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, 2020
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-38727
PennyMac Financial Services, Inc.
(formerly known as New PennyMac Financial Services, Inc.)
(Exact name of registrant as specified in its charter)
Delaware
83-1098934
(State or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification No.)
3043 Townsgate Road, Westlake Village, California
91361
(Address of principal executive offices)
(Zip Code)
(818) 224-7442
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.0001 par value
PFSI
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Class
Outstanding at May 6, 2020
79,232,448
PENNYMAC FINANCIAL SERVICES, INC.
FORM 10-Q
March 31, 2020
TABLE OF CONTENTS
Page
Special Note Regarding Forward-Looking Statements
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited):
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
2
SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Report”) contains certain forward‑looking statements that are subject to various risks and uncertainties. Forward‑looking statements are generally identifiable by use of forward‑looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” “continue,” “plan” or other similar words or expressions.
Forward‑looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward‑looking information. Examples of forward‑looking statements include the following:
·
projections of our revenues, income, earnings per share, capital structure or other financial items;
descriptions of our plans or objectives for future operations, products or services;
forecasts of our future economic performance, interest rates, profit margins and our share of future markets; and
descriptions of assumptions underlying or relating to any of the foregoing expectations regarding the timing of generating any revenues.
Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward‑looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward‑looking statements. There are a number of factors, many of which are beyond our control that could cause actual results to differ significantly from management’s expectations. Some of these factors are discussed below.
You should not place undue reliance on any forward‑looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (“SEC”) on February 28, 2020.
Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:
our exposure to risks of loss resulting from adverse weather conditions, man-made or natural disasters, the effect of climate change, pandemics, including Covid-19 coronavirus pandemic, or other events;
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;
3
changes in macroeconomic and U.S. real estate market conditions;
difficulties inherent in growing loan production volume;
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 ability to pay dividends to our stockholders; and
our organizational structure and certain requirements in our charter documents.
Other factors that could also cause results to differ from our expectations may not be described in this Report or any other document. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.
4
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31,
December 31,
2020
2019
(in thousands, except share amounts)
ASSETS
Cash (includes $773,361 and $52,599 pledged to creditors)
$
878,826
188,291
Short-term investments at fair value
1,884
74,611
Loans held for sale at fair value (includes $5,493,332 and $4,846,138 pledged to creditors)
5,541,987
4,912,953
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors
99,766
107,512
Derivative assets
433,211
159,686
Servicing advances, net (includes valuation allowance of $80,784 and $82,157; $182,531 and $207,460 pledged to creditors)
299,550
331,169
Mortgage servicing rights at fair value (includes $2,163,928 and $2,920,603 pledged to creditors)
2,193,697
2,926,790
Real estate acquired in settlement of loans
20,197
20,326
Operating lease right-of-use assets
71,639
73,090
Furniture, fixtures, equipment and building improvements, net (includes $7,392 and $20,406 pledged to creditors)
29,177
30,480
Capitalized software, net (includes $10,606 and $12,192 pledged to creditors)
74,183
63,130
Investment in PennyMac Mortgage Investment Trust at fair value
797
1,672
Receivable from PennyMac Mortgage Investment Trust
56,223
48,159
Loans eligible for repurchase
980,618
1,046,527
Other
209,378
219,621
Total assets
10,891,133
10,204,017
LIABILITIES
Assets sold under agreements to repurchase
4,444,545
4,141,053
Mortgage loan participation purchase and sale agreements
528,750
497,948
Obligations under capital lease
18,145
20,810
Notes payable secured by mortgage servicing assets
1,294,514
1,294,070
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value
157,109
178,586
Derivative liabilities
43,152
22,330
Operating lease liabilities
89,829
91,320
Accounts payable and accrued expenses
198,897
175,273
Mortgage servicing liabilities at fair value
29,761
29,140
Payable to PennyMac Mortgage Investment Trust
59,281
73,280
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement
46,158
Income taxes payable
613,043
504,569
Liability for loans eligible for repurchase
Liability for losses under representations and warranties
23,202
21,446
Total liabilities
8,527,004
8,142,510
Commitments and contingencies – Note 14
STOCKHOLDERS’ EQUITY
Common stock—authorized 200,000,000 shares of $0.0001 par value;
issued and outstanding, 79,190,245 and 78,515,047 shares, respectively
8
Additional paid-in capital
1,341,219
1,335,107
Retained earnings
1,022,902
726,392
Total stockholders' equity
2,364,129
2,061,507
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter ended March 31,
(in thousands, except per share amounts)
Revenues
Net gains on loans held for sale at fair value:
From non-affiliates
266,366
58,753
From PennyMac Mortgage Investment Trust
77,916
26,023
344,282
84,776
Loan origination fees:
53,591
21,687
3,980
2,243
57,571
23,930
Fulfillment fees from PennyMac Mortgage Investment Trust
41,940
27,574
Net loan servicing fees:
Loan servicing fees:
198,653
166,790
14,521
10,570
28,755
22,017
241,929
199,377
Change in fair value of mortgage servicing rights and mortgage servicing liabilities net of hedging results
1,357
(122,857)
Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust
14,522
4,051
15,879
(118,806)
Net loan servicing fees
257,808
80,571
Net interest income:
Interest income:
71,346
56,537
1,218
1,796
72,564
58,333
Interest expense:
To non-affiliates
59,538
34,477
To PennyMac Mortgage Investment Trust
1,974
3,066
61,512
37,543
Net interest income
11,052
20,790
Management fees from PennyMac Mortgage Investment Trust
9,055
7,248
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust
(857)
192
Results of real estate acquired in settlement of loans
(707)
274
1,681
2,350
Total net revenues
721,825
247,705
Expenses
Compensation
168,436
106,600
Loan origination
46,004
14,497
Servicing
42,166
30,293
Technology
19,107
15,966
Professional services
13,404
5,881
Occupancy and equipment
8,038
6,776
9,940
7,401
Total expenses
307,095
187,414
Income before provision for income taxes
414,730
60,291
Provision for income taxes
108,487
14,156
Net income
306,243
46,135
Earnings per share
Basic
3.89
0.59
Diluted
3.73
0.58
Weighted average shares outstanding
78,689
77,653
82,008
79,286
Dividend declared per share
0.12
—
6
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Quarter ended March 31, 2020
Additional
Total
Number of
Par
paid-in
Retained
stockholders'
shares
value
capital
earnings
equity
(in thousands)
Balance, December 31, 2019
78,515
Stock-based compensation
912
10,185
Issuance of common stock in settlement of directors' fees
1
48
Repurchase of common stock
(238)
(4,121)
Common stock dividend ($0.12 per share)
(9,733)
Balance, March 31, 2020
79,190
Quarter ended March 31, 2019
Balance, December 31, 2018
77,494
1,310,648
343,135
1,653,791
820
1,180
86
Balance, March 31, 2019
78,318
1,311,914
389,270
1,701,192
7
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cash flow from operating activities
Adjustments to reconcile net income to net cash used in operating activities:
Net gains on loans held for sale at fair value
(344,282)
(84,776)
Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread
(15,879)
118,806
Capitalization of interest and advance on loans held for sale at fair value
(18,131)
(16,487)
Accrual of interest on excess servicing spread financing payable to PennyMac Mortgage Investment Trust
Amortization of net debt issuance costs and (premiums)
2,209
(6,570)
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust
875
(156)
Results of real estate acquired in settlement in loans
707
(274)
Stock-based compensation expense
12,368
4,531
Provision for servicing advance losses
3,806
4,820
Depreciation and amortization
5,352
3,159
Amortization of right-of-use assets
2,985
2,359
Purchase of loans held for sale from PennyMac Mortgage Investment Trust
(14,509,209)
(6,959,389)
Origination of loans held for sale
(4,954,316)
(1,542,056)
Purchase of loans held for sale from non-affiliates
(620,859)
(177,678)
Purchase of loans from Ginnie Mae securities and early buyout investors for modification and subsequent sale
(2,299,262)
(941,154)
Sale to non-affiliates and principal payments of loans held for sale
19,337,017
8,536,430
Sale of loans held for sale to PennyMac Mortgage Investment Trust
2,246,127
884,510
Repurchase of loans subject to representations and warranties
(16,282)
(4,064)
Settlement of repurchase agreement derivatives
11,436
Decrease in servicing advances
18,467
24,087
Sale of real estate acquired in settlement of loans
9,459
2,075
(Increase) decrease in receivable from PennyMac Mortgage Investment Trust
(10,133)
2,775
Decrease (increase) in other assets
628
(38,676)
Decrease in operating lease liabilities
(3,469)
(2,977)
Increase in accounts payable and accrued expenses
21,866
10,483
Decrease in payable to PennyMac Mortgage Investment Trust
(17,019)
(28,752)
Increase in income taxes payable
108,474
14,090
Net cash used in operating activities
(730,284)
(134,247)
Cash flow from investing activities
Decrease (increase) in short-term investments
72,727
(31,548)
Net change in assets purchased from PMT under agreement to resell
7,746
5,096
Net settlement of derivative financial instruments used for hedging of mortgage servicing rights
942,005
125,695
Purchase of mortgage servicing rights
(24,104)
(211,481)
Purchase of furniture, fixtures, equipment and leasehold improvements
(994)
(2,126)
Acquisition of capitalized software
(14,108)
(6,750)
Decrease in margin deposits
132,953
28,343
Net cash provided by (used in) investing activities
1,116,225
(92,771)
Cash flow from financing activities
Sale of assets under agreements to repurchase
20,510,531
8,382,013
Repurchase of assets sold under agreements to repurchase
(20,205,416)
(8,164,625)
Issuance of mortgage loan participation purchase and sale certificates
5,273,329
5,555,946
Repayment of mortgage loan participation purchase and sale certificates
(5,242,527)
(5,540,374)
Repayment of obligations under capital lease
(2,665)
(1,514)
Repayment of excess servicing spread financing
(9,308)
(10,552)
Payment of debt issuance costs
(3,388)
(1,536)
Issuance of common stock pursuant to exercise of stock options
3,082
1,283
Payment of withholding taxes relating to stock-based compensation
(5,265)
(4,634)
Payment of dividend to holders of common stock
Net cash provided by financing activities
304,519
216,007
Net increase (decrease) in cash and restricted cash
690,460
(11,011)
Cash and restricted cash at beginning of quarter
188,578
155,924
Cash and restricted cash at end of quarter
879,038
144,913
Cash and restricted cash at end of quarter are comprised of the following:
Cash
144,266
Restricted cash included in Other assets
212
647
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1—Organization
PennyMac Financial Services, Inc. (“PFSI” or the “Company”) is a holding corporation and its primary assets are direct and indirect equity interests in Private National Mortgage Acceptance Company, LLC (“PennyMac”). The Company is the managing member of PennyMac, and it operates and controls all of the businesses and affairs of PennyMac, and consolidates the financial results of PennyMac and its subsidiaries.
PennyMac is a Delaware limited liability company which, through its subsidiaries, engages in mortgage banking and investment management activities. PennyMac’s mortgage banking activities consist of residential mortgage and home equity loan production and loan servicing. PennyMac’s investment management activities and a portion of its loan servicing activities are conducted on behalf of PennyMac Mortgage Investment Trust (“PMT”), a real estate mortgage investment trust that invests primarily mortgage-related assets. PennyMac’s primary wholly owned subsidiaries are:
PennyMac Loan Services, LLC (“PLS”) — a Delaware limited liability company that services portfolios of residential mortgage and home equity loans on behalf of non-affiliates and PMT, purchases, originates and sells new prime credit quality residential mortgage and home equity loans and engages in other mortgage banking activities for its own account and the account of PMT.
PLS is approved as a seller/servicer of mortgage loans by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and as an issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”). PLS is a licensed Federal Housing Administration (“FHA”) Nonsupervised Title II Lender with the U.S. Department of Housing and Urban Development (“HUD”) and a lender/servicer with the Veterans Administration (“VA”) and U.S. Department of Agriculture (“USDA”) (each an “Agency” and collectively the “Agencies”).
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 has an investment management agreement with PMT, which invests in mortgage-related assets and residential mortgage loans.
Note 2—Basis of Presentation and Recently Adopted Accounting Pronouncement
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 Securities and Exchange Commission’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, 2019.
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.
9
Accounting Change
Effective January 1, 2020, the Company adopted FASB Accounting Standards Update 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended (“ASU 2016-13”), using the modified retrospective approach. The adoption of ASU 2016-13 did not have any effect on the Company’s consolidated statements of income, stockholder’s equity or cash flows.
Note 3—Concentration of Risk
A substantial portion of the Company’s activities relate to PMT. Revenues generated from PMT (generally comprised of gains on loans held for sale, loan origination and fulfillment fees, loan servicing fees, change in fair value of excess servicing spread financing (“ESS”), management fees, net interest, and change in fair value of investment in and dividends received from PMT) totaled 22% and 31% of total net revenue for the quarters ended March 31, 2020 and 2019, respectively.
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. The Company has typically utilized the mortgage loan purchase agreement for the purpose of selling to PMT conforming balance non-government insured or guaranteed loans, as well as prime jumbo residential mortgage loans.
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. The Company purchases these mortgage loans “as is” and without recourse of any kind from PMT; however, where the Company has a claim for repurchase, indemnity or otherwise as against a correspondent seller, the Company is entitled, at its sole expense, to pursue any such claim through or in the name of PMT.
10
Following is a summary of loan production activities, including MSR recapture between the Company and PMT:
Net gains on loans held for sale to PMT
81,224
27,146
Mortgage servicing rights and excess servicing spread recapture incurred
(3,308)
(1,123)
Sale of loans held for sale to PMT
Tax service fees earned from PMT included in Loan origination fees
Fulfillment fee revenue
Unpaid principal balance of loans fulfilled for PMT subject to fulfillment fees
16,152,543
8,135,552
Sourcing fees paid to PMT
4,161
1,994
Unpaid principal balance of loans purchased from PMT
13,870,280
6,647,338
Loan Servicing
The Company and PMT have entered into a loan servicing agreement (the “Servicing Agreement”), which was amended and restated effective September 12, 2016 and pursuant to which the Company provides servicing for PMT’s portfolio of residential mortgage loans and subservicing for its portfolio of MSRs. The Servicing Agreement provides for servicing fees of per‑loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced loan or the real estate acquired in settlement of loans (“REO”). The Company also remains entitled to customary ancillary income and market-based fees and charges relating to loans it services for PMT. These include boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and a percentage of late charges.
Prime Servicing
The base servicing fees for non-distressed mortgage loans are calculated through a monthly per-loan dollar amount, with the actual dollar amount for each loan based on whether the loan is a fixed-rate or adjustable-rate loan. The base servicing fee rates are $7.50 per month for fixed-rate loans and $8.50 per month for adjustable-rate loans.
To the extent that these non-distressed loans become delinquent, the Company is entitled to an additional servicing fee per loan ranging from $10 to $55 per month and based on the delinquency, bankruptcy and foreclosure status of the loan or $75 per month if the underlying mortgaged property becomes REO. The Company is also entitled to customary ancillary income and certain market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees.
Special Servicing
The base servicing fee rates for distressed whole loans range from $30 per month for current loans up to $85 per month for loans where the borrower has declared bankruptcy. The base servicing fee rate for REO is $75 per month.
11
Because PMT has a small number of employees and limited infrastructure, the Company is required to provide a range of services and activities significantly greater in scope than the services provided in connection with a customary servicing arrangement. For these services, the Company receives a supplemental servicing fee of $25 per month for each distressed loan. The Company is entitled to reimbursement for all customary, good faith reasonable and necessary out-of-pocket expenses incurred by the Company in performance of its servicing obligations.
The Company is also entitled to certain activity-based fees for distressed whole loans that are charged based on the achievement of certain events. These fees range from $750 for a streamline modification to $1,750 for a full modification or liquidation and $500 for a deed-in-lieu of foreclosure. The Company is not entitled to earn more than one liquidation fee, reperformance fee or modification fee per loan in any 18-month period.
To the extent the Company facilitates rentals of PMT's REO under its REO rental program, the Company collects an REO rental fee of $30 per month per REO, an REO property lease renewal fee of $100 per lease renewal, and a property management fee in an amount equal to the Company’s cost if property management services and/or any related software costs are outsourced to a third-party property management firm or 9% of gross rental income if the Company provides property management services directly. The Company is also entitled to retain any tenant paid application fees and late rent fees and seek reimbursement for certain third-party vendor fees.
Except as otherwise provided in the MSR recapture agreement, when the Company effects a refinancing of a loan on behalf of PMT and not through a third-party lender and the resulting mortgage loan is readily saleable, or the Company originates a loan to facilitate the disposition of a REO, the Company is entitled to receive from PMT market-based fees and compensation consistent with pricing and terms the Company offers unaffiliated parties on a retail basis.
The Company is entitled to retain any incentive payments made to it and to which it is entitled under the U.S. Department of Treasury’s Home Affordable Modification Plan; provided, however, that with respect to any such incentive payments paid to the Company in connection with a loan modification for which PMT previously paid the Company a modification fee, the Company is required to reimburse PMT an amount equal to the incentive payments.
The 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.
Following is a summary of loan servicing and property management fees earned from PMT:
Loan type serviced:
Loans acquired for sale at fair value
536
239
Loans at fair value
300
463
Mortgage servicing rights
13,685
9,868
Property management fees received from PMT included in Other income
123
12
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.
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.
13
Following is a summary of the base management and performance incentive fees earned from PMT:
Base management
6,109
Performance incentive
1,139
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:
Reimbursement of:
Common overhead incurred by the Company
1,540
1,236
120
Expenses incurred on PMT's behalf, net
1,271
570
2,931
1,926
Payments and settlements during the quarter (1)
33,683
15,189
(1)
Payments and settlements include payments for management fees and correspondent production activities itemized in the preceding tables and netting settlements made pursuant to master netting agreements between the Company and PMT.
Conditional Reimbursement of Underwriting Fees
In connection with its initial public offering of common shares of beneficial interest on August 4, 2009 (“IPO”), PMT conditionally agreed to reimburse the Company up to $2.9 million for underwriting fees paid to the IPO underwriters by the Company on PMT’s behalf. In the event a termination fee is payable to the Company under the Management Agreement, and the Company has not received the full amount of the reimbursements and payments under the reimbursement agreement, such amount will be paid in full. On February 1, 2019, the term of the reimbursement agreement was extended to February 1, 2023. The Company received $211,000 and $75,000 in reimbursement of underwriting fees from PMT during the quarters ended March 31, 2020 and 2019, respectively.
14
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:
Interest income relating to Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell
Common shares of beneficial interest of PennyMac Mortgage Investment Trust:
Dividends received
18
36
Change in fair value of investment
(875)
156
Assets purchased from PennyMac Mortgage Investment Trust under agreements to
resell
Fair value
Number of shares
75
15
Financing Activities
Spread Acquisition and MSR Servicing Agreements
The Company has a master spread acquisition and MSR servicing agreement with PMT (the “Spread Acquisition Agreement”) which was amended and restated effective December 19, 2016, pursuant to which the Company may sell to PMT, from time to time, the right to receive participation certificates representing beneficial ownership in ESS arising from Ginnie Mae MSRs acquired by the Company, in which case the Company generally would be required to service or subservice the related mortgage loans for Ginnie Mae. The primary purpose of the amendment and restatement was to facilitate the continued financing of the ESS owned by PMT in connection with the parties’ participation in the GNMA MSR Facility.
To the extent the Company refinances any of the mortgage loans relating to the ESS it has issued, the Spread Acquisition Agreement also contains recapture provisions requiring that the Company transfer to PMT, at no cost, the ESS relating to a certain percentage of the unpaid principal balance of the newly originated mortgage loans. However, under the Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae mortgage loans is not equal to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the refinanced mortgage loans, the Company is also required to transfer additional ESS or cash in the amount of such shortfall. Similarly, in any month where the transferred ESS relating to modified Ginnie Mae mortgage loans is not equal to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the modified mortgage loans, the Spread Acquisition Agreement contains provisions that require the Company to transfer additional ESS or cash in the amount of such shortfall. To the extent the fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, the Company may, at its option, settle its obligation to PMT in cash in an amount equal to such fair market value in lieu of transferring such ESS.
Following is a summary of financing activities between the Company and PMT:
Excess servicing spread financing:
Issuance pursuant to recapture agreement
379
508
Repayment
9,308
10,552
Gain recognized
Interest expense
Recapture incurred pursuant to refinancings by the Company of mortgage loans subject to excess servicing spread financing included in Net gains on loans held for sale at fair value
381
489
Excess servicing spread financing at fair value
16
Receivable from and Payable to PMT
Amounts receivable from and payable to PMT are summarized below:
Receivable from PMT:
Fulfillment fees
17,366
18,285
Allocated expenses and expenses incurred on PMT's behalf
16,314
3,724
Management fees
10,579
Correspondent production fees
8,475
10,606
Servicing fees
4,929
4,659
Interest on assets purchased under agreements to resell
74
85
Conditional reimbursement
221
Payable to PMT:
Amounts advanced by PMT to fund its servicing advances
55,769
70,520
Mortgage servicing rights recapture payable
151
149
3,361
2,611
Exchanged Private National Mortgage Acceptance Company, LLC Unitholders
On May 8, 2013, the Company entered into a tax receivable agreement with certain former owners of PennyMac that provides for the payment from time to time by the Company to PennyMac’s exchanged unitholders of an amount equal to 85% of the amount of the net tax benefits, if any, that the Company is deemed to realize as a result of (i) increases in tax basis of PennyMac’s assets resulting from exchanges of ownership interests in PennyMac and (ii) certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.
Although a reorganization in November 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, to the extent any of the tax benefits specified above are deemed to be realized, under the tax receivable agreement to those certain prior owners of PennyMac who effected exchanges of ownership interests in PennyMac for the Company’s common stock prior to the closing of the reorganization.
Based on the PennyMac unitholder exchanges to date, the Company has recorded a $46.2 million Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement as of March 31, 2020 and December 31, 2019. The Company did not make any payments under the tax receivable agreement during the quarters ended March 31, 2020 and 2019.
.
17
Note 5—Loan Sales and Servicing Activities
The Company originates or purchases and sells loans in the secondary mortgage market without recourse for credit losses. However, the Company maintains continuing involvement with the loans in the form of servicing arrangements and the liability under representations and warranties it makes to purchasers and insurers of the loans.
The following table summarizes cash flows between the Company and transferees as a result of the sale of loans in transactions where the Company maintains continuing involvement with the loans as servicer:
Cash flows:
Sales proceeds
Servicing fees received (1)
166,556
137,148
Net servicing advance recoveries
15,209
24,176
Net of guarantee fees paid to the Agencies.
The following table summarizes unpaid principal balance (the “UPB”) of the loans sold by the Company in which it maintains continuing involvement in the form of owned servicing obligations:
Unpaid principal balance of loans outstanding
175,709,882
168,842,011
Delinquencies:
30-89 days
8,314,858
7,947,560
90 days or more:
Not in foreclosure
2,837,903
3,237,563
In foreclosure
832,922
888,136
Foreclosed
18,541
15,387
Bankruptcy
1,364,331
1,343,816
The following tables summarize the UPB of the Company’s loan servicing portfolio:
Contract
servicing and
rights owned
subservicing
loans serviced
Investor:
Non-affiliated entities:
Originated
Purchased
58,410,013
234,119,895
PennyMac Mortgage Investment Trust
144,830,043
Loans held for sale
5,276,688
239,396,583
384,226,626
Subserviced for the Company (1)
2,343,828
Delinquent loans:
30 days
8,707,825
1,031,940
9,739,765
60 days
2,131,137
157,325
2,288,462
3,977,080
302,515
4,279,595
1,088,058
58,922
1,146,980
23,023
68,125
91,148
15,927,123
1,618,827
17,545,950
1,943,407
146,205
2,089,612
Custodial funds managed by the Company (2)
7,576,973
3,935,103
11,512,076
Certain of the loans for which the Company has purchased the MSRs are subserviced on the Company’s behalf by other loan servicers on an interim basis when servicing of the loans has not yet been transferred to the Company’s loan servicing platform.
(2)
Custodial funds include cash accounts holding funds on behalf of borrowers and investors relating to loans serviced under servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns placement fees on certain of the custodial funds it manages on behalf of the loans’ borrowers and investors, which are included in Interest income in the Company’s consolidated statements of income.
19
December 31, 2019
59,703,547
228,545,558
135,414,668
4,724,006
233,269,564
368,684,232
7,987,132
857,660
8,844,792
2,490,797
172,263
2,663,060
4,070,482
274,592
4,345,074
1,113,806
68,331
1,182,137
18,315
89,421
107,736
15,680,532
1,462,267
17,142,799
1,898,367
136,818
2,035,185
Custodial funds managed by the Company (1)
6,412,291
2,529,984
8,942,275
Following is a summary of the geographical distribution of loans included in the Company’s loan servicing portfolio for the top five and all other states as measured by UPB:
State
California
58,058,528
57,311,867
Florida
31,714,639
28,940,696
Texas
29,709,362
27,909,821
Virginia
22,531,313
22,115,619
Maryland
17,282,260
16,829,320
All other states
224,930,524
215,576,909
20
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 its MSRs, its mortgage servicing liabilities (“MSLs”) and all of its non-cash financial assets other than Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell, to be accounted for at fair value so changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance. The Company has also identified its ESS financing to be accounted for at fair value as a means of hedging the related MSRs’ fair value risk.
21
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Following is a summary of assets and liabilities that are measured at fair value on a recurring basis:
Level 1
Level 2
Level 3
Assets:
Short-term investments
Loans held for sale at fair value
4,735,400
806,587
Derivative assets:
Interest rate lock commitments
317,621
Repurchase agreement derivatives
8,187
Forward purchase contracts
421,860
Forward sales contracts
23,346
MBS put options
4,062
Swaptions
36,696
Put options on interest rate futures purchase contracts
13,676
Call options on interest rate futures purchase contracts
24,434
Total derivative assets before netting
38,110
485,964
325,808
849,882
Netting
(416,671)
Total derivative assets
Mortgage servicing rights at fair value
Investment in PennyMac Mortgage Investment Trust
40,791
5,221,364
3,326,092
8,171,576
Liabilities:
Derivative liabilities:
2,427
12,553
334,111
Total derivative liabilities before netting
346,664
349,091
(305,939)
Total derivative liabilities
189,297
230,022
22
4,529,075
383,878
138,511
12,364
17,097
3,415
2,409
3,945
1,469
5,414
35,285
146,698
187,397
(27,711)
81,697
4,564,360
3,457,366
8,075,712
1,861
19,040
18,045
37,085
38,946
(16,616)
209,587
230,056
23
As shown above, all or a portion of the Company’s loans held for sale, Interest Rate Lock Commitments (“IRLCs”), repurchase agreement derivatives, MSRs, ESS and MSLs are measured using Level 3 fair value inputs. Following are roll forwards of these items for the quarters ended March 31, 2020 and 2019:
Net interest
Repurchase
Mortgage
Loans held
rate lock
agreement
servicing
Assets
for sale
commitments (1)
derivatives
rights
136,650
3,455,505
Purchases and issuances, net
1,641,231
341,980
25,760
2,008,971
Capitalization of interest and advances
18,027
Sales and repayments
(738,928)
Mortgage servicing rights resulting from loan sales
282,315
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk
(7,523)
Other factors
199,918
(1,041,168)
(841,250)
(848,773)
Transfers from Level 3 to Level 2
(489,407)
Transfers to real estate acquired in settlement of loans
(691)
Transfers of interest rate lock commitments to loans held for sale
(363,354)
315,194
3,323,665
Changes in fair value recognized during the quarter relating to assets still held at March 31, 2020
(11,856)
(737,830)
For the purpose of this table, the IRLC asset and liability positions are shown net.
Excess
spread
Liabilities
financing
liabilities
207,726
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust
Accrual of interest
Repayments
Mortgage servicing liabilities resulting from loan sales
6,576
Changes in fair value included in income
(14,522)
(5,955)
(20,477)
186,870
Changes in fair value recognized during the quarter relating to liabilities still outstanding at March 31, 2020
24
260,008
49,338
26,770
2,820,612
3,156,728
784,262
56,983
9,855
227,772
1,078,872
(176,302)
(11,436)
(187,738)
115,751
(6,091)
59,978
(557)
(259,045)
(199,624)
(205,715)
(405,163)
(1,181)
(100,234)
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)
(196,520)
216,110
8,681
224,791
794
(4,051)
(1,631)
(5,682)
205,081
7,844
212,925
Changes in fair value recognized during the quarter relating to liabilities still outstanding at March 31, 2019
The information used in the preceding roll forwards represents activity for any assets and liabilities measured at fair value on a recurring basis and identified as using “Level 3” significant fair value inputs at either the beginning or the end of the periods presented. The Company had transfers among the fair value levels arising from transfers of IRLCs to loans held for sale at fair value upon purchase or funding of the respective loans and from the return to salability in the active secondary market of certain loans held for sale.
25
Assets and Liabilities Measured at Fair Value under the Fair Value Option
Net changes in fair values included in income for assets and liabilities carried at fair value as a result of management’s election of the fair value option by income statement line item are summarized below:
Net
Net gains on
loan
loans held
for sale at
fees
fair value
398,718
101,995
(642,450)
(157,050)
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust
Mortgage servicing liabilities
5,955
1,631
20,477
5,682
Following are the fair value and related principal amounts due upon maturity of loans held for sale accounted for under the fair value option:
Principal
amount
Fair
due upon
maturity
Difference
Current through 89 days delinquent
4,907,823
4,624,282
283,541
4,628,333
4,431,854
196,479
90 days or more delinquent:
547,287
560,331
(13,044)
236,650
241,958
(5,308)
86,877
92,075
(5,198)
47,970
50,194
(2,224)
265,299
188,947
Assets Measured at Fair Value on a Nonrecurring Basis
Following is a summary of assets that were measured at fair value on a nonrecurring basis:
11,104
9,850
The following table summarizes the (losses) gains on assets measured at fair value on a nonrecurring basis:
(3,980)
26
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 secured by mortgage servicing assets and Obligations under capital lease are carried at amortized cost.
These assets and liabilities are classified as “Level 3” fair value items due to the Company’s reliance on unobservable inputs to estimate their fair values. The Company has concluded that the fair values of these assets and liabilities other than the Term Notes included in Notes payable secured by mortgage servicing assets approximate their carrying values due to their short terms and/or variable interest rates.
The Company estimates the fair value of the Term Notes based on non-affiliate broker indications of fair value. The fair value and carrying value of the Term Notes are summarized below:
Term Notes
978,250
1,303,047
Carrying value
Valuation Governance
Most of the Company’s financial assets, and all of its MSRs, ESS, derivative liabilities and MSLs, are carried at fair value with changes in fair value recognized in current period income. Certain of the Company’s financial assets and all of its MSRs, ESS, derivative liabilities and MSLs are “Level 3” fair value assets and liabilities which require 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, the Company has assigned the responsibility for estimating the fair value of these items to specialized staff and subjects the valuation process to significant senior management oversight. The Company’s Financial Analysis and Valuation group (the “FAV group”) is the Company’s specialized staff responsible for estimating the fair values of “Level 3” fair value assets and liabilities other than IRLCs.
With respect to the non-IRLC “Level 3” valuations, the FAV group reports to the Company’s senior management valuation committee, which oversees the valuations. The FAV group monitors the models used for valuation of the Company’s “Level 3” fair value assets and liabilities, including the models’ performance versus actual results, and reports those results to the Company’s senior management valuation committee. The Company’s senior management valuation committee includes the Company’s chief financial, chief risk and deputy chief financial officers.
The FAV group is responsible for reporting to the Company’s senior management valuation committee on the changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the valuation and any changes in model methods and inputs. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation of changes to the significant inputs to the models.
The Company has assigned responsibility for developing the fair values of IRLCs to its Capital Markets Risk Management staff. The fair values developed by the Capital Markets Risk Management staff are reviewed by the Company’s Capital Markets Operations group.
Valuation Techniques and Inputs
Following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” fair value assets and liabilities:
Loans Held for Sale
27
Most of the Company’s loans held for sale at fair value are saleable into active markets and are therefore categorized as “Level 2” fair value assets. The fair values of “Level 2” fair value loans are determined using their contracted selling price or quoted market price or market price equivalent.
Certain of the Company’s loans held for sale are not saleable into active markets and are therefore categorized as “Level 3” fair value assets. Loans held for sale categorized as “Level 3” fair value assets include:
Delinquent government guaranteed or insured loans purchased by the Company from Ginnie Mae guaranteed pools in its loan servicing portfolio. The Company’s right to purchase delinquent government guaranteed or insured loans arises as the result of the loan being at least three months delinquent on the date of repurchase by the Company and provides an alternative to the Company’s obligation to continue advancing principal and interest at the coupon rate of the related Ginnie Mae security. Such repurchased loans may be resold to investors and thereafter may be repurchased to the extent eligible for resale into a new Ginnie Mae guaranteed security. Such eligibility occurs when the repurchased loans become current either through the borrower’s reperformance or through completion of a modification of the loan’s terms.
The Company’s loans held for sale that are not saleable into active markets due to identification of a defect by the Company or to the repurchase by the Company of a loan with an identified defect.
Home equity lines of credit held for sale to PMT. At present, an active market with observable inputs that are significant to the estimation of fair value of home equity lines of credit does not exist.
The Company uses a discounted cash flow model to estimate the fair value of its “Level 3” fair value loans held for sale. The significant unobservable inputs used in the fair value measurement of the Company’s “Level 3” fair value loans held for sale are discount rates, home price projections, voluntary prepayment/resale and total prepayment speeds. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment speeds.
Following is a quantitative summary of key “Level 3” fair value inputs used in the valuation of loans held for sale:
Fair value (in thousands)
Key inputs (1):
Discount rate:
Range
2.9% – 9.2%
3.0% – 9.2%
Weighted average
2.9%
3.0%
Twelve-month projected housing price index change:
1.4% – 2.1%
2.6% – 3.2%
1.6%
2.8%
Voluntary prepayment/resale speed (2):
0.4% – 21.2%
0.4% – 21.4%
18.8%
18.2%
Total prepayment speed (3):
0.6% – 38.2%
0.5% – 39.2%
37.0%
36.2%
Weighted average inputs are based on the fair value of the “Level 3” loans.
Voluntary prepayment/resale speed is measured using Life Voluntary Conditional Prepayment Rate (“CPR”).
(3)
Total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments/resale and defaults.
Changes in fair value of loans held for sale attributable to changes in the loan’s instrument-specific credit risk are measured with reference to the change in the respective loan’s delinquency status and performance history at period
28
end from the later of the prior period or acquisition date. Changes in fair value of loans held for sale are included in Net gains on loans held for sale at fair value in the Company’s consolidated statements of income.
Derivative Financial Instruments
Interest Rate Lock Commitments
The Company categorizes IRLCs as “Level 3” fair value assets or liabilities. The Company estimates the fair value of IRLCs based on quoted Agency MBS prices, its estimate of the fair value of the MSRs it expects to receive in the sale of the loans and the probability that the loan will be funded or purchased (the “pull-through rate”).
The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the MSR component of the Company’s estimate of the fair value of the 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 loan principal and interest payment cash flow component, which has decreased in fair value. Changes in fair value of IRLCs are included in Net gains on loans held for sale at fair value in the consolidated statements of income.
Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:
Fair value (in thousands) (1)
Key inputs (2):
Pull-through rate:
11.8% – 100%
12.2% – 100%
78.9%
86.5%
Mortgage servicing rights value expressed as:
Servicing fee multiple:
0.9 – 5.4
1.4 – 5.7
3.5
4.2
Percentage of unpaid principal balance:
0.2% – 2.8%
0.3% – 2.8%
1.2%
For purpose of this table, IRLC asset and liability positions are shown net.
Weighted average inputs are based on the committed amounts.
Hedging Derivatives
Fair values of derivative financial instruments actively traded on exchanges are categorized by the Company as “Level 1” fair value assets and liabilities; fair values of derivative financial instruments based on observable interest rates, volatilities and prices in the MBS or other markets are categorized by the Company as “Level 2” fair value assets and liabilities.
Changes in the fair value of hedging derivatives are included in Net gains on loans held for sale at fair value, or Net mortgage loan servicing fees – Change in fair value of mortgage servicing rights and mortgage servicing liabilities, as applicable, in the consolidated statements of income.
Repurchase Agreement Derivatives
Through August 21, 2019, the Company had a master repurchase agreement that included incentives for financing loans approved for satisfying certain consumer relief characteristics. These incentives are classified for financial reporting purposes as embedded derivatives and are separated for reporting purposes from the master
29
repurchase agreement. The Company classifies repurchase agreement derivatives as “Level 3” fair value assets. The significant unobservable inputs into the valuation of repurchase agreement derivative assets are the discount rate and the Company’s expected approval rate of the loans financed under the master repurchase agreement. The resulting ratio included in the Company’s fair value estimate was 99.0% at March 31, 2020 and December 31, 2019.
Mortgage Servicing Rights
MSRs are categorized as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the estimation of the fair value of MSRs include the applicable pricing spread (discount rate), prepayment rates of the underlying loans, and annual per-loan cost to service the underlying loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key inputs are not necessarily directly related. Changes in the fair value of MSRs are included in Net loan servicing fees—Change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.
Following are the key inputs used in determining the fair value of MSRs received by the Company when it retains the obligation to service the mortgage loans it sells:
(Amount recognized and unpaid principal balance of underlying loans in thousands)
MSR and pool characteristics:
Amount recognized
Unpaid principal balance of underlying loans
18,330,384
8,145,850
Weighted average servicing fee rate (in basis points)
40
39
Pricing spread (2)
6.8% – 15.6%
5.8% – 15.6%
8.2%
8.9%
Annual total prepayment speed (3)
9.1% – 49.8%
5.8% – 73.0%
14.5%
15.3%
Equivalent average life (in years)
1.5 – 7.8
0.8 – 10.2
5.9
5.8
Per-loan annual cost of servicing
$77 – $100
$78 – $100
$97
$95
Weighted average inputs are based on the UPB of the underlying loans.
Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar London Interbank Offered Rate (“LIBOR”)/swap curve for purposes of discounting cash flows relating to MSRs.
Annual total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is included for informational purposes.
30
Following is a quantitative summary of key inputs used in the valuation of the Company’s MSRs and the effect on the fair value from adverse changes in those inputs:
(Fair value, unpaid principal balance of underlying
loans and effect on fair value amounts in thousands)
$ 2,193,697
$ 2,926,790
Pool characteristics:
$ 231,484,161
$ 225,787,103
Weighted average note interest rate
3.9%
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Pricing spread (2):
8.3% – 18.1%
6.8% – 15.8%
10.7%
8.5%
Effect on fair value of:
5% adverse change
($38,151)
($44,561)
10% adverse change
($74,912)
($87,734)
20% adverse change
($144,545)
($170,155)
Annual total prepayment speed (3):
9.7% – 27.9%
9.3% – 40.9%
16.5%
12.7%
1.3 – 7.2
1.4 – 7.4
5.0
6.1
($61,123)
($63,569)
($119,166)
($124,411)
($226,812)
($238,549)
Annual per-loan cost of servicing:
$78 – $112
$108
($24,995)
($24,516)
($49,991)
($49,032)
($99,981)
($98,065)
The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to MSRs.
The preceding sensitivity analyses are limited in that they were performed as of a particular date; only contemplate the movements in the indicated inputs; do not incorporate changes to other inputs; are subject to the accuracy of the models and inputs used; and do not incorporate other factors that would affect the Company’s overall financial performance in such events, including operational adjustments made by management to account for changing circumstances. For these reasons, the preceding estimates should not be viewed as earnings forecasts.
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Excess Servicing Spread Financing at Fair Value
ESS is categorized 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 MSRs 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 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:
$ 157,109
$ 178,586
Unpaid principal balance of underlying loans (in thousands)
$ 19,153,856
$ 19,904,571
Average servicing fee rate (in basis points)
34
Average excess servicing spread (in basis points)
5.4% – 5.8%
3.0% – 3.3%
5.6%
3.1%
8.7% – 14.9%
8.7% – 16.2%
11.9%
11.0%
2.7 – 7.1
2.7 – 7.2
The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to ESS.
Mortgage Servicing Liabilities
MSLs are categorized as “Level 3” fair value liabilities. The Company uses a discounted cash flow approach to estimate the fair value of MSLs. This approach consists of projecting net servicing cash flows discounted at a rate that the Company believes market participants would use in their determinations of fair value. The key inputs used in the estimation of the fair value of MSLs include the applicable pricing spread (discount rate), prepayment rates, and the annual per-loan cost to service the underlying loans. Changes in the fair value of MSLs are included in Net servicing fees—Change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.
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Following are the key inputs used in determining the fair value of MSLs:
Servicing fee rate (in basis points)
Key inputs:
Pricing spread (1)
Annual total prepayment speed (2)
Annual per-loan cost of servicing
The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to MSLs.
Note 7—Loans Held for Sale at Fair Value
Loans held for sale at fair value include the following:
Loan type
Government-insured or guaranteed
3,998,657
4,222,010
Conventional conforming
735,615
307,065
Jumbo
1,128
Purchased from Ginnie Mae pools serviced by the Company
788,283
374,121
Repurchased pursuant to representations and warranties
17,961
9,244
Home equity lines of credit
343
513
Fair value of loans pledged to secure:
4,937,094
4,322,789
556,238
523,349
5,493,332
4,846,138
Note 8—Derivative Financial Instruments
The Company holds and issues derivative financial instruments in connection with its operating activities. Derivative financial instruments are created as a result of certain of the Company’s operations and when the Company enters into derivative transactions as part of its interest rate risk management activities. Derivative financial instruments created as a result of the Company’s operations include:
IRLCs that are created when the Company commits to purchase or originate a loan for sale.
Derivatives that were embedded in a master repurchase agreement that provided for the Company to receive incentives for financing mortgage loans that satisfied certain consumer relief characteristics under the master repurchase agreement.
The Company also engages in interest rate risk management activities in an effort to moderate the effect of changes in market interest rates on the fair value of the Company’s assets. To manage this fair value risk resulting from interest rate risk, the Company uses derivative financial instruments acquired with the intention of reducing the risk that changes in market interest rates will result in unfavorable changes in the fair value of the Company’s IRLCs, inventory of loans held for sale and the portion of its MSRs not financed with ESS.
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The Company does not designate and qualify any of its derivatives for hedge accounting. The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.
Derivative Notional Amounts and Fair Value of Derivatives
The Company had the following derivative financial instruments recorded on its consolidated balance sheets:
Notional
Derivative
Instrument
assets
Not subject to master netting arrangements:
9,377,614
7,122,316
Used for hedging purposes:
20,480,331
13,618,361
20,196,818
16,220,526
10,700,000
6,100,000
Swaption futures purchase contracts
6,800,000
1,750,000
4,925,000
2,250,000
1,925,000
750,000
Treasury futures purchase contracts
650,000
1,276,000
Treasury futures sale contracts
810,000
1,010,000
Interest rate swap futures purchase contracts
2,560,000
3,210,000
Total derivatives before netting
Collateral placed with (received from) derivative counterparties, net
(110,732)
(11,095)
The following table summarizes notional amount activity for derivative contracts used in the Company’s hedging activities:
Notional amounts, quarter ended March 31, 2020
Beginning of
Dispositions/
End of
quarter
Additions
expirations
112,859,449
(105,997,479)
Forward sale contracts
130,436,231
(126,459,939)
22,000,000
(17,400,000)
7,900,000
(2,850,000)
Swaption futures sale contracts
2,850,000
7,600,000
(4,925,000)
3,540,000
(2,365,000)
Put options on interest rate futures sale contracts
Call options on interest rate futures sale contracts
2,365,000
2,035,000
(2,661,000)
2,461,000
1,225,000
(1,875,000)
Interest rate swap futures sales contracts
1,875,000
Notional amounts, quarter ended March 31, 2019
6,657,026
52,621,845
(49,965,482)
9,313,389
6,890,046
59,673,487
(58,980,528)
7,583,005
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
3,085,000
6,675,000
(6,410,000)
1,512,500
4,462,800
(3,725,300)
10,135,300
(10,135,300)
835,000
4,111,200
(3,136,200)
1,810,000
2,761,200
1,075,000
625,000
400,000
1,025,000
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:
Gross
Gross amount
Net amount
amount of
offset in the
of assets in the
recognized
consolidated
balance sheet
Derivatives not subject to master netting arrangements:
Derivatives subject to master netting arrangements:
524,074
107,403
40,699
12,988
Derivative Assets, Financial Instruments, and Cash Collateral Held by Counterparty
The following table summarizes by significant counterparty the amount of derivative asset positions after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance qualifying for netting.
Gross amount not
Financial
collateral
instruments
received
RJ O'Brien
38,109
JPMorgan Chase Bank, N.A.
27,313
2,196
Goldman Sachs
14,537
2,548
Citibank, N.A.
9,995
Deutsche Bank
7,894
9,138
Wells Fargo Bank, N.A.
5,848
Daiwa Capital Markets
3,084
Mizuho Securities
2,989
1,597
Federal National Mortgage Association
1,980
Others
3,841
282
Offsetting of Derivative Liabilities and Financial Liabilities
Following is a summary of net derivative liabilities and assets sold under agreements to repurchase and related netting amounts. Assets sold under agreements to repurchase do not qualify for netting.
of liabilities
in the
Derivatives not subject to master netting arrangements – Interest rate lock commitments
Derivatives subject to a master netting arrangement:
40,725
20,469
Total derivatives
Assets sold under agreements to repurchase:
Amount outstanding
4,446,795
4,141,680
Unamortized debt issuance cost, net
(2,250)
(627)
4,793,636
4,487,697
4,179,999
4,163,383
Derivative Liabilities, Financial Instruments, and Collateral Held by Counterparty
The following table summarizes by significant counterparty the amount of derivative liabilities and assets sold under agreements to repurchase after considering master netting arrangements and financial instruments or cash pledged that do not qualify under the accounting guidance for netting. All assets sold under agreements to repurchase are secured by sufficient collateral or have fair value that exceeds the liability amount recorded on the consolidated balance sheets.
Gross amounts
not offset in the
pledged
Credit Suisse First Boston Mortgage Capital LLC
1,552,669
(1,533,516)
19,153
1,235,430
(1,235,430)
870,965
(870,965)
936,172
(936,172)
657,315
(657,315)
655,831
(653,170)
2,661
Bank of America, N.A.
654,788
(643,834)
10,954
379,400
(374,190)
5,210
Morgan Stanley Bank, N.A.
296,497
(293,813)
2,684
582,941
(582,941)
Royal Bank of Canada
250,919
(250,919)
175,897
(175,897)
BNP Paribas
196,791
(196,433)
358
183,880
(183,880)
5,674
Mitsubishi UFJ Securities
1,396
11,212
506
1,386
4,489,947
(4,446,795)
4,164,010
(4,141,680)
Following are the gains (losses) recognized by the Company on derivative financial instruments and the income statement lines where such gains and losses are included:
Derivative activity
Income statement line
178,543
16,727
Hedged item:
Interest rate lock commitments and loans held for sale
(225,557)
(34,668)
Net loan servicing fees–Change in fair value of mortgage servicing rights and mortgage servicing liabilities
1,036,570
134,557
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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:
Balance at beginning of quarter
Additions:
Resulting from loan sales
Purchases
308,075
343,523
Change in fair value due to:
Changes in valuation inputs used in valuation model (1)
(915,862)
(161,638)
Other changes in fair value (2)
(125,306)
(97,407)
Total change in fair value
Balance at end of quarter
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets
2,163,928
2,920,603
Principally reflects changes in discount rate and prepayment speed inputs, primarily due to changes in market interest rates, and servicing costs.
Represents changes due to realization of cash flows.
Mortgage Servicing Liabilities at Fair Value
The activity in MSLs is summarized below:
Changes in fair value due to:
4,432
3,301
(10,387)
(4,932)
Principally reflects changes in expected borrower performance and servicer losses given default.
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Contractual servicing fees relating to MSRs and MSLs are recorded in Net loan servicing fees—Loan servicing fees—From non-affiliates on the consolidated statements of income; other fees relating to MSRs and MSLs are recorded in Net loan servicing fees—Loan servicing fees—Other on the Company’s consolidated statements of income. Such amounts are summarized below:
Contractual servicing fees
Other fees:
Late charges
12,613
9,812
4,850
1,661
216,116
178,263
Note 10—Leases
The Company has operating lease agreements relating to its facilities. The Company’s operating lease agreements have remaining terms ranging from less than one year to ten years; some of these operating lease agreements include options to extend the term for up to five years. None of the Company’s operating lease agreements require the Company to make variable lease payments.
The Company’s lease agreements are summarized below:
(dollars in thousands)
Lease expense:
Operating leases
3,932
3,229
Short-term leases
256
217
Sublease income
(32)
Net lease expense included in Occupancy and equipment
4,188
3,414
Other information:
Cash payments for operating leases
4,440
3,846
Operating lease right-of-use assets recognized:
Upon adoption Accounting Standards Update 2016-02, Leases (Topic 842)
58,598
New leases
1,534
Period end weighted averages:
Remaining lease term (in years)
6.9
6.3
Discount rate
The maturities of the Company’s operating lease liabilities are summarized below:
Twelve months ended March 31,
2021
17,111
2022
15,795
2023
14,509
2024
13,755
2025
11,643
Thereafter
32,758
Total lease payments
105,571
Less imputed interest
(15,742)
As of March 31, 2020, the Company had one operating lease that has not yet commenced with an undiscounted minimum payment commitment totaling $1.5 million. The lease is expected to commence in May 2020.
Note 11—Borrowings
The borrowing facilities described throughout this Note 11 contain various covenants, including financial covenants governing the Company’s net worth, debt-to-equity ratio, profitability and liquidity. Management believes that the Company was in compliance with these covenants as of March 31, 2020.
Assets Sold Under Agreements to Repurchase
The Company has multiple borrowing facilities in the form of asset sales under agreements to repurchase. These borrowing facilities are secured by loans held for sale at fair value or participation certificates backed by MSRs. Eligible loans and participation certificates backed by MSRs are sold at advance rates based on the fair value (as determined by the lender) of the assets sold. Interest is charged at a rate based on the lender’s overnight cost of funds rate or on LIBOR depending on the terms of the respective agreements. Loans and MSRs financed under these agreements may be re-pledged by the lenders.
Assets sold under agreements to repurchase are summarized below:
Average balance of assets sold under agreements to repurchase
3,139,328
1,437,957
Weighted average interest rate (1)
3.07
%
4.47
Total interest expense (2)
25,684
8,635
Maximum daily amount outstanding
2,152,588
Carrying value:
Unpaid principal balance
Unamortized debt issuance costs
Weighted average interest rate
2.54
3.29
Available borrowing capacity (3):
Committed
125,810
Uncommitted
1,403,205
782,510
908,320
Fair value of assets securing repurchase agreements:
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell
Servicing advances (4)
182,531
207,460
Mortgage servicing rights (4)
2,151,501
2,902,721
Margin deposits placed with counterparties (5)
5,000
Excludes the effect of amortization of net issuance costs of $1.6 million and premiums of $7.4 million for the quarters ended March 31, 2020 and 2019, respectively.
In 2017, PFSI entered into a master repurchase agreement that provides the Company with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. The Company included $9.3 million of such incentives as reductions in Interest expense during the quarter ended March 31, 2019. The master repurchase agreement expired on August 21, 2019.
The amount the Company is able to borrow under asset repurchase agreements is tied to the fair value of unencumbered assets eligible to secure those agreements and the Company’s ability to fund the agreements’ margin requirements relating to the assets financed.
(4)
Beneficial interests in the Ginnie Mae MSRs and servicing advances are pledged to the Issuer Trust and together serve as the collateral backing the VFN, 2018-GT1 Notes and 2018-GT2 Notes described in Notes payable secured by mortgage servicing assets. 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 secured by mortgage servicing assets on the Company's consolidated balance sheets.
(5)
Margin deposits are included in Other assets on the Company’s consolidated balance sheets.
Following is a summary of maturities of outstanding advances under repurchase agreements by maturity date:
Remaining maturity at March 31, 2020
Within 30 days
1,585,379
Over 30 to 90 days
2,614,849
Over 90 to 180 days
246,567
Total assets sold under agreements to repurchase
Weighted average maturity (in months)
1.2
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, 2020:
maturity of advances
under repurchase
Counterparty
Amount at risk
Facility maturity
Credit Suisse First Boston Mortgage Capital LLC (1)
983,098
April 26, 2020
245,618
April 24, 2020
JP Morgan Chase Bank, N.A.
97,688
June 1, 2020
October 9, 2020
67,788
April 10, 2020
August 4, 2020
61,809
May 4, 2020
March 11, 2021
26,408
June 12, 2020
August 21, 2020
24,012
April 30, 2020
15,575
June 16, 2020
July 31, 2020
The calculation of the amount at risk includes the VFN and the Term Notes because 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 secured by mortgage servicing assets below. 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 secured by mortgage servicing assets on the Company's consolidated balance sheets.
The Company is subject to margin calls during the period the repurchase agreements are outstanding and therefore may be required to repay a portion of the borrowings before the respective agreements mature if the fair value (as determined by the applicable lender) of the assets securing those agreements decreases.
Mortgage Loan Participation Purchase and Sale Agreements
Certain of the borrowing facilities secured by loans held for sale are in the form of mortgage loan participation purchase and sale agreements. Participation certificates, each of which represents an undivided beneficial ownership interest in mortgage loans that have been pooled with Fannie Mae, Freddie Mac or Ginnie Mae, are sold to a lender pending the securitization of the mortgage loans and sale of the resulting securities. A commitment to sell the securities resulting from the pending securitization between the Company and a non-affiliate is also assigned to the lender at the
41
time a participation certificate is sold.
The purchase price paid by the lender for each participation certificate is based on the trade price of the security, plus an amount of interest expected to accrue on the security to its anticipated delivery date, minus a present value adjustment, any related hedging costs and a holdback amount that is based on a percentage of the purchase price. The holdback amount is not required to be paid to the Company until the settlement of the security and its delivery to the lender.
The mortgage loan participation purchase and sale agreements are summarized below:
Average balance
247,811
236,667
2.64
3.68
Total interest expense
1,810
2,311
530,220
548,038
Excludes the effect of amortization of facility fees totaling $173,000 and $135,000 for the quarters ended March 31, 2020 and 2019, respectively.
2.18
3.05
Fair value of loans pledged to secure mortgage loan participation purchase and sale agreements
Obligations Under Capital Lease
The Company has a capital lease transaction secured by certain fixed assets and capitalized software. The capital lease matures on June 13, 2022 and bears interest at a spread over one-month LIBOR.
Obligations under capital lease are summarized below:
19,406
3.36
4.50
167
66
6,605
3.18
3.74
Assets pledged to secure obligations under capital lease:
Furniture, fixtures and equipment
7,392
20,406
Capitalized software
12,192
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Notes Payable Secured by Mortgage Servicing Assets
On February 28, 2018, the Company, through PNMAC GMSR ISSUER TRUST (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 of 1933, as amended (the “Securities Act”). The 2018-GT1 Notes bear interest at a rate equal to one-month LIBOR plus 2.85% per annum. The 2018-GT1 Notes will mature on February 25, 2023 or, if extended pursuant to the terms of the related indenture supplement, February 25, 2025 (unless earlier redeemed in accordance with their terms). Concurrent with issuance of the 2018-GT1 Notes, the Company also redeemed certain notes previously issued by the Issuer Trust.
On August 10, 2018, the Company, through the Issuer Trust, issued an aggregate principal amount of $650 million in Term Notes (the “2018-GT2 Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The 2018-GT2 Notes bear interest at a rate equal to one-month LIBOR plus 2.65% per annum. The 2018-GT2 Notes will mature on August 25, 2023 or, if extended pursuant to the terms of the related indenture supplement, August 25, 2025 (unless earlier redeemed in accordance with their terms). Concurrent with the issuance of the 2018-GT2 Notes, the Company also redeemed certain notes previously issued by the Issuer Trust.
All of the Term Notes rank pari passu with each other and with the VFN issued by the Issuer Trust to PLS and are secured by certain participation certificates relating to Ginnie Mae MSRs and ESS that are financed pursuant to the GNMA MSR Facility.
MSR Note Payable
On February 1, 2018, the Company issued a note payable that is secured by Freddie Mac MSRs. Interest is charged at a rate based on LIBOR plus the applicable contract margin. The facility expires on April 24, 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, 2020 or 2019.
Notes payable are summarized below:
1,300,000
4.43
5.25
14,846
17,510
Excludes the effect of amortization of debt issuance costs totaling $445,000 and $734,000 for the quarters ended March 31, 2020 and 2019, respectively.
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(5,486)
(5,930)
4.38
4.46
Assets pledged to secure notes payable:
Servicing advances (1)
Mortgage servicing rights (1)
2,117,619
2,861,442
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 secured by mortgage servicing assets on the Company's consolidated balance sheet.
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. The Company did not borrow under this facility during the quarter ended March 31, 2020 or the year ended December 31, 2019.
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Corporate revolving line of credit is summarized below:
Interest expense (1)
503
485
Unused amount
150,000
Cash pledged to secure corporate revolving line of credit
773,361
52,599
Interest expenses represent debt issuance costs and non-utilization fees.
In conjunction with the Company’s 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.
Following is a summary of ESS:
Issuances of excess servicing spread to PennyMac Mortgage Investment Trust pursuant to recapture agreement
Change in fair value
Note 12—Liability for Losses Under Representations and Warranties
Following is a summary of the Company’s liability for losses under representations and warranties:
21,155
Provision for losses on loans sold:
Resulting from sales of loans
3,712
1,067
Reduction in liability due to change in estimate
(1,676)
(4,210)
Losses incurred, net
(280)
(30)
17,982
Unpaid principal balance of loans subject to representations and warranties at end of quarter
186,517,598
133,698,782
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Note 13—Income Taxes
The Company’s effective income tax rates were 26.2% and 23.5% for the quarters ended March 31, 2020 and 2019, respectively. The increase in effective tax rate in the quarter ended March 31, 2020 compared to the same period in 2019 was due to reduced impact of the permanent and favorable tax adjustment for equity compensation in the quarter ended March 31, 2020 compared to the same period in 2019. The equity compensation deduction for tax purposes was lower by $0.4 million while the pretax income increased by $354.4 million, thereby reducing the effect of the tax adjustment on the effective tax rate.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), passed in March, 2020, introduced a number of tax law changes which are generally taxpayer favorable. Based on a preliminary analysis, the Company does not anticipate the recording of any material permanent differences resulting from the CARES Act.
Note 14—Commitments and Contingencies
Litigation
From time to time, the Company may be a party to legal proceedings, lawsuits and other claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on the financial condition, results of operations, or cash flows of the Company.
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 (the “Delaware Court”), 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 a corporate reorganization (the “Reorganization”), which the Company formed as a Delaware corporation on July 2, 2018, and became the top-level parent holding company for the consolidated PennyMac business on November 1, 2018, 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 December 19, 2019, the Delaware Court denied a motion to dismiss filed by the Company and certain of its directors and officers. While no assurance can be provided as to the ultimate outcome of this claim or the account of any losses to the Company, the Company believes the Garfield Action is without merit and plans to vigorously defend the matter, which remains pending.
On November 5, 2019, Black Knight Servicing Technologies, LLC, a wholly-owned indirect subsidiary of Black Knight, Inc. (“BKI”), filed a Complaint and Demand for Jury Trial in the Circuit Court for the Fourth Judicial Circuit in and for Duval County, Florida (the “Florida State Court”), captioned Black Knight Servicing Technologies, LLC v. PennyMac Loan Services, LLC, Case No. 2019-CA-007908 (the “BKI Complaint”). Allegations contained within the BKI Complaint include breach of contract and misappropriation of MSP® System trade secrets in order to develop an imitation mortgage-processing system intended to replace the MSP® System. The BKI Complaint seeks damages for breach of contract and misappropriation of trade secrets, injunctive relief under the Florida Uniform Trade Secrets Act and declaratory judgment of ownership of all intellectual property and software developed by or on behalf of PLS as a result of its wrongful use of and access to the MSP® System and related trade secret and confidential information. On April 6, 2020, the Florida State Court entered an order granting a motion to compel arbitration filed by the Company. On April 21, 2020, BKI filed a motion for reconsideration of the order compelling arbitration. On May 6, 2020, the
Florida State Court entered an order denying BKI's motion for reconsideration. Also on May 6, 2020, BKI filed a notice of appeal with respect to both orders. While no assurance can be provided as to the ultimate outcome of BKI Complaint or the account of any losses to the Company, the Company believes the BKI Complaint is without merit and plans to vigorously defend the matter, which remains pending.
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Regulatory Matters
The Company and/or its subsidiaries are subject to various state and federal regulations related to its loan production and servicing operations by the various states it operates in as well as federal agencies such as the Consumer Financial Protection Bureau, HUD, and the FHA and is subject to the requirements of the Agencies to which it sells loans and for which it performs loan servicing activities. As a result, the Company may become involved in information-gathering requests, reviews, investigations and proceedings (both formal and informal) by such various federal, state and local regulatory bodies.
Commitments to Purchase and Fund Mortgage Loans
The Company’s commitments to purchase and fund loans totaled $9.4 billion as of March 31, 2020.
Note 15—Stockholders’ Equity
In June 2017, the Company’s board of directors authorized a stock repurchase program under which the Company may repurchase up to $50 million of its outstanding common stock. Following is a summary of activity under the stock repurchase program:
Cumulative
total (1)
Shares of common stock repurchased
238
1,054
Cost of shares of common stock repurchased
4,121
19,069
Amounts represent the total shares of common stock repurchased under the stock repurchase program through March 31, 2020.
Note 16—Net Gains on Loans Held for Sale
Net gains on loans held for sale at fair value is summarized below:
From non-affiliates:
Cash loss:
Loans
111,757
(41,242)
Hedging activities
(122,666)
(8,927)
(10,909)
(50,169)
Non-cash gain:
Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales
275,739
114,957
Provision for losses relating to representations and warranties:
Pursuant to loan sales
(3,712)
(1,067)
1,676
4,210
Change in fair value of loans and derivatives held at quarter end:
(72,080)
(164)
Hedging derivatives
(102,891)
(25,741)
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Note 17—Net Interest Income
Net interest income is summarized below:
Cash and short-term investments
1,711
1,933
46,426
31,343
Placement fees relating to custodial funds
23,209
23,261
From PennyMac Mortgage Investment Trust—Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell
To non-affiliates:
Assets sold under agreements to repurchase (1)
Notes payable
15,349
17,995
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations
14,871
4,311
Interest on mortgage loan impound deposits
1,657
1,159
To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value
In 2017, the Company entered into a master repurchase agreement that provided the Company with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. The Company included $9.3 million of such incentives as reductions of Interest expense during the quarter ended March 31, 2019. The master repurchase agreement expired on August 21, 2019.
Note 18—Stock-based Compensation
As of March 31, 2020, the Company had one stock-based compensation plan. Following is a summary of the stock-based compensation activity:
Grants:
Units:
Performance-based RSUs
422
665
Stock options
273
344
Time-based RSUs
304
330
Grant date fair value:
14,768
15,253
2,770
2,965
10,662
7,545
28,200
25,763
Vestings and exercises:
Performance-based RSUs vested
603
648
Stock options exercised
180
89
Time-based RSUs vested
348
291
Compensation expense
Note 19—Earnings Per Share of Common Stock
Basic earnings per share of common stock is determined using net income attributable to the Company’s common stockholders divided by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock is determined by dividing net income attributable to the Company’s common stockholders by the weighted average number of shares of common stock outstanding, assuming all dilutive shares of common stock were issued.
Potentially dilutive shares of common stock include non-vested stock-based compensation awards. 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.
The following table summarizes the basic and diluted earnings per share calculations:
Weighted average basic shares of common stock outstanding
Effect of dilutive shares:
Common shares issuable under stock-based compensation plan
3,319
1,633
Weighted average shares of common stock applicable to diluted earnings per share
Basic earnings per share of common stock
Diluted earnings per share of common stock
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Calculations of diluted earnings per share require certain potentially dilutive shares to be excluded when their inclusion in the diluted earnings per share calculation would be anti-dilutive. The following table summarizes the anti-dilutive weighted-average number of outstanding performance-based restricted share units (“RSUs”), time-based RSUs, and stock options excluded from the calculation of diluted earnings per share:
(in thousands except for weighted-average exercise price)
Performance-based RSUs (1)
162
1,279
117
61
Stock options (2)
105
706
Total anti-dilutive shares and units
384
2,046
Weighted average exercise price of anti-dilutive stock options (2)
35.03
24.26
Certain performance-based RSUs were outstanding but not included in the computation of earnings per share because the performance thresholds included in such RSUs have not been achieved.
Certain stock options were outstanding but not included in the computation of diluted earnings per share because the weighted-average exercise prices were above the average stock prices for the period.
Note 20—Supplemental Cash Flow Information
Cash paid for interest
64,527
33,952
Cash paid for income taxes, net
Non-cash investing activity:
Unsettled portion of MSR acquisitions
1,656
16,291
Operating right-of-use assets recognized
Non-cash financing activity:
Issuance of Excess servicing spread payable to PennyMac Mortgage Investment Trust pursuant to a recapture agreement
Issuance of common stock in settlement of director fees
Note 21—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 established by the Federal Housing Finance Agency (“FHFA”) 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 UPB 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 (including nonperforming Agency loans that are in payment forbearance) in excess of 600 basis points.
On January 31, 2020, FHFA proposed changes to the eligibility requirements, which would increase the tangible net worth requirement to $2.5 million plus 35 basis points of the UPB of loans serviced for Ginnie Mae and 25 basis points of the UPB of all other 1-4 unit loans serviced, and increase the liquidity requirement to 4 basis points of the aggregate UPB serviced for Fannie Mae and Freddie Mac and 10 basis points of the UPB serviced for Ginnie Mae plus 300 basis points of total nonperforming Agency servicing UPB (including nonperforming Agency loans that are in payment forbearance) in excess of 400 basis points.
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The Company is also subject to financial eligibility requirements for Ginnie Mae single-family issuers. The eligibility requirements include net worth of $2.5 million plus 35 basis points of PLS' outstanding Ginnie Mae single-family obligations and a liquidity requirement equal to the greater of $1.0 million or 10 basis points of PLS' outstanding Ginnie Mae single-family securities.
The Agencies’ capital and liquidity requirements, the calculations of which are specified by each Agency, are summarized below:
Agency–company subject to requirement
Actual (1)
Requirement (1)
Capital
Fannie Mae & Freddie Mac – PLS
2,648,008
600,991
2,247,751
585,674
Ginnie Mae – PLS
2,324,574
931,240
1,907,398
910,456
HUD – PLS
2,500
Liquidity
875,336
81,942
257,794
79,991
222,121
216,119
Adjusted net worth / Total assets ratio
Tangible net worth / Total assets ratio
Calculated in compliance with the respective Agency’s requirements.
Noncompliance with an Agency’s requirements can result in such Agency taking various remedial actions up to and including terminating PennyMac’s ability to sell loans to and service loans on behalf of the respective Agency.
Note 22—Segments
The Company operates in three segments: production, servicing and investment management.
Two of the segments are in the mortgage banking business: production and servicing. The production segment performs loan origination, acquisition and sale activities. The servicing segment performs servicing of loans, execution and management of early buyout loan transactions and servicing of loans sourced and managed by the investment management segment for PMT, including executing the loan resolution strategy identified by the investment management segment relating to distressed mortgage loans.
The investment management segment represents the activities of the Company’s investment manager, which include sourcing, performing diligence, bidding and closing investment asset acquisitions and managing the acquired assets and correspondent production activities for PMT.
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Financial performance and results by segment are as follows:
Mortgage Banking
Investment
Production
Management
Revenue: (1)
316,635
27,647
Loan origination fees
Interest income
26,585
45,979
20,157
41,346
61,503
6,428
4,633
11,061
(9)
(10)
(680)
(690)
807
Total net revenue
422,564
289,408
711,972
9,853
182,433
118,566
300,999
6,096
240,131
170,842
410,973
3,757
Segment assets at quarter end
5,686,878
5,186,188
10,873,066
18,067
All revenues are from external customers.
66,721
18,055
Net interest income (expense):
14,369
43,964
3,915
33,621
37,536
10,454
10,343
20,797
(7)
488
765
1,253
1,563
2,816
129,167
109,734
238,901
8,804
82,161
98,571
180,732
6,682
47,006
11,163
58,169
2,122
2,501,468
5,299,813
7,801,281
17,719
7,819,000
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Note 23—Subsequent Events
Management has evaluated all events and transactions through the date the Company issued these consolidated financial statements. During this period:
On April 1, 2020, the Company issued a series of variable funding notes, the Series 2020-SPIADVF1 Notes (“GMSR Servicing Advance Notes”), to be sold under agreement to repurchase pursuant to a Master Repurchase Agreement, dated as of April 1, 2020, with Credit Suisse First Boston Mortgage Capital LLC (“CSFB”), acting as administrative agent on behalf of Credit Suisse AG, Cayman Islands Branch (“CSCIB”), as buyer (the “GMSR Servicing Advances Repurchase Agreement”).
The GMSR Servicing Advance Notes leverage an existing MSR financing facility to support a separately defined servicing advance facility within the existing structure and provide the Company enhanced ability to finance its servicing advance obligations to Ginnie Mae and its security holders as necessary and afford borrowers critical relief as required under the recently enacted CARES Act. Specifically, the GMSR Servicing Advances Repurchase Agreement provides the Company with financing secured by its servicing advances to pay, in accordance with the Ginnie Mae requirements, in the event borrowers are delinquent: (i) regularly scheduled monthly principal and bond interest to mortgage-backed securities holders; (ii) taxes, homeowner’s insurance, and other escrowed items; and (iii) other expenses related to servicing delinquent loans as specified by (A) state and federal laws and (B) government agencies, including the FHA, the VA, and the USDA.
On April 24, 2020, PLS amended and renewed its credit facilities with Credit Suisse First Boston Mortgage Capital LLC to (i) increase the borrowing capacity under the GMSR Servicing Advances Repurchase Agreement from $400 million to $600 million, all of which is committed and may be used to finance the servicing advances related to delinquent FHA, VA, and USDA loans, including delinquencies caused by forbearance in accordance with the CARES Act, and (ii) increase the maximum combined purchase price available to PLS under the Credit Suisse Credit Facilities from $2.0 billion to $2.25 billion, $1.5 billion of which is now available to finance Ginnie Mae EBO Loans. The maximum combined purchase price of the GMSR Servicing Spread Agreement, the Fannie Mae Servicing Spread Agreement and the Freddie Mac Servicing Spread Agreement may not exceed $400 million. After renewal, the maturity dates for the Credit Suisse Credit Facilities are April 23, 2021 or later, other than the Freddie Mac Servicing Spread Agreement, which matures on October 21, 2020.
On May 7, the Company announced that the board of directors declared a cash dividend of $0.12 per common share. The dividend will be paid on May 28, 2020 to common shareholders of record as of May 18, 2020.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
The following discussion and analysis of financial condition and results of operations should be read with the consolidated financial statements including the related notes of PennyMac Financial Services, Inc. (“PFSI”) included within this Quarterly Report on Form 10-Q.
Statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those expressed or implied in such statements. You can identify these forward-looking statements by words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors,” as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and our other filings with the United States Securities and Exchange Commission (“SEC”). The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date hereof and we assume no obligation to update or supplement any forward-looking statements.
Overview
The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to the words “we,” “us,” “our” and the “Company” refer to PFSI.
Our Company
We are a specialty financial services firm with a comprehensive mortgage platform and integrated business primarily focused on the production and servicing of U.S. residential mortgage and home equity loans (activities which we refer to as mortgage banking) and the management of investments related to the U.S. mortgage market. We believe that our operating capabilities, specialized expertise, access to long-term investment capital, and our management’s experience across all aspects of the mortgage business will allow us to profitably grow these activities and capitalize on other related opportunities as they arise in the future.
We operate and control all of the business and affairs and consolidate the financial results of Private National Mortgage Acceptance Company, LLC (“PennyMac”). PennyMac was founded in 2008 by members of our executive leadership team and two strategic partners, BlackRock Mortgage Ventures, LLC and HC Partners, LLC, formerly known as Highfields Capital Investments, LLC, together with its affiliates.
We were formed as a Delaware corporation on July 2, 2018. We became the top-level parent holding company for the consolidated PennyMac business pursuant to a corporate reorganization (the “Reorganization”) that was consummated on November 1, 2018. Before the Reorganization, PNMAC Holdings, Inc. (formerly known as PennyMac Financial Services, Inc.) (“PNMAC Holdings”) was our top-level parent holding company and our public company registrant.
One result of the consummation of the Reorganization was that our equity structure was changed to create a single class of publicly-held common stock as opposed to the two classes that were in place before the Reorganization. For tax purposes, the Reorganization was to be treated as an integrated transaction that qualifies as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code and/or a transfer described in Section 351(a) of the Internal Revenue Code. PNMAC Holdings’ financial statements remain our historical financial statements.
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We conduct our business in three segments: production, servicing (together, production and servicing comprise our mortgage banking activities) and investment management.
The production segment performs loan origination, acquisition and sale activities.
The servicing segment performs loan servicing for both newly originated loans we are holding for sale and loans we service for others, including for PMT.
The investment management segment represents our investment management activities, which include the activities associated with investment asset acquisitions and dispositions such as sourcing, due diligence, negotiation and settlement.
Our principal mortgage banking subsidiary, PennyMac Loan Services, LLC (“PLS”), is a non-bank producer and servicer of mortgage and home equity loans in the United States. PLS is a seller/servicer for the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), each of which is a government‑sponsored entity (“GSE”). PLS is also an approved issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”), a lender of the Federal Housing Administration (“FHA”), and a lender/servicer of the Veterans Administration (“VA”) and the U.S. Department of Agriculture (“USDA”). We refer to each of Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA and USDA as an “Agency” and collectively as the “Agencies.” PLS is able to service loans in all 50 states, the District of Columbia, Guam and the U.S. Virgin Islands, and originate loans in 49 states and the District of Columbia, either because PLS is properly licensed in a particular jurisdiction or exempt or otherwise not required to be licensed in that jurisdiction.
Our investment management subsidiary is PNMAC Capital Management, LLC (“PCM”), a Delaware limited liability company registered with the Securities and Exchange Commission (“SEC”) as an investment adviser under the Investment Advisers Act of 1940, 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.
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Results of Operations
Our results of operations are summarized below:
(dollars in thousands, except per share amounts)
Revenues:
Return on average common stockholders' equity
56.0
11.0
Income before provision for income taxes by segment:
Mortgage banking:
Total mortgage banking
Investment management
During the quarter:
Interest rate lock commitments issued
24,804,994
10,134,199
At end of quarter:
Interest rate lock commitments outstanding
3,821,942
Unpaid principal balance of loan servicing portfolio:
Owned:
231,484,161
219,834,361
2,635,734
1,000,403
2,573,121
223,407,885
Subserviced for PMT
101,287,428
324,695,313
Net assets of PennyMac Mortgage Investment Trust
1,823,368
1,727,589
Book value per share
29.85
21.72
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During the quarter ended March 31, 2020, the United States was significantly impacted by the effects of the COVID-19 pandemic (the “Pandemic” or “COVID-19”) and the effects of market and government responses to the pandemic. These developments have triggered an economic recession in the United States. Initial unemployment claims totaled 26 million for the five weeks ended April 18 as compared to one million for the preceding five weeks.
This sudden and significant increase in unemployment has created financial hardships for many existing borrowers. As part of its response to the Pandemic, the federal government included requirements in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act that we provide borrowers with substantial payment forbearance on loans we service subject to Agency securitizations. As a result of this requirement, we have seen and expect to further see a large increases in delinquencies in our servicing portfolio which will increase our cost to service those loans and require us to finance substantial amounts of advances of principal and interest payments to the holders of the securities holding those loans.
In the near term, or in subsequent quarters, we expect this development to have a negative effect on the earnings of our servicing segment before taking into account the effect of future developments on the valuation of our MSRs by, among other things, reducing servicing fee income, reducing our ability to earn gains on early buyout loans and reducing the amount of placement fees we earn on custodial deposits related to these loans, increasing our cost to service due to higher delinquency and default rates, as well as increased financing costs due to the need to advance funds on behalf of delinquent borrowers. These effects may be offset by growth in our loan servicing portfolio, increases in the servicing fees we earn from PMT for servicing the delinquent loans in its loan servicing portfolio and gains on early buyout loans as those borrowers reperform.
Before the onset of the Pandemic, the mortgage origination market was experiencing healthy demand owing to historically low interest rates in the United States. The government’s response to the onset of the Pandemic, including fiscal stimulus and infusions of additional liquidity by the Federal Reserve into financial markets acted to further lower market mortgage interest rates. These developments have acted to sustain heightened demand for new mortgage loans despite the slowdown in overall economic activity. The mortgage origination market for 2019 was estimated at $2.3 trillion; current forecasts estimate the origination market to approximate $2.4 trillion for 2020 and $2.2 trillion for 2021. However, the uncertainties and strains on many organizations introduced by the Pandemic have caused some market participants to scale back or exit mortgage loan production activities which, combined with constraints on mortgage industry origination capacity that existed before the Pandemic, has allowed us to realize higher gain-on sale margins in our production segment.
The Pandemic had a substantial negative effect on the investments of PMT. As a result, PMT recognized a net loss of $595 million. Because the effects of the Pandemic began to be realized during March of 2020, its effects on the base management fees were we earn from PMT were not significant. However, we expect base management fees to be significantly reduced in future periods and we do not expect to recognize performance incentive fees for the foreseeable future because of the losses PMT incurred during the quarter ended March 31, 2020.
The current environment caused by the Pandemic in the United States is historically unprecedented and the source of much uncertainty surrounding future economic and market prospects and the ongoing effects of this developing situation on our future prospects are difficult to anticipate, for further discussion of the potential impacts of the Pandemic please also see “Risk Factors” in Part II, Item 1A.
For the quarter ended March 31, 2020, income before provision for income taxes increased $354.4 million compared to the same period in 2019. The increase was primarily due to:
increases in production income (Net gains on loans held for sale at fair value, Loan origination fees and Fulfillment fees from PennyMac Mortgage Investment Trust); and
increases in Net loan servicing fees, partially offset by;
increases in total expenses.
The increases in production income reflect higher production volume and improved profit margins. The increase in Net loan servicing fees was due to a combination of increased loan servicing fees resulting from growth in
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our loan servicing portfolio and changes in the fair value of our MSRs, MSLs and ESS, net of hedging results, compared to the same period in 2019. The increases in total expenses were mainly due to increases in loan origination and compensation expenses, reflecting the continuing growth of our mortgage banking activities.
Net Gains on Loans Held for Sale at Fair Value
During the quarter ended March 31, 2020, we recognized Net gains on loans held for sale at fair value totaling $344.3 million, an increase of $259.5 million, compared to the same period in 2019. The increase was primarily due to the combined effects of decreasing interest rates on demand for loans and of reduced industry capacity on profit margins during 2020 as compared to 2019 as discussed above.
Our net gains on loans held for sale are summarized below:
Total cash loss
Change in fair value of loans and derivative financial instruments outstanding at year end:
3,572
(9,178)
Total non-cash gain
277,275
108,922
Total gains on sale from non-affiliates
Interest rate lock commitments issued:
Government-insured or guaranteed mortgage loans
19,029,138
8,831,495
Conventional mortgage loans
5,765,876
1,301,243
Jumbo mortgage loans
8,304
1,461
2,668,929
Commitments to fund and purchase loans
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Our gain on sale of loans held for sale includes both cash and non-cash elements. We receive proceeds on sale that include our estimate of the fair value of MSRs and we incur liabilities for mortgage servicing liabilities (which represents the fair value of the costs we expect to incur in excess of the fees we receive for early buyout of delinquent loans (“EBO loans”) we have resold) and for the fair value of our estimate of the losses we expect to incur relating to the representation and warranties we provide in our loan sale transactions.
Non-cash elements of gain on sale of loans
The MSRs, MSLs, and liability for representations and warranties we recognize represent our estimate of the fair value of future benefits and costs we will realize for years in the future. These estimates represented approximately 79% of our gain on sale of loans at fair value for the quarters ended March 31, 2020, as compared to 128% for the quarter ended March 31, 2019. How we measure and update our measurements of MSRs and MSLs is detailed in Note 6 – Fair value – Valuation Techniques and Inputs to the consolidated financial statements included in this Quarterly Report.
Our agreements with the purchasers and insurers include representations and warranties related to the loans we sell. The representations and warranties require adherence to purchaser and insurer origination and underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.
In the event of a breach of our representations and warranties, we may be required to either repurchase the loans with the identified defects or indemnify the purchaser or insurer. In such cases, we bear any subsequent credit loss on the loans. Our credit loss may be reduced by any recourse we have to correspondent originators that sold such loans to us and breached similar or other representations and warranties. In such event, we have the right to seek a recovery of related repurchase losses from that correspondent seller.
The method used to estimate our losses on representations and warranties is a function of our estimate of future defaults, loan repurchase rates, the severity of loss in the event of default, if applicable, and the probability of reimbursement by the correspondent loan seller. We establish a liability at the time loans are sold and review our liability estimate on a periodic basis.
We recorded provisions for losses under representations and warranties relating to current loan sales as a component of Net gains on loans held for sale at fair value totaling $3.7 million for the quarter ended March 31, 2020, compared to $1.1 million for the quarter ended March 31, 2019. We also recorded a reduction in the liability of $1.7 million during the quarter ended March 31, 2020, compared to $4.2 million during the quarter ended March 31, 2019. The reductions in the liability resulted from previously sold loans meeting performance criteria established by the Agencies which significantly limits the likelihood of certain repurchase or indemnification claims.
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Following is a summary of loan repurchase activity and the UPB of loans subject to representations and warranties:
Indemnification activity:
Loans indemnified by PFSI at beginning of quarter
15,366
8,899
New indemnifications
879
682
Less indemnified loans sold, repaid or refinanced
Loans indemnified by PFSI at end of quarter
16,245
9,464
Repurchase activity:
Total loans repurchased by PFSI
16,282
4,064
Less:
Loans repurchased by correspondent lenders
6,153
2,920
Loans repaid by borrowers or resold with defects resolved
1,446
907
Net loans repurchased with losses chargeable to liability for representations and warranties
8,683
237
Net losses charged to liability for representations and warranties
280
Unpaid principal balance of loans subject to representations and warranties
Liability for representations and warranties
During the quarter ended March 31, 2020, we repurchased loans totaling $16.3 million and we recorded losses of $280,000 net of recoveries. If the outstanding balance of loans we purchase and sell subject to representations and warranties increases, the loans sold continue to season, economic conditions change or investor and insurer loss mitigation strategies are adjusted, the level of repurchase and loss activity may increase.
The level of the liability for losses under representations and warranties is difficult to estimate and requires considerable judgment. The level of loan repurchase losses is dependent on economic factors, purchaser or insurer loss mitigation strategies, and other external conditions that may change over the lives of the underlying loans. Our estimate of the liability for representations and warranties is developed by our credit administration staff and approved by our senior management credit committee which includes our senior executives and senior management in our loan production, loan servicing and credit risk management areas.
Our representations and warranties are generally not subject to stated limits of exposure. However, we believe that the current UPB of mortgage loans sold by us and subject to representation and warranty liability to date represents the maximum exposure to repurchases related to representations and warranties.
Loan origination fees increased $33.6 million during the quarter ended March 31, 2020, compared to the same period in 2019. The increase was primarily due to an increase in volume of loans we produced.
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Fulfillment fees from PMT represent fees we collect for services we perform on behalf of PMT in connection with the acquisition, packaging and sale of loans. The fulfillment fees are calculated as a percentage of the UPB of the loans we fulfill for PMT.
Following is a summary of our fulfillment fees:
Unpaid principal balance of loans fulfilled subject to fulfillment fees
Average fulfillment fee rate (in basis points)
Fulfillment fees increased $14.4 million during the quarter ended March 31, 2020, compared to the same period in 2019. The increase was primarily due to an increase in PMT’s loan production volume, partially offset by an increase in discretionary reductions in the fulfillment fee rate during the quarter ended March 31, 2020, compared to the same period in 2019.
Net Loan Servicing Fees
Following is a summary of our net loan servicing fees:
Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing net of hedging results
Average loan servicing portfolio
377,294,965
308,212,285
Change in fair value of mortgage servicing rights and excess servicing spread are summarized below:
Realization of cash flows
(114,919)
(92,475)
Other changes in fair value of mortgage servicing rights and mortgage servicing liabilities
(920,294)
(164,939)
Change in fair value of excess servicing spread
Hedging results
Total change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing net of hedging results
Average balances:
2,562,205
2,843,028
29,384
8,188
Excess servicing spread financing
169,195
211,661
At quarter end:
Following is a summary of our loan servicing portfolio:
Loans serviced
Prime servicing:
173,171,678
166,188,825
Acquired
58,312,483
59,598,279
225,787,104
2,758,454
144,734,874
135,288,944
Total prime servicing
384,131,457
368,558,508
Special servicing for PMT
95,169
125,724
Total loans serviced
Net loan servicing fees increased $177.2 million during the quarter ended March 31, 2020, compared to the same period in 2019. The increase was due to an increase of $134.7 million in changes in fair value of MSRs and mortgage servicing liabilities (“MSLs”), net of hedging results and ESS fair value changes, and an increase of $42.6 million in loan servicing fees for the quarter ended March 31, 2020, resulting from an increase in our average servicing portfolio of 22% for the quarter ended March 31, 2020, compared to the same period in 2019.
As discussed above, the decreasing interest rate environment, along with expectations of higher costs to service loans in the coming months and increased returns demanded by market participants in response to the uncertainties created by the Pandemic, resulted in a 36% reduction in fair value (as measured by the December 31, 2019 fair value) of our investment in MSRs. This reduction in fair value was offset by our hedging results and change in fair value of ESS.
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There can be no assurance that our hedging activities will continue to perform in a like manner in the future. As discussed above, we expect the effects of the Pandemic and the requirements of the CARES Act to reduce our servicing income and to increase our servicing expenses due to the increased number of delinquent loans, and significant levels of forbearance that we have and continue to grant, as well as the resolution of loans that we expect to ultimately default as the result of the Pandemic.
Net Interest Income
Net interest income decreased $9.7 million during the quarter ended March 31, 2020, compared to the same period in 2019. The decrease was primarily due to:
increases in interest expense on repurchase agreements, reflecting the expiration of a master repurchase agreement in August 2019 that provided us with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. We recorded $9.3 million of such incentives as reductions in Interest expense during the quarter ended March 31, 2019. An increase in average borrowing balances during the quarter ended March 31, 2020 to fund a higher volume of loan inventory compared to the same period in 2019 also contributed to the increase in the interest expense; and
increases in interest shortfall on repayments of loans serviced for Agency securitizations, reflecting increased loan payoffs as a result of the lower interest rates in 2020 as compared to 2019, partially offset by;
increases in interest income on loans held for sale due to larger average loan inventory balances during the quarter ended March 31, 2020 as compared to 2019.
Management fees and Carried Interest
Management fees and Carried Interest are summarized below:
Management fees:
PennyMac Mortgage Investment Trust:
Net assets of PMT at end of quarter
Management fees increased $1.8 million during the quarter ended March 31, 2020, compared to the same period in 2019. The increase was due to an increase of $2.9 million in base management fees, reflecting the increase in PMT’s average shareholders’ equity upon which its base management fees are based, partially offset by a decrease of $1.1 million in incentive fees due to the loss PMT incurred during the quarter ended March 31, 2020 compared to the same period in 2019. As discussed above, because the effects of the Pandemic began to be realized during March of 2020, its effects on the base management fees we earn from PMT were not significant. However, in future periods we expect base management fees to be significantly reduced and we do not expect to recognize performance incentive fees for the foreseeable future because of the losses PMT incurred during the quarter ended March 31, 2020.
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Our compensation expense is summarized below:
Salaries and wages
89,315
67,058
Incentive compensation
45,981
19,175
Taxes and benefits
20,772
15,836
Stock and unit-based compensation
Head count:
Average
4,289
3,461
Quarter end
4,458
3,459
Compensation expense increased $61.8 million during the quarter ended March 31 2020, compared to the same period in 2019. The increase was primarily due to increases in incentive compensation resulting from performance-based incentives in our mortgage banking business and higher than expected attainment of profitability targets along with increases in salaries and wages due to increased average headcounts resulting from the growth in our mortgage banking activities.
Loan origination expense increased $31.5 million during the quarter ended March 31, 2020, compared to the same period in 2019. The increase was primarily due to increases in wholesale brokerage fees and loan file compilation expenses, resulting from increased consumer and broker direct lending activities, as well as an increase in discounts offered to generate sufficient incentives for borrowers to refinance during the quarter ended March 31, 2020 compared to the same period during 2019.
Servicing expenses increased $11.9 million during the quarter ended March 31, 2020, compared to the same period in 2019. The increases were primarily due to increased purchases of EBO loans from Ginnie Mae guaranteed pools for the quarter ended March 31, 2020, compared to the same period in 2019. During the quarter ended March 31, 2020, we purchased $920.6 million in UPB of EBO loans, compared to $351.7 million during the same period in 2019.
The EBO program reduces the ongoing cost of servicing defaulted loans that have been sold into Ginnie Mae MBS when we purchase and either sell the defaulted loans or finance them with debt at interest rates below the Ginnie Mae MBS pass-through rates. While the EBO program reduces the ultimate cost of servicing such loan pools, it results in loss recognition when the loans are purchased. We recognize the loss because purchasing the mortgage loans from their Ginnie Mae pools causes us to write off accumulated non-reimbursable interest advances, net of interest receivable from the loans’ insurer or guarantor at the debenture rate of interest we receive from the insurer or guarantor while the loan is in default.
Provision for Income Taxes
Our effective income tax rate was 26.2% during the quarter ended March 31, 2020, compared to 23.5% during the quarter ended March 31, 2019. The increase in effective tax rate in the quarter ended March 31, 2020 compared to the same period in 2019 was primarily due to the lower impact of the permanent and favorable tax adjustment for equity compensation in the quarter ended March 31, 2020 compared to the same period in 2019.
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Balance Sheet Analysis
Following is a summary of key balance sheet items as of the dates presented:
880,710
262,902
Servicing advances, net
Investments in and advances to affiliates
156,786
157,343
837,785
566,333
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt
4,973,295
4,639,001
Long-term debt
1,469,768
1,493,466
490,280
458,947
Stockholders' equity
Total liabilities and stockholders' equity
Total assets increased $687.1 million from $10.2 billion at December 31, 2019 to $10.9 billion at March 31, 2020. The increase was primarily due to increases of $629.0 million in loans held for sale at fair value resulting from an increase in loan production volume, $ 690.5 million in cash, and $273.5 million in derivative assets, partially offset by a decrease of $733.1 million in MSRs. We increased our holding of cash during the quarter ended March 31, 2020 due to cash collected from our hedging activities combined with an increase in our short-term borrowings. Historically, we used excess cash to pay down borrowings, but in response to the uncertainties surrounding the Pandemic, we determined to maintain greater cash liquidity.
Total liabilities increased $384.5 million from $8.1 billion at December 31, 2019 to $8.5 billion at March 31, 2020. The increase was primarily attributable to an increase in borrowings required to finance a larger inventory of loans held for sale.
Cash Flows
Our cash flows for the nine months ended March 31, 2020 and 2019 are summarized below:
Change
Operating
(596,037)
Investing
1,208,996
Financing
88,512
701,471
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Our cash flows resulted in a net increase in cash and restricted cash of $690.5 million during the quarter ended March 31, 2020 as discussed below.
Operating activities
Net cash used in operating activities totaled $730.3 million during the quarter ended March 31, 2020 compared with $134.2 million during the same period in 2019. Our cash flows from operating activities are primarily influenced by changes in the levels of our inventory of mortgage loans as shown below:
Cash flows from:
(816,784)
(203,401)
Other operating sources
86,500
69,154
Investing activities
Net cash provided by investing activities during the quarter ended March 31, 2020 totaled $1.1 billion primarily due to $942.0 million in net settlement of derivative financial instruments used to hedge our investment in MSRs, and a decrease in margin deposits of $133.0 million. 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.
Financing activities
Net cash provided by financing activities totaled $304.5 million during the quarter ended March 31, 2020, primarily to finance the growth in our inventory of mortgage loans held for sale. 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.
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.
The impact of the Pandemic on our operations, liquidity and capital resources remain uncertain and difficult to predict, for further discussion of the potential impacts of the Pandemic please also see “Risk Factors” in Part II, Item 1A.
Our current borrowing strategy is to finance our assets where we believe such borrowing is prudent, appropriate and available. Our borrowing activities are in the form of sales of assets under agreements to repurchase, sales of mortgage loan participation purchase and sale certificates, ESS financing, notes payable (including a revolving credit agreement) and a capital lease. Most of our borrowings have short-term maturities and provide for terms of approximately one year. Because a significant portion of our current debt facilities consists of short-term borrowings, we expect to renew these facilities in advance of maturity in order to ensure our ongoing liquidity and access to capital or otherwise allow ourselves sufficient time to replace any necessary financing.
Our repurchase agreements represent the sales of assets together with agreements for us to buy back the respective assets at a later date. The table below presents the average, maximum daily and ending balances:
Maximum daily balance
Balance at year end
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 one of the two most recent calendar quarters;
a minimum in unrestricted cash and cash equivalents of $40 million;
a minimum tangible net worth of $1.25 billion;
a maximum ratio of total liabilities to tangible net worth of 10:1; and
at least one other warehouse or repurchase facility that finances amounts and assets that are similar to those being financed under certain of our existing secured financing agreements.
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 $40 million;
a minimum of tangible net worth of $1.25 billion;
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.
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We are also subject to liquidity and net worth requirements established by the Federal Housing Finance Agency (“FHFA”) for Agency seller/servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established minimum liquidity and 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 (including nonperforming Agency loans that are in payment forbearance) exceeds 6% of the applicable Agency servicing UPB; allowable assets to satisfy liquidity requirement include cash and cash equivalents (unrestricted), certain investment-grade securities that are available for sale or held for trading including Agency mortgage-backed securities, obligations of Fannie Mae or Freddie Mac, and U.S. Treasury obligations, and unused and available portions of committed servicing advance lines;
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.
On January 31, 2020, FHFA proposed changes to the eligibility requirements, which would increase the tangible net worth requirement to $2.5 million plus 35 basis points of the UPB of loans serviced for Ginnie Mae and 25 basis points of the UPB of all other 1-4 unit loans serviced, and increase the liquidity requirement to 4 basis points of the aggregate UPB serviced for Fannie Mae and Freddie Mac and 10 basis points of the UPB serviced for Ginnie Mae plus 300 basis points of total nonperforming Agency servicing UPB (including nonperforming Agency loans that are in payment forbearance) in excess of 4% of total Agency servicing UPB.
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, 2020, we have repurchased $19.1 million of shares under our stock repurchase program.
We continue to explore a variety of means of financing our continued growth, including debt financing through bank warehouse lines of credit, bank loans, repurchase agreements, securitization transactions and corporate debt. However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing will take or whether such efforts will be successful.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Off-Balance Sheet Arrangements and Guarantees
As of March 31, 2020, we have not entered into any off-balance sheet arrangements.
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Contractual Obligations
As of March 31, 2020, we had contractual obligations aggregating $16.2 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.
Payment obligations under these agreements are summarized below:
Payments due by year
Less than
1-3
3-5
More than
Contractual obligations
1 year
years
5 years
Commitments to purchase and originate loans
4,975,545
1,475,254
7,677
660,468
Interest on long-term debt
233,173
66,321
126,480
21,156
19,216
Office leases
107,070
17,739
30,798
25,649
32,884
33,966
16,214,814
14,457,088
817,746
696,805
243,175
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, 2020, we believe we were in compliance in all material respects with these covenants.
The agreements also contain margin call provisions that, upon notice from the applicable lender, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.
In addition, the agreements contain events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, servicer termination events and defaults, material adverse changes, bankruptcy or insolvency proceedings and other events of default customary for these types of transactions. The remedies for such events of default are also customary for these types of transactions and include the acceleration of the principal amount outstanding under the agreements and the liquidation by our lenders of the mortgage loans or other collateral then subject to the agreements.
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The borrowings have maturities as follows:
Outstanding
Lender
indebtedness (1)
facility size (2)
facility (2)
Maturity date (2)
(dollar amounts in thousands)
Credit Suisse First Boston Mortgage Capital LLC (3)
1,483,516
1,650,000
300,000
April 23, 2021
50,000
600,000
700,000
643,834
800,000
500,000
293,813
100,000
350,000
20,000
196,433
200,000
550,000
GMSR 2018-GT1 Term Note
February 25, 2023
GMSR 2018-GT2 Term Note
August 25, 2023
Credit Suisse AG
October 30, 2020
Credit Suisse AG (3)
October 21, 2020
Banc of America Leasing and Capital LLC
25,000
June 13, 2022
Outstanding indebtedness as of March 31, 2020.
Total facility size, committed facility and maturity date include contractual changes through the date of this Report.
The borrowing of $50 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 $600 million, less any amount utilized under the Credit Suisse AG note payable and an agreement to repurchase relating to the financing of Fannie Mae MSRs.
The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to our assets sold under agreements to repurchase is summarized by counterparty below as of March 31, 2020:
maturity of
advances under
repurchase agreement
Credit Suisse First Boston Mortgage Capital LLC (2)
The borrowing facility with Credit Suisse First Boston Mortgage Capital LLC is in the form of a sale of a variable funding note under an agreement to repurchase.
The borrowing facility with Credit Suisse First Boston Mortgage Capital LLC is in the form of an asset sale under agreement to repurchase.
All debt financing arrangements that matured between March 31, 2020 and the date of this Report have been renewed or extended and are described in Note 11—Borrowings to the accompanying consolidated financial statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, real estate values and other market based risks. The primary market risks that we are exposed to are credit risk, interest rate risk, prepayment risk, inflation risk and fair value risk.
The following sensitivity analyses are limited in that they were performed at a particular point in time; only contemplate the movements in the indicated variables; do not incorporate changes to other variables; are subject to the accuracy of various models and assumptions used; and do not incorporate other factors that would affect our overall financial performance in such scenarios, including operational adjustments made by management to account for changing circumstances. For these reasons, the following estimates should not be viewed as earnings forecasts.
The following tables summarize the estimated change in fair value of MSRs as of March 31, 2020, given several shifts in pricing spreads, prepayment speed and annual per loan cost of servicing:
Pricing spread shift in %
-20%
-10%
-5%
+5%
+10%
+20%
2,361,847
2,274,488
2,233,317
2,155,546
2,118,785
2,049,152
Change in fair value:
168,150
80,791
39,620
(38,151)
(74,912)
(144,545)
7.7
3.7
1.8
(1.7)
(3.4)
(6.6)
Prepayment speed shift in %
2,473,758
2,326,093
2,258,122
2,132,574
2,074,531
1,966,885
280,061
132,396
64,425
(61,123)
(119,166)
(226,812)
12.8
6.0
2.9
(2.8)
(5.4)
(10.3)
Per-loan servicing cost shift in %
2,293,679
2,243,688
2,218,692
2,168,702
2,143,706
2,093,716
99,981
49,991
24,995
(24,995)
(49,991)
(99,981)
4.6
2.3
1.1
(1.1)
(2.3)
(4.6)
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Excess Servicing Spread Financing
The following tables summarize the estimated change in fair value of our ESS accounted for using the fair value method as of March 31, 2020, given several shifts in pricing spreads and prepayment speed (decrease in the liabilities’ values increases net income):
164,444
160,695
158,882
155,375
153,677
150,390
7,335
3,586
1,773
(1,735)
(3,432)
(6,719)
4.7
(2.2)
(4.3)
173,255
164,819
160,879
153,500
150,043
143,549
16,146
7,709
3,769
(3,609)
(7,066)
(13,561)
10.3
4.9
2.4
(4.5)
(8.6)
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. However, no matter how well a control system is designed and operated, it can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports.
Our management has conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report as required by paragraph (b) of Rule 13a-15 under the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this Report, to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
In the ordinary course of business, we review our system of internal control over financial reporting and make changes that we believe will improve the efficiency and effectiveness of controls, ensure sufficient precision of controls, and appropriately mitigate the risk of material misstatement in the financial statements.
Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, whether any changes in our internal control over financial reporting that occurred during our last fiscal quarter have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. There have been no changes in our internal control over financial reporting since December 31, 2019 that have materially affected, or are reasonably likely to material affect, our internal control over financial reporting.
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Item 1. Legal Proceedings
From time to time, the Company may be involved in various legal and regulatory proceedings, lawsuits and other claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on the financial condition, results of operations, or cash flows of the Company. Set forth below are material updates to legal proceedings of the Company.
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 December 19, 2019, the Delaware Court denied a motion to dismiss filed by the Company and certain of its directors and officers. While no assurance can be provided as to the ultimate outcome of this claim or the account of any losses to the Company, the Company believes the Garfield Action is without merit and plans to vigorously defend the matter, which remains pending.
On November 5, 2019, Black Knight Servicing Technologies, LLC, a wholly-owned indirect subsidiary of Black Knight, Inc. (“BKI”), filed a Complaint and Demand for Jury Trial in the Circuit Court for the Fourth Judicial Circuit in and for Duval County, Florida (the “Florida State Court”), captioned Black Knight Servicing Technologies, LLC v. PennyMac Loan Services, LLC, Case No. 2019-CA-007908 (the “BKI Complaint”). Allegations contained within the BKI Complaint include breach of contract and misappropriation of MSP® System trade secrets in order to develop an imitation mortgage-processing system intended to replace the MSP® System. The BKI Complaint seeks damages for breach of contract and misappropriation of trade secrets, injunctive relief under the Florida Uniform Trade Secrets Act and declaratory judgment of ownership of all intellectual property and software developed by or on behalf of PLS as a result of its wrongful use of and access to the MSP® System and related trade secret and confidential information. On April 6, 2020, the Florida State Court entered an order granting a motion to compel arbitration filed by the Company. On April 21, 2020, BKI filed a motion for reconsideration of the order compelling arbitration. On May 6, 2020, the Florida State Court entered an order denying BKI's motion for reconsideration. Also on May 6, 2020, BKI filed a notice of appeal with respect to both orders. While no assurance can be provided as to the ultimate outcome of the BKI Complaint or the account of any losses to the Company, the Company believes the BKI Complaint is without merit and plans to vigorously defend the matter, which remains pending.
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, 2019, filed with the SEC on February 28, 2020, except for the following:
Our business, financial condition and results of operations have been, and will likely continue to be, adversely affected by the emergence of the COVID-19 pandemic.
The COVID-19 pandemic has created unprecedented economic, financial and public health disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition and results of operations. The extent to which COVID-19 continues to negatively affect our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to COVID-19.
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The federal government enacted the CARES Act, which allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from COVID-19. As a result of the CARES Act forbearance requirements, we expect to record additional increases in delinquencies in our servicing portfolio that may require us to finance substantial amounts of advances of principal and interest payments to the holders of the securities holding those loans, as well as advances of property taxes, insurance premiums and other expenses to protect investors’ interests in the properties securing the loans.. We also expect the effects of the CARES Act forbearance requirements to reduce our servicing income and increase our servicing expenses due to the increased number of delinquent loans, significant levels of forbearance that we have granted and continue to grant, as well as the resolution of loans that we expect to ultimately default as the result of COVID-19.
Financial markets have experienced substantial volatility and reduced liquidity, resulting in unprecedented federal government intervention to lower the federal funds rate to near zero and support market liquidity by purchasing assets in many financial markets, including the mortgage-backed securities market. The CARES Act forbearance requirements and the decline in financial markets have negatively impacted the fair value of our servicing assets. In addition, the CARES Act forbearance requirements and the decline in financial markets have materially and negatively impacted the book value of PMT and, as a result, our net assets under management. Consequently, we expect PMT base management fees to be significantly reduced, and we do not expect to earn performance incentive fees from PMT for the foreseeable future. Further market volatility may result in additional declines in the value of our servicing assets, lower base management fees and make it increasingly difficult to optimize our hedging activities. Also, our liquidity and/or regulatory capital could be adversely impacted by volatility and disruptions in the capital and credit markets. In addition, if we fail to meet or satisfy any of the covenants in our repurchase agreements or other financing arrangements as a result of the impact of the COVID-19 pandemic, we would be in default under these agreements, which could result in a cross-default or cross-acceleration under other financing arrangements, and our lenders could elect to declare outstanding amounts due and payable (or such amounts may automatically become due and payable), terminate their commitments, require the posting of additional collateral and enforce their respective interests against existing collateral.
We may also have difficulty accessing debt and equity capital on attractive terms, or at all, as a result of the impact of the COVID-19 pandemic, which may adversely affect our access to capital necessary to fund our operations or address maturing liabilities on a timely basis. This includes renewals of our existing credit facilities with our lenders who are also adversely impacted by the volatility and dislocations in the financial markets and may not be willing to continue to extend us credit on the same terms, or on favorable terms, or at all.
In addition, our business could be disrupted if we are unable to operate due to changing governmental restrictions such as travel bans and quarantines placed on our employees or operations, including, successfully operating our business from remote locations, ensuring the protection of our employees’ health and maintaining our information technology infrastructure.
Governmental authorities have taken additional measures to stabilize the financial markets and support the economy. The success of these measures are unknown and they may not be sufficient to address the current market dislocations or avert severe and prolonged reductions in economic activity. We may also face increased risks of disputes with our business partners, litigation and governmental and regulatory scrutiny as a result of the effects of COVID-19. The scope and duration of COVID-19 and the efficacy of the extraordinary measures put in place to address it are currently unknown. Even after COVID-19 subsides, the economy may not fully recover for some time and we may be materially and adversely affected by a prolonged recession or economic downturn.
To the extent the COVID-19 pandemic adversely affects our business, financial condition and results of operations, it may also have the effect of heightening many of the other risks described in our Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “Risk Factors.”
If forbearances resulting from the COVID-19 pandemic and the CARES Act are determined to be delinquent by the FHFA and the Agencies, it will significantly impact our liquidity and financial condition.
As described in Liquidity and Capital Resources, the FHFA establishes certain liquidity requirements for Agency and Ginnie Mae loan servicers that are generally tied to the UPB of loans serviced by such loan servicer for the Agencies. To the extent that the percentage of seriously delinquent loans ("SDQ"), i.e., loans that are 90 days or more delinquent, exceeds defined thresholds, the liquidity requirements for loan servicers increase materially. If the FHFA and the Agencies determine that forbearances resulting from COVID-19 are delinquent for the purposes of the SDQ thresholds and the associated liquidity requirements, we expect that the significant number of such forbearances will result in delinquencies that exceed the SDQ thresholds. Exceeding such SDQ thresholds would result in substantially higher liquidity requirements, as well as a reduction in the advance rates applicable to our MSR financing structure that are tied to such SDQ thresholds, all of which may materially impact our results of operations and financial condition, and the market value of our common shares.
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, 2020.
The following table summarizes information about our stock repurchases during the quarter ended March 31, 2020:
Total numberof sharespurchased
Average pricepaid per share
Total number of shares purchasedas part of publicly announced plans or program (1)
Approximate dollarvalue of shares thatmay yet bepurchased under the plans or program (1)
January 1, 2020 – January 31, 2020
35,051,668
February 1, 2020 – February 29, 2020
March 1, 2020 – March 31, 2020
238,133
17.31
30,930,481
283,133
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.
Item 5. Other Information
None
Item 6. Exhibits
Incorporated by Referencefrom the Below-Listed Form(Each Filed under SECFile Number 15-68669 or001-38727)
Exhibit No.
Exhibit Description
Form
Filing Date
2.1
Contribution Agreement and Plan of Merger, dated as of August 2, 2018, by and among PennyMac Financial Services, Inc., New PennyMac Financial Services, Inc., New PennyMac Merger Sub, LLC, Private National Mortgage Acceptance Company, LLC, and the Contributors.
8-K12B
November 1, 2018
3.1
Amended and Restated Certificate of Incorporation of New PennyMac Financial Services, Inc.
3.1.1
Certificate of Amendment to Amended and Restated Certificate of Incorporation of New PennyMac Financial Services, Inc.
3.2
Amended and Restated Bylaws of New PennyMac Financial Services, Inc.
3.2.1
Amendment to Amended and Restated Bylaws of PennyMac Financial Services, Inc. (formerly known as New PennyMac Financial Services, Inc.).
10-Q
November 4, 2019
10.1#
Tax Receivable Agreement, dated as of May 8, 2013, between PennyMac Financial Services, Inc., Private National Mortgage Acceptance Company, LLC and each of the Members.
8-K
May 14, 2013
10.2#
Master Repurchase Agreement, dated as of December 19, 2016, by and among PNMAC GMSR ISSUER TRUST, PennyMac Loan Services, LLC, and Private National Mortgage Acceptance Company, LLC.
December 21, 2016
10.3#
Master Repurchase Agreement, dated as of December 19, 2016, by and among, Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, and PennyMac Loan Services, LLC.
10.4#
Guaranty, dated as of December 19, 2016, by Private National Mortgage Acceptance Company, LLC in favor of Credit Suisse First Boston Mortgage Capital LLC.
November 7, 2017
10.5
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.
10.6
Second Amended and Restated Stockholder Agreement, dated February 12, 2020, by and among PennyMac Financial Services, Inc. (formerly known as New PennyMac Financial Services, Inc.) and BlackRock Mortgage Ventures, LLC.
February 13, 2020
76
10.7
Amendment No. 8 to the Third Amended and Restated Master Repurchase Agreement, dated as of March 6, 2020, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.
March 11, 2020
10.8
Amendment No. 9 to the Third Amended and Restated Master Repurchase Agreement, dated as of April 1, 2020, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.
April 7, 2020
10.9
Amendment No. 10 to Third Amended and Restated Master Repurchase Agreement, dated as of April 24, 2020, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization LTD, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.
*
10.10
Master Repurchase Agreement, dated as of April 1, 2020, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch and PennyMac Loan Services, LLC.
10.11
Amended and Restated Guaranty, dated April 1, 2020, made by Private National Mortgage Acceptance Company, LLC in favor of Credit Suisse First Boston Mortgage Capital LLC.
10.12
Series 2020-SPIADVF1 Indenture Supplement, dated as of April 1, 2020, to Third Amended and Restated Base Indenture, dated as of April 1, 2020, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC and Credit Suisse First Boston Mortgage Capital LLC.
10.13
Third Amended and Restated Base Indenture, dated as of April 1, 2020, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, Credit Suisse First Boston Mortgage Capital LLC and Pentalpha Surveillance LLC.
10.14
Amended and Restated Master Repurchase Agreement, dated as of April 1, 2020, by and among PNMAC GMSR ISSUER TRUST, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.
10.15
Amendment No. 2 to Master Repurchase Agreement, dated as of April 1, 2020, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch and PennyMac Loan Services, LLC.
10.16
Joint Amendment No. 2 to Loan and Security Agreement and Amendment No. 1 to Pricing Side Letter, dated as of April 1, 2020, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Private National Mortgage Acceptance Company, LLC and PennyMac Loan Services, LLC.
77
10.17^
Joint Amendment No. 1 to the Series 2020-SPIADVF1 Repurchase Agreement and Amendment No. 1 to the Pricing Side Letter, dated as of April 24, 2020, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse Ag, Cayman Islands Branch and PennyMac Loan Services, LLC.
10.18^
Joint Amendment No. 3 to the Series 2016-MSRVF1 Repurchase Agreement and Amendment No. 2 to the Pricing Side Letter, dated as of April 24, 2020, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch and PennyMac Loan Services, LLC.
10.19^
Joint Amendment No. 1 to the MSR PC Repo Agreement and Amendment No. 2 to the Pricing Side Letter, dated as of April 24, 2020, among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, PennyMac Loan Services, LLC and Private National Mortgage Acceptance Company, LLC.
10.20
Consent Letter regarding Series 2020-SPIADVF1 Indenture Supplement, dated as of April 24, 2020, by and among PennyMacLoan Services, LLC and Credit Suisse First Boston Mortgage Capital LLC.
10.21^
Amendment No. 2 to the Amended and Restated Series 2016-MSRVF1 Indenture Supplement, dated as of April 24, 2020, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC, and Credit Suisse First Boston Mortgage Capital LLC.
10.22^
Joint Amendment No. 3 to Loan and Security Agreement and Amendment No. 2 to Pricing Side Letter, dated as of April 24, 2020, by and among Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch, Private National Mortgage Acceptance Company, LLC and PennyMac Loan Services, LLC.
10.23†
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Stock Option Award Agreement (2020).
10.24†
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Subject to Continued Service Award Agreement (Net Share Withholding) (2020).
10.25†
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Subject to Continued Service Award Agreement for Non Employee Directors (2020).
10.26†
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Subject to Performance Components Award Agreement (Sale to Cover) (2020).
10.27†
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Subject to Continued Service Award Agreement (Sale to Cover) (2020).
78
10.28†
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Restricted Stock Unit Subject to Performance Components Award Agreement (Net Share Withholding) (2020).
31.1
Certification of David A. Spector pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Andrew S. Chang pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of David A. Spector pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**
32.2
Certification of Andrew S. Chang pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 (ii) the Consolidated Statements of Income for the quarters ended March 31, 2020 and March 31, 2019, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended March 31, 2020 and March 31, 2019, (iv) the Consolidated Statements of Cash Flows for the quarters ended March 31, 2020 and March 31, 2019 and (v) the Notes to the Consolidated Financial Statements.
# Refiled herewith to provide an updated hyperlink to the appropriate prior filing.
^ Portions of the exhibit have been redacted.
* 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.
79
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant)
Dated: May 7, 2020
By:
/s/ DAVID A. SPECTOR
David A. Spector
President and Chief Executive Officer
/s/ ANDREW S. CHANG
Andrew S. Chang
Senior Managing Director and
Chief Financial Officer
80