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PennyMac Financial Services, Inc. - Quarter Report: 2019 March (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 March 31, 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)

 


 

 

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 ☒

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 per value

 

PFSI

 

New York Stock Exchange

 

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 May 3, 2019

Common Stock, $0.0001 par value

 

78,334,037

 

 

 

 

 


 

Table of Contents

 

PENNYMAC FINANCIAL SERVICES, INC.

 

FORM 10-Q

March 31, 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

8

 

Notes to Consolidated Financial Statements

9

Item 2. 

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

54

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

70

Item 4. 

Controls and Procedures

71

 

 

 

PART II. OTHER INFORMATION 

72

 

 

 

Item 1. 

Legal Proceedings

72

Item 1A. 

Risk Factors

72

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

72

Item 3. 

Defaults Upon Senior Securities

72

Item 4. 

Mine Safety Disclosures

72

Item 5. 

Other Information

73

Item 6. 

Exhibits

73

 

 

 

2


 

Table of Contents

 

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


 

Table of Contents

 

·

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)

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

    

2019

    

2018

 

 

(in thousands, except share amounts)

ASSETS

 

 

 

 

 

 

Cash (includes $93,372 and $108,174 pledged to creditors)

 

 $

144,266

 

 $

155,289

Short-term investments at fair value

 

 

149,372

 

 

117,824

Mortgage loans held for sale at fair value (includes $2,639,669 and $2,478,858 pledged to creditors)

 

 

2,668,929

 

 

2,521,647

Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors

 

 

125,929

 

 

131,025

Derivative assets

 

 

121,153

 

 

96,347

Servicing advances, net (includes valuation allowance of $65,696 and $70,582; $147,435 and $162,895 pledged to creditors)

 

 

284,230

 

 

313,197

Mortgage servicing rights at fair value (includes $2,675,704 and $2,807,333 pledged to creditors)

 

 

2,905,090

 

 

2,820,612

Real estate acquired in settlement of loans

 

 

1,690

 

 

2,250

Operating lease right-of-use assets

 

 

56,239

 

 

 —

Furniture, fixtures, equipment and building improvements, net (includes $15,254 and $16,281 pledged to creditors)

 

 

33,423

 

 

33,374

Capitalized software, net (includes $940 and $1,017 pledged to creditors)

 

 

45,416

 

 

39,748

Investment in PennyMac Mortgage Investment Trust at fair value

 

 

1,553

 

 

1,397

Receivable from PennyMac Mortgage Investment Trust

 

 

29,951

 

 

33,464

Mortgage loans eligible for repurchase

 

 

1,094,702

 

 

1,102,840

Other 

 

 

157,057

 

 

109,559

Total assets

 

 $

7,819,000

 

 $

7,478,573

LIABILITIES

 

 

 

 

 

 

Assets sold under agreements to repurchase 

 

 $

2,151,938

 

 $

1,933,859

Mortgage loan participation purchase and sale agreements

 

 

547,879

 

 

532,251

Notes payable

 

 

1,292,736

 

 

1,292,291

Obligations under capital lease

 

 

5,091

 

 

6,605

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

 

 

205,081

 

 

216,110

Derivative liabilities

 

 

17,838

 

 

3,064

Operating lease liabilities

 

 

76,373

 

 

 —

Accounts payable and accrued expenses

 

 

162,677

 

 

156,212

Mortgage servicing liabilities at fair value

 

 

7,844

 

 

8,681

Payable to PennyMac Mortgage Investment Trust 

 

 

76,494

 

 

104,631

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

 

 

46,537

 

 

46,537

Income taxes payable

 

 

414,636

 

 

400,546

Liability for mortgage loans eligible for repurchase

 

 

1,094,702

 

 

1,102,840

Liability for losses under representations and warranties  

 

 

17,982

 

 

21,155

Total liabilities

 

 

6,117,808

 

 

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, 78,317,843 and  77,494,332 shares, respectively

 

 

 8

 

 

 8

Additional paid-in capital

 

 

1,311,914

 

 

1,310,648

Retained earnings

 

 

389,270

 

 

343,135

Total stockholders' equity

 

 

1,701,192

 

 

1,653,791

Total liabilities and stockholders’ equity

 

 $

7,819,000

 

 $

7,478,573

 

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

5


 

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

 

2019

 

2018

 

 

(in thousands, except earnings per share)

Revenues

 

 

 

 

 

 

Net mortgage loan servicing fees:

 

 

 

 

 

 

Mortgage loan servicing fees:

 

 

 

 

 

 

From non-affiliates

 

$

166,790

 

$

135,483

From PennyMac Mortgage Investment Trust

 

 

10,570

 

 

11,019

Ancillary and other fees

 

 

22,017

 

 

14,171

 

 

 

199,377

 

 

160,673

Change in fair value of mortgage servicing rights and mortgage servicing liabilities

 

 

(122,857)

 

 

(36,963)

Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust

 

 

4,051

 

 

(6,921)

 

 

 

(118,806)

 

 

(43,884)

Net mortgage loan servicing fees

 

 

80,571

 

 

116,789

Net gains on mortgage loans held for sale at fair value:

 

 

 

 

 

 

From non-affiliates

 

 

58,753

 

 

59,028

From PennyMac Mortgage Investment Trust

 

 

26,023

 

 

12,386

 

 

 

84,776

 

 

71,414

Mortgage loan origination fees:

 

 

 

 

 

 

From non-affiliates

 

 

21,687

 

 

23,355

From PennyMac Mortgage Investment Trust

 

 

2,243

 

 

1,208

 

 

 

23,930

 

 

24,563

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

27,574

 

 

11,944

Net interest income:

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

From non-affiliates

 

 

56,537

 

 

40,639

From PennyMac Mortgage Investment Trust

 

 

1,796

 

 

1,976

 

 

 

58,333

 

 

42,615

Interest expense:

 

 

 

 

 

 

To non-affiliates

 

 

34,477

 

 

32,811

To PennyMac Mortgage Investment Trust

 

 

3,066

 

 

3,934

 

 

 

37,543

 

 

36,745

Net interest income

 

 

20,790

 

 

5,870

Management fees, net:

 

 

 

 

 

 

From PennyMac Mortgage Investment Trust

 

 

7,248

 

 

5,696

From Investment Funds

 

 

 —

 

 

79

 

 

 

7,248

 

 

5,775

Carried Interest from Investment Funds

 

 

 —

 

 

(180)

Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust

 

 

192

 

 

182

Results of real estate acquired in settlement of loans

 

 

274

 

 

(28)

Other

 

 

2,350

 

 

1,872

Total net revenues

 

 

247,705

 

 

238,201

Expenses

 

 

 

 

 

 

Compensation

 

 

106,600

 

 

102,013

Servicing

 

 

30,293

 

 

26,299

Technology

 

 

15,966

 

 

14,620

Loan origination

 

 

14,497

 

 

2,115

Occupancy and equipment

 

 

6,776

 

 

6,377

Professional services

 

 

5,881

 

 

5,738

Marketing

 

 

1,325

 

 

2,161

Other

 

 

6,076

 

 

5,882

Total expenses

 

 

187,414

 

 

165,205

Income before provision for income taxes

 

 

60,291

 

 

72,996

Provision for income taxes

 

 

14,156

 

 

6,070

Net income

 

 

46,135

 

 

66,926

Less: Net income attributable to noncontrolling interest

 

 

 —

 

 

50,307

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

 

$

46,135

 

$

16,619

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

Basic

 

$

0.59

 

$

0.70

Diluted

 

$

0.58

 

$

0.67

Weighted average shares outstanding

 

 

 

 

 

 

Basic

 

 

77,653

 

 

23,832

Diluted

 

 

79,286

 

 

79,461

 

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 March 31, 2019

 

 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Total

 

 

Number of

 

Par

 

paid-in

 

Retained

 

stockholders'

 

    

shares

    

value

    

capital

    

earnings

    

equity

 

 

(in thousands)

Balance at December 31, 2018

 

77,494

 

$

 8

 

$

1,310,648

 

$

343,135

 

$

1,653,791

Net income

 

 —

 

 

 —

 

 

 —

 

 

46,135

 

 

46,135

Stock-based compensation

 

820

 

 

 —

 

 

1,180

 

 

 —

 

 

1,180

Issuance of common stock in settlement of directors' fees

 

 4

 

 

 —

 

 

86

 

 

 —

 

 

86

Balance at March 31, 2019

 

78,318

 

$

 8

 

$

1,311,914

 

$

389,270

 

$

1,701,192

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 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 at 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 at January 1, 2018

 

23,530

 

 

 2

 

 

204,103

 

 

265,495

 

 

1,250,850

 

 

1,720,450

Net income

 

 —

 

 

 —

 

 

 —

 

 

16,619

 

 

50,307

 

 

66,926

Stock and unit-based compensation

 

 —

 

 

 —

 

 

5,191

 

 

 —

 

 

4,235

 

 

9,426

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

 

 —

 

 

 —

 

 

24

 

 

 —

 

 

55

 

 

79

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

 

748

 

 

 —

 

 

14,859

 

 

 —

 

 

(14,859)

 

 

 —

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.

 

 —

 

 

 —

 

 

(2,682)

 

 

 —

 

 

 —

 

 

(2,682)

Balance at March 31, 2018

 

24,278

 

$

 2

 

$

221,495

 

$

282,114

 

$

1,290,588

 

$

1,794,199

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Cash flow from operating activities

 

 

 

 

 

 

Net income

 

$

46,135

 

$

66,926

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

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

 

 

118,806

 

 

43,884

Net gains on mortgage loans held for sale at fair value

 

 

(84,776)

 

 

(71,414)

Capitalization of interest on mortgage loans held for sale at fair value

 

 

(16,487)

 

 

(14,467)

Accrual of interest on excess servicing spread financing

 

 

3,066

 

 

3,934

Amortization of net debt issuance (premiums) and costs

 

 

(6,570)

 

 

(3,600)

Carried Interest from Investment Funds

 

 

 —

 

 

180

Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust

 

 

(156)

 

 

(147)

Results of real estate acquired in settlement in loans

 

 

(274)

 

 

28

Stock-based compensation expense

 

 

4,531

 

 

6,171

Provision for servicing advance losses

 

 

4,820

 

 

6,787

Depreciation and amortization

 

 

3,159

 

 

2,592

Amortization of right-of-use assets

 

 

2,359

 

 

 —

Purchase of mortgage loans held for sale from PennyMac Mortgage Investment Trust

 

 

(6,959,389)

 

 

(9,212,188)

Originations of mortgage loans held for sale

 

 

(1,719,734)

 

 

(1,281,302)

Purchase of mortgage loans from Ginnie Mae securities and early buyout investors for modification and subsequent sale

 

 

(941,154)

 

 

(911,585)

Sale to non-affiliates and principal payments of mortgage loans held for sale

 

 

8,536,430

 

 

11,103,785

Sale of mortgage loans held for sale to PennyMac Mortgage Investment Trust

 

 

884,510

 

 

781,326

Repurchase of mortgage loans subject to representations and warranties

 

 

(4,064)

 

 

(6,309)

Settlement of repurchase agreement derivatives

 

 

11,436

 

 

 —

Decrease in servicing advances

 

 

24,087

 

 

27,450

Sale of real estate acquired in settlement of loans

 

 

2,075

 

 

1,230

Decrease (increase) in receivable from PennyMac Mortgage Investment Trust

 

 

2,775

 

 

(955)

(Increase) decrease in other assets

 

 

(38,676)

 

 

6,198

Decrease in operating lease liabilities

 

 

(2,977)

 

 

 —

Increase in accounts payable and accrued expenses

 

 

10,483

 

 

2,344

Decrease in payable to PennyMac Mortgage Investment Trust

 

 

(28,752)

 

 

(19,544)

Increase in income taxes payable

 

 

14,090

 

 

6,068

Net cash (used in) provided by operating activities

 

 

(134,247)

 

 

537,392

Cash flow from investing activities

 

 

 

 

 

 

(Increase) decrease in short-term investments

 

 

(31,548)

 

 

64,190

Net change in assets purchased from PMT under agreement to resell

 

 

5,096

 

 

1,190

Net settlement of derivative financial instruments used for hedging

 

 

125,695

 

 

(128,099)

Purchase of mortgage servicing rights

 

 

(211,481)

 

 

(27,544)

Purchase of furniture, fixtures, equipment and leasehold improvements

 

 

(2,126)

 

 

(2,779)

Acquisition of capitalized software

 

 

(6,750)

 

 

(3,722)

Decrease in margin deposits

 

 

28,343

 

 

15,501

Net cash used in investing activities

 

 

(92,771)

 

 

(81,263)

Cash flow from financing activities

 

 

 

 

 

 

Sale of assets under agreements to repurchase

 

 

8,382,013

 

 

9,771,234

Repurchase of assets sold under agreements to repurchase

 

 

(8,164,625)

 

 

(10,338,629)

Issuance of mortgage loan participation purchase and sale certificates

 

 

5,555,946

 

 

6,155,178

Repayment of mortgage loan participation purchase and sale certificates

 

 

(5,540,374)

 

 

(6,172,301)

Advances on notes payable

 

 

 —

 

 

650,000

Repayment of notes payable

 

 

 —

 

 

(400,000)

Repayment of obligations under capital lease

 

 

(1,514)

 

 

(4,536)

Repayment of excess servicing spread financing

 

 

(10,552)

 

 

(12,291)

Payment of debt issuance costs

 

 

(1,536)

 

 

(7,891)

Issuance of common stock pursuant to exercise of stock options

 

 

1,283

 

 

3,255

Payment of withholding taxes relating to stock-based compensation

 

 

(4,634)

 

 

 —

Net cash provided by (used in) financing activities

 

 

216,007

 

 

(355,981)

Net (decrease) increase in cash and restricted cash

 

 

(11,011)

 

 

100,148

Cash and restricted cash at beginning of quarter

 

 

155,924

 

 

38,173

Cash and restricted cash at end of quarter

 

$

144,913

 

$

138,321

Cash and restricted cash at end of quarter are comprised of the following:

 

 

 

 

 

 

Cash

 

$

144,266

 

$

137,863

Restricted cash included in Other assets

 

 

647

 

 

458

 

 

$

144,913

 

$

138,321

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, subject to the consent rights of other members under certain circumstances, 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 loan production and mortgage loan servicing. PennyMac’s investment management activities and a portion of its mortgage loan servicing activities are conducted on behalf of investment vehicles that invest in residential mortgage 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 (the “Private Fund”) (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 loans on behalf of non-affiliates and PMT, purchases, originates and sells new prime credit quality residential mortgage 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. As part of the Reorganization, the Company retained its officers and directors in their previously existing roles and assumed the predecessor holding company's stock-based compensation plan. The details of the Reorganization are more fully described in Note 1 – Organization to 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 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 the prior comparative period.

As part of its adoption of ASU 2016-02, the Company made the following accounting policy elections:

·

to retain its current 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 adoption of ASU 2016-02 did not have any effect on the Company’s consolidated statements of income, stockholder’s equity or cash flows.

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 commencement date to determine the present value of its lease payment obligations. The operating lease right-of-use assets also includes any lease payments made and is 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 along with the lease component 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 mortgage loan servicing fees, gains on mortgage loans held for sale, mortgage loan origination fees, fulfillment fees, change in fair value of excess servicing spread financing (“ESS”), net interest paid to these entities, management fees, and change in fair value of investment and dividend received from PMT) totaled 31% and 15% of total net revenue for the quarters ended March 31, 2019 and 2018, respectively.

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Table of Contents

 

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 March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Net gains (loss) on mortgage loans held for sale at fair value:

 

 

 

 

 

 

Net gains on mortgage loans held for sale to PMT

 

$

27,146

 

$

13,811

Mortgage servicing rights and excess servicing spread recapture incurred

 

 

(1,123)

 

 

(1,425)

 

 

$

26,023

 

$

12,386

Sale of mortgage loans held for sale to PMT

 

$

884,510

 

$

781,326

 

 

 

 

 

 

 

Fulfillment fee revenue

    

$

27,574

    

$

11,944

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

 

$

8,135,552

 

$

4,225,631

 

 

 

 

 

 

 

Sourcing fees paid to PMT

 

$

1,994

 

$

2,641

Unpaid principal balance of mortgage loans purchased from PMT

 

$

6,647,338

 

$

8,847,873

 

 

 

 

 

 

 

Tax service fees earned from PMT included in Mortgage loan origination fees

 

$

2,243

 

$

1,208

 

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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 mortgage 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 mortgage 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 mortgage 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 mortgage 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 mortgage 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 mortgage 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 mortgage 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 mortgage 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 mortgage loan is a fixed-rate or adjustable-rate loan. The base servicing fee rates are $7.50 per month and $8.50 per month for fixed-rate loans and adjustable-rate loans, respectively.

 

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 mortgage loan servicing fees earned from PMT:

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Mortgage loans acquired for sale at fair value

 

$

239

 

$

178

Mortgage loans at fair value

 

 

463

 

 

3,085

Mortgage servicing rights

 

 

9,868

 

 

7,756

 

 

$

10,570

 

$

11,019

Property management fees received from PMT included in Other income

 

$

123

 

$

99

 

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.

 

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.

 

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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 March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Base management

 

$

6,109

 

$

5,696

Performance incentive

 

 

1,139

 

 

 —

 

 

$

7,248

 

$

5,696

 

 

 

 

 

 

 

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.

 

The Company received reimbursements from PMT for expenses as follows:

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Reimbursement of:

    

 

                

    

 

                

Common overhead incurred by the Company included in Other revenue

 

$

1,236

 

$

1,001

Compensation included in Other revenue

 

 

120

 

 

120

Expenses incurred on PMT's behalf, net

 

 

570

 

 

573

 

 

$

1,926

 

$

1,694

Payments and settlements during the quarter (1)

 

$

15,189

 

$

7,658


(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.

 

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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 $75,000 in reimbursement of underwriting fees from PMT during the quarter ended March 31, 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.

 

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 March 31, 

 

    

2019

    

2018

 

 

(in thousands)

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

 

$

1,796

 

$

1,976

Common shares of beneficial interest of PennyMac Mortgage Investment Trust:

 

 

 

 

 

 

Dividends received

 

$

36

 

$

35

Change in fair value of investment

 

 

156

 

 

147

 

 

$

192

 

$

182

 

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Table of Contents

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2019

    

2018

 

 

(in thousands)

Assets purchased from PennyMac Mortgage Investment Trust under agreements to

 resell

 

$

125,929

 

$

131,025

Common shares of beneficial interest of PennyMac Mortgage Investment Trust:

 

 

 

 

 

 

Fair value

 

$

1,553

 

$

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 acquired, 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 equivalent 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 equivalent 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.

 

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

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

 

    

2019

    

2018

 

 

 

(in thousands)

 

Excess servicing spread financing:

 

 

 

 

 

 

 

Issuance pursuant to recapture agreement

 

$

508

 

$

904

 

Repayment

 

$

10,552

 

$

12,291

 

Gain (loss) recognized

 

$

4,051

 

$

(6,921)

 

Interest expense

 

$

3,066

 

$

3,934

 

Recapture incurred pursuant to refinancings by the Company of mortgage loans subject to excess servicing spread financing included in Net gains on mortgage loans held for sale at fair value

 

$

489

 

$

830

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

 

 

(in thousands)

 

Excess servicing spread financing at fair value

 

$

205,081

 

$

216,110

 

 

16


 

Table of Contents

Receivable from and Payable to PMT

 

Amounts receivable from and payable to PMT are summarized below:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2019

    

2018

 

 

(in thousands)

Receivable from PMT:

 

 

 

 

 

 

Fulfillment fees

 

$

11,744

 

$

10,006

Management fees

 

 

7,238

 

 

6,559

Servicing fees

 

 

4,350

 

 

4,841

Allocated expenses and expenses incurred on PMT's behalf

 

 

3,907

 

 

9,066

Correspondent production fees

 

 

1,852

 

 

2,071

Conditional Reimbursement

 

 

726

 

 

801

Interest on assets purchased under agreements to resell

 

 

134

 

 

120

 

 

$

29,951

 

$

33,464

Payable to PMT:

 

 

 

 

 

 

Deposits made by PMT to fund servicing advances

 

$

73,149

 

$

100,554

Mortgage servicing rights recapture payable

 

 

160

 

 

179

Other

 

 

3,185

 

 

3,898

 

 

$

76,494

 

$

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 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 Company’s reorganization in 2018 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, if any, 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.

 

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 March 31, 2019 and December 31, 2018. The Company did not make any payments under the tax receivable agreement during the quarters ended March 31, 2019 and 2018.

 

 

 .

17


 

Table of Contents

Note 5—Loan Sales and Servicing Activities

 

The Company originates or purchases and sells mortgage loans in the secondary mortgage market without recourse for credit losses. However, the Company maintains continuing involvement with the mortgage loans in the form of servicing arrangements and the liability under representations and warranties it makes to purchasers and insurers of the mortgage loans.

 

The following table summarizes cash flows between the Company and transferees as a result of the sale of mortgage loans in transactions where the Company maintains continuing involvement with the mortgage loans as servicer:

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Cash flows:

   

 

 

   

 

 

Sales proceeds

 

$

8,536,430

 

$

11,103,785

Servicing fees received (1)

 

$

137,148

 

$

113,091

Net servicing recoveries

 

$

(24,176)

 

$

(10,637)


(1)

Net of guarantee fees paid to the Agencies.

 

The following table summarizes unpaid principal balance (the “UPB”) of the mortgage loans sold by the Company in which it maintains continuing involvement:

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31,

 

 

    

2019

   

2018

 

 

 

(in thousands)

 

Unpaid principal balance of mortgage loans outstanding

 

$

148,795,055

 

$

145,224,596

 

Delinquencies:

 

 

 

 

 

 

 

30-89 days

 

$

5,489,000

 

$

6,222,864

 

90 days or more:

 

 

 

 

 

 

 

Not in foreclosure

 

$

2,085,034

 

$

2,208,083

 

In foreclosure

 

$

710,297

 

$

720,894

 

Foreclosed

 

$

24,875

 

$

24,243

 

Bankruptcy

 

$

1,053,399

 

$

970,329

 

 

 

18


 

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

 

Contract

 

Total

 

 

Servicing

 

 servicing and

 

mortgage

 

    

rights owned

    

subservicing

    

loans serviced

 

 

(in thousands)

Investor:

 

 

 

 

 

 

 

 

 

Non-affiliated entities:

    

 

 

 

 

 

 

 

 

Originated

 

$

148,795,055

    

$

 —

    

$

148,795,055

Purchased

 

 

72,039,709

 

 

 —

 

 

72,039,709

 

 

 

220,834,764

 

 

 —

 

 

220,834,764

PennyMac Mortgage Investment Trust

 

 

 —

 

 

101,287,428

 

 

101,287,428

Mortgage loans held for sale

 

 

2,573,121

 

 

 —

 

 

2,573,121

 

 

$

223,407,885

 

$

101,287,428

 

$

324,695,313

Subserviced for the Company (1)

 

$

16,270,233

 

$

 —

 

$

16,270,233

Delinquent mortgage loans:

 

 

 

 

 

 

 

 

 

30 days

 

$

6,244,534

 

$

479,185

 

$

6,723,719

60 days

 

 

1,781,121

 

 

111,089

 

 

1,892,210

90 days or more:

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

3,100,186

 

 

223,231

 

 

3,323,417

In foreclosure

 

 

1,094,892

 

 

115,637

 

 

1,210,529

Foreclosed

 

 

35,354

 

 

157,762

 

 

193,116

 

 

$

12,256,087

 

$

1,086,904

 

$

13,342,991

Bankruptcy

 

$

1,521,842

 

$

118,609

 

$

1,640,451

Custodial funds managed by the Company (2)

 

$

3,851,327

 

$

1,384,404

 

$

5,235,731


(1)

Certain of the mortgage loans for which the Company has purchased the MSRs are subserviced on the Company’s behalf by other mortgage 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 mortgage 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 mortgage loans’ borrowers and investors, which are included in Interest income in the Company’s consolidated statements of income.

 

 

19


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

Contract

 

Total

 

 

Servicing

 

servicing and

 

mortgage

 

    

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

Mortgage 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 mortgage 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 mortgage loans for which the Company has purchased the MSRs are subserviced on the Company’s behalf by other mortgage 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 mortgage 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 mortgage 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 mortgage loans included in the Company’s mortgage loan servicing portfolio for the top five and all other states as measured by UPB:

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

State

    

2019

    

2018

 

 

 

(in thousands)

 

California

 

$

54,790,956

 

$

51,377,441

 

Florida

 

 

25,043,416

 

 

22,650,926

 

Texas

 

 

24,957,664

 

 

23,648,042

 

Virginia

 

 

19,845,177

 

 

19,011,950

 

Maryland

 

 

14,748,291

 

 

13,774,011

 

All other states

 

 

185,309,809

 

 

168,831,502

 

 

 

$

324,695,313

 

$

299,293,872

 

 

 

 

20


 

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. Management has also identified its ESS financing to be accounted for at fair value as a means of hedging the related MSRs’ fair value risk.

 

21


 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

(in thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

149,372

 

$

 —

 

$

 —

 

$

149,372

Mortgage loans held for sale at fair value

 

 

 —

 

 

2,213,396

 

 

455,533

 

 

2,668,929

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

 —

 

 

 —

 

 

68,248

 

 

68,248

Repurchase agreement derivatives

 

 

 —

 

 

 —

 

 

24,632

 

 

24,632

Forward purchase contracts

 

 

 —

 

 

61,932

 

 

 —

 

 

61,932

Forward sales contracts

 

 

 —

 

 

1,215

 

 

 —

 

 

1,215

MBS put options

 

 

 —

 

 

6,287

 

 

 —

 

 

6,287

MBS call options

 

 

 —

 

 

6,251

 

 

 —

 

 

6,251

Put options on interest rate futures purchase contracts

 

 

2,639

 

 

 —

 

 

 —

 

 

2,639

Call options on interest rate futures purchase contracts

 

 

14,078

 

 

 —

 

 

 —

 

 

14,078

Total derivative assets before netting

 

 

16,717

 

 

75,685

 

 

92,880

 

 

185,282

Netting

 

 

 —

 

 

 —

 

 

 —

 

 

(64,129)

Total derivative assets

 

 

16,717

 

 

75,685

 

 

92,880

 

 

121,153

Investment in PennyMac Mortgage Investment Trust

 

 

1,553

 

 

 —

 

 

 —

 

 

1,553

Mortgage servicing rights at fair value

 

 

 —

 

 

 —

 

 

2,905,090

 

 

2,905,090

 

 

$

167,642

 

$

2,289,081

 

$

3,453,503

 

$

5,846,097

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 —

 

$

 —

 

$

205,081

 

$

205,081

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

 —

 

 

 —

 

 

2,183

 

 

2,183

Forward purchase contracts

 

 

 —

 

 

3,170

 

 

 —

 

 

3,170

Forward sales contracts

 

 

 —

 

 

25,962

 

 

 —

 

 

25,962

Total derivative liabilities before netting

 

 

 —

 

 

29,132

 

 

2,183

 

 

31,315

Netting

 

 

 —

 

 

 —

 

 

 —

 

 

(13,477)

Total derivative liabilities

 

 

 —

 

 

29,132

 

 

2,183

 

 

17,838

Mortgage servicing liabilities at fair value

 

 

 —

 

 

 —

 

 

7,844

 

 

7,844

 

 

$

 —

 

$

29,132

 

$

215,108

 

$

230,763

 

22


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

 

(in thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

117,824

 

$

 —

 

$

 —

 

$

117,824

Mortgage 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

Investment in PennyMac Mortgage Investment Trust

 

 

1,397

 

 

 —

 

 

 —

 

 

1,397

Mortgage servicing rights at fair value

 

 

 —

 

 

 —

 

 

2,820,612

 

 

2,820,612

 

 

$

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

 

23


 

Table of Contents

As shown above, all or a portion of the Company’s mortgage 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 rollforwards of these items for each of the quarters ended March 31, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 2019

 

 

 

Mortgage

 

Net interest 

 

Repurchase

 

Mortgage 

 

 

 

 

 

 

loans held

 

rate lock

 

agreement

 

servicing 

 

 

 

 

 

 

for sale

 

commitments (1)

 

derivatives

 

rights

 

 

Total

 

 

    

(in thousands)

 

Assets:

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance, December 31, 2018

 

$

260,008

 

$

49,338

 

$

26,770

 

$

2,820,612

 

$

3,156,728

 

Purchases and issuances, net

 

 

784,262

 

 

56,983

 

 

9,855

 

 

227,772

 

 

1,078,872

 

Sales and repayments

 

 

(176,302)

 

 

 —

 

 

(11,436)

 

 

 —

 

 

(187,738)

 

Mortgage servicing rights resulting from mortgage loan sales

 

 

 —

 

 

 —

 

 

 —

 

 

115,751

 

 

115,751

 

Changes in fair value included in income arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument-specific credit risk

 

 

(6,091)

 

 

 —

 

 

 —

 

 

 —

 

 

(6,091)

 

Other factors

 

 

 —

 

 

59,978

 

 

(557)

 

 

(259,045)

 

 

(199,624)

 

 

 

 

(6,091)

 

 

59,978

 

 

(557)

 

 

(259,045)

 

 

(205,715)

 

Transfers from Level 3 to Level 2

 

 

(405,163)

 

 

 —

 

 

 —

 

 

 —

 

 

(405,163)

 

Transfers to real estate acquired in settlement of loans

 

 

(1,181)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,181)

 

Transfers of interest rate lock commitments to mortgage loans held for sale

 

 

 —

 

 

(100,234)

 

 

 —

 

 

 —

 

 

(100,234)

 

Balance, March 31, 2019

 

$

455,533

 

$

66,065

 

$

24,632

 

$

2,905,090

 

$

3,451,320

 

Changes in fair value recognized during the quarter relating to assets still held at March 31, 2019

 

$

(3,540)

 

$

66,065

 

$

 —

 

$

(259,045)

 

$

(196,520)

 


(1)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 2019

 

 

Excess

 

 

 

 

 

 

 

servicing

 

Mortgage

 

 

 

 

 

spread

 

servicing

 

 

 

 

 

financing

 

liabilities

 

Total

 

 

(in thousands)

Liabilities:

 

 

 

 

 

 

 

 

 

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

 

 

508

 

 

 —

 

 

508

Accrual of interest

 

 

3,066

 

 

 —

 

 

3,066

Repayments

 

 

(10,552)

 

 

 —

 

 

(10,552)

Mortgage servicing liabilities resulting from mortgage loan sales

 

 

 —

 

 

794

 

 

794

Changes in fair value included in income

 

 

(4,051)

 

 

(1,631)

 

 

(5,682)

Balance, March 31, 2019

 

$

205,081

 

$

7,844

 

$

212,925

Changes in fair value recognized during the quarter relating to liabilities still outstanding at March 31, 2019

 

$

(4,051)

 

$

(1,631)

 

$

(5,682)

 

24


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 2018

 

 

Mortgage

 

Net interest 

 

Repurchase

 

Mortgage

 

 

 

 

 

loans held

 

rate lock

 

agreement

 

servicing

 

 

 

 

    

for sale

    

commitments (1)

    

derivatives

    

rights

    

Total

 

 

(in thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

647,269

 

 

65,598

 

 

10,751

 

 

27,606

 

 

751,224

Sales and repayments

 

 

(604,094)

 

 

 —

 

 

(7)

 

 

 —

 

 

(604,101)

Mortgage servicing rights resulting from mortgage loan sales

 

 

 —

 

 

 —

 

 

 —

 

 

143,910

 

 

143,910

Changes in fair value included in income arising from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in instrument-specific credit risk

 

 

(8,755)

 

 

 —

 

 

 —

 

 

 —

 

 

(8,755)

Other factors

 

 

 —

 

 

(44,913)

 

 

(426)

 

 

62,537

 

 

17,198

 

 

 

(8,755)

 

 

(44,913)

 

 

(426)

 

 

62,537

 

 

8,443

Transfers from Level 3 to Level 2

 

 

 (356,232)

 

 

 —

 

 

 —

 

 

 —

 

 

(356,232)

Transfers of interest rate lock commitments to mortgage loans held for sale

 

 

 —

 

 

(28,061)

 

 

 —

 

 

 —

 

 

(28,061)

Balance, March 31, 2018

 

$

460,399

 

$

50,896

 

$

20,974

 

$

2,354,489

 

$

2,886,758

Changes in fair value recognized during the quarter relating to assets still held at March 31, 2018

 

$

(7,598)

 

$

50,896

 

$

(77)

 

$

62,537

 

$

105,758


(1)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 2018

 

 

Excess

 

 

 

 

 

 

 

 

servicing

 

Mortgage 

 

 

 

 

 

spread

 

servicing

 

 

 

 

    

financing

    

liabilities

    

Total

 

 

(in thousands)

Liabilities:

 

 

 

 

 

 

 

 

 

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

 

 

904

 

 

 —

 

 

904

Accrual of interest

 

 

3,934

 

 

 —

 

 

3,934

Repayments

 

 

(12,291)

 

 

 —

 

 

(12,291)

Mortgage servicing liabilities resulting from mortgage loan sales

 

 

 —

 

 

2,037

 

 

2,037

Changes in fair value included in income

 

 

6,921

 

 

(4,094)

 

 

2,827

Balance, March 31, 2018

 

$

236,002

 

$

12,063

 

$

248,065

Changes in fair value recognized during the quarter relating to liabilities still outstanding at March 31, 2018

 

$

6,921

 

$

(4,094)

 

$

2,827

 

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 quarters presented. The Company had transfers among the fair value levels arising from transfers of IRLCs to mortgage loans held for sale at fair value upon purchase or funding of the respective mortgage loans and from the return to salability in the active secondary market of certain mortgage loans held for sale.

 

25


 

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 March 31, 

 

 

2019

 

2018

 

 

    

Net

   

Net gains on 

   

 

 

   

Net

 

Net gains on 

   

 

 

 

 

 

mortgage

 

mortgage

 

 

 

 

mortgage

 

mortgage

 

 

 

 

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale 

 

$

 —

 

$

101,995

 

$

101,995

 

$

 —

 

$

(6,118)

 

$

(6,118)

 

Mortgage servicing rights

 

 

(259,045)

 

 

 —

 

 

(259,045)

 

 

62,537

 

 

 —

 

 

62,537

 

 

 

$

(259,045)

 

$

101,995

 

$

(157,050)

 

$

62,537

 

$

(6,118)

 

$

56,419

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

4,051

 

$

 —

 

$

4,051

 

$

(6,921)

 

$

 —

 

$

(6,921)

 

Mortgage servicing liabilities

 

 

1,631

 

 

 —

 

 

1,631

 

 

4,094

 

 

 —

 

 

4,094

 

 

 

$

5,682

 

$

 —

 

$

5,682

 

$

(2,827)

 

$

 —

 

$

(2,827)

 

 

 

Following are the fair value and related principal amounts due upon maturity of assets accounted for under the fair value option:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

December 31, 2018

 

 

 

 

Principal

 

 

 

 

 

Principal

 

 

 

 

 

 

amount

 

 

 

 

 

amount

 

 

 

 

Fair

 

 due upon 

 

 

 

Fair

 

 due upon 

 

 

 

    

value

    

maturity

    

Difference

    

value

    

maturity

    

Difference

 

 

(in thousands)

Mortgage loans held for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current through 89 days delinquent

 

$

2,357,344

 

$

2,252,816

 

$

104,528

 

$

2,324,203

 

$

2,220,371

 

$

103,832

90 days or more delinquent:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not in foreclosure

 

 

235,957

 

 

240,728

 

 

(4,771)

 

 

143,631

 

 

144,011

 

 

(380)

In foreclosure

 

 

75,628

 

 

79,577

 

 

(3,949)

 

 

53,813

 

 

56,254

 

 

(2,441)

 

 

$

2,668,929

 

$

2,573,121

 

$

95,808

 

$

2,521,647

 

$

2,420,636

 

$

101,011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets Measured at Fair Value on a Nonrecurring Basis

 

Following is a summary of assets and liabilities 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)

March 31, 2019

 

$

 —

 

$

 —

 

$

719

 

$

719

December 31, 2018

 

$

 —

 

$

 —

 

$

2,150

 

$

2,150

 

 

 

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

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Real estate acquired in settlement of loans

 

$

21

 

$

27

 

 

 

 

 

 

 

26


 

Table of Contents

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 these their fair values. The Company has concluded that the fair values of these assets and liabilities other than the Term Notes approximate their carrying values due to their short terms and/or variable interest rates. The fair value of the Term Notes at March 31, 2019 was $1.3 billion and was based on non-affiliate broker indications of value. The fair value of Term Notes at December 31, 2018 was $1.3 billion, and was estimated using a discounted cash flow approach using indications of market pricing spreads provided by non-affiliated brokers to develop an appropriate discount rate.

 

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 require the use 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, management has assigned the responsibility for estimating the fair value of these items to specialized staff and subjects the valuation process to significant senior management oversight. The Company’s Financial Analysis and Valuation group (the “FAV group”) is the Company’s specialized staff responsible for estimating the fair values of “Level 3” fair value assets and liabilities other than IRLCs.

 

With respect to the non-IRLC “Level 3” valuations, the FAV group reports to the Company’s senior management valuation committee, which oversees the valuations. The FAV group monitors the models used for valuation of the Company’s “Level 3” fair value assets and liabilities, including the models’ performance versus actual results, and reports those results to the Company’s senior management valuation committee. The Company’s senior management valuation committee includes the Company’s executive chairman, chief executive, chief financial, chief risk and deputy chief financial officers.

 

The FAV group is responsible for reporting to the Company’s senior management valuation committee on the changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the valuation and any changes in model methods and inputs. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation of changes to the significant inputs to the models.

 

The Company has assigned responsibility for developing the fair values of IRLCs to its Capital Markets Risk Management staff. The fair values developed by the Capital Markets Risk Management staff are reviewed by the Company’s Capital Markets Operations group.

 

Valuation Techniques and Inputs

 

Following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” fair value assets and liabilities:

 

Mortgage Loans Held for Sale

 

Most of the Company’s mortgage 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 mortgage loans are determined using their quoted market or contracted selling price or market price equivalent.

 

27


 

Table of Contents

Certain of the Company’s mortgage loans held for sale are not saleable into active markets and are therefore categorized as “Level 3” fair value assets. Mortgage loans held for sale categorized as “Level 3” fair value assets include:

 

·

Certain delinquent government guaranteed or insured mortgage loans purchased by the Company from Ginnie Mae guaranteed pools in its mortgage loan servicing portfolio. The Company’s right to purchase delinquent government guaranteed or insured mortgage 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 mortgage loans may be resold to investors and thereafter may be repurchased to the extent eligible for resale into a new Ginnie Mae guaranteed pool. Such eligibility occurs when when the repurchased mortgage loans become current either through the borrower’s reperformance or through completion of a modification of the mortgage loan’s terms.

 

·

Certain of the Company’s mortgage loans held for sale that are non-saleable into active markets due to identification of a defect by the Company or to the repurchase by the Company of a mortgage loan with an identified defect.

 

The Company uses a discounted cash flow model to estimate the fair value of its “Level 3” fair value mortgage loans held for sale. The significant unobservable inputs used in the fair value measurement of the Company’s “Level 3” fair value mortgage 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 mortgage loans’ fair value measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment speeds.

 

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

 

 

 

 

 

 

 

 

 

 

Key inputs (1)

    

March 31, 2019

    

December 31, 2018

Discount rate:

 

 

 

 

Range

 

3.1% – 9.2%

 

2.8% – 9.2%

Weighted average

 

3.1%

 

2.9%

Twelve-month projected housing price index change:

 

 

 

 

Range

 

3.0% – 4.8%

 

2.2% – 5.0%

Weighted average

 

3.3%

 

3.5%

Voluntary prepayment / resale speed (2):

 

 

 

 

Range

 

0.1% – 24.3%

 

0.1% – 21.8%

Weighted average

 

22.0%

 

20.1%

Total prepayment speed (3):

 

 

 

 

Range

 

0.1% – 42.0%

 

0.1% – 40.5%

Weighted average

 

39.2%

 

37.7%


(1)

Weighted average inputs are based on the fair value of mortgage 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 mortgage loan’s delinquency status and performance history at quarter end from the later of the beginning of the quarter or acquisition date. Changes in fair value of mortgage loans held for sale are included in Net gains on mortgage loans held for sale at fair value in the Company’s consolidated statements of income.

 

28


 

Table of Contents

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 mortgage loans and the probability that the mortgage loan will fund or be 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 mortgage 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 mortgage 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 mortgage loans acquired for sale at fair value and may be allocated to Net mortgage 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.

 

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

 

 

 

 

 

 

 

 

 

 

 

Key inputs (1)

    

March 31, 2019

    

December 31, 2018

Pull-through rate:

 

 

 

 

Range

 

12.2% – 100%

 

16.6% – 100%

Weighted average

 

82.8%

 

84.1%

Mortgage servicing rights value expressed as:

 

 

 

 

Servicing fee multiple:

 

 

 

 

Range

 

1.1 – 5.7

 

1.5 – 5.5

Weighted average

 

3.8

 

3.8

Percentage of unpaid principal balance:

 

 

 

 

Range

 

0.3% – 2.7%

 

0.4% – 3.2%

Weighted average

 

1.5%

 

1.5%


(1)

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 mortgage 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. 

 

29


 

Table of Contents

Repurchase Agreement Derivatives

 

The Company has a master repurchase agreement that includes 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 accounting purposes from the master repurchase agreement. The Company classifies these derivatives as “Level 3” fair value assets. The significant unobservable inputs into the valuation of these 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 was 97% at March 31, 2019 and December 31, 2018.

 

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 and default rates of the underlying mortgage loans, and annual per-loan cost to service mortgage 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 mortgage loan servicing feesChange in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.  

 

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

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

 

2019

 

2018

 

 

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

MSR and pool characteristics:

 

 

 

    

 

 

Amount recognized

 

$

115,751

 

$

143,910

Unpaid principal balance of underlying mortgage loans

 

$

8,145,850

 

$

10,162,316

Weighted average servicing fee rate (in basis points)

 

 

39

 

 

35

Key inputs (1):

 

 

 

 

 

 

Pricing spread (2) 

 

 

 

 

 

 

Range

 

 

5.8% – 15.6%

 

 

7.4% – 14.1%

Weighted average

 

 

8.9%

 

 

10.3%

Annual total prepayment speed (3) 

 

 

 

 

 

 

Range

 

 

5.8% – 73.0%

 

 

3.9% – 49.0%

Weighted average

 

 

15.3%

 

 

8.9%

Life (in years)

 

 

 

 

 

 

Range

 

 

0.8 – 10.2

 

 

1.1 – 11.6

Weighted average

 

 

5.8

 

 

8.2

Per-loan annual cost of servicing

 

 

 

 

 

 

Range

 

 

$78 – $100

 

 

$78 – $98

Weighted average

 

 

$95

 

 

$89


(1)

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

 

 

30


 

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:

 

 

 

 

 

 

 

 

March 31, 2019

 

December 31, 2018

 

 

(Carrying value, unpaid principal balance of underlying 

 

 

mortgage loans and effect on fair value amounts in thousands)

MSR and pool characteristics:

 

 

 

 

Carrying value

 

$2,905,090

 

$2,820,612

Unpaid principal balance of underlying mortgage loans

 

$219,834,361

 

$201,054,144

Weighted average note interest rate

 

4.0%

 

4.0%

Weighted average servicing fee rate (in basis points)

 

33

 

33

Key inputs (1):

 

 

 

 

Pricing spread (2):

 

 

 

 

Range

 

6.0% – 15.8%

 

5.8% – 16.1%

Weighted average

 

8.7%

 

8.7%

Effect on fair value of:

 

 

 

 

5% adverse change

 

($45,330)

 

($45,268)

10% adverse change

 

($89,217)

 

($89,073)

20% adverse change

 

($172,915)

 

($172,556)

Prepayment speed (3):

 

 

 

 

Range

 

9.0% – 33.5%

 

8.4% – 32.6%

Weighted average

 

11.4%

 

9.9%

Average life (in years):

 

 

 

 

Range

 

1.5 – 7.6

 

1.5 – 7.9

Weighted average

 

6.6

 

7.2

Effect on fair value of:

 

 

 

 

5% adverse change

 

($54,920)

 

($47,687)

10% adverse change

 

($107,628)

 

($93,626)

20% adverse change

 

($206,907)

 

($180,623)

Annual per-loan cost of servicing:

 

 

 

 

Range

 

$78 – $100

 

$78 – $99

Weighted average

 

$97

 

$93

Effect on fair value of:

 

 

 

 

5% adverse change

 

($24,494)

 

($22,944)

10% adverse change

 

($49,004)

 

($45,888)

20% adverse change

 

($98,024)

 

($91,775)


(1)

Weighted average inputs are based on the UPB of the underlying mortgage 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 mortgage 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 mortgage loans underlying the ESS, thereby increasing its fair value. Changes in the fair value of ESS are included in Net mortgage loan servicing fees—Change in fair value of excess servicing spread payable to PennyMac Mortgage Investment Trust.

 

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

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2019

   

2018

Carrying value (in thousands)

 

$205,081

 

$216,110

ESS and pool characteristics:

 

 

 

 

Unpaid principal balance of underlying mortgage loans (in thousands)

 

$22,664,211

 

$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

 

8.5% – 29.9%

 

8.2% – 29.5%

Weighted average

 

10.4%

 

9.7%

Average life (in years):

 

 

 

 

Range

 

1.5 – 7.4

 

1.6 – 7.6

Weighted average

 

6.5

 

6.8


(1)

Weighted average inputs are based on the UPB of the underlying mortgage 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 management 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 mortgage loans, and the per-loan annual cost to service the respective mortgage 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.

 

 

32


 

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

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

December 31, 

 

 

 

2019

 

 

2018

MSL and pool characteristics:

 

 

 

 

    

 

Carrying value (in thousands)

 

$

7,844

 

$

8,681

Unpaid principal balance of underlying mortgage loans (in thousands)

 

$

1,000,403

 

$

1,160,938

Servicing fee rate (in basis points)

 

 

25

 

 

25

Key inputs:

 

 

 

 

 

 

Pricing spread (1)

 

 

7.4%

 

 

7.3%

Prepayment speed (2) 

 

 

32.6%

 

 

32.2%

Average life (in years)

 

 

3.6

 

 

3.8

Annual per-loan cost of servicing

 

$

364

 

$

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—Mortgage Loans Held for Sale at Fair Value

 

Mortgage loans held for sale at fair value include the following:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2019

    

2018

 

 

(in thousands)

Government-insured or guaranteed

 

$

2,083,470

 

$

2,116,126

Conventional conforming

 

 

129,926

 

 

145,513

Home equity lines of credit

 

 

86

 

 

 —

Purchased from Ginnie Mae pools serviced by the Company

 

 

446,290

 

 

250,585

Repurchased pursuant to representations and warranties

 

 

9,157

 

 

9,423

 

 

$

2,668,929

 

$

2,521,647

Fair value of mortgage loans pledged to secure:

 

 

 

 

 

 

Assets sold under agreements to repurchase

 

$

2,065,151

 

$

1,923,857

Mortgage loan participation purchase and sale agreements

 

 

574,518

 

 

555,001

 

 

$

2,639,669

 

$

2,478,858

 

 

 

Note 8—Derivative Activities

 

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 the Company also 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 acquired 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 mortgage loans held for sale and the portion of its MSRs not financed with ESS.

 

33


 

Table of Contents

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

December 31, 2018

 

 

 

 

Fair value

 

 

 

Fair value

 

 

Notional

 

Derivative

 

Derivative

 

Notional

 

Derivative

 

Derivative

Instrument

    

amount

    

assets

    

liabilities

    

amount

    

assets

    

liabilities

 

 

(in thousands)

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not subject to master netting arrangements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

3,821,942

 

$

68,248

 

$

2,183

 

2,805,400

 

$

50,507

 

$

1,169

Repurchase agreement derivatives

 

 

 

 

24,632

 

 

 —

 

 

 

 

26,770

 

 

 —

Used for hedging purposes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward purchase contracts

 

9,313,389

 

 

61,932

 

 

3,170

 

6,657,026

 

 

35,916

 

 

215

Forward sales contracts

 

7,583,005

 

 

1,215

 

 

25,962

 

6,890,046

 

 

437

 

 

26,762

MBS put options

 

9,425,000

 

 

6,287

 

 

 —

 

4,635,000

 

 

720

 

 

 —

MBS call options

 

3,350,000

 

 

6,251

 

 

 —

 

1,450,000

 

 

2,135

 

 

 —

Put options on interest rate futures purchase contracts

 

3,350,000

 

 

2,639

 

 

 —

 

3,085,000

 

 

866

 

 

 —

Call options on interest rate futures purchase contracts

 

2,250,000

 

 

14,078

 

 

 —

 

1,512,500

 

 

5,965

 

 

 —

Treasury futures purchase contracts

 

1,810,000

 

 

 —

 

 

 —

 

835,000

 

 

 —

 

 

 —

Treasury futures sale contracts

 

1,075,000

 

 

 —

 

 

 —

 

1,450,000

 

 

 —

 

 

 —

Interest rate swap futures purchase contracts

 

1,025,000

 

 

 —

 

 

 —

 

625,000

 

 

 —

 

 

 —

Total derivatives before netting

 

 

 

 

185,282

 

 

31,315

 

 

 

 

123,316

 

 

28,146

Netting

 

 

 

 

(64,129)

 

 

(13,477)

 

 

 

 

(26,969)

 

 

(25,082)

 

 

 

 

$

121,153

 

$

17,838

 

 

 

$

96,347

 

$

3,064

Deposits placed with derivative counterparties

 

 

 

$

50,652

 

 

 

 

 

 

$

1,887

 

 

 

 

 

The following table summarizes notional amount activity for derivative contracts used in the Company’s hedging activities:

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 2019

 

 

Notional

 

 

 

 

 

Notional

 

 

amount

 

 

 

 

 

amount

 

 

beginning of

 

 

 

Dispositions/

 

end of

Instrument

    

quarter

    

Additions

    

expirations

    

quarter

 

 

(in thousands)

Forward purchase contracts

 

6,657,026

 

52,621,845

 

(49,965,482)

 

9,313,389

Forward sale contracts

 

6,890,046

 

59,673,487

 

(58,980,528)

 

7,583,005

MBS put options

 

4,635,000

 

19,160,000

 

(14,370,000)

 

9,425,000

MBS call options

 

1,450,000

 

4,500,000

 

(2,600,000)

 

3,350,000

Put options on interest rate futures purchase contracts

 

3,085,000

 

6,675,000

 

(6,410,000)

 

3,350,000

Call options on interest rate futures purchase contracts

 

1,512,500

 

4,462,800

 

(3,725,300)

 

2,250,000

Put options on interest rate futures sale contracts

 

 —

 

10,135,300

 

(10,135,300)

 

 —

Treasury futures purchase contracts

 

835,000

 

4,111,200

 

(3,136,200)

 

1,810,000

Treasury futures sale contracts

 

1,450,000

 

2,761,200

 

(3,136,200)

 

1,075,000

Interest rate swap futures purchase contracts

 

625,000

 

400,000

 

 —

 

1,025,000

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 2018

 

 

Notional

 

 

 

 

 

Notional

 

 

amount

 

 

 

 

 

amount

 

 

beginning of

 

 

 

Dispositions/

 

end of

Instrument

    

quarter

    

Additions

    

expirations

    

quarter

 

 

(in thousands)

Forward purchase contracts

 

4,920,883

 

45,330,785

 

(43,707,885)

 

6,543,783

Forward sale contracts

 

5,204,796

 

56,355,552

 

(54,636,002)

 

6,924,346

MBS put options

 

4,925,000

 

4,500,000

 

(5,675,000)

 

3,750,000

MBS call options

 

 —

 

5,675,000

 

(5,675,000)

 

 —

Put options on interest rate futures purchase contracts

 

2,125,000

 

5,525,000

 

(4,850,000)

 

2,800,000

Call options on interest rate futures purchase contracts

 

100,000

 

375,000

 

(250,000)

 

225,000

Put options on interest rate futures sale contracts

 

 —

 

4,850,000

 

(4,850,000)

 

 —

Call options on interest rate futures sale contracts

 

 —

 

250,000

 

(250,000)

 

 —

Treasury futures purchase contracts

 

100,000

 

1,904,900

 

(1,494,900)

 

510,000

Treasury futures sale contracts

 

 —

 

3,406,200

 

(2,156,200)

 

1,250,000

Interest rate swap futures purchase contracts

 

1,400,000

 

465,000

 

(1,400,000)

 

465,000

Interest rate swap futures sale contracts

 

 —

 

1,400,000

 

(1,400,000)

 

 —

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 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

 

$

68,248

 

$

 —

 

$

68,248

 

$

50,507

 

$

 —

 

$

50,507

Repurchase agreement derivatives

 

 

24,632

 

 

 —

 

 

24,632

 

 

26,770

 

 

 —

 

 

26,770

 

 

 

92,880

 

 

 —

 

 

92,880

 

 

77,277

 

 

 —

 

 

77,277

Derivatives subject to master netting arrangements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward purchase contracts

 

 

61,932

 

 

 —

 

 

61,932

 

 

35,916

 

 

 —

 

 

35,916

Forward sale contracts

 

 

1,215

 

 

 —

 

 

1,215

 

 

437

 

 

 —

 

 

437

MBS put options

 

 

6,287

 

 

 —

 

 

6,287

 

 

720

 

 

 —

 

 

720

MBS call options

 

 

6,251

 

 

 —

 

 

6,251

 

 

2,135

 

 

 —

 

 

2,135

Put options on interest rate futures purchase contracts

 

 

2,639

 

 

 —

 

 

2,639

 

 

866

 

 

 —

 

 

866

Call options on interest rate futures purchase contracts

 

 

14,078

 

 

 —

 

 

14,078

 

 

5,965

 

 

 —

 

 

5,965

Netting

 

 

 

 

 

(64,129)

 

 

(64,129)

 

 

 —

 

 

(26,969)

 

 

(26,969)

 

 

 

92,402

 

 

(64,129)

 

 

28,273

 

 

46,039

 

 

(26,969)

 

 

19,070

 

 

$

185,282

 

$

(64,129)

 

$

121,153

 

$

123,316

 

$

(26,969)

 

$

96,347

 

35


 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 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

 

$

68,248

 

$

 —

 

$

 —

 

$

68,248

 

$

50,507

 

$

 —

 

$

 —

 

$

50,507

Deutsche Bank

 

 

24,632

 

 

 —

 

 

 —

 

 

24,632

 

 

26,770

 

 

 —

 

 

 —

 

 

26,770

RJ O'Brien

 

 

16,717

 

 

 —

 

 

 —

 

 

16,717

 

 

6,831

 

 

 —

 

 

 —

 

 

6,831

Bank of America, N.A.

 

 

4,052

 

 

 —

 

 

 —

 

 

4,052

 

 

2,781

 

 

 —

 

 

 —

 

 

2,781

JPMorgan Chase Bank, N.A.

 

 

3,494

 

 

 —

 

 

 —

 

 

3,494

 

 

1,399

 

 

 —

 

 

 —

 

 

1,399

Wells Fargo Bank, N.A.

 

 

2,275

 

 

 —

 

 

 —

 

 

2,275

 

 

3,707

 

 

 —

 

 

 —

 

 

3,707

Goldman Sachs

 

 

1,286

 

 

 —

 

 

 —

 

 

1,286

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Citibank, N.A.

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,488

 

 

 —

 

 

 —

 

 

2,488

Others

 

 

449

 

 

 —

 

 

 —

 

 

449

 

 

1,864

 

 

 —

 

 

 —

 

 

1,864

 

 

$

121,153

 

$

 —

 

$

 —

 

$

121,153

 

$

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 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

 

$

2,183

 

$

 —

 

$

2,183

 

$

1,169

 

$

 —

 

$

1,169

Derivatives subject to a master netting arrangement:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward purchase contracts

 

 

3,170

 

 

 —

 

 

3,170

 

 

215

 

 

 —

 

 

215

Forward sale contracts

 

 

25,962

 

 

 —

 

 

25,962

 

 

26,762

 

 

 —

 

 

26,762

Netting

 

 

 —

 

 

(13,477)

 

 

(13,477)

 

 

 —

 

 

(25,082)

 

 

(25,082)

 

 

 

29,132

 

 

(13,477)

 

 

15,655

 

 

26,977

 

 

(25,082)

 

 

1,895

Total derivatives

 

 

31,315

 

 

(13,477)

 

 

17,838

 

 

28,146

 

 

(25,082)

 

 

3,064

Assets sold under agreements to repurchase:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount outstanding

 

 

2,152,588

 

 

 —

 

 

2,152,588

 

 

1,935,200

 

 

 —

 

 

1,935,200

Unamortized debt issuance premiums and costs, net

 

 

(650)

 

 

 —

 

 

(650)

 

 

(1,341)

 

 

 —

 

 

(1,341)

 

 

 

2,151,938

 

 

 —

 

 

2,151,938

 

 

1,933,859

 

 

 —

 

 

1,933,859

 

 

$

2,183,253

 

$

(13,477)

 

$

2,169,776

 

$

1,962,005

 

$

(25,082)

 

$

1,936,923

 

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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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 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

 

$

2,183

 

$

 —

 

$

 —

 

$

2,183

 

$

1,169

 

$

 —

 

$

 —

 

$

1,169

Credit Suisse First Boston Mortgage Capital LLC

 

 

848,914

 

 

(845,622)

 

 

 —

 

 

3,292

 

 

691,030

 

 

(690,766)

 

 

 —

 

 

264

Deutsche Bank

 

 

692,010

 

 

(692,010)

 

 

 —

 

 

 —

 

 

741,978

 

 

(741,978)

 

 

 —

 

 

 —

BNP Paribas

 

 

199,395

 

 

(199,395)

 

 

 —

 

 

 —

 

 

149,675

 

 

(149,482)

 

 

 —

 

 

193

Bank of America, N.A.

 

 

170,859

 

 

(170,859)

 

 

 —

 

 

 —

 

 

170,820

 

 

(170,820)

 

 

 —

 

 

 —

Citibank, N.A.

 

 

83,533

 

 

(82,659)

 

 

 —

 

 

874

 

 

14,960

 

 

(14,960)

 

 

 —

 

 

 —

Morgan Stanley Bank, N.A.

 

 

80,998

 

 

(71,069)

 

 

 —

 

 

9,929

 

 

77,687

 

 

(77,687)

 

 

 —

 

 

 —

JPMorgan Chase Bank, N.A.

 

 

50,875

 

 

(50,875)

 

 

 —

 

 

 —

 

 

54,326

 

 

(54,326)

 

 

 —

 

 

 —

Royal Bank of Canada

 

 

40,099

 

 

(40,099)

 

 

 —

 

 

 —

 

 

35,181

 

 

(35,181)

 

 

 —

 

 

 —

Federal National Mortgage Association

 

 

764

 

 

 —

 

 

 —

 

 

764

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Others

 

 

796

 

 

 —

 

 

 —

 

 

796

 

 

1,438

 

 

 —

 

 

 —

 

 

1,438

 

 

$

2,170,426

 

$

(2,152,588)

 

$

 —

 

$

17,838

 

$

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 line items where such gains and losses are included:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

Derivative activity

    

Income statement line

    

2019

    

2018

 

 

 

 

(in thousands)

Interest rate lock commitments

 

Net gains on mortgage loans held for sale at fair value

 

$

16,727

 

$

(7,376)

Repurchase agreement derivatives

 

Interest expense 

 

$

(557)

 

$

(426)

Hedged item:

 

 

 

 

 

 

 

 

Interest rate lock commitments and mortgage loans held for sale

 

Net gains on mortgage loans held for sale at fair value

 

$

(34,668)

 

$

87,747

Mortgage servicing rights

 

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

 

$

134,557

 

$

(103,593)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Note 9—Mortgage Servicing Rights and Mortgage Servicing Liabilities

 

Mortgage Servicing Rights at Fair Value

 

The activity in MSRs is as follows:

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Balance at beginning of quarter

 

$

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

 

 

2,820,612

 

 

2,120,436

Additions:

 

 

 

 

 

 

Purchases

 

 

227,772

 

 

27,606

Resulting from mortgage loan sales

 

 

115,751

 

 

143,910

 

 

 

343,523

 

 

171,516

Change in fair value due to:

 

 

 

 

 

 

Changes in inputs used in valuation model (1)

 

 

(161,638)

 

 

130,449

Other changes in fair value (2) 

 

 

(97,407)

 

 

(67,912)

Total change in fair value

 

 

(259,045)

 

 

62,537

Balance at end of quarter

 

$

2,905,090

 

$

2,354,489

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31,

 

 

2019

 

2018

 

 

 

(in thousands)

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

 

$

2,675,704

 

$

2,807,333


(1)

Principally reflects changes in discount rate and prepayment speed inputs, primarily due to changes in market interest rates, and changes in expected borrower performance and servicer losses given default.

 

(2)

Represents changes due to realization of cash flows.

 

 

 

Mortgage Servicing Liabilities at Fair Value

 

The activity in MSLs is summarized below:

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Balance at beginning of quarter

 

$

8,681

 

$

14,120

Mortgage servicing liabilities resulting from mortgage loan sales

 

 

794

 

 

2,037

Changes in fair value due to:

 

 

 

 

 

 

Changes in valuation inputs used in valuation model (1)

 

 

3,301

 

 

2,643

Other changes in fair value (2) 

 

 

(4,932)

 

 

(6,737)

Total change in fair value

 

 

(1,631)

 

 

(4,094)

Balance at end of quarter

 

$

7,844

 

$

12,063


 

 

(1)

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

 

(2)

Represents changes due to realization of cash flows.

 

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Table of Contents

Servicing fees relating to MSRs and MSLs are recorded in Net mortgage loan servicing fees—Mortgage loan servicing fees—From non-affiliates on the consolidated statements of income; late charges and other ancillary fees relating to MSRs and MSLs are recorded in Net mortgage loan servicing fees—Mortgage loan servicing fees—Ancillary and other fees on the Company’s consolidated statements of income. Such amounts are summarized below:

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Contractual servicing fees

 

$

166,790

 

$

135,483

Ancillary and other fees:

 

 

 

 

 

 

Late charges

 

 

9,812

 

 

7,459

Other

 

 

1,661

 

 

1,562

 

 

$

178,263

 

$

144,504

 

 

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 which include options to extend 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 March 31, 2019

 

 

(dollars in thousands)

Lease expense:

 

 

 

Operating leases

 

$

3,229

Short-term leases

 

 

217

Sublease income

 

 

(32)

Net lease expense included in Occupancy and equipment

 

$

3,414

 

 

 

 

Other information:

 

 

 

Cash payments for operating leases

 

$

3,846

Operating lease right-of-use assets recognized upon the adoption of ASU 2016-02

 

$

58,598

Weighted averages:

 

 

 

Remaining lease term (in years)

 

 

6.3

Discount rate

 

 

4.6%

 

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

 

 

 

 

 

Twelve months ended March 31,

 

Operating leases

 

 

(in thousands)

2020

 

$

15,683

2021

 

 

14,993

2022

 

 

13,397

2023

 

 

11,941

2024

 

 

10,343

Thereafter

 

 

21,999

Total lease payments

 

 

88,356

Less imputed interest

 

 

(11,983)

Total

 

$

76,373

 

 

 

 

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As of March 31, 2019, the Company has 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 March 31, 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 mortgage loans held for sale at fair value or participation certificates backed by MSRs. Eligible mortgage 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. Mortgage 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 March 31, 

 

 

    

2019

    

2018

    

 

 

(dollars in thousands)

Average balance of assets sold under agreements to repurchase

 

$

1,437,957

 

$

1,643,443

 

Weighted average interest rate (1)

 

 

4.47

%  

 

3.59

%

Total interest expense (2)

 

$

8,635

 

$

6,732

 

Maximum daily amount outstanding

 

$

2,152,588

 

$

2,380,121

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

December 31, 

 

 

    

2019

    

2018

 

 

 

(dollars in thousands)

 

Carrying value:

 

 

 

 

 

 

 

Unpaid principal balance

 

$

2,152,588

 

$

1,935,200

 

Unamortized debt issuance premiums and costs, net

 

 

(650)

 

 

(1,341)

 

 

 

$

2,151,938

 

$

1,933,859

 

Weighted average interest rate

 

 

4.35

%

 

4.22

%

Available borrowing capacity (3):

 

 

 

 

 

 

 

Committed

 

$

625,413

 

$

695,767

 

Uncommitted

 

 

2,206,999

 

 

2,354,033

 

 

 

$

2,832,412

 

$

3,049,800

 

Fair value of assets securing repurchase agreements:

 

 

 

 

 

 

 

Mortgage loans held for sale

 

$

2,065,151

 

$

1,923,857

 

Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell

 

$

125,929

 

$

131,025

 

Servicing advances (4)

 

$

147,435

 

$

162,895

 

Mortgage servicing rights (4)

 

$

2,574,228

 

$

2,807,333

 

Margin deposits placed with counterparties (5)

 

$

3,750

 

$

3,750

 


(1)

Excludes the effect of amortization of net premiums totaling $7.4 million and $8.0 million for the quarters ended March 31, 2019 and 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. During the quarters ended March 31, 2019 and 2018, the Company included $9.3 million and $10.2 million, respectively, of such incentives as reductions in Interest expense. The master repurchase agreement expires on August 21, 2019, unless terminated earlier at the option of the lender. The Company expects that it will cease to accrue the incentives under the repurchase agreement in the second quarter of 2019.

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Table of Contents

(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 March 31, 2019

    

Balance

 

 

(dollars in thousands)

Within 30 days

 

$

518,972

Over 30 to 90 days

 

 

1,334,389

Over 90 to 180 days

 

 

44,227

Over one to two years

 

 

255,000

Total assets sold under agreements to repurchase

 

$

2,152,588

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 March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average

 

 

 

 

 

 

 

maturity of advances  

 

 

 

 

 

 

 

under repurchase

 

 

Counterparty

    

Amount at risk

    

agreement

    

Facility maturity

 

 

(in thousands)

 

 

 

 

Credit Suisse First Boston Mortgage Capital LLC

 

$

1,165,339

 

April 26, 2020

 

April 26, 2020

Credit Suisse First Boston Mortgage Capital LLC

 

$

26,541

 

April 16, 2019

 

April 26, 2019

Deutsche Bank AG

 

$

90,911

 

June 16, 2019

 

August 21, 2019

BNP Paribas

 

$

16,691

 

June 19, 2019

 

August 2, 2019

Bank of America, N.A.

 

$

14,405

 

May 4, 2019

 

October 28, 2019

Morgan Stanley Bank, N.A.

 

$

5,237

 

June 15, 2019

 

August 23, 2019

Citibank, N.A.

 

$

4,828

    

June 7, 2019

    

June 7, 2019

JP Morgan Chase Bank, N.A.

 

$

4,360

 

May 31, 2019

 

October 11, 2019

Royal Bank of Canada

 

$

2,631

 

June 28, 2019

 

June 28, 2019

 

The Company is subject to margin calls during the period the 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 mortgage 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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Table of Contents

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 March 31, 

 

 

    

2019

    

2018

    

 

 

(dollars in thousands)

 

Average balance

 

$

236,667

 

$

215,614

 

Weighted average interest rate (1)

 

 

3.68

%  

 

2.89

%

Total interest expense

 

$

2,311

 

$

1,727

 

Maximum daily amount outstanding

 

$

548,038

 

$

527,706

 


(1)

Excludes the effect of amortization of facility fees totaling $135,000 and $171,000 for the quarters ended March 31, 2019 and 2018, respectively.

 

 

 

 

 

 

 

 

 

 

    

March 31, 

 

December 31, 

 

 

 

2019

    

2018

    

 

 

(dollars in thousands)

 

Carrying value:

 

 

 

 

 

 

 

Unpaid principal balance

 

$

548,038

 

$

532,466

 

Unamortized debt issuance costs

 

 

(159)

 

 

(215)

 

 

 

$

547,879

    

$

532,251

 

Weighted average interest rate

 

 

3.75

%  

 

3.77

%

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

 

$

574,518

 

$

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. As a result, the Company recognized unamortized debt issuance costs of $3.4 million in Interest Expense during the quarter ended March 31, 2018.

 

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. As a result, the Company recognized unamortized debt issuance costs of $4.6 million in Interest Expense during the quarter ended September 31, 2018.

 

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 quarters ended March 31, 2019 or 2018.

 

Notes payable are summarized below:

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

 

    

2019

    

2018

 

 

 

(dollars in thousands)

Average balance

 

$

1,300,000

 

$

979,868

 

Weighted average interest rate (1)

 

 

5.25

%  

 

5.63

%

Total interest expense

 

$

17,995

 

$

18,222

 

Maximum daily amount outstanding

 

$

1,300,000

 

$

1,150,000

 


(1)

Excluding the effect of amortization of debt issuance costs totaling $0.7 million and $4.2 million for the quarters ended March 31, 2019 and 2018, respectively. Also excludes the effect of non-utilization fees of $196,000 and $192,000 for the quarters ended March 31, 2019 and 2018, respectively.

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2019

    

2018

 

 

 

(dollars in thousands)

 

Carrying value:

 

 

 

 

 

 

 

Unpaid principal balance

 

$

1,300,000

    

$

1,300,000

 

Unamortized debt issuance costs

 

 

(7,264)

 

 

(7,709)

 

 

 

$

1,292,736

 

$

1,292,291

 

Weighted average interest rate

 

 

5.24

%

 

5.07

%

Unused amount

 

$

150,000

 

$

150,000

 

Assets pledged to secure notes payable:

 

 

 

 

 

 

 

Cash

 

$

93,372

 

$

108,174

 

Servicing advances (1)

 

$

147,435

 

$

162,895

 

Mortgage servicing rights (1)

 

$

2,675,704

 

$

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

 

In December 2015, the Company entered into a capital lease transaction secured by certain fixed assets and capitalized software. The capital lease matures on March 23, 2020 and bears interest at a spread over one-month LIBOR.

 

Obligations under capital lease are summarized below:

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

 

    

2019

    

2018

    

 

 

(dollars in thousands)

 

Average balance

 

$

5,848

 

$

18,703

 

Weighted average interest rate

 

 

4.50

%  

 

3.64

%

Total interest expense

 

$

66

 

$

170

 

Maximum daily amount outstanding

 

$

6,605

 

$

20,971

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2019

    

2018

 

 

 

(dollars in thousands)

 

Unpaid principal balance

 

$

5,091

    

$

6,605

 

Weighted average interest rate

 

 

4.48

%  

 

4.46

%  

Assets pledged to secure obligations under capital lease:

 

 

 

 

 

 

 

Furniture, fixtures and equipment

 

$

15,254

 

$

16,281

 

Capitalized software

 

$

940

 

$

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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Following is a summary of ESS:

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Balance at beginning of quarter

 

$

216,110

 

$

236,534

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

 

 

508

 

 

904

Accrual of interest

 

 

3,066

 

 

3,934

Repayment

 

 

(10,552)

 

 

(12,291)

Change in fair value

 

 

(4,051)

 

 

6,921

Balance at end of quarter

 

$

205,081

 

$

236,002

 

 

 

 

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 March 31, 

 

 

    

2019

    

2018

 

 

 

(in thousands)

 

Balance at beginning of quarter

 

$

21,155

 

$

20,053

 

Provision for losses on mortgage loans sold:

 

 

 

 

 

 

 

Resulting from sales of mortgage loans

 

 

1,067

 

 

1,492

 

Reduction in liability due to change in estimate

 

 

(4,210)

 

 

(1,113)

 

Incurred losses, net

 

 

(30)

 

 

(3)

 

Balance at end of quarter

 

$

17,982

 

$

20,429

 

Unpaid principal balance of mortgage loans subject to representations and warranties at end of quarter

 

$

133,698,782

 

$

127,056,220

 

 

 

Note 13—Income Taxes

 

The Company’s effective income tax rates were 23.5% and 8.3% for the quarters ended March 31, 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 prior to the Reorganization was not subject to income tax at the Company level. As a result, the Company reported a higher effective tax rate for the quarter ended March 31, 2019 than for the quarter ended March 31, 2018.

 

Note 14—Commitments and Contingencies

 

Litigation

 

The Company is a party to legal proceedings and potential 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 such proceedings and exposure will not have a material adverse effect on the financial condition, results of operations, or cash flows of the Company.

 

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.

 

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Commitments to Purchase and Fund Mortgage Loans

 

The Company’s commitments to purchase and fund mortgage loans totaled $3.8 billion as of March 31, 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. The Company has repurchased and cancelled $13.9 million of shares of common stock under the stock repurchase program from its inception through March 31, 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

 

    

March 31, 2018

 

 

(in thousands)

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

 

$

16,619

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.

 

$

14,859

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

 

 

748

 

 

 

 

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Note 17—Net Gains on Mortgage Loans Held for Sale

 

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

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

From non-affiliates:

 

 

 

 

 

 

Cash loss:

 

 

 

 

 

 

Mortgage loans

 

$

(41,242)

 

$

(181,801)

Hedging activities

 

 

(8,927)

 

 

104,396

 

 

 

(50,169)

 

 

(77,405)

Non-cash gain:

 

 

 

 

 

 

Mortgage servicing rights and mortgage servicing liabilities
resulting from mortgage loan sales

 

 

114,957

 

 

141,873

Provision for losses relating to representations and warranties:

 

 

 

 

 

 

Pursuant to mortgage loan sales

 

 

(1,067)

 

 

(1,492)

Reduction in liability due to change in estimate

 

 

4,210

 

 

1,113

Change in fair value relating to mortgage loans and derivatives held at quarter end:

 

 

 

 

 

 

Interest rate lock commitments

 

 

16,727

 

 

(7,376)

Mortgage loans

 

 

(164)

 

 

18,964

Hedging derivatives

 

 

(25,741)

 

 

(16,649)

 

 

 

58,753

 

 

59,028

From PennyMac Mortgage Investment Trust

 

 

26,023

 

 

12,386

 

 

$

84,776

 

$

71,414

 

 

 

 

 

 

 

 

 

 

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Note 18—Net Interest Income

 

Net interest income is summarized below:

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Interest income:

 

 

 

 

 

 

From non-affiliates:

 

 

 

 

 

 

Cash and short-term investments

 

$

1,933

 

$

608

Mortgage loans held for sale at fair value

 

 

31,343

 

 

26,607

Placement fees relating to custodial funds

 

 

23,261

 

 

13,424

 

 

 

56,537

 

 

40,639

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

 

 

1,796

 

 

1,976

 

 

 

58,333

 

 

42,615

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

To non-affiliates:

 

 

 

 

 

 

Assets sold under agreements to repurchase (1)

 

 

8,635

 

 

6,732

Mortgage loan participation purchase and sale agreements

 

 

2,311

 

 

1,727

Notes payable

 

 

17,995

 

 

18,222

Obligations under capital lease

 

 

66

 

 

170

Interest shortfall on repayments of mortgage loans serviced for Agency securitizations

 

 

4,311

 

 

4,830

Interest on mortgage loan impound deposits

 

 

1,159

 

 

1,130

 

 

 

34,477

 

 

32,811

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

 

 

3,066

 

 

3,934

 

 

 

37,543

 

 

36,745

 

 

$

20,790

 

$

5,870


(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. During the quarters ended March 31, 2019 and 2018, the Company included $9.3 million and $10.2 million, respectively, of such incentives as reductions in Interest expense. The master repurchase agreement expires on August 21, 2019, unless terminated earlier at the option of the lender. The Company expects that it will cease to accrue the financing incentives under the repurchase agreement in the second quarter of 2019.

 

 

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Note 19—Stock-based Compensation

 

As of March 31, 2019, the Company had one stock-based compensation plan. Following is a summary of the stock-based compensation activity:

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

 

    

2019

    

2018

 

 

 

(in thousands)

 

Grants:

 

 

 

 

 

 

 

Units:

 

 

 

 

 

 

 

Performance-based RSUs

 

 

665

 

 

524

 

Stock options

 

 

344

 

 

674

 

Time-based RSUs

 

 

330

 

 

316

 

Grant date fair value:

 

 

 

 

 

 

 

Performance-based RSUs

 

$

15,253

 

$

12,791

 

Stock options

 

 

2,965

 

 

6,147

 

Time-based RSUs

 

 

7,545

 

 

7,703

 

Total

 

$

25,763

 

$

26,641

 

Vestings and exercises:

 

 

 

 

 

 

 

Performance-based RSUs vested

 

 

648

 

 

 —

 

Stock options exercised

 

 

89

 

 

196

 

Time-based RSUs vested

 

 

291

 

 

234

 

Compensation expense

 

$

4,531

 

$

6,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 quarter. 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 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 Class A units of PNMAC 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 March 31, 

 

    

2019

    

2018

 

 

(in thousands, except per share amounts)

Basic earnings per share of common stock:

 

 

 

    

 

 

Net income attributable to common stockholders

 

$

46,135

    

$

16,619

Weighted average shares of common stock outstanding

 

 

77,653

 

 

23,832

Basic earnings per share of common stock

 

$

0.59

 

$

0.70

 

 

 

 

 

 

 

Diluted earnings per share of common stock:

 

 

 

 

 

 

Net income attributable to common stockholders

 

$

46,135

 

$

16,619

Net income attributable to dilutive stock-based compensation units

 

 

 —

 

 

1,400

Net income attributable to PennyMac Class A units exchangeable to Class A common stock, net of income taxes

 

 

 —

 

 

35,449

Net income attributable to common stockholders for diluted earnings per share

 

$

46,135

 

$

53,468

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

 

 

77,653

 

 

23,832

Effect of dilutive shares:

 

 

 

 

 

 

Common shares issuable under stock-based compensation plan

 

 

1,633

 

 

2,947

PennyMac Class A units exchangeable to Class A common stock

 

 

 —

 

 

52,682

Weighted average shares of common stock applicable to diluted earnings per share

 

 

79,286

 

 

79,461

Diluted earnings per share of common stock

 

$

0.58

 

$

0.67

 

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 March 31, 

 

    

2019

    

2018

 

 

(in thousands except for weighted-average exercise price)

Performance-based RSUs (1)

 

 

1,279

 

 

134

Time-based RSUs

 

 

61

 

 

 —

Stock options (2)

 

 

706

 

 

172

Total anti-dilutive stock-based compensation

 

 

2,046

 

 

306

Weighted average exercise price of anti-dilutive stock options (2)

 

$

24.26

 

$

24.40


(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 quarter.

 

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Note 21—Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Cash paid for interest

 

$

33,952

   

$

40,227

Cash paid for income taxes, net

 

$

66

 

$

 2

Non-cash investing activity:

 

 

 

 

 

 

Mortgage servicing rights resulting from mortgage loan sales

 

$

115,751

 

$

143,910

Mortgage servicing liabilities resulting from mortgage loan sales

 

$

794

 

$

2,037

Unsettled portion of MSR acquisitions

 

$

16,291

 

$

62

Operating right-of-use assets recognized upon the adoption of ASU 2016-02

 

$

58,598

 

$

 —

Non-cash financing activity:

 

 

 

 

 

 

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

 

$

508

 

$

904

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

 

$

86

 

$

79

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 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

 

$

1,833,819

 

$

561,020

 

$

1,788,430

 

$

514,089

 

Ginnie Mae PLS

 

$

1,543,756

 

$

819,028

 

$

1,535,826

 

$

733,342

 

Ginnie Mae PennyMac

 

$

1,802,129

 

$

900,931

 

$

1,786,430

 

$

806,676

 

HUD PLS

 

$

1,543,756

 

$

2,500

 

$

1,535,826

 

$

2,500

 

Liquidity

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae & Freddie Mac PLS

 

$

287,089

 

$

77,292

 

$

271,802

 

$

70,775

 

Ginnie Mae PLS

 

$

287,089

 

$

208,693

 

$

271,802

 

$

189,592

 

Tangible net worth / Total assets ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

Fannie Mae & Freddie Mac – PLS

 

 

20

%  

 

 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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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 mortgage loan origination, acquisition and sale activities. The servicing segment performs servicing of mortgage loans, execution and management of early buyout loan transactions and servicing of mortgage 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 March 31, 2019

 

 

 

Mortgage Banking

 

Investment

 

 

 

 

 

    

Production

    

Servicing

    

Total

    

Management

    

Total

 

 

 

(in thousands)

 

Revenue: (1)

 

 

 

 

 

 

 

 

 

 

 

                    

 

 

 

 

Net mortgage loan servicing fees

 

$

 —

 

$

80,571

 

$

80,571

 

$

 —

 

$

80,571

 

Net gains on mortgage loans held for sale at fair value

 

 

66,721

 

 

18,055

 

 

84,776

 

 

 —

 

 

84,776

 

Mortgage loan origination fees

 

 

23,930

 

 

 —

 

 

23,930

 

 

 —

 

 

23,930

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

27,574

 

 

 —

 

 

27,574

 

 

 —

 

 

27,574

 

Net interest income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

14,369

 

 

43,964

 

 

58,333

 

 

 —

 

 

58,333

 

Interest expense

 

 

3,915

 

 

33,621

 

 

37,536

 

 

 7

 

 

37,543

 

 

 

 

10,454

 

 

10,343

 

 

20,797

 

 

(7)

 

 

20,790

 

Management fees

 

 

 —

 

 

 —

 

 

 —

 

 

7,248

 

 

7,248

 

Other

 

 

488

 

 

765

 

 

1,253

 

 

1,563

 

 

2,816

 

Total net revenue

 

 

129,167

 

 

109,734

 

 

238,901

 

 

8,804

 

 

247,705

 

Expenses

 

 

82,161

 

 

98,571

 

 

180,732

 

 

6,682

 

 

187,414

 

Income before provision for income taxes

 

$

47,006

 

$

11,163

 

$

58,169

 

$

2,122

 

$

60,291

 

Segment assets at quarter end

 

$

2,501,468

 

$

5,299,813

 

$

7,801,281

 

$

17,719

 

$

7,819,000

 


(1)

All revenues are from external customers.

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 2018

 

 

 

Mortgage Banking

 

Investment

 

 

 

 

 

    

Production

    

Servicing

    

Total

    

Management

    

 Total

 

 

 

(in thousands)

 

Revenue: (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net mortgage loan servicing fees

 

$

 —

 

$

116,789

 

$

116,789

 

$

 —

 

$

116,789

 

Net gains on mortgage loans held for sale at fair value

 

 

36,198

 

 

35,216

 

 

71,414

 

 

 —

 

 

71,414

 

Mortgage loan origination fees

 

 

24,563

 

 

 —

 

 

24,563

 

 

 —

 

 

24,563

 

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

11,944

 

 

 —

 

 

11,944

 

 

 —

 

 

11,944

 

Net interest income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

14,248

 

 

28,367

 

 

42,615

 

 

 —

 

 

42,615

 

Interest expense

 

 

2,102

 

 

34,627

 

 

36,729

 

 

16

 

 

36,745

 

 

 

 

12,146

 

 

(6,260)

 

 

5,886

 

 

(16)

 

 

5,870

 

Management fees

 

 

 —

 

 

 —

 

 

 —

 

 

5,775

 

 

5,775

 

Carried Interest from Investment Funds

 

 

 —

 

 

 —

 

 

 —

 

 

(180)

 

 

(180)

 

Other

 

 

316

 

 

395

 

 

711

 

 

1,315

 

 

2,026

 

Total net revenue

 

 

85,167

 

 

146,140

 

 

231,307

 

 

6,894

 

 

238,201

 

Expenses

 

 

67,997

 

 

91,265

 

 

159,262

 

 

5,943

 

 

165,205

 

Income before provision for income taxes

 

$

17,170

 

$

54,875

 

$

72,045

 

$

951

 

$

72,996

 

Segment assets at quarter end (2)

 

$

2,251,354

 

$

4,630,946

 

$

6,882,300

 

$

11,877

 

$

6,894,177

 


(1)

All revenues are from external customers.

 

(2)

Excludes parent Company assets, which consist of $8.7 million of cash.

 

 

 

Note 24—Subsequent Events

 

Management has evaluated all events and transactions through the date the Company issued these consolidated financial statements. During this period, there have been no material events that would require recognition in our consolidated financial statements or disclosure in the notes to the consolidated financial statements.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Statement Regarding Forward-Looking Statements

 

The following discussion and analysis of financial condition and results of operations should be read with the consolidated financial statements including the related notes of PennyMac Financial Services, Inc. (“PFSI”) included within this Quarterly Report on Form 10-Q.

 

Statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those expressed or implied in such statements. You can identify these forward-looking statements by words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors,” as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and our other filings with the United States Securities and Exchange Commission (“SEC”). The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date hereof and we assume no obligation to update or supplement any forward-looking statements.

 

Overview

 

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to the words “we,” “us,” “our” and the “Company” refer to PFSI.

 

Our Company

 

We are a specialty financial services firm with a comprehensive mortgage platform and integrated business primarily focused on the production and servicing of U.S. residential mortgage 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 (“BlackRock” or “BlackRock, Inc.”) and HC Partners, LLC, formerly known as Highfields Capital Investments, LLC, together with its affiliates (“Highfields”).

 

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. 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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Our principal mortgage banking subsidiary, PennyMac Loan Services, LLC (“PLS”), is a non-bank producer and servicer of mortgage 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” and, together with PMT, as our “Advised Entities.”  The Investment Funds were dissolved during 2018.

 

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 mortgage loan origination, acquisition and sale activities.

·

The servicing segment performs mortgage 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.

 

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Results of Operations

 

Our results of operations are summarized below:

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(dollars in thousands, except per share amounts)

Revenues:

 

 

 

 

 

 

Net mortgage loan servicing fees

 

$

80,571

 

$

116,789

Net gains on mortgage loans held for sale at fair value

 

 

84,776

 

 

71,414

Mortgage loan origination fees

 

 

23,930

 

 

24,563

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

27,574

 

 

11,944

Net interest income

 

 

20,790

 

 

5,870

Management fees

 

 

7,248

 

 

5,775

Other

 

 

2,816

 

 

1,846

Total net revenue

 

 

247,705

 

 

238,201

Expenses

 

 

187,414

 

 

165,205

Provision for income taxes

 

 

14,156

 

 

6,070

Net income

 

$

46,135

 

$

66,926

Earnings per share

 

 

 

 

 

 

Basic

 

$

0.59

 

$

0.70

Diluted

 

$

0.58

 

$

0.67

Annualized return on average common stockholders' equity

 

 

11.0%

 

 

13.6%

Income before provision for income taxes by segment:

 

 

 

 

 

 

Mortgage banking:

 

 

 

 

 

 

Production

 

$

47,006

 

$

17,170

Servicing

 

 

11,163

 

 

54,875

Total mortgage banking

 

 

58,169

 

 

72,045

Investment management

 

 

2,122

 

 

951

 

 

$

60,291

 

$

72,996

During the quarter:

 

 

 

 

 

 

Interest rate lock commitments issued

 

$

10,134,199

 

$

10,857,635

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

 

$

8,135,552

 

$

4,225,631

At end of quarter:

 

 

 

 

 

 

Unpaid principal balance of mortgage loan servicing portfolio:

 

 

 

 

 

 

Owned:

 

 

 

 

 

 

Mortgage servicing rights

 

$

219,834,361

 

$

173,487,165

Mortgage servicing liabilities

 

 

1,000,403

 

 

1,766,722

Mortgage loans held for sale

 

 

2,573,121

 

 

2,512,546

 

 

 

223,407,885

 

 

177,766,433

Subserviced for PMT

 

 

101,287,428

 

 

77,539,438

 

 

$

324,695,313

 

$

255,305,871

Net assets of Advised Entities:

 

 

 

 

 

 

PennyMac Mortgage Investment Trust

 

$

1,727,589

 

$

1,542,258

Investment Funds

 

 

 —

 

 

2,668

 

 

$

1,727,589

 

$

1,544,926

Book value per share

 

$

21.72

 

$

20.74

 

For the quarter ended March 31, 2019, net income decreased $20.8 million compared to the same period in 2018. The decrease was primarily due to a reduction in net mortgage loan servicing fees combined with increases in total expenses and an increase in the provision for income taxes resulting from the Reorganization. The decrease in net mortgage loan servicing fees was mainly due to lower interest rates that resulted in a fair value loss net of hedging results, compared to fair value gains during the same period in 2018. The increase in total expenses was mainly due to increases in origination expenses, servicing expenses and compensation expenses, reflecting the continuing growth of our mortgage banking activities. Following is a discussion of these changes.  

 

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Net Mortgage Loan Servicing Fees

 

Following is a summary of our net mortgage loan servicing fees:

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Net mortgage loan servicing fees:

 

 

 

 

 

 

Mortgage loan servicing fees:

 

 

 

 

 

 

From non-affiliates

 

$

166,790

 

$

135,483

From PennyMac Mortgage Investment Trust

 

 

10,570

 

 

11,019

Ancillary and other fees

 

 

22,017

 

 

14,171

 

 

 

199,377

 

 

160,673

Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing net of hedging results

 

 

(118,806)

 

 

(43,884)

Net mortgage loan servicing fees

 

$

80,571

 

$

116,789

Average mortgage loan servicing portfolio

 

$

308,212,285

 

$

249,833,285

 

Change in fair value of mortgage servicing rights and excess servicing spread are summarized below:

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Realization of cash flows

 

$

(92,475)

 

$

(61,176)

Other changes in fair value of mortgage servicing rights and mortgage servicing liabilities

 

 

(164,939)

 

 

127,806

Change in fair value of excess servicing spread

 

 

4,051

 

 

(6,921)

Hedging results

 

 

134,557

 

 

(103,593)

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

 

$

(118,806)

 

$

(43,884)

Quarterly average balances:

 

 

 

 

 

 

Mortgage servicing rights

 

$

2,843,028

 

$

2,265,744

Mortgage servicing liabilities

 

$

8,188

 

$

12,063

Excess servicing spread financing

 

$

211,661

 

$

238,320

At quarter end:

 

 

 

 

 

 

Mortgage servicing rights

 

$

2,905,090

 

$

2,354,489

Mortgage servicing liabilities

 

$

7,844

 

$

12,063

Excess servicing spread financing

 

$

205,081

 

$

236,002

 

 

 

 

 

 

 

 

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Following is a summary of our mortgage loan servicing portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2019

    

2018

 

 

 

(in thousands)

 

Mortgage loans serviced

 

 

 

 

 

 

 

Prime servicing:

 

 

 

 

 

 

 

Owned:

 

 

 

 

 

 

 

Mortgage servicing rights

 

 

 

 

 

 

 

Originated

 

$

147,987,738

 

$

144,296,544

 

Acquired

 

 

71,846,623

 

 

56,757,600

 

 

 

 

219,834,361

 

 

201,054,144

 

Mortgage servicing liabilities

 

 

1,000,403

 

 

1,160,938

 

Mortgage loans held for sale

 

 

2,573,121

 

 

2,420,636

 

 

 

 

223,407,885

 

 

204,635,718

 

Subserviced for PMT

 

 

100,939,297

 

 

94,276,938

 

Total prime servicing

 

 

324,347,182

 

 

298,912,656

 

Special servicing – Subserviced for PMT

 

 

348,131

 

 

381,216

 

Total mortgage loans serviced

 

$

324,695,313

 

$

299,293,872

 

 

Net mortgage loan servicing fees decreased $36.2 million during the quarter ended March 31, 2019 as compared to the same period in 2018. The decrease was due to an increase of $74.9 million in losses in fair value of MSRs and mortgage servicing liabilities (“MSLs”), net of hedging results, resulting from the effect of lower interest rates during the quarter ended March 31, 2019. The increased losses were partially offset by an increase of $38.7 million in mortgage loan servicing fees, resulting from an increase in our average servicing portfolio of 23% for the quarter ended March 31, 2019, as compared to the same period in 2018.

 

The lower interest rates that prevailed during the quarter ended March 31, 2019, as compared to the same period in 2018, resulted in a $26.3 million in fair value loss, net of hedging results, as compared to $17.3 million of gains during 2018. The market-based fair value losses were partially offset by a $7.4 million increase in mortgage loan servicing fees, net of increased realization of cash flows. This increase reflects the offsetting influences of growth in our MSR portfolio and increased rate of realization of cash flows caused by increased prepayment expectations.

 

Net Gains on Mortgage Loans Held for Sale at Fair Value

 

Most of our mortgage 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 mortgage 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 ended March 31, 2019, we recognized Net gains on mortgage loans held for sale at fair value totaling $84.8 million, an increase of $13.4 million compared to the same period in 2018. The increase was primarily due to an improvement in profit margins in our mortgage lending business.

 

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Our net gains on mortgage loans held for sale are summarized below:

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

 

    

2019

    

2018

 

 

 

(in thousands)

 

From non-affiliates:

 

 

 

 

 

 

 

Cash loss:

 

 

                       

 

 

                       

 

Mortgage loans

 

$

(41,242)

 

$

(181,801)

 

Hedging activities

 

 

(8,927)

 

 

104,396

 

 

 

 

(50,169)

 

 

(77,405)

 

Non-cash gain:

 

 

 

 

 

 

 

Mortgage servicing rights and mortgage servicing liabilities resulting from mortgage loan sales

 

 

114,957

 

 

141,873

 

Provision for losses relating to representations and warranties:

 

 

 

 

 

 

 

Pursuant to mortgage loan sales

 

 

(1,067)

 

 

(1,492)

 

Reduction in liability due to change in estimate

 

 

4,210

 

 

1,113

 

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

 

 

 

 

 

 

 

Interest rate lock commitments

 

 

16,727

 

 

(7,376)

 

Mortgage loans

 

 

(164)

 

 

18,964

 

Hedging derivatives

 

 

(25,741)

 

 

(16,649)

 

 

 

 

58,753

 

 

59,028

 

From PennyMac Mortgage Investment Trust

 

 

26,023

 

 

12,386

 

 

 

$

84,776

 

$

71,414

 

During the quarter:

 

 

 

 

 

 

 

Interest rate lock commitments issued:

 

 

 

 

 

 

 

Government-insured or guaranteed mortgage loans

 

$

8,831,495

 

$

9,755,438

 

Conventional mortgage loans

 

 

1,301,243

 

 

1,102,197

 

Home equity lines of credit

 

 

1,461

 

 

 —

 

 

 

$

10,134,199

 

$

10,857,635

 

At end of quarter:

 

 

 

 

 

 

 

Mortgage loans held for sale at fair value

 

$

2,668,929

 

$

2,584,236

 

Commitments to fund and purchase mortgage loans

 

$

3,821,942

 

$

4,275,126

 

 

Our gain on sale of mortgage loans acquired 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 mortgage 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 mortgage loan sale transactions. How we measure and update our measurements of MSRs and MSLs is detailed in Note 6 – Fair value – Valuation Techniques and Inputs to the financial statements included in this Quarterly Report.  

 

Our agreements with the purchasers and insurers include representations and warranties related to the mortgage 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 mortgage 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 mortgage loans with the identified defects or indemnify the purchaser or insurer. In such cases, we bear any subsequent credit loss on the mortgage loans. Our credit loss may be reduced by any recourse we have to correspondent originators that sold such mortgage 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.

 

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The method used to estimate our losses on representations and warranties is a function of our estimate of future defaults, mortgage loan repurchase rates, the severity of loss in the event of default, if applicable, and the probability of reimbursement by the correspondent mortgage loan seller. We establish a liability at the time mortgage loans are sold and review our liability estimate on a periodic basis. 

 

We recorded provisions for losses under representations and warranties relating to current mortgage loan sales as a component of Net gains on mortgage loans held for sale at fair value totaling $1.1 million and $1.5 million for the quarters ended March 31, 2019 and 2018, respectively. We also recorded reductions in the liability of $4.2 million during the quarter ended March 31, 2019 compared to $1.1 million during the same period in 2018. The reductions in the liability resulted from previously sold mortgage loans meeting criteria established by the Agencies which exempt them from certain repurchase or indemnification claims.

 

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

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

During the quarter:

 

 

                       

 

 

                       

Indemnification activity

 

 

 

 

 

 

Mortgage loans indemnified by PFSI at beginning of quarter

 

$

8,899

 

$

7,579

New indemnifications

 

 

682

 

 

2,632

Less indemnified mortgage loans sold, repaid or refinanced

 

 

117

 

 

210

Mortgage loans indemnified by PFSI at end of quarter

 

$

9,464

 

$

10,001

Repurchase activity

 

 

 

 

 

 

Total mortgage loans repurchased by PFSI

 

$

4,064

 

$

6,313

Less:

 

 

 

 

 

 

Mortgage loans repurchased by correspondent lenders

 

 

2,920

 

 

6,646

Mortgage loans repaid by borrowers or resold with defects resolved

 

 

907

 

 

116

Net mortgage loans repurchased (resold or repaid) with losses chargeable to liability for representations and warranties

 

$

237

 

$

(449)

Net losses charged to liability for representations and warranties

 

$

30

 

$

 3

 

 

 

 

 

 

 

At end of quarter:

 

 

 

 

Unpaid principal balance of mortgage loans subject to representations and warranties

 

$

133,698,782

 

$

127,056,220

Liability for representations and warranties

 

$

17,982

 

$

20,429

 

During the quarter ended March 31, 2019, we repurchased mortgage loans totaling $4.1 million in UPB. We recorded net losses of $30,000 net of recoveries from correspondent sellers as a result of these repurchases during the quarter ended March 31, 2019. As the outstanding balance of mortgage loans we purchase and sell subject to representations and warranties increases, as the loans sold continue to season, as economic conditions change and as investor and insurer loss mitigation strategies are adjusted, we expect that 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 mortgage 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 mortgage 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.

 

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Mortgage loan origination fees

 

Mortgage loan origination fees decreased $633,000 during the quarter ended March 31, 2019 compared to the same period in 2018. The decrease was primarily due to a decrease in volume of mortgage loans we produced.

 

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 mortgage loans. The fulfillment fees are calculated as a percentage of the UPB of the mortgage loans we fulfill for PMT.

 

Following is a summary of our fulfillment fees:

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Fulfillment fee revenue

 

$

27,574

 

$

11,944

Unpaid principal balance of mortgage loans fulfilled subject to fulfillment fees

 

$

8,135,552

 

$

4,225,631

Average fulfillment fee rate (in basis points)

 

 

34

 

 

28

 

Fulfillment fees increased $15.6 million during the quarter ended March 31, 2019 compared to the same period in 2018. The increase was primarily due to a combination of an increase in PMT’s loan production volume and a decrease in discretionary reductions in the fulfillment fee rate during the quarter ended March 31, 2019, as compared to the same period in 2018.

 

Net Interest Income

 

Net interest income increased $14.9 million during the quarter ended March 31, 2019 compared to the same period in 2018. The increase is primarily due to an increase in the placement fees we receive relating to custodial funds that we manage, reflecting the growth of our servicing portfolio, as well as an increase in net interest income on mortgage loans held for sale.

 

We entered into a master repurchase agreement in 2017 that provides us with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. We recorded $9.3 million and $10.2 million of such incentives as reductions of Interest expense during the quarters ended March 31, 2019 and 2018, respectively. The master repurchase agreement expires on August 21, 2019, unless terminated earlier at the option of the lender. We expect that we will cease to accrue the incentives under the repurchase agreement in the second quarter of 2019. While there can be no assurance, we expect that the loss of such incentives will be partially offset by an improvement in pricing margins in our Net gains on mortgage loans held for sale at fair value.  

 

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Management fees and Carried Interest

 

Management fees and Carried Interest are summarized below:

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

 

2019

   

2018

 

 

(in thousands)

Management Fees:

 

 

 

 

 

 

PennyMac Mortgage Investment Trust:

 

 

 

 

 

 

Base management

    

$

6,109

    

$

5,696

Performance incentive

 

 

1,139

 

 

 —

 

 

 

7,248

 

 

5,696

Investment Funds

 

 

 —

 

 

79

Total management fees

 

 

7,248

 

 

5,775

Carried Interest

 

 

 —

 

 

(180)

Total management fees and Carried Interest

 

$

7,248

 

$

5,595

Net assets of Advised Entities at end of quarter:

 

 

 

 

 

 

PennyMac Mortgage Investment Trust

 

$

1,727,589

 

$

1,542,258

Investment Funds

 

 

 —

 

 

2,668

 

 

$

1,727,589

 

$

1,544,926

 

Management fees increased $1.5 million during the quarter ended March 31, 2019 compared to the same period in 2018, reflecting the combined effect of the performance incentive fee 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 ended March 31, 2019.

 

Expenses

 

Compensation

 

Our compensation expense is summarized below:

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Salaries and wages

 

$

67,058

 

$

63,380

Incentive compensation

 

 

19,175

 

 

19,576

Taxes and benefits

 

 

15,836

 

 

12,886

Stock and unit-based compensation

 

 

4,531

 

 

6,171

 

 

$

106,600

 

$

102,013

Head count:

 

 

 

 

 

 

Average

 

 

3,461

 

 

3,233

Quarter end

 

 

3,459

 

 

3,241

 

Compensation expense increased $4.6 million during the quarter ended March 31, 2019 compared to the same period in 2018. The increase was primarily due to an increase in salaries and wages due to increased average headcount resulting from the growth in our mortgage banking activities, partially offset by a decrease in stock and unit-based compensation due to lower than expected attainment of profitability targets during the quarter ended March 31, 2019.

 

Servicing

 

Servicing expenses increased $4.0 million during the quarter ended March 31, 2019 compared to the same period in 2018. The increase was primarily due to increased purchases of EBO loans from Ginnie Mae guaranteed pools for the quarter ended March 31, 2019 compared to the same period in 2018. During the quarter ended March 31, 2019, we purchased $351.7 million in UPB of EBO loans compared to $264.9 million for the quarter ended March 31, 2018.

 

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The EBO program reduces the ongoing cost of servicing defaulted mortgage 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 mortgage loan pools, it accelerates loss recognition when the mortgage 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 mortgage loans’ insurer or guarantor at the debenture rate of interest applicable to the respective mortgage loans.

 

Loan origination

 

Loan origination expense increased $12.4 million during the quarter ended March 31, 2019 compared to the same period in 2018. The increase was primarily due to increases in wholesale brokerage fees and loan file compilation expenses, resulting from increased 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 ended March 31, 2019 as compared to the same period during 2018.

 

Provision for Income Taxes

 

Our effective income tax rates were 23.5% and 8.3% for the quarters ended March 31, 2019 and 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 before the Reorganization was not subject to income tax at the PFSI level. As a result, we reported a higher effective tax rate for the quarter ended March 31, 2019 than the quarter ended March 31, 2018.

 

Balance Sheet Analysis

 

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

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2019

    

2018

 

 

(in thousands)

ASSETS

 

 

 

 

 

 

Cash and short-term investments

 

$

293,638

 

$

273,113

Mortgage loans held for sale at fair value

 

 

2,668,929

 

 

2,521,647

Servicing advances, net

 

 

284,230

 

 

313,197

Investments in and advances to affiliates

 

 

157,433

 

 

165,886

Mortgage servicing rights

 

 

2,905,090

 

 

2,820,612

Mortgage loans eligible for repurchase

 

 

1,094,702

 

 

1,102,840

Other

 

 

414,978

 

 

281,278

Total assets

 

$

7,819,000

 

$

7,478,573

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Short-term debt

 

$

2,449,908

 

$

2,332,143

Long-term debt

 

 

1,752,817

 

 

1,648,973

Liability for mortgage loans eligible for repurchase

 

 

1,094,702

 

 

1,102,840

Other

 

 

820,381

 

 

740,826

Total liabilities

 

 

6,117,808

 

 

5,824,782

Stockholders' equity

 

 

1,701,192

 

 

1,653,791

Total liabilities and stockholders' equity

 

$

7,819,000

 

$

7,478,573

 

Total assets increased $340.4 million from $7.5 billion at December 31, 2018 to $7.8 billion at March 31, 2019. The increase was primarily due to increases in mortgage loans held for sale at fair value resulting from an increase in mortgage loan production volume and in our investment in MSRs reflecting continued additions from our mortgage loan production activities and servicing portfolio acquisitions, as well as an increase in other assets due to capitalization of operating leases pursuant to our adoption of the Financial Accounting Standards Board’s Accounting Standards Update 2016-02, Leases (Topic 842) (“ASU 2016-02”) effective January 1, 2019.

 

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Total liabilities increased $293.0 million from $5.8 billion at December 31, 2018 to $6.1 billion at March 31, 2019. The increase was primarily attributable to an increase in borrowings required to finance a larger inventory of mortgage loans held for sale and MSR asset combined with a $76.4 million increase in other liabilities due to recognition of operating lease liabilities effective January 1, 2019, as the result of our adoption of ASU 2016-02, which requires us to recognize our lease obligations on our consolidated balance sheet.

 

Cash Flows

 

Our cash flows for the quarter ended March 31, 2019 and 2018 are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Quarter ended March 31, 

 

 

 

 

 

 

2019

    

2018

    

Change

 

 

 

(in thousands)

 

Operating

 

$

(134,247)

 

$

537,392

 

$

(671,639)

 

Investing

 

 

(92,771)

 

 

(81,263)

 

 

(11,508)

 

Financing

 

 

216,007

 

 

(355,981)

 

 

571,988

 

Net (decrease) increase in cash and restricted cash

 

$

(11,011)

 

$

100,148

 

$

(111,159)

 

 

Our cash flows resulted in a net decrease in cash and restricted cash of $11.0 million during the quarter ended March 31, 2019 as discussed below.

 

Operating activities

 

Net cash used in operating activities totaled $134.2 million during quarter ended March, 31, 2019 and net cash provided by operating activities totaled $537.4 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:

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

 

2019

    

2018

 

 

(in thousands)

Cash flows from:

 

 

 

 

 

 

Mortgage loans held for sale

 

$

(203,401)

 

$

473,727

Other operating sources

 

 

69,154

 

 

63,665

 

 

$

(134,247)

 

$

537,392

Investing activities

 

Net cash used in investing activities during the quarter ended March 31, 2019 totaled $92.8 million primarily due to the purchase of MSRs totaling $211.5 million, partially offset by a $125.7 million net settlement of derivative financial instruments used to hedge our investment in MSRs. Net cash used in investing activities during the quarter ended March 31, 2018 totaled $81.3 million primarily due to a $128.1 million net use of cash in net settlement of derivative financial instruments used for hedging our investment in MSRs and purchase of MSRs totaling $27.6 million, partially offset by a $64.2 million decrease in short-term investments.

 

Financing activities

 

Net cash provided by financing activities totaled $216.0 million during the quarter ended March 31, 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 $356.0 million during the quarter ended March 31, 2018 primarily due to net repurchases of assets sold under agreements to repurchase, reflecting a reduction in our financing of mortgage loans held for sale.

 

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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 outstanding, maximum and ending balances:

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Average balance

 

$

1,437,957

 

$

1,643,443

Maximum daily balance

 

$

2,152,588

 

$

2,380,121

Balance at quarter end

 

$

2,152,588

 

$

1,813,463

 

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;

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·

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 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 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 March 31, 2019, we have repurchased $13.9 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.

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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

 

Off-Balance Sheet Arrangements and Guarantees

 

As of March 31, 2019, we have not entered into any off-balance sheet arrangements.

 

Contractual Obligations

 

As of March 31, 2019 we had contractual obligations aggregating $8.5 billion, comprised of borrowings, commitments to purchase and originate mortgage loans and a payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under a tax receivable agreement. We also lease our office facilities and license certain software to support our loan servicing operations.

 

Payment obligations under these agreements are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments due by year

 

 

 

 

Less than

 

1-3

 

3-5

 

More than

Contractual obligations

    

Total

    

1 year

    

years

    

years

    

5 years

 

 

(in thousands)

Commitments to purchase and originate mortgage loans

 

$

3,821,942

 

$

3,821,942

 

$

 —

 

$

 —

 

$

 —

Short-term debt

 

 

2,450,717

 

 

2,450,717

 

 

 —

 

 

 —

 

 

 —

Long-term debt

 

 

1,760,081

 

 

 —

 

 

255,000

 

 

1,300,000

 

 

205,081

Interest on long-term debt

 

 

351,286

 

 

79,425

 

 

154,893

 

 

91,617

 

 

25,351

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

 

 

46,537

 

 

 —

 

 

 —

 

 

 —

 

 

46,537

Software licenses (1)

 

 

13,942

 

 

13,942

 

 

 —

 

 

 —

 

 

 —

Office leases

 

 

89,855

 

 

15,683

 

 

29,387

 

 

22,534

 

 

22,251

Total

 

$

8,534,360

 

$

6,381,709

 

$

439,280

 

$

1,414,151

 

$

299,220


(1)

Software licenses include both volume and activity based fees that are dependent on the number of loans serviced during each period and include a base fee of approximately $1.9 million per month. Estimated payments for software licenses above are based on the number of loans currently serviced by us, which totaled approximately 1.6 million at March 31, 2019. Future amounts due may significantly fluctuate based on changes in the number of loans serviced by us. For the quarter ended March 31, 2019, software license fees totaled $7.1 million.

 

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 March 31, 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.

 

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In addition, the agreements contain events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, servicer termination events and defaults, material adverse changes, bankruptcy or insolvency proceedings and other events of default customary for these types of transactions. The remedies for such events of default are also customary for these types of transactions and include the acceleration of the principal amount outstanding under the agreements and the liquidation by our lenders of the mortgage loans or other collateral then subject to the agreements.

 

The borrowings have maturities as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding

 

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

 

$

590,622

 

$

1,100,000

 

$

300,000

 

April 24, 2020

Credit Suisse First Boston Mortgage Capital LLC (3)

 

$

255,000

 

$

400,000

 

$

400,000

 

April 26, 2020

Deutsche Bank AG

 

$

692,010

 

$

950,000

 

$

 —

 

August 21, 2019

BNP Paribas

 

$

199,395

 

$

200,000

 

$

100,000

 

August 2, 2019

Bank of America, N.A.

 

$

170,859

 

$

500,000

 

$

500,000

 

October 28, 2019

Citibank, N.A.

 

$

82,659

 

$

700,000

 

$

350,000

 

June 7, 2019

Morgan Stanley Bank, N.A.

 

$

71,069

 

$

500,000

 

$

100,000

 

August 23, 2019

JPMorgan Chase Bank, N.A.

 

$

50,875

 

$

500,000

 

$

50,000

 

October 11, 2019

Royal Bank of Canada

 

$

40,099

 

$

135,000

 

$

20,000

 

June 28, 2019

Mortgage loan participation purchase and sale agreements

 

 

 

 

 

 

 

 

 

 

 

Bank of America, N.A.

 

$

548,038

 

$

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

 

$

5,091

 

$

35,000

 

$

 —

 

March 23, 2020


(1)

Outstanding indebtedness as of March 31, 2019.

(2)

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

(3)

The borrowing of $255 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 facility.

 

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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 March 31, 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)

 

$

1,165,339

 

April 26, 2020

 

April 26, 2020

Credit Suisse First Boston Mortgage Capital LLC (2)

 

$

26,541

 

April 16, 2019

 

April 26, 2019

Deutsche Bank AG

 

$

90,911

 

June 16, 2019

 

August 21, 2019

BNP Paribas

 

$

16,691

 

June 19, 2019

 

August 2, 2019

Bank of America, N.A.

 

$

14,405

 

May 4, 2019

 

October 28, 2019

Morgan Stanley Bank, N.A.

 

$

5,237

 

June 15, 2019

 

August 23, 2019

Citibank, N.A.

 

$

4,828

 

June 7, 2019

 

June 7, 2019

JP Morgan Chase Bank, N.A.

 

$

4,360

 

May 31, 2019

 

October 11, 2019

Royal Bank of Canada

 

$

2,631

 

June 28, 2019

 

June 28, 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 March 31, 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 March 31, 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

 

$

3,102,267

 

$

3,000,357

 

$

2,951,932

 

$

2,859,760

 

$

2,815,873

 

$

2,732,175

 

Change in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

197,177

 

$

95,266

 

$

46,841

 

$

(45,330)

 

$

(89,217)

 

$

(172,915)

 

%

 

 

6.8

%  

 

3.3

%  

 

1.6

%  

 

(1.6)

%  

 

(3.1)

%  

 

(6.0)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepayment speed shift in %

    

-20%

    

-10%

    

-5%

    

+5%

    

+10%

    

+20%

 

 

    

(dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

3,149,794

 

$

3,022,122

 

$

2,962,358

 

$

2,850,171

 

$

2,797,462

 

$

2,698,183

 

Change in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

244,704

 

$

117,032

 

$

57,268

 

$

(54,920)

 

$

(107,628)

 

$

(206,907)

 

%

 

 

8.4

%  

 

4.0

%  

 

2.0

%  

 

(1.9)

%  

 

(3.7)

%  

 

(7.1)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per-loan servicing cost shift in %

    

-20%

    

-10%

    

-5%

    

+5%

    

+10%

    

+20%

 

 

 

(dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

3,003,145

 

$

2,954,126

 

$

2,929,616

 

$

2,880,596

 

$

2,856,086

 

$

2,807,066

 

Change in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

98,055

 

$

49,035

 

$

24,525

 

$

(24,494)

 

$

(49,004)

 

$

(98,024)

 

%

 

 

3.4

%  

 

1.7

%  

 

0.8

%  

 

(0.8)

%  

 

(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 March 31, 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

 

$

210,894

 

$

207,949

 

$

206,505

 

$

203,675

 

$

202,288

 

$

199,566

 

Change in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

5,813

 

$

2,868

 

$

1,424

 

$

(1,406)

 

$

(2,793)

 

$

(5,515)

 

%

 

 

2.8

%  

 

1.4

%  

 

0.7

%  

 

(0.7)

%  

 

(1.4)

%  

 

(2.7)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepayment speed shift in %

    

-20%

    

-10%

    

-5%

    

+5%

    

+10%

    

+20%

    

 

 

(dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

225,659

 

$

214,934

 

$

209,905

 

$

200,451

 

$

196,004

 

$

187,620

 

Change in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

$

20,578

 

$

9,853

 

$

4,824

 

$

(4,630)

 

$

(9,077)

 

$

(17,461)

 

%

 

 

10.0

%  

 

4.8

%  

 

2.4

%  

 

(2.3)

%  

 

(4.4)

%  

 

(8.5)

%

 

 

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

 

There has been no change in our internal control over financial reporting during the quarter ended March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Table of Contents

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company is a party to legal proceedings and potential claims arising in the ordinary course of our 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 such proceedings and exposure will not have a material adverse impact on the financial condition, results of operations, or cash flows of the Company.

 

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.

 

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 March 31, 2019.

 

Repurchases of our Common Stock

 

The following table summarizes information about our stock repurchases during the quarter ended March 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Total number
of shares
purchased

    


Average price
paid per share

    

Total number of
shares purchased
as part of publicly
announced plans
or program (1)

 

Approximate dollar
value of shares that
may yet be
purchased under
the plans
or program (1)

January 1, 2019 – March 31, 2019

 

 

 —

 

$

 —

 

 

 —

 

$

36,108,029


(1)

As disclosed in our current report on Form 8-K filed on June 21, 2017, our Board of Directors approved a stock repurchase program authorizing us to repurchase up to $50.0 million of our outstanding Class A common stock. The stock repurchase program does not require us to purchase a specific number of shares, and the timing and amount of any shares repurchased are based on market conditions and other factors, including price, regulatory requirements and capital availability. Stock repurchases may be effected through negotiated transactions or open market purchases, including pursuant to a trading plan implemented pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The stock repurchase program does not have an expiration date but may be suspended, modified or discontinued at any time without prior notice.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

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Table of Contents

Item 5. Other Information

 

None

 

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

 

 

 

 

 

 

 

10.1#

 

Amended and Restated Registration Rights Agreement, dated as of November 1, 2018, among PennyMac Financial Services, Inc., New PennyMac Financial Services, Inc. and the Holders.

 

8-K12B

 

November 1, 2018

 

 

 

 

 

 

 

10.2#

 

Amended and Restated Stockholder Agreement, dated as of November 1, 2018, among PennyMac Financial Services, Inc., New PennyMac Financial Services, Inc. and HC Partners LLC.

 

8-K12B

 

November 1, 2018

 

 

 

 

 

 

 

10.3#

 

Master Lease Agreement No. 30350-90000, dated as of December 9, 2015, among Private National Mortgage Acceptance Company, LLC and Banc of America Leasing & Capital, LLC.

 

8-K

 

December 14, 2015

 

 

 

 

 

 

 

10.4

 

HELOC Flow Purchase and Servicing Agreement, dated as of February 25, 2019, by and between PennyMac Loan Services, LLC and PennyMac Corp.

 

*

 

 

 

 

 

 

 

 

 

10.5

 

Amendment No. 6 to Third Amended and Restated Master Repurchase Agreement, dated as of April 26, 2019, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Alpine Securitization LTD, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.

 

*

 

 

 

 

 

 

 

 

 

10.6†

 

PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement for Non-Employee Directors (2019).

 

*

 

 

 

 

 

 

 

 

 

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.

 

**

 

 

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Table of Contents

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101

 

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 (ii) the Consolidated Statements of Income for the quarters ended March 31, 2019 and March 31, 2018, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended March 31, 2019 and March 31, 2018, (iv) the Consolidated Statements of Cash Flows for the quarters ended March 31, 2019 and March 31, 2018 and (v) the Notes to the Consolidated Financial Statements.

 

 

 

 


#     Refiled herewith to provide an updated hyperlink to the appropriate prior filing.

*     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 Section 13 or 15(d) 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: May 6, 2019

By:

/s/ DAVID A. SPECTOR

 

 

David A. Spector

 

 

President and Chief Executive Officer

 

 

 

Dated: May 6, 2019

By:

/s/ ANDREW S. CHANG

 

 

Andrew S. Chang

 

 

Senior Managing Director and

Chief Financial Officer

 

75