

 

 

102

 

 

100

 

 

7,647

 

 

7,803

Total

 

$

102

 

$

100

 

$

25,865

 

$

26,741

Vestings and exercises:

 

 

 

 

 

 

 

 

 

 

 

 

Performance-based RSUs vested

 

 

 —

 

 

 —

 

 

648

 

 

774

Stock options exercised

 

 

127

 

 

55

 

 

245

 

 

285

Time-based RSUs vested

 

 

 3

 

 

 1

 

 

294

 

 

245

Compensation expense

 

$

8,941

 

$

8,532

 

$

19,124

 

$

20,766

 

 

 

 

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.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

   

2019

   

2018

 

 

(in thousands, except per share amounts)

Basic earnings per share of common stock:

 

 

 

    

 

 

 

 

 

    

 

 

Net income attributable to common stockholders

 

$

121,473

    

$

14,489

 

$

240,304

    

$

48,945

Weighted average shares of common stock outstanding

 

 

78,361

 

 

25,125

 

 

78,119

 

 

24,644

Basic earnings per share of common stock

 

$

1.55

 

$

0.58

 

$

3.08

 

$

1.99

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

121,473

 

$

14,489

 

$

240,304

 

$

48,945

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

 

$

121,473

 

$

44,621

 

$

240,304

 

$

153,301

Weighted average shares of common stock outstanding applicable to basic earnings per share

 

 

78,361

 

 

25,125

 

 

78,119

 

 

24,644

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

 

 

80,382

 

 

78,913

 

 

79,821

 

 

78,954

Diluted earnings per share of common stock

 

$

1.51

 

$

0.57

 

$

3.01

 

$

1.94

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(in thousands except for weighted-average exercise price)

Performance-based RSUs (1)

 

 

1,157

 

 

1,172

 

 

985

 

 

1,060

Time-based RSUs

 

 

 —

 

 

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

 

$

17.79


(1)

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

 

(2)

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

 

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Table of Contents

Note 21—Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

    

2019

    

2018

 

 

(in thousands)

Cash paid for interest

 

$

125,987

   

$

123,622

Cash paid (refunds received) for income taxes , net

 

$

5,761

 

$

(1,541)

Non-cash investing activity:

 

 

 

 

 

 

Mortgage servicing rights resulting from loan sales

 

$

545,839

 

$

448,604

Mortgage servicing liabilities resulting from loan sales

 

$

27,133

 

$

5,548

Unsettled portion of MSR acquisitions

 

$

 —

 

$

13,501

Operating right-of-use assets recognized

 

$

60,642

 

$

 —

Non-cash financing activity:

 

 

 

 

 

 

Issuance of Excess servicing spread payable to PennyMac Mortgage Investment Trust pursuant to a recapture agreement

 

$

1,327

 

$

1,983

Issuance of common stock and Class A common stock in settlement of director fees

 

$

184

 

$

245

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

 

Agency–company subject to requirement

    

Actual (1)

    

Requirement (1)

    

Actual (1)

    

Requirement (1)

 

 

 

(dollars in thousands)

 

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

 

$

1,718,072

 

$

2,500

 

$

1,535,826

 

$

2,500

 

Liquidity

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae & Freddie Mac PLS

 

$

282,056

 

$

78,240

 

$

271,802

 

$

70,775

 

Ginnie Mae PLS

 

$

282,056

 

$

211,021

 

$

271,802

 

$

189,592

 

Tangible net worth / Total assets ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae & Freddie Mac – PLS

 

 

19

%  

 

 6

%  

 

21

%  

 

6

%


(1)

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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Table of Contents

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 2019

 

 

 

Mortgage Banking

 

Investment

 

 

 

 

 

    

Production

    

Servicing

    

Total

    

Management

    

Total

 

 

 

(in thousands)

 

Revenue: (1)

 

 

 

 

 

 

 

 

 

 

 

                    

 

 

 

 

Net gains on loans held for sale at fair value

 

$

216,132

 

$

19,600

 

$

235,732

 

$

 —

 

$

235,732

 

Loan origination fees

 

 

49,434

 

 

 —

 

 

49,434

 

 

 —

 

 

49,434

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

45,149

 

 

 —

 

 

45,149

 

 

 —

 

 

45,149

 

Net loan servicing fees

 

 

 —

 

 

66,229

 

 

66,229

 

 

 —

 

 

66,229

 

Net interest income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

22,445

 

 

61,007

 

 

83,452

 

 

 —

 

 

83,452

 

Interest expense

 

 

18,423

 

 

37,936

 

 

56,359

 

 

21

 

 

56,380

 

 

 

 

4,022

 

 

23,071

 

 

27,093

 

 

(21)

 

 

27,072

 

Management fees

 

 

 —

 

 

 —

 

 

 —

 

 

10,098

 

 

10,098

 

Other

 

 

324

 

 

567

 

 

891

 

 

1,742

 

 

2,633

 

Total net revenue

 

 

315,061

 

 

109,467

 

 

424,528

 

 

11,819

 

 

436,347

 

Expenses

 

 

135,777

 

 

127,581

 

 

263,358

 

 

6,792

 

 

270,150

 

Income before provision for income taxes

 

$

179,284

 

$

(18,114)

 

$

161,170

 

$

5,027

 

$

166,197

 

Segment assets at quarter end

 

$

4,850,741

 

$

4,433,177

 

$

9,283,918

 

$

19,281

 

$

9,303,199

 


(1)

All revenues are from external customers.

 

57

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 2018

 

 

 

Mortgage Banking

 

Investment

 

 

 

 

 

    

Production

    

Servicing

    

Total

    

Management

    

 Total

 

 

 

(in thousands)

 

Revenue: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains on loans held for sale at fair value

 

$

34,947

 

$

21,967

 

$

56,914

 

$

 —

 

$

56,914

 

 Loan origination fees

 

 

26,485

 

 

 —

 

 

26,485

 

 

 —

 

 

26,485

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

26,256

 

 

 —

 

 

26,256

 

 

 —

 

 

26,256

 

Net loan servicing fees

 

 

 —

 

 

109,703

 

 

109,703

 

 

 —

 

 

109,703

 

Net interest income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

17,013

 

 

43,935

 

 

60,948

 

 

16

 

 

60,964

 

Interest expense

 

 

1,274

 

 

37,491

 

 

38,765

 

 

10

 

 

38,775

 

 

 

 

15,739

 

 

6,444

 

 

22,183

 

 

 6

 

 

22,189

 

Management fees

 

 

 —

 

 

 —

 

 

 —

 

 

6,471

 

 

6,471

 

Carried Interest from Investment Funds

 

 

 —

 

 

 —

 

 

 —

 

 

(17)

 

 

(17)

 

Other

 

 

645

 

 

805

 

 

1,450

 

 

1,478

 

 

2,928

 

Total net revenue

 

 

104,072

 

 

138,919

 

 

242,991

 

 

7,938

 

 

250,929

 

Expenses

 

 

78,405

 

 

105,346

 

 

183,751

 

 

5,481

 

 

189,232

 

Income before provision for income taxes

 

$

25,667

 

$

33,573

 

$

59,240

 

$

2,457

 

$

61,697

 

Segment assets at quarter end (2)

 

$

2,168,126

 

$

4,812,898

 

$

6,981,024

 

$

11,996

 

$

6,993,020

 


(1)

All revenues are from external customers.

 

(2)

Excludes parent Company assets, which consist of $1.8 million of cash and includes receivable from parent Company of $2.3 million.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2019

 

 

 

Mortgage Banking

 

Investment

 

 

 

 

 

    

Production

    

Servicing

    

Total

    

Management

    

Total

 

 

 

(in thousands)

 

Revenue: (1)

 

 

 

 

 

 

 

 

 

 

 

                    

 

 

 

 

Net gains on loans held for sale at fair value

 

$

407,713

 

$

60,328

 

$

468,041

 

$

 —

 

$

468,041

 

Loan origination fees

 

 

110,288

 

 

 —

 

 

110,288

 

 

 —

 

 

110,288

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

102,313

 

 

 —

 

 

102,313

 

 

 —

 

 

102,313

 

Net loan servicing fees

 

 

 —

 

 

205,934

 

 

205,934

 

 

 —

 

 

205,934

 

Net interest income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

55,714

 

 

156,971

 

 

212,685

 

 

 —

 

 

212,685

 

Interest expense

 

 

36,236

 

 

110,572

 

 

146,808

 

 

39

 

 

146,847

 

 

 

 

19,478

 

 

46,399

 

 

65,877

 

 

(39)

 

 

65,838

 

Management fees

 

 

 —

 

 

 —

 

 

 —

 

 

26,178

 

 

26,178

 

Other

 

 

929

 

 

2,664

 

 

3,593

 

 

4,844

 

 

8,437

 

Total net revenue

 

 

640,721

 

 

315,325

 

 

956,046

 

 

30,983

 

 

987,029

 

Expenses

 

 

316,187

 

 

324,949

 

 

641,136

 

 

19,815

 

 

660,951

 

Income before provision for income taxes

 

$

324,534

 

$

(9,624)

 

$

314,910

 

$

11,168

 

$

326,078

 

Segment assets at period end

 

$

4,850,741

 

$

4,433,177

 

$

9,283,918

 

$

19,281

 

$

9,303,199

 

 


(1)

All revenues are from external customers.

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

 

 

Mortgage Banking

 

Investment

 

 

 

 

 

    

Production

    

Servicing

    

Total

    

Management

    

 Total

  

 

 

(in thousands)

 

Revenue: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains on loans held for sale at fair value

 

$

105,111

 

$

84,163

 

$

189,274

 

$

 —

 

$

189,274

 

Loan origination fees

 

 

75,476

 

 

 —

 

 

75,476

 

 

 —

 

 

75,476

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

52,759

 

 

 —

 

 

52,759

 

 

 —

 

 

52,759

 

Net loan servicing fees

 

 

 —

 

 

340,181

 

 

340,181

 

 

 —

 

 

340,181

 

Net interest income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

48,135

 

 

110,532

 

 

158,667

 

 

16

 

 

158,683

 

Interest expense

 

 

4,401

 

 

103,694

 

 

108,095

 

 

41

 

 

108,136

 

 

 

 

43,734

 

 

6,838

 

 

50,572

 

 

(25)

 

 

50,547

 

Management fees

 

 

 —

 

 

 —

 

 

 —

 

 

17,910

 

 

17,910

 

Carried Interest from Investment Funds

 

 

 —

 

 

 —

 

 

 —

 

 

(365)

 

 

(365)

 

Other

 

 

1,497

 

 

1,928

 

 

3,425

 

 

4,221

 

 

7,646

 

Total net revenue

 

 

278,577

 

 

433,110

 

 

711,687

 

 

21,741

 

 

733,428

 

Expenses

 

 

216,722

 

 

290,094

 

 

506,816

 

 

17,221

 

 

524,037

 

Income before provision for income taxes

 

$

61,855

 

$

143,016

 

$

204,871

 

$

4,520

 

$

209,391

 

Segment assets at period end (2)

 

$

2,168,126

 

$

4,812,898

 

$

6,981,024

 

$

11,996

 

$

6,993,020

 


(1)

All revenues are from external customers.

 

(2)

Excludes parent Company assets, which consist of $1.8 million of cash and includes receivable from parent Company of $2.3 million.

 

 

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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Table of Contents

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

 

    

2019

    

2018

   

2019

    

2018

 

 

 

(dollars in thousands, except per share amounts)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains on loans held for sale at fair value

 

$

235,732

 

$

56,914

 

$

468,041

 

$

189,274

 

Loan origination fees

 

 

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

 

 

66,229

 

 

109,703

 

 

205,934

 

 

340,181

 

Net interest income

 

 

27,072

 

 

22,189

 

 

65,838

 

 

50,547

 

Management fees

 

 

10,098

 

 

6,471

 

 

26,178

 

 

17,910

 

Other

 

 

2,633

 

 

2,911

 

 

8,437

 

 

7,281

 

Total net revenue

 

 

436,347

 

 

250,929

 

 

987,029

 

 

733,428

 

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

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.55

 

$

0.58

 

$

3.08

 

$

1.99

 

Diluted

 

$

1.51

 

$

0.57

 

$

3.01

 

$

1.94

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

Production

 

$

179,284

 

$

25,667

 

$

324,534

 

$

61,855

 

Servicing

 

 

(18,114)

 

 

33,573

 

 

(9,624)

 

 

143,016

 

Total mortgage banking

 

 

161,170

 

 

59,240

 

 

314,910

 

 

204,871

 

Investment management

 

 

5,027

 

 

2,457

 

 

11,168

 

 

4,520

 

 

 

$

166,197

 

$

61,697

 

$

326,078

 

$

209,391

 

During the period:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments issued

 

$

22,423,177

 

$

11,130,611

 

$

49,291,237

 

$

33,843,166

 

Unpaid principal balance of loans fulfilled for PMT subject to fulfillment fees

 

$

16,647,172

 

$

7,517,883

 

$

35,523,802

 

$

17,139,884

 

At end of period:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance of loan servicing portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

Owned:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

221,215,993

 

$

193,659,378

 

 

 

 

 

 

 

Mortgage servicing liabilities

 

 

2,327,687

 

 

1,265,461

 

 

 

 

 

 

 

Loans held for sale

 

 

4,323,252

 

 

2,352,771

 

 

 

 

 

 

 

 

 

 

227,866,932

 

 

197,277,610

 

 

 

 

 

 

 

Subserviced for PMT

 

 

120,608,076

 

 

87,226,461

 

 

 

 

 

 

 

 

 

$

348,475,008

 

$

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(in thousands)

Net loan servicing fees:

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing fees:

 

 

 

 

 

 

 

 

 

 

 

 

From non-affiliates

 

$

185,967

 

$

147,182

 

$

533,510

 

$

421,536

From PennyMac Mortgage Investment Trust

 

 

12,964

 

 

10,071

 

 

35,102

 

 

30,521

From Investment Funds

 

 

 —

 

 

 —

 

 

 —

 

 

 3

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, mortgage servicing liabilities and excess servicing spread financing net of hedging results

 

 

(158,720)

 

 

(64,559)

 

 

(436,721)

 

 

(156,696)

Net loan servicing fees

 

$

66,229

 

$

109,703

 

$

205,934

 

$

340,181

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(in thousands)

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

 

 

3,864

 

 

(1,109)

 

 

11,519

 

 

(9,026)

Hedging results

 

 

250,146

 

 

(52,971)

 

 

587,883

 

 

(180,853)

Total change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread

 

$

(158,720)

 

$

(64,559)

 

$

(436,721)

 

$

(156,696)

Average balances:

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

2,601,069

 

$

2,634,026

 

$

2,757,948

 

$

2,302,713

Mortgage servicing liabilities

 

$

23,997

 

$

9,961

 

$

14,649

 

$

10,920

Excess servicing spread financing

 

$

187,088

 

$

225,926

 

$

199,911

 

$

232,694

At period end:

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

2,556,253

 

$

2,785,964

 

 

 

 

 

 

Mortgage servicing liabilities

 

$

34,294

 

$

9,769

 

 

 

 

 

 

Excess servicing spread financing

 

$

183,141

 

$

223,275

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Following is a summary of our loan servicing portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2019

    

2018

 

 

 

(in thousands)

 

Loans serviced

 

 

 

 

 

 

 

Prime servicing:

 

 

 

 

 

 

 

Owned:

 

 

 

 

 

 

 

Mortgage servicing rights

 

 

 

 

 

 

 

Originated

 

$

157,437,101

 

$

144,296,544

 

Acquired

 

 

63,778,892

 

 

56,757,600

 

 

 

 

221,215,993

 

 

201,054,144

 

Mortgage servicing liabilities

 

 

2,327,687

 

 

1,160,938

 

Loans held for sale

 

 

4,323,252

 

 

2,420,636

 

 

 

 

227,866,932

 

 

204,635,718

 

Subserviced for PMT

 

 

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

 

$

348,475,008

 

$

299,293,872

 

 

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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Table of Contents

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

 

    

2019

    

2018

    

2019

    

2018

 

 

 

(in thousands)

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of loans and derivative financial instruments outstanding at period end:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

33,347

 

 

(18,526)

 

 

95,785

 

 

(21,109)

 

Loans

 

 

(5,822)

 

 

6,897

 

 

(35,508)

 

 

21,407

 

Hedging derivatives

 

 

92,588

 

 

13,327

 

 

72,838

 

 

11,100

 

 

 

 

120,113

 

 

1,698

 

 

133,115

 

 

11,398

 

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)

 

Reduction in liability due to change in estimate

 

 

1,175

 

 

1,155

 

 

6,305

 

 

3,627

 

 

 

 

225,923

 

 

146,572

 

 

519,789

 

 

442,133

 

 

 

 

346,036

 

 

148,270

 

 

652,904

 

 

453,531

 

From PennyMac Mortgage Investment Trust

 

 

60,662

 

 

18,565

 

 

122,996

 

 

45,878

 

 

 

$

235,732

 

$

56,914

 

$

468,041

 

$

189,274

 

During the period:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Home equity lines of credit

 

 

2,970

 

 

 —

 

 

7,043

 

 

 —

 

 

 

$

22,423,177

 

$

11,130,611

 

$

49,291,237

 

$

33,843,166

 

At end of period:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale at fair value

 

$

4,522,971

 

$

2,416,955

 

 

 

 

 

 

 

Commitments to fund and purchase mortgage loans

 

$

8,311,786

 

$

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.

 

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Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(in thousands)

During the period:

 

 

                       

 

 

                       

 

 

                       

 

 

                       

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

 

 

1,942

Loans indemnified by PFSI at end of period

 

$

16,923

 

$

9,747

 

$

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

 

 

9,961

 

 

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

 

$

1,208

 

$

7,502

Net losses charged (recoveries credited) to liability for representations and warranties

 

$

74

 

$

252

 

$

104

 

$

(46)

 

 

 

 

 

 

 

 

 

 

 

 

 

At end of period:

 

 

 

 

 

 

 

 

 

 

Unpaid principal balance of loans subject to representations and warranties

 

$

166,541,153

 

$

139,315,779

 

 

 

 

 

 

Liability for representations and warranties

 

$

19,968

 

$

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

 

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 PennyMac Mortgage Investment Trust

 

Fulfillment fees from PMT represent fees we collect for services we perform on behalf of PMT in connection with the acquisition, packaging and sale of loans. The fulfillment fees are calculated as a percentage of the UPB of the loans we fulfill for PMT.

 

Following is a summary of our fulfillment fees:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(in thousands)

Fulfillment fee revenue

 

$

45,149

 

$

26,256

 

$

102,313

 

$

52,759

Unpaid principal balance of loans fulfilled subject to fulfillment fees

 

$

16,647,172

 

$

7,517,883

 

$

35,523,802

 

$

17,139,884

Average fulfillment fee rate (in basis points)

 

 

27

 

 

35

 

 

29

 

 

31

 

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.

 

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Management fees and Carried Interest

 

Management fees and Carried Interest are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

 

2019

   

2018

    

2019

    

2018

 

 

(in thousands)

Management fees:

 

 

 

 

 

 

 

 

 

 

 

 

PennyMac Mortgage Investment Trust:

 

 

 

 

 

 

 

 

 

 

 

 

Base management

    

$

7,914

    

$

5,799

 

$

20,862

    

$

17,223

Performance incentive

 

 

2,184

 

 

683

 

 

5,316

 

 

683

 

 

 

10,098

 

 

6,482

 

 

26,178

 

 

17,906

Investment Funds

 

 

 —

 

 

(11)

 

 

 —

 

 

 4

Total management fees

 

 

10,098

 

 

6,471

 

 

26,178

 

 

17,910

Carried Interest

 

 

 —

 

 

(17)

 

 

 —

 

 

(365)

Total management fees and Carried Interest

 

$

10,098

 

$

6,454

 

$

26,178

 

$

17,545

 

 

 

 

 

 

 

 

 

 

 

 

 

Net assets of PennyMac Mortgage Investment Trust at end of period

 

$

2,219,611

 

$

1,558,563

 

 

 

 

 

 

 

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.

 

Expenses

 

Compensation

 

Our compensation expense is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(in thousands)

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

Stock and unit-based compensation

 

 

8,941

 

 

8,532

 

 

19,124

 

 

20,766

 

 

$

141,132

 

$

103,364

 

$

362,449

 

$

303,917

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

 

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

 

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.

 

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Balance Sheet Analysis

 

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

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

 

 

(in thousands)

ASSETS

 

 

 

 

 

 

Cash and short-term investments

 

$

291,931

 

$

273,113

Loans held for sale at fair value

 

 

4,522,971

 

 

2,521,647

Servicing advances, net

 

 

271,501

 

 

313,197

Investments in and advances to affiliates

 

 

149,089

 

 

165,886

Mortgage servicing rights

 

 

2,556,253

 

 

2,820,612

Loans eligible for repurchase

 

 

892,631

 

 

1,102,840

Other

 

 

618,823

 

 

281,278

Total assets

 

$

9,303,199

 

$

7,478,573

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Short-term debt

 

$

4,053,514

 

$

2,332,143

Long-term debt

 

 

1,500,647

 

 

1,648,973

Liability for loans eligible for repurchase

 

 

892,631

 

 

1,102,840

Other

 

 

944,794

 

 

740,826

Total liabilities

 

 

7,391,586

 

 

5,824,782

Stockholders' equity

 

 

1,911,613

 

 

1,653,791

Total liabilities and stockholders' equity

 

$

9,303,199

 

$

7,478,573

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Nine months ended September 30, 

 

 

 

 

 

 

2019

    

2018

    

Change

 

 

 

(in thousands)

 

Operating

 

$

(1,690,141)

 

$

732,584

 

$

(2,422,725)

 

Investing

 

 

169,416

 

 

(349,783)

 

 

519,199

 

Financing

 

 

1,566,513

 

 

(317,722)

 

 

1,884,235

 

Net increase in cash and restricted cash

 

$

45,788

 

$

65,079

 

$

(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:

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

2019

    

2018

 

 

(in thousands)

Cash flows from:

 

 

 

 

 

 

Loans held for sale

 

$

(2,010,338)

 

$

543,106

Other operating sources

 

 

320,197

 

 

189,478

 

 

$

(1,690,141)

 

$

732,584

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended September 30, 

 

Nine months ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

(in thousands)

Average balance

 

$

2,098,208

 

$

1,563,053

 

$

1,861,086

 

$

1,618,008

Maximum daily balance

 

$

3,539,459

 

$

2,201,880

 

$

3,539,459

 

$

2,380,121

Balance at period end

 

$

3,539,459

 

$

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.

 

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Payment obligations under these agreements are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments due by year

 

 

 

 

Less than

 

1-3

 

3-5

 

More than

Contractual obligations

    

Total

    

1 year

    

years

    

years

    

5 years

 

 

(in thousands)

Commitments to purchase and originate loans

 

$

8,311,786

 

$

8,311,786

 

$

 —

 

$

 —

 

$

 —

Short-term debt

 

 

4,054,084

 

 

4,054,084

 

 

 —

 

 

 —

 

 

 —

Long-term debt

 

 

1,507,022

 

 

9,226

 

 

14,655

 

 

1,300,000

 

 

183,141

Interest on long-term debt

 

 

282,034

 

 

72,343

 

 

141,501

 

 

50,674

 

 

17,516

Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement

 

 

46,537

 

 

 —

 

 

 —

 

 

 —

 

 

46,537

Office leases

 

 

84,001

 

 

17,334

 

 

27,959

 

 

20,954

 

 

17,754

Total

 

$

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.

 

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The borrowings have maturities as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

Total

 

Committed

 

 

Lender

    

indebtedness (1)

    

facility size (2)

    

facility (2)

    

Maturity date (2)

 

 

(dollar amounts in thousands)

 

                                        

Assets sold under agreements to repurchase

 

 

 

 

 

 

 

 

 

 

 

Credit Suisse First Boston Mortgage Capital LLC (3)

 

$

899,713

 

$

1,100,000

 

$

300,000

 

April 24, 2020

Credit Suisse First Boston Mortgage Capital LLC (3)

 

$

100,000

 

$

400,000

 

$

400,000

 

April 26, 2020

JPMorgan Chase Bank, N.A.

 

$

711,619

 

$

1,000,000

 

$

50,000

 

October 11, 2019

Morgan Stanley Bank, N.A.

 

$

551,027

 

$

800,000

 

$

100,000

 

August 21, 2020

Bank of America, N.A.

 

$

497,335

 

$

500,000

 

$

500,000

 

October 28, 2019

Citibank, N.A.

 

$

461,496

 

$

700,000

 

$

300,000

 

August 4, 2020

BNP Paribas

 

$

192,534

 

$

200,000

 

$

100,000

 

July 31, 2020

Royal Bank of Canada

 

$

125,735

 

$

135,000

 

$

20,000

 

December 31, 2019

Mortgage loan participation purchase and sale agreements

 

 

 

 

 

 

 

 

 

 

 

Bank of America, N.A.

 

$

514,625

 

$

550,000

 

$

 —

 

October 28, 2019

Notes payable

 

 

 

 

 

 

 

 

 

 

 

GMSR 2018-GT1 Term Note

 

$

650,000

 

$

650,000

 

 

 

 

February 25, 2023

GMSR 2018-GT2 Term Note

 

$

650,000

 

$

650,000

 

 

 

 

August 25, 2023

Credit Suisse AG

 

$

 —

 

$

150,000

 

$

 —

 

October 31, 2019

Credit Suisse AG (3)

 

$

 —

 

$

 —

 

$

 —

 

February 1, 2020

Obligations under capital lease

 

 

 

 

 

 

 

 

 

 

 

Banc of America Leasing and Capital LLC

 

$

23,881

 

$

25,000

 

$

 —

 

June 13, 2022


(1)

Outstanding indebtedness as of September 30, 2019.

(2)

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

(3)

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average

 

 

 

 

 

 

 

maturity of 

 

 

 

 

 

 

 

advances under 

 

 

Counterparty

    

Amount at risk

    

repurchase agreement

   

Facility maturity

 

 

(in thousands)

 

 

 

 

Credit Suisse First Boston Mortgage Capital LLC (1)

 

$

1,313,083

 

April 26, 2020

 

April 26, 2020

Credit Suisse First Boston Mortgage Capital LLC (2)

 

$

231,656

 

December 2, 2019

 

April 24, 2020

Bank of America, N.A.

 

$

82,942

 

October 28, 2019

 

October 28, 2019

JP Morgan Chase Bank, N.A.

 

$

79,142

 

October 9, 2019

 

October 11, 2019

Citibank, N.A.

 

$

41,279

 

December 17, 2019

 

August 4, 2020

Morgan Stanley Bank, N.A.

 

$

40,511

 

December 16, 2019

 

August 21, 2020

BNP Paribas

 

$

12,363

 

December 17, 2019

 

July 31, 2020

Royal Bank of Canada

 

$

9,804

 

December 31, 2019

 

December 31, 2019


(1)

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.

(2)

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 11Borrowings 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.

 

Mortgage Servicing Rights

 

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%

 

 

 

(dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

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 %

    

-20%

    

-10%

    

-5%

    

+5%

    

+10%

    

+20%

 

 

    

(dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

2,849,511

 

$

2,694,915

 

$

2,623,737

 

$

2,492,206

 

$

2,431,360

 

$

2,318,431

 

Change in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

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 %

    

-20%

    

-10%

    

-5%

    

+5%

    

+10%

    

+20%

 

 

 

(dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

2,643,178

 

$

2,599,715

 

$

2,577,984

 

$

2,534,521

 

$

2,512,790

 

$

2,469,328

 

Change in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

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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Table of Contents

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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pricing spread shift in %

    

-20%

    

-10%

    

-5%

    

+5%

    

+10%

    

+20%

 

 

 

(dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

188,259

 

$

185,666

 

$

184,396

 

$

181,904

 

$

180,682

 

$

178,285

 

Change in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

5,117

 

$

2,525

 

$

1,254

 

$

(1,238)

 

$

(2,460)

 

$

(4,856)

 

%

 

 

2.8

%  

 

1.4

%  

 

0.7

%  

 

(0.7)

%  

 

(1.3)

%  

 

(2.7)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepayment speed shift in %

    

-20%

    

-10%

    

-5%

    

+5%

    

+10%

    

+20%

    

 

 

(dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

203,530

 

$

192,865

 

$

187,893

 

$

178,597

 

$

174,248

 

$

166,091

 

Change in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

20,389

 

$

9,724

 

$

4,752

 

$

(4,544)

 

$

(8,893)

 

$

(17,051)

 

%

 

 

11.1

%  

 

5.3

%  

 

2.6

%  

 

(2.5)

%  

 

(4.9)

%  

 

(9.3)

%

 

 

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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Table of Contents

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.

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Table of Contents

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

Item 6.  Exhibits

 

 

 

 

 

 

 

 

 

 

 

 

Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC
File Number 15‑68669 or
001‑38727)

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.

 

8‑K12B

 

November 1, 2018

 

 

 

 

 

 

 

3.2

 

Amended and Restated Bylaws of New PennyMac Financial Services, Inc.

 

8‑K12B

 

November 1, 2018

 

 

 

 

 

 

 

3.2.1

 

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

 

 

 

 

 

 

 

10.8

 

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.

 

*

 

 

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Table of Contents

 

 

 

 

 

 

 

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.

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Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

PENNYMAC FINANCIAL SERVICES, INC.

 

(Registrant)

 

 

 

Dated: November 4, 2019

By:

/s/ DAVID A. SPECTOR

 

 

David A. Spector

 

 

President and Chief Executive Officer

 

 

 

Dated: November 4, 2019

By:

/s/ ANDREW S. CHANG

 

 

Andrew S. Chang

 

 

Senior Managing Director and

Chief Financial Officer

 

83