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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 8/05/21 PennyMac Financial Services, Inc. 10-Q 6/30/21 121:30M Toppan Merrill Bridge/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 3.62M
2: EX-10.7 Material Contract HTML 63K
3: EX-10.8 Material Contract HTML 59K
4: EX-10.9 Material Contract HTML 44K
5: EX-31.1 Certification -- §302 - SOA'02 HTML 38K
6: EX-31.2 Certification -- §302 - SOA'02 HTML 39K
7: EX-32.1 Certification -- §906 - SOA'02 HTML 36K
8: EX-32.2 Certification -- §906 - SOA'02 HTML 36K
15: R1 Document and Entity Information HTML 84K
16: R2 Consolidated Balance Sheets HTML 138K
17: R3 Consolidated Balance Sheets (Parenthetical) HTML 50K
18: R4 Consolidated Statements of Income HTML 173K
19: R5 Consolidated Statements of Changes in HTML 92K
Stockholders' Equity
20: R6 Consolidated Statements of Changes in HTML 33K
Stockholders' Equity (Parenthetical)
21: R7 Consolidated Statements of Cash Flows HTML 170K
22: R8 Organization HTML 39K
23: R9 Basis of Presentation and Recently Adopted HTML 36K
Accounting Pronouncement
24: R10 Concentration of Risk HTML 34K
25: R11 Related Party Transactions HTML 282K
26: R12 Loan Sales and Servicing Activities HTML 264K
27: R13 Fair Value HTML 1.01M
28: R14 Loans Held for Sale at Fair Value HTML 55K
29: R15 Derivative Financial Instruments HTML 523K
30: R16 Mortgage Servicing Rights and Mortgage Servicing HTML 147K
Liabilities
31: R17 Leases HTML 90K
32: R18 Other Assets HTML 61K
33: R19 Short-Term Borrowings HTML 244K
34: R20 Long-Term Debt HTML 247K
35: R21 Liability for Losses Under Representations and HTML 64K
Warranties
36: R22 Income Taxes HTML 36K
37: R23 Commitments and Contingencies HTML 40K
38: R24 Stockholders' Equity HTML 55K
39: R25 Net Gains on Loans Held for Sale HTML 94K
40: R26 Net Interest (Expense) Income HTML 120K
41: R27 Stock-based Compensation HTML 90K
42: R28 Earnings Per Share of Common Stock HTML 98K
43: R29 Supplemental Cash Flow Information HTML 55K
44: R30 Regulatory Capital and Liquidity Requirements HTML 87K
45: R31 Segments HTML 336K
46: R32 Subsequent Events HTML 41K
47: R33 Related Party Transactions (Tables) HTML 245K
48: R34 Loan Sales and Servicing Activities (Tables) HTML 261K
49: R35 Fair Value (Tables) HTML 1.01M
50: R36 Loans Held for Sale at Fair Value (Tables) HTML 53K
51: R37 Derivative Financial Instruments (Tables) HTML 529K
52: R38 Mortgage Servicing Rights and Mortgage Servicing HTML 150K
Liabilities (Tables)
53: R39 Leases (Tables) HTML 91K
54: R40 Other Assets (Tables) HTML 61K
55: R41 Short-Term Borrowings (Tables) HTML 238K
56: R42 Long-Term Debt (Tables) HTML 245K
57: R43 Liability for Losses Under Representations and HTML 63K
Warranties (Tables)
58: R44 Stockholders' Equity (Tables) HTML 54K
59: R45 Net Gains on Loans Held for Sale (Tables) HTML 93K
60: R46 Net Interest (Expense) Income (Tables) HTML 119K
61: R47 Stock-based Compensation (Tables) HTML 90K
62: R48 Earnings Per Share of Common Stock (Tables) HTML 98K
63: R49 Supplemental Cash Flow Information (Tables) HTML 54K
64: R50 Regulatory Capital and Liquidity Requirements HTML 80K
(Tables)
65: R51 Segments (Tables) HTML 331K
66: R52 Concentration of Risk (Details) HTML 38K
67: R53 Related Party Transactions - Correspondent HTML 123K
Production (Details)
68: R54 Related Party Transactions - Mortgage Loan HTML 67K
Servicing (Details)
69: R55 Related Party Transactions - Management Fees HTML 88K
(Details)
70: R56 Related Party Transactions - Other Transactions, HTML 55K
Reimbursement of Common Overhead Expenses
(Details)
71: R57 Related Party Transactions - Investing Activities HTML 58K
(Details)
72: R58 Related Party Transactions - Financing Activities HTML 57K
(Details)
73: R59 Related Party Transactions - Amounts due from HTML 55K
Affiliate (Details)
74: R60 Related Party Transactions - Exchanged Private HTML 40K
National Mortgage Acceptance Company, LLC
Unitholders (Details)
75: R61 Loan Sales and Servicing Activities - Summary of HTML 58K
Cash Flows with Transferees (Details)
76: R62 Loan Sales and Servicing Activities - Summary of HTML 92K
Mortgage Servicing Portfolio (Details)
77: R63 Loan Sales and Servicing Activities - Geographical HTML 45K
Distribution of Loans (Details)
78: R64 Fair Value - Financial Statement Items Measured at HTML 142K
Fair Value on a Recurring Basis (Details)
79: R65 Fair Value - Level 3 Input Roll Forward, Recurring HTML 118K
Basis (Details)
80: R66 Fair Value - Changes in Fair Value, Fair Value HTML 62K
Option, Recurring Basis (Details)
81: R67 Fair Value - Fair Value Option Maturities, HTML 63K
Recurring Basis (Details)
82: R68 Fair Value - Measurement Basis, Nonrecurring HTML 55K
(Details)
83: R69 Fair Value - Level 3 Unobservable Inputs, Mortgage HTML 78K
Loans and IRLC (Details)
84: R70 Fair Value - Level 3 Unobservable Inputs, Mortgage HTML 94K
Servicing Rights - Initial Recognition (Details)
85: R71 Fair Value - Level 3 Unobservable Inputs, Mortgage HTML 99K
Servicing Rights, Effect of Change In Inputs on
Fair Value (Details)
86: R72 Fair Value - Level 3 Unobservable Inputs, ESS HTML 60K
(Details)
87: R73 Fair Value - Level 3 Unobservable Inputs, Mortgage HTML 52K
Servicing Liabilities (Details)
88: R74 Loans Held for Sale at Fair Value (Details) HTML 49K
89: R75 Derivative Financial Instruments - Other HTML 126K
Information (Details)
90: R76 Derivative Financial Instruments - Offsetting of HTML 75K
Derivative Assets (Details)
91: R77 Derivative Financial Instruments - Offsetting of HTML 56K
Derivative Assets - Derivative Assets, Financial
Assets, and Collateral Held by Counterparty
(Details)
92: R78 Derivative Financial Instruments - Offsetting of HTML 100K
Derivative Assets - Offsetting of Derivative and
Financial Liabilities (Details)
93: R79 Derivative Financial Instruments - Offsetting of HTML 78K
Derivative Assets - Derivative Liabilities,
Financial Liabilities, and Collateral Held by
Counterparty (Details)
94: R80 Mortgage Servicing Rights and Mortgage Servicing HTML 56K
Liabilities - Activity in MSRs at Fair Value
(Details)
95: R81 Mortgage Servicing Rights and Mortgage Servicing HTML 47K
Liabilities - Mortgage Servicing Liabilities
Carried at FV (Details)
96: R82 Mortgage Servicing Rights and Mortgage Servicing HTML 44K
Liabilities - Servicing, Late, Ancillary and Other
Fees Relating to MSRs (Details)
97: R83 Leases (Details) HTML 84K
98: R84 Other Assets - Other (Details) HTML 57K
99: R85 Short-Term Borrowings - Assets Sold Under HTML 112K
Agreement to Repurchase (Details)
100: R86 Short-Term Borrowings - Maturities of Outstanding HTML 46K
Advances Under Repurchase Agreements (Details)
101: R87 Short-Term Borrowings - Mortgage Loans Sold Under HTML 58K
Agreement to Repurchase by Counterparty (Details)
102: R88 Short-Term Borrowings - Mortgage Loan HTML 71K
Participation and Sale Agreement (Details)
103: R89 Long-Term Debt - Obligations Under Capital Lease HTML 50K
(Details)
104: R90 Long-Term Debt - Note Payable (Details) HTML 133K
105: R91 Long-Term Debt - Maturities (Details) HTML 53K
106: R92 Liability for Losses Under Representations and HTML 42K
Warranties (Details)
107: R93 Income Taxes (Details) HTML 33K
108: R94 Commitments and Contingencies - Other (Details) HTML 33K
109: R95 Stockholders' Equity (Details) HTML 43K
110: R96 Net Gains on Loans Held for Sale (Details) HTML 61K
111: R97 Net Interest (Expense) Income (Details) HTML 76K
112: R98 Stock-based Compensation - Other (Details) HTML 59K
113: R99 Earnings Per Share of Common Stock (Details) HTML 75K
114: R100 Supplemental Cash Flow Information (Details) HTML 51K
115: R101 Regulatory Capital and Liquidity Requirements HTML 74K
(Details)
116: R102 Segments (Details) HTML 112K
117: R103 Subsequent Events (Details) HTML 57K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form i 10-Q
(Mark One)
i ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended i June 30, 2021
or
i ☐ | 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: i 001-38727
i PennyMac Financial Services, Inc.
(Exact name of registrant as specified in its charter)
| | |
i Delaware | | i 83-1098934 |
(State or other jurisdiction of | | (IRS Employer |
incorporation or organization) | | Identification No.) |
| | |
i 3043 Townsgate Road, i Westlake Village, i California | | i 91361 |
(Address of principal executive offices) | | (Zip Code) |
( i 818) i 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 |
i Common Stock, $0.0001 par value | | i PFSI | | i 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. i 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). i 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.
| | |
i Large accelerated filer ☒ | | Accelerated filer ☐ |
| | |
Non-accelerated filer ☐ | | Smaller reporting company i ☐ |
| | Emerging growth company i ☐ |
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 i ☐ 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 August 3, 2021 |
Common Stock, $0.0001 par value | | i 62,055,841 |
PENNYMAC FINANCIAL SERVICES, INC.
FORM 10-Q
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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, 2020, filed with the Securities and Exchange Commission (“SEC”) on February 25, 2021.
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, and pandemics, such as the COVID-19 pandemic; |
| ● | failure to modify, resell or refinance early buyout loans and or defaults of early buyout loans beyond our expectations; |
| ● | 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; |
| ● | elimination of the Federal Housing Finance Agency’s adverse market refinance fee; |
| ● | 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; |
3
| ● | our ability to manage third-party service providers and vendors and their compliance with laws, regulations and investor requirements; |
| ● | changes in macroeconomic and U.S. real estate market conditions; |
| ● | difficulties inherent in growing loan production volume; |
| ● | difficulties inherent in adjusting the size of our operations to reflect changes in business levels; |
| ● | maintaining sufficient capital and liquidity to support business growth including compliance with financial covenants; |
| ● | changes in prevailing interest rates; |
| ● | our substantial amount of indebtedness; |
| ● | 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; |
| ● | 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. |
4
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.
5
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| | | | | | |
|
| June 30, |
| |||
|
| 2021 |
| 2020 | ||
| | (in thousands, except share amounts) | ||||
ASSETS | | | | | | |
Cash | | $ | i 324,158 | | $ | i 532,716 |
Short-term investments at fair value | | | i 3,720 | | | i 15,217 |
Loans held for sale at fair value (includes $ i 10,451,126 and $ i 11,457,678 pledged to creditors) | | | i 10,884,506 | | | i 11,616,400 |
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors | | | — | | | i 80,862 |
Derivative assets | | | i 371,269 | | | i 711,238 |
Servicing advances, net (includes valuation allowance of $ i 140,270 and $ i 181,433; $ i 311,896 and $ i 413,484 pledged to creditors) | | | i 519,028 | | | i 579,528 |
Mortgage servicing rights at fair value (includes $ i 3,408,088 and $ i 2,577,964 pledged to creditors) | | | i 3,412,648 | | | i 2,581,174 |
Operating lease right-of-use assets | | | i 75,829 | | | i 74,934 |
Investment in PennyMac Mortgage Investment Trust at fair value | | | i 1,580 | | | i 1,105 |
Receivable from PennyMac Mortgage Investment Trust | | | i 61,883 | | | i 87,005 |
Loans eligible for repurchase | | | i 7,613,244 | | | i 14,625,447 |
Other (includes $ i 60,857 and $ i 166,418 pledged to creditors) | | | i 612,273 | | | i 692,169 |
Total assets | | $ | i 23,880,138 | | $ | i 31,597,795 |
LIABILITIES | | | | | | |
Assets sold under agreements to repurchase | | $ | i 8,254,543 | | $ | i 9,654,797 |
Mortgage loan participation purchase and sale agreements | | | i 512,253 | | | i 521,477 |
Obligations under capital lease | | | i 7,677 | | | i 11,864 |
Notes payable secured by mortgage servicing assets | | | i 1,296,731 | | | i 1,295,840 |
Unsecured senior notes | | | i 1,288,769 | | | i 645,820 |
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value | | | — | | | i 131,750 |
Derivative liabilities | | | i 43,910 | | | i 42,638 |
Mortgage servicing liabilities at fair value | | | i 100,091 | | | i 45,324 |
Accounts payable and accrued expenses | | | i 369,766 | | | i 308,398 |
Operating lease liabilities | | | i 96,463 | | | i 94,193 |
Payable to PennyMac Mortgage Investment Trust | | | i 136,660 | | | i 140,306 |
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement | | | i 31,815 | | | i 35,165 |
Income taxes payable | | | i 570,052 | | | i 622,700 |
Liability for loans eligible for repurchase | | | i 7,613,244 | | | i 14,625,447 |
Liability for losses under representations and warranties | | | i 44,335 | | | i 32,688 |
Total liabilities | | | i 20,366,309 | | | i 28,208,407 |
| | | | | | |
Commitments and contingencies – Note 16 | | | | | | |
| | | | | | |
STOCKHOLDERS’ EQUITY | | | | | | |
Common stock—authorized i i 200,000,000 / shares of $ i i 0.0001 / par value; issued and outstanding, i 64,483,965 and i 70,905,532 shares, respectively | | | i 6 | | | i 7 |
Additional paid-in capital | | | i 618,337 | | | i 1,047,052 |
Retained earnings | | | i 2,895,486 | | | i 2,342,329 |
Total stockholders' equity | | | i 3,513,829 | | | i 3,389,388 |
Total liabilities and stockholders’ equity | | $ | i 23,880,138 | | $ | i 31,597,795 |
The accompanying notes are an integral part of these consolidated financial statements.
6
PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
| | | | | | | | | | | | |
| | Quarter ended June 30, |
| Six months ended June 30, | ||||||||
| | 2021 | | 2020 |
| 2021 | | 2020 | ||||
| | (in thousands, except per share amounts) | ||||||||||
Revenues | | | | | | | | | | | | |
Net gains on loans held for sale at fair value: | | | | | | | | | | | | |
From non-affiliates | | $ | i 594,196 | | $ | i 687,765 | | $ | i 1,362,785 | | $ | i 954,131 |
From PennyMac Mortgage Investment Trust | | | ( i 11,548) | | | ( i 5,592) | | | ( i 25,796) | | | i 72,324 |
| | | i 582,648 | | | i 682,173 | | | i 1,336,989 | | | i 1,026,455 |
Loan origination fees: | | | | | | | | | | | | |
From non-affiliates | | | i 90,163 | | | i 54,660 | | | i 186,008 | | | i 108,251 |
From PennyMac Mortgage Investment Trust | | | i 7,128 | | | i 4,288 | | | i 15,320 | | | i 8,268 |
| | | i 97,291 | | | i 58,948 | | | i 201,328 | | | i 116,519 |
Fulfillment fees from PennyMac Mortgage Investment Trust | | | i 54,020 | | | i 52,815 | | | i 114,855 | | | i 94,755 |
Net loan servicing fees: | | | | | | | | | | | | |
Loan servicing fees: | | | | | | | | | | | | |
From non-affiliates | | | i 208,275 | | | i 199,178 | | | i 419,028 | | | i 397,831 |
From PennyMac Mortgage Investment Trust | | | i 20,015 | | | i 15,533 | | | i 39,108 | | | i 30,054 |
Other | | | i 31,731 | | | i 28,543 | | | i 61,330 | | | i 57,298 |
| | | i 260,021 | | | i 243,254 | | | i 519,466 | | | i 485,183 |
Change in fair value of mortgage servicing rights and mortgage servicing liabilities | | | ( i 336,268) | | | ( i 205,789) | | | ( i 112,805) | | | ( i 1,241,002) |
Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust | | | — | | | i 636 | | | ( i 1,037) | | | i 15,158 |
Mortgage servicing rights hedging results | | | i 91,118 | | | ( i 15,764) | | | ( i 351,033) | | | i 1,020,806 |
| | | ( i 245,150) | | | ( i 220,917) | | | ( i 464,875) | | | ( i 205,038) |
Net loan servicing fees | | | i 14,871 | | | i 22,337 | | | i 54,591 | | | i 280,145 |
Net interest (expense) income: | | | | | | | | | | | | |
Interest income: | | | | | | | | | | | | |
From non-affiliates | | | i 80,797 | | | i 46,526 | | | i 162,491 | | | i 117,872 |
From PennyMac Mortgage Investment Trust | | | — | | | i 792 | | | i 387 | | | i 2,010 |
| | | i 80,797 | | | i 47,318 | | | i 162,878 | | | i 119,882 |
Interest expense: | | | | | | | | | | | | |
To non-affiliates | | | i 102,431 | | | i 50,835 | | | i 208,864 | | | i 110,373 |
To PennyMac Mortgage Investment Trust | | | — | | | i 2,372 | | | i 1,280 | | | i 4,346 |
| | | i 102,431 | | | i 53,207 | | | i 210,144 | | | i 114,719 |
Net interest (expense) income | | | ( i 21,634) | | | ( i 5,889) | | | ( i 47,266) | | | i 5,163 |
Management fees from PennyMac Mortgage Investment Trust | | | i 11,913 | | | i 8,288 | | | i 20,362 | | | i 17,343 |
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust | | | i 144 | | | i 543 | | | i 545 | | | ( i 314) |
Results of real estate acquired in settlement of loans | | | i 540 | | | i 296 | | | i 1,320 | | | ( i 411) |
Other | | | i 2,459 | | | i 2,123 | | | i 4,214 | | | i 3,804 |
Total net revenues | | | i 742,252 | | | i 821,634 | | | i 1,686,938 | | | i 1,543,459 |
Expenses | | | | | | | | | | | | |
Compensation | | | i 265,067 | | | i 179,886 | | | i 523,896 | | | i 348,322 |
Loan origination | | | i 75,675 | | | i 50,921 | | | i 163,067 | | | i 96,925 |
Technology | | | i 34,236 | | | i 21,905 | | | i 67,908 | | | i 41,012 |
Servicing | | | i 31,290 | | | i 56,503 | | | i 50,473 | | | i 98,669 |
Professional services | | | i 24,834 | | | i 12,500 | | | i 38,120 | | | i 25,904 |
Occupancy and equipment | | | i 9,029 | | | i 8,293 | | | i 18,067 | | | i 16,331 |
Other | | | i 22,606 | | | i 11,264 | | | i 39,884 | | | i 21,204 |
Total expenses | | | i 462,737 | | | i 341,272 | | | i 901,415 | | | i 648,367 |
Income before provision for income taxes | | | i 279,515 | | | i 480,362 | | | i 785,523 | | | i 895,092 |
Provision for income taxes | | | i 75,286 | | | i 127,685 | | | i 204,426 | | | i 236,172 |
Net income | | $ | i 204,229 | | $ | i 352,677 | | $ | i 581,097 | | $ | i 658,920 |
Earnings per share | | | | | | | | | | | | |
Basic | | $ | i 3.10 | | $ | i 4.53 | | $ | i 8.61 | | $ | i 8.42 |
Diluted | | $ | i 2.94 | | $ | i 4.39 | | $ | i 8.16 | | $ | i 8.11 |
Weighted average shares outstanding | | | | | | | | | | | | |
Basic | | | i 65,890 | | | i 77,790 | | | i 67,493 | | | i 78,240 |
Diluted | | | i 69,399 | | | i 80,424 | | | i 71,248 | | | i 81,241 |
Dividend declared per share | | $ | i 0.20 | | $ | i 0.12 | | $ | i 0.40 | | $ | i 0.24 |
The accompanying notes are an integral part of these consolidated financial statements.
7
PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
| | | | | | | | | | | | | | |
| | Quarter ended June 30, 2021 | ||||||||||||
| | | | | | Additional | | | | Total | ||||
| | Number of | | Par | | paid-in | | Retained | | stockholders' | ||||
|
| shares |
| value |
| capital |
| earnings |
| equity | ||||
| | (in thousands) | ||||||||||||
Balance, March 31, 2021 | | i 66,961 | | $ | i 7 | | $ | i 762,585 | | $ | i 2,704,822 | | $ | i 3,467,414 |
Net income | | — | | | — | | | — | | | i 204,229 | | | i 204,229 |
Stock-based compensation | | i 96 | | | — | | | i 10,621 | | | — | | | i 10,621 |
Issuance of common stock in settlement of directors' fees | | i 1 | | | — | | | i 50 | | | — | | | i 50 |
Repurchase of common stock | | ( i 2,574) | | | ( i 1) | | | ( i 154,919) | | | — | | | ( i 154,920) |
Common stock dividend ($ i 0.20 per share) | | — | | | — | | | — | | | ( i 13,565) | | | ( i 13,565) |
Balance, June 30, 2021 | | i 64,484 | | $ | i 6 | | $ | i 618,337 | | $ | i 2,895,486 | | $ | i 3,513,829 |
| | | | | | | | | | | | | | |
| | Quarter ended June 30, 2020 | ||||||||||||
| | | | | | Additional | | | | Total | ||||
| | Number of | | Par | | paid-in | | Retained | | stockholders' | ||||
|
| shares |
| value |
| capital |
| earnings |
| equity | ||||
| | (in thousands) | ||||||||||||
Balance, March 31, 2020 | | i 79,190 | | $ | i 8 | | $ | i 1,341,219 | | $ | i 1,022,902 | | $ | i 2,364,129 |
Net income | | — | | | — | | | — | | | i 352,677 | | | i 352,677 |
Stock-based compensation | | i 141 | | | — | | | i 9,306 | | | — | | | i 9,306 |
Issuance of common stock in settlement of directors' fees | | i 2 | | | — | | | i 48 | | | — | | | i 48 |
Repurchase of common stock | | ( i 6,975) | | | ( i 1) | | | ( i 237,161) | | | — | | | ( i 237,162) |
Common stock dividend ($ i 0.12 per share) | | — | | | — | | | — | | | ( i 9,805) | | | ( i 9,805) |
Balance, June 30, 2020 | | i 72,358 | | $ | i 7 | | $ | i 1,113,412 | | $ | i 1,365,774 | | $ | i 2,479,193 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Six months ended June 30, 2021 | ||||||||||||
| | | | | | Additional | | | | Total | ||||
| | Number of | | Par | | paid-in | | Retained | | stockholders' | ||||
|
| shares |
| value |
| capital |
| earnings |
| equity | ||||
| | (in thousands) | ||||||||||||
Balance, December 31, 2020 | | i 70,906 | | $ | i 7 | | $ | i 1,047,052 | | $ | i 2,342,329 | | $ | i 3,389,388 |
Net income | | — | | | — | | | — | | | i 581,097 | | | i 581,097 |
Stock-based compensation | | i 803 | | | — | | | i 14,622 | | | — | | | i 14,622 |
Issuance of common stock in settlement of directors' fees | | i 2 | | | — | | | i 101 | | | — | | | i 101 |
Repurchase of common stock | | ( i 7,227) | | | ( i 1) | | | ( i 443,438) | | | — | | | ( i 443,439) |
Common stock dividends ($ i 0.40 per share) | | — | | | — | | | — | | | ( i 27,940) | | | ( i 27,940) |
Balance, June 30, 2021 | | i 64,484 | | $ | i 6 | | $ | i 618,337 | | $ | i 2,895,486 | | $ | i 3,513,829 |
| | | | | | | | | | | | | | |
| | Six months ended June 30, 2020 | ||||||||||||
| | | | | | Additional | | | | Total | ||||
| | Number of | | Par | | paid-in | | Retained | | stockholders' | ||||
|
| shares |
| value |
| capital |
| earnings |
| equity | ||||
| | (in thousands) | ||||||||||||
Balance, December 31, 2019 | | i 78,515 | | $ | i 8 | | $ | i 1,335,107 | | $ | i 726,392 | | $ | i 2,061,507 |
Net income | | — | | | — | | | — | | | i 658,920 | | | i 658,920 |
Stock-based compensation | | i 1,053 | | | — | | | i 19,491 | | | — | | | i 19,491 |
Issuance of common stock in settlement of directors' fees | | i 3 | | | — | | | i 96 | | | — | | | i 96 |
Repurchase of common stock | | ( i 7,213) | | | ( i 1) | | | ( i 241,282) | | | — | | | ( i 241,283) |
Common stock dividends ($ i 0.24 per share) | | — | | | — | | | — | | | ( i 19,538) | | | ( i 19,538) |
Balance, June 30, 2020 | | i 72,358 | | $ | i 7 | | $ | i 1,113,412 | | $ | i 1,365,774 | | $ | i 2,479,193 |
| | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
8
PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| | | | | | |
| | Six months ended June 30, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
Cash flow from operating activities | | | | | | |
Net income | | $ | i 581,097 | | $ | i 658,920 |
Adjustments to reconcile net income to net cash used in operating activities: | | | | | | |
Net gains on loans held for sale at fair value | | | ( i 1,336,989) | | | ( i 1,026,455) |
Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread | | | i 113,842 | | | i 1,225,844 |
Mortgage servicing rights hedging results | | | i 351,033 | | | ( i 1,020,806) |
Capitalization of interest and advances on loans held for sale | | | ( i 1,925) | | | ( i 33,198) |
Accrual of interest on excess servicing spread financing payable to PennyMac Mortgage Investment Trust | | | i 1,280 | | | i 4,346 |
Amortization debt issuance costs | | | i 13,977 | | | i 5,565 |
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust | | | ( i 475) | | | i 362 |
Results of real estate acquired in settlement in loans | | | ( i 1,320) | | | i 411 |
Stock-based compensation expense | | | i 19,771 | | | i 19,125 |
(Reversal of) Provision for servicing advance losses | | | ( i 33,590) | | | i 34,061 |
Impairment of capitalized software | | | i 728 | | | — |
Depreciation and amortization | | | i 14,967 | | | i 10,725 |
Amortization of right-of-use assets | | | i 6,918 | | | i 6,017 |
Purchase of loans held for sale from PennyMac Mortgage Investment Trust | | | ( i 35,474,697) | | | ( i 26,112,503) |
Origination of loans held for sale | | | ( i 27,731,285) | | | ( i 11,820,127) |
Purchase of loans held for sale from non-affiliates | | | ( i 2,664,336) | | | ( i 1,461,210) |
Purchase of loans from Ginnie Mae securities and early buyout investors | | | ( i 11,562,768) | | | ( i 2,995,791) |
Sale to non-affiliates and principal payments of loans held for sale | | | i 79,007,900 | | | i 40,526,005 |
Sale to PennyMac Mortgage Investment Trust of loans held for sale | | | — | | | i 2,248,869 |
Repurchase of loans subject to representations and warranties | | | ( i 43,914) | | | ( i 34,518) |
Sale of real estate acquired in settlement of loans | | | i 9,503 | | | i 19,559 |
Decrease in servicing advances | | | i 12,543 | | | i 2,411 |
Decrease (increase) in receivable from PennyMac Mortgage Investment Trust | | | i 18,058 | | | ( i 171) |
Decrease (increase) in other assets | | | i 63,006 | | | ( i 132,288) |
Increase in accounts payable and accrued expenses | | | i 61,121 | | | i 39,792 |
Decrease in operating lease liabilities | | | ( i 8,265) | | | ( i 6,888) |
Decrease in payable to PennyMac Mortgage Investment Trust | | | ( i 28,584) | | | ( i 24,761) |
Payments to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement | | | ( i 3,350) | | | — |
(Decrease) increase in income taxes payable | | | ( i 52,648) | | | i 232,301 |
Net cash provided by operating activities | | | i 1,331,598 | | | i 365,597 |
Cash flow from investing activities | | | | | | |
Decrease in short-term investments | | | i 11,497 | | | i 66,865 |
Net change in assets purchased from PMT under agreement to resell | | | i 80,862 | | | i 17,411 |
Net settlement of derivative financial instruments used for hedging of mortgage servicing rights | | | ( i 345,621) | | | i 995,223 |
Purchase of mortgage servicing rights | | | — | | | ( i 24,707) |
Purchase of furniture, fixtures, equipment and leasehold improvements | | | ( i 5,049) | | | ( i 3,472) |
Acquisition of capitalized software | | | ( i 21,594) | | | ( i 33,270) |
Decrease (increase) in margin deposits | | | i 134,666 | | | ( i 31,913) |
Net cash (used in) provided by investing activities | | | ( i 145,239) | | | i 986,137 |
Cash flow from financing activities | | | | | | |
Sale of assets under agreements to repurchase | | | i 69,437,269 | | | i 39,561,048 |
Repurchase of assets sold under agreements to repurchase | | | ( i 70,839,012) | | | ( i 39,933,232) |
Issuance of mortgage loan participation purchase and sale certificates | | | i 12,508,356 | | | i 11,548,130 |
Repayment of mortgage loan participation purchase and sale certificates | | | ( i 12,517,580) | | | ( i 11,509,683) |
Repayment of obligations under capital lease | | | ( i 4,187) | | | ( i 4,061) |
Issuance of unsecured senior notes | | | i 650,000 | | | — |
Repayment of excess servicing spread financing | | | ( i 134,624) | | | ( i 17,430) |
Payment of debt issuance costs | | | ( i 18,648) | | | ( i 14,240) |
Issuance of common stock pursuant to exercise of stock options | | | i 3,397 | | | i 5,631 |
Payment of withholding taxes relating to stock-based compensation | | | ( i 8,546) | | | ( i 5,265) |
Payment of dividend to holders of common stock | | | ( i 27,940) | | | ( i 19,538) |
Repurchase of common stock | | | ( i 443,439) | | | ( i 241,283) |
Net cash used in financing activities | | | ( i 1,394,954) | | | ( i 629,923) |
Net (decrease) increase in cash and restricted cash | | | ( i 208,595) | | | i 721,811 |
Cash and restricted cash at beginning of period | | | i 532,781 | | | i 188,578 |
Cash and restricted cash at end of period | | $ | i 324,186 | | $ | i 910,389 |
Cash and restricted cash at end of period are comprised of the following: | | | | | | |
Cash | | $ | i 324,158 | | $ | i 910,257 |
Restricted cash included in Other assets | | | i 28 | | | i 132 |
| | $ | i 324,186 | | $ | i 910,389 |
The accompanying notes are an integral part of these consolidated financial statements.
9
PENNYMAC FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1—Organization
PennyMac Financial Services, Inc. (“PFSI” or the “Company”) is a holding corporation and its primary assets are direct and indirect equity interests in Private National Mortgage Acceptance Company, LLC (“PennyMac”). The Company is the managing member of PennyMac, and it operates and controls all of the businesses and affairs of PennyMac, and consolidates the financial results of PennyMac and its subsidiaries.
PennyMac is a Delaware limited liability company which, through its subsidiaries, engages in mortgage banking and investment management activities. PennyMac’s mortgage banking activities consist of residential mortgage loan production and 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 publicly-traded real estate mortgage investment trust that invests primarily in 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 loans on behalf of non-affiliates and PMT, purchases, originates and sells new prime credit quality residential mortgage loans and engages in other mortgage banking activities for its own account and the account of PMT. |
PLS is approved as a seller/servicer of mortgage loans by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and as an issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”). PLS is a licensed Federal Housing Administration (“FHA”) Nonsupervised Title II Lender with the U.S. Department of Housing and Urban Development (“HUD”) and a lender/servicer with the Veterans Administration (“VA”) and U.S. Department of Agriculture (“USDA”) (each of the above an “Agency” and collectively the “Agencies”).
| ● | PNMAC Capital Management, LLC (“PCM”)— a Delaware limited liability company registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended. PCM has an investment management agreement with PMT. |
iNote 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, 2020.
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 presented, but are not necessarily indicative of income to be anticipated for the full year ending December 31, 2021. 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.
10
iNote 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”), net interest, management fees, and change in fair value of investment in and dividends received from PMT) totaled i 11% and i 9% of total net revenue for the quarters ended June 30, 2021 and 2020, respectively, and i 10% and i 15% for the six months ended June 30, 2021 and 2020, respectively.
/
iNote 4—Related Party Transactions
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.
Through June 30, 2020, pursuant to the terms of an MSR recapture agreement by and between the Company and PMT, if the Company refinanced mortgage loans for which PMT previously held the MSRs, the Company was generally required to transfer and convey to PMT cash in an amount equal to i 30% of the fair market value of the MSRs related to all such mortgage loans. On June 30, 2020, the MSR recapture agreement was amended and restated for a term of i five years (the “2020 MSR Recapture Agreement”).
Effective July 1, 2020, the 2020 MSR Recapture Agreement changes the recapture fee payable by the Company to a tiered amount equal to:
| ● | i 40% of the fair market value of the MSRs relating to the recaptured loans subject to the first i 15% of the “recapture rate”; |
| ● | i 35% of the fair market value of the MSRs relating to the recaptured loans subject to the “recapture rate” in excess of i 15% and up to i 30%; and |
| ● | i 30% of the fair market value of the MSRs relating to the recaptured loans subject to the “recapture rate” in excess of i 30%. |
The “recapture rate” means, during each month, the ratio of (i) the aggregate unpaid principal balance of all recaptured loans, to (ii) the aggregate unpaid principal balance of all mortgage loans for which the Company held the MSRs and that were refinanced or otherwise paid off in such month. The Company has also agreed to allocate sufficient resources to target a recapture rate of i 15%.
The Company provides PMT with certain mortgage banking services, including fulfillment and disposition-related services, for which it receives a monthly fulfillment fee.
Through June 30, 2020, pursuant to the terms of a mortgage banking services agreement, the monthly fulfillment fee was an amount equal to:
| a) | no greater than the product of (i) 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) 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 was due or payable to the Company with respect to any mortgage loans underwritten to the Ginnie Mae Mortgage-Backed Securities (“MBS”) Guide. |
/11
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 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, through June 30, 2020, a sourcing fee ranging from i 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. While the Company purchases these mortgage loans “as is” and without recourse of any kind from PMT, where the Company has a claim for repurchase, indemnity or otherwise against a correspondent seller, it is entitled, at its sole expense, to pursue any such claim through or in the name of PMT.
Effective July 1, 2020, the fulfillment fees and sourcing fees were revised as follows:
| ● | Fulfillment fees shall not exceed the following: |
| (i) | the number of loan commitments multiplied by a pull-through factor of either i .99 or i .80 depending on whether the loan commitments are subject to a “mandatory trade confirmation” or a “best efforts lock confirmation”, respectively, and then multiplied by $ i 585 for each pull-through adjusted loan commitment up to and including i 16,500 per quarter and $ i 355 for each pull-through adjusted loan commitment in excess of i 16,500 per quarter, plus |
| (ii) | $ i 315 multiplied by the number of purchased loans that are sold to Fannie Mae and Freddie Mac up to the and including i 16,500 per quarter and $ i 195 multiplied by the number of such purchased loans in excess of i 16,500 per quarter, plus |
| (iii) | $ i 750 multiplied by the number of all purchased loans that are sold or securitized to parties other than Fannie Mae and Freddie Mac; provided however, that i no fulfillment fee shall be due or payable to PLS with respect to any Ginnie Mae loans. |
| ● | Sourcing fees charged to PLS range from i one to i two basis points, generally based on the average number of calendar days the loans are held by PMT before purchase by PLS. |
Following is a summary of loan production activities, including MSR recapture between the Company and PMT:
i
| | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | ||||||||||
Net gains on loans held for sale at fair value: | | | | | | | | | | | | |
Net gains on loans held for sale to PMT (primarily cash) | | $ | — | | $ | i 70 | | $ | — | | $ | i 81,294 |
Mortgage servicing rights and excess servicing spread recapture incurred | | | ( i 11,548) | | | ( i 5,662) | | | ( i 25,796) | | | ( i 8,970) |
| | $ | ( i 11,548) | | $ | ( i 5,592) | | $ | ( i 25,796) | | $ | i 72,324 |
Sale of loans held for sale to PMT | | $ | — | | $ | i 2,742 | | $ | — | | $ | i 2,248,869 |
| | | | | | | | | | | | |
Tax service fees earned from PMT included in Loan origination fees | | $ | i 7,128 | | $ | i 4,288 | | $ | i 15,320 | | $ | i 8,268 |
| | | | | | | | | | | | |
Fulfillment fee revenue |
| $ | i 54,020 |
| $ | i 52,815 |
| $ | i 114,855 | | $ | i 94,755 |
| | | | | | | | | | | | |
Sourcing fees included in cost of loans purchased from PMT | | $ | i 1,630 | | $ | i 3,324 | | $ | i 3,368 | | $ | i 7,485 |
Unpaid principal balance of loans purchased from PMT | | $ | i 16,297,216 | | $ | i 11,080,565 | | $ | i 33,856,791 | | $ | i 24,950,845 |
12
Loan Servicing
The Company and PMT have entered into a loan servicing agreement (the “Servicing Agreement”), 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 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 $ i 7.50 per month for fixed-rate loans and $ i 8.50 per month for adjustable-rate loans. |
| ● | To the extent that non-distressed loans become delinquent, the Company is entitled to an additional servicing fee per loan ranging from $ i 10 to $ i 55 per month based on the delinquency, bankruptcy and foreclosure status of the loan or $ i 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. |
| ● | Effective July 1, 2020, the Company also receives certain fees for COVID-19-related forbearance and modification activities provided for under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). |
Special Servicing (Distressed loans)
| ● | The base servicing fee rates for distressed loans range from $ i 30 per month for current loans up to $ i 95 per month for loans in foreclosure proceedings. The base servicing fee rate for REO is $ i 75 per month. The Company also receives a supplemental servicing fee of $ i 25 per month for each distressed loan. |
| ● | The Company receives activity-based fees for modifications, foreclosures and liquidations that it facilitates with respect to distressed loans, as well as other market-based refinancing and loan disposition fees. The Company may also receive REO rental fees, property lease renewal fees, property management fees, tenant paid application fees, late rent fees, and third-party vendor fees associated with its management of REO. |
Following is a summary of loan servicing fees earned from PMT:
i
| | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | ||||||||||
Loan type serviced: | | | | | | | | | | | | |
Loans acquired for sale at fair value | | $ | i 630 | | $ | i 607 | | $ | i 1,173 | | $ | i 1,143 |
Distressed loans | | | i 80 | | | i 188 | | | i 217 | | | i 488 |
Mortgage servicing rights | | | i 19,305 | | | i 14,738 | | | i 37,718 | | | i 28,423 |
| | $ | i 20,015 | | $ | i 15,533 | | $ | i 39,108 | | $ | i 30,054 |
On June 30, 2020, the Servicing Agreement was amended and restated for a term of i five years (the “2020 Servicing Agreement”). The terms of the 2020 Servicing Agreement are substantially similar to those in the prior servicing agreement except that they now include fees relating to COVID-19 related forbearance and modification activities provided for under the CARES Act.
13
Investment Management Activities
The Company has a management agreement with PMT (“Management Agreement”), pursuant to which 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 PFSI 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) i 1.5% per year of PMT’s average shareholders’ equity up to $ i 2 billion, (ii) i 1.375% per year of PMT’s average shareholders’ equity in excess of $ i 2 billion and up to $ i 5 billion, and (iii) i 1.25% per year of PMT’s average shareholders’ equity in excess of $ i 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) i 10% of the amount by which PMT’s “net income” for the quarter exceeds (i) an i 8% return on equity plus the “high watermark,” up to (ii) a i 12% return on PMT’s “equity”; plus (b) i 15% of the amount by which PMT’s “net income” for the quarter exceeds (i) a i 12% return on PMT’s “equity” plus the “high watermark,” up to (ii) a i 16% return on PMT’s “equity”; plus (c) i 20% of the amount by which PMT’s “net income” for the quarter exceeds a i 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 i 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 i 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 i 50% paid in common shares), at PMT’s option.
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.
14
Following is a summary of the base management and performance incentive fees earned from PMT:
i
| | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | ||||||||||
Base management | | $ | i 8,648 | | $ | i 8,288 | | $ | i 17,097 |
| $ | i 17,343 |
Performance incentive | | | i 3,265 | | | — | | | i 3,265 | | | — |
| | $ | i 11,913 | | $ | i 8,288 | | $ | i 20,362 | | $ | i 17,343 |
| | | | | | | | | | | | |
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 was reimbursed $ i 120,000 per fiscal quarter through June 30, 2020.
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 are 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.
On June 30, 2020, the Management Agreement was amended and restated for a term of i five years (the “2020 Management Agreement”). The terms of the 2020 Management Agreement are materially consistent with those of the prior management agreement, except that, effective July 1, 2020, PMT’s reimbursement of PCM’s and its affiliates’ compensation expenses was increased from $ i 120,000 to $ i 165,000 per fiscal quarter, such amount to be reviewed annually and not preclude reimbursement for any other services performed by the Company or its affiliates.
The Company received reimbursements from PMT for expenses as follows:
i
| | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | ||||||||||
Reimbursement of: |
| |
|
| |
|
| |
| | | |
Common overhead incurred by the Company | | $ | i 1,268 | | $ | i 1,585 | | $ | i 1,839 | | $ | i 3,125 |
Compensation | | | i 165 | | | i 120 | | | i 330 | | | i 240 |
Expenses incurred on PMT's behalf, net | | | i 7,804 | | | i 1,438 | | | i 9,140 | | | i 2,709 |
| | $ | i 9,237 | | $ | i 3,143 | | $ | i 11,309 | | $ | i 6,074 |
Payments and settlements during the period (1) | | $ | i 74,441 | | $ | i 136,352 | | $ | i 187,182 | | $ | i 170,035 |
| (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. |
15
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 the first quarter of 2021, PLS repurchased the ESS from PMH at fair market value, effectively terminating the borrowing arrangements allowing PMH to finance its participation certificates representing beneficial ownership in ESS. Such ESS is now included in PLS's participation certificates representing beneficial ownership in ESS.
The Company holds an investment in PMT in the form of i 75,000 common shares of beneficial interest.
Following is a summary of investing activities between the Company and PMT:
i
| | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | ||||||||||
Interest income relating to Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell | | $ | — | | $ | i 792 | | $ | i 387 | | $ | i 2,010 |
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust | | $ | i 144 | | $ | i 543 | | $ | i 545 | | $ | ( i 314) |
| | | | | | |
| | June 30, | | |||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell | | $ | — | | $ | i 80,862 |
Common shares of beneficial interest of PennyMac Mortgage Investment Trust: | | | | | | |
Fair value | | $ | i 1,580 | | $ | i 1,105 |
Number of shares | | | i 75 | | | i 75 |
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.
16
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 $ i 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.
During the quarter ended March 31, 2021, the Company repurchased ESS from PMT and repaid its outstanding ESS financing payable to PMT.
Following is a summary of financing activities between the Company and PMT:
i
| | | | | | | | | |
| | Quarter ended | | Six months ended June 30, | |||||
|
|
| 2021 |
| 2020 | ||||
| | (in thousands) | |||||||
Excess servicing spread financing: | | | | | | | | | |
Balance at beginning of period | | $ | i 157,109 | | $ | i 131,750 | | $ | i 178,586 |
Issuance pursuant to recapture agreement | | | i 483 |
| | i 557 |
| | i 862 |
Accrual of interest | | | i 2,372 | | | i 1,280 | | | i 4,346 |
Repayment | | | ( i 8,122) | | | ( i 134,624) | | | ( i 17,430) |
Change in fair value | | | ( i 636) | | | i 1,037 | | | ( i 15,158) |
Balance at end of period | | $ | i 151,206 | | $ | — | | $ | i 151,206 |
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 | | $ | i 535 | | $ | i 614 | | $ | i 916 |
17
Receivable from and Payable to PMT
Amounts receivable from and payable to PMT are summarized below:
i
| | | | | | |
| | June 30, | | |||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
Receivable from PMT: | | | | | | |
Allocated expenses and expenses incurred on PMT's behalf | | $ | i 17,002 | | $ | i 38,142 |
Fulfillment fees | | | i 16,467 | | | i 20,873 |
Management fees | | | i 11,913 | | | i 8,686 |
Correspondent production fees | | | i 9,764 | | | i 13,065 |
Servicing fees | | | i 6,737 | | | i 6,213 |
Interest on assets purchased under agreements to resell | | | — | | | i 26 |
| | $ | i 61,883 | | $ | i 87,005 |
Payable to PMT: | | | | | | |
Amounts advanced by PMT to fund its servicing advances | | $ | i 117,444 | | $ | i 132,154 |
Other | | | i 19,216 | | | i 8,152 |
| | $ | i 136,660 | | $ | i 140,306 |
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 i 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.
The Company has recorded $ i 31.8 million and $ i 35.2 million, Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement as of June 30, 2021 and December 31, 2020, respectively. The Company made $ i i 3.4 / million of payments under the tax receivable agreement during the quarter and six months ended June 30, 2021 and did i not make any payments during the six months ended June 30, 2020.
.
18
Note 5—Loan Sales and Servicing Activities
The Company, through PLS, 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:
i
| | | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
| | (in thousands) | | ||||||||||
Cash flows: |
| | |
| | | | | |
| | | |
Sales proceeds | | $ | i 41,739,700 | | $ | i 21,188,988 | | $ | i 79,007,900 | | $ | i 40,526,005 | |
Servicing fees received (1) | | $ | i 201,866 | | $ | i 158,871 | | $ | i 397,648 | | $ | i 325,427 | |
| (1) | Net of guarantee fees paid to the Agencies. |
The following table summarizes unpaid principal balance (the “UPB”) of the loans sold by the Company in which it maintains continuing involvement in the form of owned servicing obligations:
i
| | | | | | | | | | | | |
| | | | | | | | June 30, | | |||
|
| | | | | |
| 2021 |
| 2020 | ||
| | | | | | | | (in thousands) | ||||
Unpaid principal balance of loans outstanding | | | | | | | | $ | i 227,560,336 | | $ | i 199,655,361 |
Delinquencies (1): | | | | | | | | | | | | |
30-89 days | | | | | | | | $ | i 4,574,834 | | $ | i 6,041,366 |
90 days or more: | | | | | | | | | | | | |
Not in foreclosure | | | | | | | | $ | i 13,173,282 | | $ | i 17,799,621 |
In foreclosure | | | | | | | | $ | i 481,974 | | $ | i 581,683 |
Foreclosed | | | | | | | | $ | i 6,444 | | $ | i 10,893 |
Bankruptcy | | | | | | | | $ | i 1,201,936 | | $ | i 1,230,696 |
Delinquent loans in COVID-19 pandemic-related forbearance: | | | | | | | | | | | | |
30-89 days | | | | | | | | $ | i 1,383,601 | | $ | i 2,626,617 |
90 days or more | | | | | | | | | i 9,019,414 | | | i 12,181,174 |
| | | | | | | | $ | i 10,403,015 | | $ | i 14,807,791 |
| (1) | Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act. |
/19
The following tables summarize the UPB of the Company’s loan servicing portfolio:
i
| | | | | | | | | |
| | ||||||||
| | | | | | ||||
| | Servicing | | servicing and | | Total | |||
|
| rights owned |
| subservicing |
| loans serviced | |||
| | (in thousands) | |||||||
Investor: | | | | | | | | | |
Non-affiliated entities: |
| | | | | | | | |
Originated | | $ | i 227,560,336 |
| $ | — |
| $ | i 227,560,336 |
Purchased | | | i 31,050,313 | | | — | | | i 31,050,313 |
| | | i 258,610,649 | | | — | | | i 258,610,649 |
PennyMac Mortgage Investment Trust | | | — | | | i 204,174,462 | | | i 204,174,462 |
Loans held for sale | | | i 10,438,935 | | | — | | | i 10,438,935 |
| | $ | i 269,049,584 | | $ | i 204,174,462 | | $ | i 473,224,046 |
Delinquent loans (1): | | | | | | | | | |
30 days | | $ | i 4,175,393 | | $ | i 708,701 | | $ | i 4,884,094 |
60 days | | | i 1,432,015 | | | i 198,221 | | | i 1,630,236 |
90 days or more: | | | | | | | | | |
Not in foreclosure | | | i 15,364,421 | | | i 2,988,774 | | | i 18,353,195 |
In foreclosure | | | i 624,204 | | | i 28,514 | | | i 652,718 |
Foreclosed | | | i 7,191 | | | i 21,557 | | | i 28,748 |
| | $ | i 21,603,224 | | $ | i 3,945,767 | | $ | i 25,548,991 |
Bankruptcy | | $ | i 1,582,002 | | $ | i 149,224 | | $ | i 1,731,226 |
Delinquent loans in COVID-19 pandemic-related forbearance: | | | | | | | | | |
30 days | | $ | i 854,161 | | $ | i 140,175 | | $ | i 994,336 |
60 days | | | i 791,271 | | | i 134,304 | | | i 925,575 |
90 days or more | | | i 10,402,947 | | | i 2,467,315 | | | i 12,870,262 |
| | $ | i 12,048,379 | | $ | i 2,741,794 | | $ | i 14,790,173 |
Custodial funds managed by the Company (2) | | $ | i 10,262,380 | | $ | i 4,937,986 | | $ | i 15,200,366 |
| (1) | Includes delinquent loans in COVID-19 related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act. |
| (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. |
/20
| | | | | | | | | |
| | ||||||||
| | | | | | ||||
| | Servicing | | servicing and | | Total | |||
|
| rights owned |
| subservicing |
| loans serviced | |||
| | (in thousands) | |||||||
Investor: | | | | | | | | | |
Non-affiliated entities: | | | | | | | | | |
Originated | | $ | i 199,655,361 |
| $ | — |
| $ | i 199,655,361 |
Purchased | | | i 41,612,940 | | | — | | | i 41,612,940 |
| | | i 241,268,301 | | | — | | | i 241,268,301 |
PennyMac Mortgage Investment Trust | | | — | | | i 174,418,591 | | | i 174,418,591 |
Loans held for sale | | | i 11,063,938 | | | — | | | i 11,063,938 |
| | $ | i 252,332,239 | | $ | i 174,418,591 | | $ | i 426,750,830 |
Delinquent loans (1): | | | | | | | | | |
30 days | | $ | i 5,217,949 | | $ | i 901,965 | | $ | i 6,119,914 |
60 days | | | i 2,393,267 | | | i 348,416 | | | i 2,741,683 |
90 days or more: | | | | | | | | | |
Not in foreclosure | | | i 21,781,226 | | | i 4,473,217 | | | i 26,254,443 |
In foreclosure | | | i 751,586 | | | i 33,312 | | | i 784,898 |
Foreclosed | | | i 12,938 | | | i 37,131 | | | i 50,069 |
| | $ | i 30,156,966 | | $ | i 5,794,041 | | $ | i 35,951,007 |
Bankruptcy | | $ | i 1,698,418 | | $ | i 153,179 | | $ | i 1,851,597 |
Delinquent loans in COVID-19 pandemic-related forbearance: | | | | | | | | | |
30 days | | $ | i 1,745,257 | | $ | i 334,498 | | $ | i 2,079,755 |
60 days | | | i 1,479,753 | | | i 259,019 | | | i 1,738,772 |
90 days or more | | | i 14,904,052 | | | i 3,690,505 | | | i 18,594,557 |
| | $ | i 18,129,062 | | $ | i 4,284,022 | | $ | i 22,413,084 |
Custodial funds managed by the Company (2) | | $ | i 10,660,517 | | $ | i 6,086,725 | | $ | i 16,747,242 |
| (1) | Includes delinquent loans in COVID-19 related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act. |
| (2) | Custodial funds include cash accounts holding funds on behalf of borrowers and investors relating to loans serviced under servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns placement fees on certain of the custodial funds it manages on behalf of the loans’ borrowers and investors, which are included in Interest income in the Company’s consolidated statements of income. |
Following is a summary of the geographical distribution of loans included in the Company’s loan servicing portfolio for the top five and all other states as measured by UPB:
i
| | | | | | | |
| | June 30, | | December 31, | | ||
State |
| 2021 |
| 2020 |
| ||
| | (in thousands) | | ||||
California | | $ | i 65,386,177 | | $ | i 60,591,363 |
|
Florida | | | i 39,712,103 | | | i 35,360,190 | |
Texas | | | i 38,627,464 | | | i 34,591,419 | |
Virginia | | | i 29,487,339 | | | i 26,209,701 | |
Maryland | | | i 22,372,406 | | | i 19,974,809 | |
All other states | | | i 277,638,557 | | | i 250,023,348 | |
| | $ | i 473,224,046 | | $ | i 426,750,830 | |
21
Note 6—Fair Value
Most of the Company’s assets and certain of its liabilities are measured at or based on their fair values. The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the significant 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.
22
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Following is a summary of assets and liabilities that are measured at fair value on a recurring basis:
i
| | | | | | | | | | | | |
| | |||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
| | (in thousands) | ||||||||||
Assets: | | | | | | | | | | | | |
Short-term investments | | $ | i 3,720 | | $ | — | | $ | — | | $ | i 3,720 |
Loans held for sale at fair value | | | — | | | i 7,066,245 | | | i 3,818,261 | | | i 10,884,506 |
Derivative assets: | | | | | | | | | | | | |
Interest rate lock commitments | | | — | | | — | | | i 344,128 | | | i 344,128 |
Forward purchase contracts | | | — | | | i 55,765 | | | — | | | i 55,765 |
Forward sales contracts | | | — | | | i 39,597 | | | — | | | i 39,597 |
MBS put options | | | — | | | i 13,106 | | | — | | | i 13,106 |
MBS call options | | | — | | | i 687 | | | — | | | i 687 |
Swaption purchase contracts | | | — | | | i 11,041 | | | — | | | i 11,041 |
Put options on interest rate futures purchase contracts | | | i 2,664 | | | — | | | — | | | i 2,664 |
Call options on interest rate futures purchase contracts | | | i 2,297 | | | — | | | — | | | i 2,297 |
Total derivative assets before netting | | | i 4,961 | | | i 120,196 | | | i 344,128 | | | i 469,285 |
Netting | | | — | | | — | | | — | | | ( i 98,016) |
Total derivative assets | | | i 4,961 | | | i 120,196 | | | i 344,128 | | | i 371,269 |
Mortgage servicing rights at fair value | | | — | | | — | | | i 3,412,648 | | | i 3,412,648 |
Investment in PennyMac Mortgage Investment Trust | | | i 1,580 | | | — | | | — | | | i 1,580 |
| | $ | i 10,261 | | $ | i 7,186,441 | | $ | i 7,575,037 | | $ | i 14,673,723 |
Liabilities: | | | | | | | | | | | | |
Derivative liabilities: | | | | | | | | | | | | |
Interest rate lock commitments | | $ | — | | $ | — | | $ | i 518 | | $ | i 518 |
Forward purchase contracts | | | — | | | i 23,274 | | | — | | | i 23,274 |
Forward sales contracts | | | — | | | i 68,347 | | | — | | | i 68,347 |
Total derivative liabilities before netting | | | — | | | i 91,621 | | | i 518 | | | i 92,139 |
Netting | | | — | | | — | | | — | | | ( i 48,229) |
Total derivative liabilities | | | — | | | i 91,621 | | | i 518 | | | i 43,910 |
Mortgage servicing liabilities at fair value | | | — | | | — | | | i 100,091 | | | i 100,091 |
| | $ | — | | $ | i 91,621 | | $ | i 100,609 | | $ | i 144,001 |
/23
| | | | | | | | | | | | |
| | |||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
| | (in thousands) | ||||||||||
Assets: | | | | | | | | | | | | |
Short-term investments | | $ | i 15,217 | | $ | — | | $ | — | | $ | i 15,217 |
Loans held for sale at fair value | | | — | | | i 6,941,231 | | | i 4,675,169 | | | i 11,616,400 |
Derivative assets: | | | | | | | | | | | | |
Interest rate lock commitments | | | — | | | — | | | i 679,961 | | | i 679,961 |
Forward purchase contracts | | | — | | | i 133,267 | | | — | | | i 133,267 |
Forward sales contracts | | | — | | | i 1,451 | | | — | | | i 1,451 |
MBS put options | | | — | | | i 14,302 | | | — | | | i 14,302 |
Swaption purchase contracts | | | — | | | i 11,939 | | | — | | | i 11,939 |
Put options on interest rate futures purchase contracts | | | i 5,520 | | | — | | | — | | | i 5,520 |
Call options on interest rate futures purchase contracts | | | i 1,391 | | | — | | | — | | | i 1,391 |
Total derivative assets before netting | | | i 6,911 | | | i 160,959 | | | i 679,961 | | | i 847,831 |
Netting | | | — | | | — | | | — | | | ( i 136,593) |
Total derivative assets | | | i 6,911 | | | i 160,959 | | | i 679,961 | | | i 711,238 |
Mortgage servicing rights at fair value | | | — | | | — | | | i 2,581,174 | | | i 2,581,174 |
Investment in PennyMac Mortgage Investment Trust | | | i 1,105 | | | — | | | — | | | i 1,105 |
| | $ | i 23,233 | | $ | i 7,102,190 | | $ | i 7,936,304 | | $ | i 14,925,134 |
Liabilities: | | | | | | | | | | | | |
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value | | $ | — | | $ | — | | $ | i 131,750 | | $ | i 131,750 |
Derivative liabilities: | | | | | | | | | | | | |
Interest rate lock commitments | | | — | | | — | | | i 2,935 | | | i 2,935 |
Forward purchase contracts | | | — | | | i 1,276 | | | — | | | i 1,276 |
Forward sales contracts | | | — | | | i 251,149 | | | — | | | i 251,149 |
Total derivative liabilities before netting | | | — | | | i 252,425 | | | i 2,935 | | | i 255,360 |
Netting | | | — | | | — | | | — | | | ( i 212,722) |
Total derivative liabilities | | | — | | | i 252,425 | | | i 2,935 | | | i 42,638 |
Mortgage servicing liabilities at fair value | | | — | | | — | | | i 45,324 | | | i 45,324 |
| | $ | — | | $ | i 252,425 | | $ | i 180,009 | | $ | i 219,712 |
24
As shown above, all or a portion of the Company’s loans held for sale, Interest Rate Lock Commitments (“IRLCs”), MSRs, ESS and MSLs are measured using Level 3 fair value inputs. Following are roll forwards of assets and liabilities measured at fair value using “Level 3” inputs at either the beginning or the end of the period presented:
i
| | | | | | | | | | | | |
| | Quarter ended June 30, 2021 | ||||||||||
| | | | Net interest | | Mortgage | | | | |||
| | Loans held | | rate lock | | servicing | | | | |||
Assets |
| for sale |
| commitments (1) |
| rights |
| Total | ||||
| | (in thousands) | ||||||||||
Balance, March 31, 2021 | | $ | i 5,202,065 | | $ | i 337,940 | | $ | i 3,268,910 | | $ | i 8,808,915 |
Purchases and issuances, net | | | i 6,828,094 | | | i 351,934 | | | — | | | i 7,180,028 |
Capitalization of interest and advances | | | i 60,439 | | | — | | | — | | | i 60,439 |
Sales and repayments | | | ( i 3,866,340) | | | — | | | — | | | ( i 3,866,340) |
Mortgage servicing rights resulting from loan sales | | | — | | | — | | | i 483,362 | | | i 483,362 |
Changes in fair value included in income arising from: | | | | | | | | | | | | |
Changes in instrument-specific credit risk | | | i 179,792 | | | — | | | — | | | i 179,792 |
Other factors | | | — | | | i 332,435 | | | ( i 339,624) | | | ( i 7,189) |
| | | i 179,792 | | | i 332,435 | | | ( i 339,624) | | | i 172,603 |
Transfers from Level 3 to Level 2 | | | ( i 4,585,789) | | | — | | | — | | | ( i 4,585,789) |
Transfers to loans held for sale | | | — | | | ( i 678,699) | | | — | | | ( i 678,699) |
Balance, June 30, 2021 | | $ | i 3,818,261 | | $ | i 343,610 | | $ | i 3,412,648 | | $ | i 7,574,519 |
Changes in fair value recognized during the quarter relating to assets still held at June 30, 2021 | | $ | i 74,184 | | $ | i 343,610 | | $ | ( i 339,624) | | $ | i 78,170 |
| (1) | For the purpose of this table, the IRLC asset and liability positions are shown net. |
| | | |
| | Quarter ended | |
Liabilities |
| ||
| | (in thousands) | |
Mortgage servicing liabilities: | | | |
Balance, March 31, 2021 | | $ | i 46,026 |
Mortgage servicing liabilities resulting from loan sales | | | i 57,421 |
Changes in fair value included in income | | | ( i 3,356) |
Balance, June 30, 2021 | | $ | i 100,091 |
Changes in fair value recognized during the quarter relating to liabilities still outstanding at June 30, 2021 | | $ | ( i 3,356) |
| | | |
25
| | | | | | | | | | | | | | | | | | |
| | Quarter ended June 30, 2020 | | | | |||||||||||||
| | | | Net interest | | Repurchase | | Mortgage | | | | | | | ||||
| | Loans held | | rate lock | | agreement | | servicing | | | | | | | ||||
Assets | | for sale |
| commitments (1) |
| derivatives |
| rights |
| | Total | | | |||||
| | (in thousands) | | | | |||||||||||||
Balance, March 31, 2020 |
| $ | i 806,587 | | $ | i 315,194 | | $ | i 8,187 | | $ | i 2,193,697 | | $ | i 3,323,665 | | | |
Purchases and issuances, net | | | i 288,856 | | | i 496,149 | | | — | | | — | | | i 785,005 | | | |
Capitalization of interest and advances | | | i 14,994 | | | — | | | — | | | — | | | i 14,994 | | | |
Sales and repayments | | | ( i 60,364) | | | — | | | — | | | — | | | ( i 60,364) | | | |
Mortgage servicing rights resulting from loan sales | | | — | | | — | | | — | | | i 225,534 | | | i 225,534 | | | |
Changes in fair value included in income arising from: | | | | | | | | | | | | | | | | | | |
Changes in instrument-specific credit risk | | | i 1,132 | | | — | | | — | | | — | | | i 1,132 | | | |
Other factors | | | — | | | i 297,198 | | | — | | | ( i 205,692) | | | i 91,506 | | | |
| | | i 1,132 | | | i 297,198 | | | — | | | ( i 205,692) | | | i 92,638 | | | |
Transfers from Level 3 to Level 2 | | | ( i 389,486) | | | — | | | — | | | — | | | ( i 389,486) | | | |
Transfers to loans held for sale | | | — | | | ( i 740,477) | | | — | | | — | | | ( i 740,477) | | | |
Balance, June 30, 2020 | | $ | i 661,719 | | $ | i 368,064 | | $ | i 8,187 | | $ | i 2,213,539 | | $ | i 3,251,509 | | | |
Changes in fair value recognized during the quarter relating to assets still held at June 30, 2020 | | $ | ( i 717) | | $ | i 368,064 | | $ | — | | $ | ( i 205,692) | | $ | i 161,655 | | | |
| (1) | For the purpose of this table, the IRLC asset and liability positions are shown net. |
| | | | | | | | | |
| | Quarter ended June 30, 2020 | |||||||
| | Excess | | | | | | ||
| | servicing | | Mortgage | | | | ||
| | spread | | servicing | | | | ||
Liabilities |
| financing |
| liabilities |
| Total | |||
| | (in thousands) | |||||||
Balance, March 31, 2020 | | $ | i 157,109 | | $ | i 29,761 |
| $ | i 186,870 |
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust | | | i 483 | | | — | | | i 483 |
Accrual of interest | | | i 2,372 | | | — | | | i 2,372 |
Repayments | | | ( i 8,122) | | | — | | | ( i 8,122) |
Changes in fair value included in income | | | ( i 636) | | | i 97 | | | ( i 539) |
Balance, June 30, 2020 | | $ | i 151,206 | | $ | i 29,858 | | $ | i 181,064 |
Changes in fair value recognized during the quarter relating to liabilities still outstanding at June 30, 2020 | | $ | ( i 636) | | $ | i 97 | | $ | ( i 539) |
26
| | | | | | | | | | | | |
| | Six months ended June 30, 2021 | ||||||||||
| | | | Net interest | | Mortgage | | | | |||
| | Loans held | | rate lock | | servicing | | | | |||
Assets | | for sale |
| commitments (1) |
| rights |
| Total | ||||
|
| (in thousands) | ||||||||||
Balance, December 31, 2020 | | $ | i 4,675,169 | | $ | i 677,026 | | $ | i 2,581,174 | | $ | i 7,933,369 |
Purchases and issuances, net | | | i 11,056,535 | | | i 829,867 | | | — | | | i 11,886,402 |
Capitalization of interest and advances | | | i 78,844 | | | — | | | — | | | i 78,844 |
Sales and repayments | | | ( i 4,795,241) | | | — | | | — | | | ( i 4,795,241) |
Mortgage servicing rights resulting from loan sales | | | — | | | — | | | i 953,895 | | | i 953,895 |
Changes in fair value included in income arising from: | | | | | | | | | | | | |
Changes in instrument-specific credit risk | | | i 227,946 | | | — | | | — | | | i 227,946 |
Other factors | | | — | | | i 152,822 | | | ( i 122,421) | | | i 30,401 |
| | | i 227,946 | | | i 152,822 | | | ( i 122,421) | | | i 258,347 |
Transfers from Level 3 to Level 2 | | | ( i 7,424,910) | | | — | | | — | | | ( i 7,424,910) |
Transfers to real estate acquired in settlement of loans | | | ( i 82) | | | — | | | — | | | ( i 82) |
Transfers to loans held for sale | | | — | | | ( i 1,316,105) | | | — | | | ( i 1,316,105) |
Balance, June 30, 2021 | | $ | i 3,818,261 | | $ | i 343,610 | | $ | i 3,412,648 | | $ | i 7,574,519 |
Changes in fair value recognized during the period relating to assets still held at June 30, 2021 | | $ | i 135,823 | | $ | i 343,610 | | $ | ( i 122,421) | | $ | i 357,012 |
| (1) | For the purpose of this table, the IRLC asset and liability positions are shown net. |
| | | | | | | | | |
| | Six months ended June 30, 2021 | |||||||
| | Excess | | | | | | ||
| | servicing | | Mortgage | | | | ||
| | spread | | servicing | | | | ||
Liabilities | | financing | | liabilities | | Total | |||
| | (in thousands) | |||||||
Balance, December 31, 2020 |
| $ | i 131,750 | | $ | i 45,324 | | $ | i 177,074 |
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust | | | i 557 | | | — | | | i 557 |
Accrual of interest | | | i 1,280 | | | — | | | i 1,280 |
Repayments | | | ( i 134,624) | | | — | | | ( i 134,624) |
Mortgage servicing liabilities resulting from loan sales | | | — | | | i 64,383 | | | i 64,383 |
Changes in fair value included in income | | | i 1,037 | | | ( i 9,616) | | | ( i 8,579) |
Balance, June 30, 2021 | | $ | — | | $ | i 100,091 | | $ | i 100,091 |
Changes in fair value recognized during the period relating to liabilities still outstanding at June 30, 2021 | | $ | — | | $ | ( i 9,616) | | $ | ( i 9,616) |
27
| | | | | | | | | | | | | | | |
| | Six months ended June 30, 2020 | |||||||||||||
| | | | Net interest | | Repurchase | | Mortgage | | | | ||||
| | Loans held | | rate lock | | agreement | | servicing | | | | ||||
Assets |
| for sale |
| commitments (1) |
| derivatives |
| rights |
| Total | |||||
| | (in thousands) | |||||||||||||
Balance, December 31, 2019 |
| $ | i 383,878 | | $ | i 136,650 | | $ | i 8,187 | | $ | i 2,926,790 | | $ | i 3,455,505 |
Purchases and issuances, net | | | i 1,930,087 | | | i 838,129 | | | — | | | i 25,760 | | | i 2,793,976 |
Capitalization of interest and advances | | | i 33,021 | | | — | | | — | | | — | | | i 33,021 |
Sales and repayments | | | ( i 799,292) | | | — | | | — | | | — | | | ( i 799,292) |
Mortgage servicing rights resulting from loan sales | | | — | | | — | | | — | | | i 507,849 | | | i 507,849 |
Changes in fair value included in income arising from: | | | | | | | | | | | | | | | |
Changes in instrument-specific credit risk | | | ( i 6,391) | | | — | | | — | | | — | | | ( i 6,391) |
Other factors | | | — | | | i 497,116 | | | — | | | ( i 1,246,860) | | | ( i 749,744) |
| | | ( i 6,391) | | | i 497,116 | | | — | | | ( i 1,246,860) | | | ( i 756,135) |
Transfers from Level 3 to Level 2 | | | ( i 878,893) | | | — | | | — | | | — | | | ( i 878,893) |
Transfers to real estate acquired in settlement of loans | | | ( i 691) | | | — | | | — | | | — | | | ( i 691) |
Transfers of interest rate lock commitments to loans held for sale | | | — | | | ( i 1,103,831) | | | — | | | — | | | ( i 1,103,831) |
Balance, June 30, 2020 | | $ | i 661,719 | | $ | i 368,064 | | $ | i 8,187 | | $ | i 2,213,539 | | $ | i 3,251,509 |
Changes in fair value recognized during the period relating to assets still held at June 30, 2020 | | $ | ( i 563) | | $ | i 368,064 | | $ | — | | $ | ( i 1,246,860) | | $ | ( i 879,359) |
| (1) | For the purpose of this table, the IRLC asset and liability positions are shown net. |
| | | | | | | | | |
| | Six months ended June 30, 2020 | |||||||
| | Excess | | | | | | | |
| | servicing | | Mortgage | | | | ||
| | spread | | servicing | | | | ||
Liabilities |
| financing |
| liabilities |
| Total | |||
| | (in thousands) | |||||||
Balance, December 31, 2019 | | $ | i 178,586 | | $ | i 29,140 |
| $ | i 207,726 |
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust | | | i 862 | | | — | | | i 862 |
Accrual of interest | | | i 4,346 | | | — | | | i 4,346 |
Repayments | | | ( i 17,430) | | | — | | | ( i 17,430) |
Mortgage servicing liabilities resulting from loan sales | | | — | | | i 6,576 | | | i 6,576 |
Changes in fair value included in income | | | ( i 15,158) | | | ( i 5,858) | | | ( i 21,016) |
Balance, June 30, 2020 | | $ | i 151,206 | | $ | i 29,858 | | $ | i 181,064 |
Changes in fair value recognized during the period relating to liabilities still outstanding at June 30, 2020 | | $ | ( i 15,158) | | $ | ( i 5,858) | | $ | ( i 21,016) |
The Company had transfers among the fair value levels arising from the return to salability in the active secondary market of certain loans held for sale and from transfers of IRLCs to loans held for sale at fair value upon purchase or funding.
28
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:
i
| | | | | | | | | | | | | | | | | | |
| | Quarter ended June 30, | ||||||||||||||||
| | 2021 | | 2020 | ||||||||||||||
| | Net gains on | | Net | | | | Net gains on | | Net | | | ||||||
| | loans held | | loan | | | | loans held | | loan | | | ||||||
| | for sale at | | servicing | | | | for sale at | | servicing | | | ||||||
| | fair value | | fees | | Total | | fair value | | fees | | Total | ||||||
| | (in thousands) | ||||||||||||||||
Assets: | | | | | | | | | | | | | | | | | | |
Loans held for sale | | $ | i 761,841 | | $ | — | | $ | i 761,841 | | $ | i 739,797 | | $ | — | | $ | i 739,797 |
Mortgage servicing rights | | | — | | | ( i 339,624) | | | ( i 339,624) | | | — | | | ( i 205,692) | | | ( i 205,692) |
| | $ | i 761,841 | | $ | ( i 339,624) | | $ | i 422,217 | | $ | i 739,797 | | $ | ( i 205,692) | | $ | i 534,105 |
Liabilities: | | | | | | | | | | | | | | | | | | |
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust | | $ | — | | $ | — | | $ | — | | $ | — | | $ | i 636 | | $ | i 636 |
Mortgage servicing liabilities | | | — | | | i 3,356 | | | i 3,356 | | | — | | | ( i 97) | | | ( i 97) |
| | $ | — | | $ | i 3,356 | | $ | i 3,356 | | $ | — | | $ | i 539 | | $ | i 539 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, | ||||||||||||||||
| | 2021 | | 2020 | ||||||||||||||
| | Net gains on | | Net | | | | | Net gains on | | Net | | | | ||||
| | loans held | | loan | | | | | loans held | | loan | | | | ||||
| | for sale at | | servicing | | | | | for sale at | | servicing | | | | ||||
|
| fair value |
| fees |
| Total |
| fair value |
| fees |
| Total | ||||||
| | (in thousands) | ||||||||||||||||
Assets: | | | | | | | | | | | | | | | | | | |
Loans held for sale | | $ | i 1,411,960 | | $ | — | | $ | i 1,411,960 | | $ | i 1,138,515 | | $ | — | | $ | i 1,138,515 |
Mortgage servicing rights | | | — | | | ( i 122,421) | | | ( i 122,421) | | | — | | | ( i 1,246,860) | | | ( i 1,246,860) |
| | $ | i 1,411,960 | | $ | ( i 122,421) | | $ | i 1,289,539 | | $ | i 1,138,515 | | $ | ( i 1,246,860) | | $ | ( i 108,345) |
Liabilities: | | | | | | | | | | | | | | | | | | |
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust | | $ | — | | $ | ( i 1,037) | | $ | ( i 1,037) | | $ | — | | $ | i 15,158 | | $ | i 15,158 |
Mortgage servicing liabilities | | | — | | | i 9,616 | | | i 9,616 | | | — | | | i 5,858 | | | i 5,858 |
| | $ | — | | $ | i 8,579 | | $ | i 8,579 | | $ | — | | $ | i 21,016 | | $ | i 21,016 |
Following are the fair value and related principal amounts due upon maturity of loans held for sale:
i
| | | | | | | | | | | | | | | | | | |
| | | ||||||||||||||||
| | | | Principal | | | | | | Principal | | | ||||||
| | | | amount | | | | | | amount | | | ||||||
| | Fair | | due upon | | | | Fair | | due upon | | | ||||||
Loans held for sale |
| value |
| maturity |
| Difference |
| value |
| maturity |
| Difference | ||||||
| | (in thousands) | ||||||||||||||||
Current through 89 days delinquent | | $ | i 10,526,148 | | $ | i 10,079,813 | | $ | i 446,335 | | $ | i 11,304,308 | | $ | i 10,743,814 | | $ | i 560,494 |
90 days or more delinquent: | | | | | | | | | | | | | | | | | | |
Not in foreclosure | | | i 330,472 | | | i 327,869 | | | i 2,603 | | | i 275,419 | | | i 280,595 | | | ( i 5,176) |
In foreclosure | | | i 27,886 | | | i 31,253 | | | ( i 3,367) | | | i 36,673 | | | i 39,529 | | | ( i 2,856) |
| | $ | i 10,884,506 | | $ | i 10,438,935 | | $ | i 445,571 | | $ | i 11,616,400 | | $ | i 11,063,938 | | $ | i 552,462 |
| | | | | | | | | | | | | | | | | | |
29
Assets Measured at Fair Value on a Nonrecurring Basis
Following is a summary of assets that were measured at fair value on a nonrecurring basis:
i
| | | | | | | | | | | | |
Real estate acquired in settlement of loans | | Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
|
| (in thousands) | ||||||||||
| $ | — | | $ | — | | $ | i 2,863 | | $ | i 2,863 | |
| $ | — | | $ | — | | $ | i 1,450 | | $ | i 1,450 | |
/The following table summarizes the (losses) gains recognized on assets when they were remeasured at fair value on a nonrecurring basis:
i
| | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | ||||||||||
Real estate acquired in settlement of loans | | $ | ( i 434) | | $ | ( i 1,001) | | $ | ( i 743) | | $ | ( i 2,283) |
Fair Value of Financial Instruments Carried at Amortized Cost
The Company’s Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors, Assets sold under agreements to repurchase, Mortgage loan participation purchase and sale agreements, Obligations under capital lease, Notes payable secured by mortgage servicing assets and Unsecured senior notes 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 2018-GTI Term Notes and 2018-GT2 Term Notes included in Notes payable secured by mortgage servicing assets and the Unsecured senior notes approximate their carrying values due to their short terms and/or variable interest rates.
The Company estimates the fair value of the Notes payable secured by mortgage servicing assets and the Unsecured senior notes based on non-affiliate broker indications of fair value. The fair value and carrying value of these notes are summarized below:
i
| | | | | | | | | | | | |
|
|
| ||||||||||
| | Fair value | | Carrying value | | Fair value | | Carrying value | ||||
| | (in thousands) | ||||||||||
Notes payable secured by mortgage servicing assets | | $ | i 1,298,603 | | $ | i 1,296,731 | | $ | i 1,268,304 | | $ | i 1,295,840 |
Unsecured senior notes | | $ | i 1,309,750 | | $ | i 1,288,769 | | $ | i 685,750 | | $ | i 645,820 |
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 derivative liabilities and all of its MSRs, ESS, 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.
30
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 operating, financial, investment and risk officers as well as other senior members of the Company’s finance, capital markets and risk management staffs.
The FAV group is responsible for reporting to the Company’s senior management valuation committee on the changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the valuation and any changes in model methods and inputs. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation of changes to the significant inputs to the models.
The Company has assigned responsibility for developing the fair values of IRLCs to its Capital Markets Risk Management staff. The fair values developed by the Capital Markets Risk Management staff are reviewed by the Company’s Capital Markets Operations group.
Valuation Techniques and Inputs
Following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” fair value assets and liabilities:
Loans Held for Sale
Most of the Company’s loans held for sale at fair value are saleable into active markets and are therefore categorized as “Level 2” fair value assets. The fair values of “Level 2” fair value loans are determined using their contracted selling price or quoted market price or market price equivalent.
Certain of the Company’s loans held for sale are not saleable into active markets and are therefore categorized as “Level 3” fair value assets. Loans held for sale categorized as “Level 3” fair value assets include:
| ● | 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 government guaranteed or insured loans arises as the result of the loan being at least three months delinquent on the date of purchase 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 loans may be resold to investors and thereafter may be repurchased to the extent eligible for resale into a new Ginnie Mae guaranteed security. |
Loans become eligible for resale into a new Ginnie Mae security when the loans become current either through completion of a modification of the loan’s terms or after six months of timely payments following either the completion of certain types of payment deferral programs or borrower reperformance and when the issuance date of the new security is at least 210 days after the date the loan was last delinquent.
| ● | Loans that are not saleable into active markets due to identification of a defect by the Company or to the repurchase by the Company of a loan with an identified defect. |
The Company uses a discounted cash flow model to estimate the fair value of its “Level 3” fair value loans held for sale. The significant unobservable inputs used in the fair value measurement of the Company’s “Level 3” fair value loans held for sale are discount rates, home price projections, voluntary prepayment/resale and total prepayment speeds. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment speeds.
31
Following is a quantitative summary of key “Level 3” fair value inputs used in the valuation of loans held for sale:
i
| | | | | | |
| | | | | | |
|
|
| ||||
Fair value (in thousands) | | $ | i 3,818,261 | | $ | i 4,675,169 |
Key inputs (1): | | | | | | |
Discount rate: | | | | | | |
Range | | | i 2.0% – i 9.2% | | | i 2.8% – i 9.2% |
Weighted average | | | i 2.0% | | | i 2.8% |
Twelve-month projected housing price index change: | | | | | | |
Range | | | i 4.8% – i 5.3% | | | i 2.7% – i 3.5% |
Weighted average | | | i 5.1% | | | i 3.0% |
Voluntary prepayment/resale speed (2): | | | | | | |
Range | | | i 0.4% – i 26.8% | | | i 0.4% – i 31.3% |
Weighted average | | | i 22.0% | | | i 21.9% |
Total prepayment speed (3): | | | | | | |
Range | | | i 0.4% – i 37.6% | | | i 0.5% – i 42.9% |
Weighted average | | | i 28.8% | | | i 29.2% |
| (1) | Weighted average inputs are based on the fair value of the “Level 3” loans. |
| (2) | Voluntary prepayment/resale speed is measured using Life Voluntary Conditional Prepayment Rate (“CPR”). |
| (3) | Total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayment and resale rates. |
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 end from the later of the beginning of the period or acquisition date. Changes in fair value of loans held for sale are included in Net gains on loans held for sale at fair value in the Company’s consolidated statements of income.
Derivative Financial Instruments
Interest Rate Lock Commitments
The Company categorizes IRLCs as “Level 3” fair value assets or liabilities. The Company estimates the fair value of IRLCs based on quoted Agency MBS prices, its estimate of the fair value of the MSRs it expects to receive in the sale of the loans and the probability that the loan will be funded or purchased (the “pull-through rate”).
The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the estimated fair value of MSR attributable to 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.
32
Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:
i
| | | | | | |
| | | | | | |
|
|
| ||||
Fair value (in thousands) (1) |
| $ | i 343,610 | | $ | i 677,026 |
Key inputs (2): | | | | | | |
Pull-through rate: | | | | | | |
Range | | | i 8.0% – i 100% | | | i 10.1% – i 100% |
Weighted average | | | i 82.7% | | | i 82.7% |
Mortgage servicing rights value expressed as: | | | | | | |
Servicing fee multiple: | | | | | | |
Range | | | ( i 14.7) – i 6.5 | | | i 0.7 – i 5.3 |
Weighted average | | | i 3.6 | | | i 3.6 |
Percentage of loan commitment amount | | | | | | |
Range | | | ( i 2.1)% – i 3.1% | | | i 0.1% – i 2.6% |
Weighted average | | | i 1.2% | | | i 1.2% |
| (1) | For purpose of this table, IRLC asset and liability positions are shown net. |
| (2) | Weighted average inputs are based on the committed amounts. |
/Hedging Derivatives
Fair 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 loan servicing fees – Hedging results, as applicable, in the consolidated statements of income.
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 (prepayment speed), 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 directly related. Changes in the fair value of MSRs are included in Net loan servicing fees—Change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.
33
Following are the key inputs used in determining the fair value of MSRs received by the Company when it retains the obligation to service the mortgage loans it sells:
i
| | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | ||||||||
| | 2021 | | 2020 |
| 2021 | | 2020 | ||||
| | (Amount recognized and unpaid principal balance of underlying loans in thousands) | ||||||||||
MSR and pool characteristics: | | | |
| | | | | |
| | |
Amount recognized | | $ | i 483,362 | | $ | i 225,534 | | $ | i 953,895 | | $ | i 507,849 |
Unpaid principal balance of underlying loans | | $ | i 36,830,098 | | $ | i 20,066,302 | | $ | i 71,773,352 | | $ | i 38,396,686 |
Weighted average servicing fee rate (in basis points) | | | i 33 | | | i 36 | | | i 33 | | | i 38 |
Key inputs (1): | | | | | | | | | | | | |
Pricing spread (2): | | | | | | | | | | | | |
Range | | | i 6.0% – i 16.9% | | | i 8.1% – i 18.1% | | | i 6.0% – i 16.9% | | | i 6.8% – i 18.1% |
Weighted average | | | i 8.9% | | | i 9.9% | | | i 9.2% | | | i 9.1% |
Annual total prepayment speed (3): | | | | | | | | | | | | |
Range | | | i 6.7% – i 17.7% | | | i 8.8% – i 29.1% | | | i 6.2% – i 16.7% | | | i 8.8% – i 49.8% |
Weighted average | | | i 8.5% | | | i 13.0% | | | i 8.1% | | | i 13.7% |
Equivalent average life (in years): | | | | | | | | | | | | |
Range | | | i 4.0 – i 8.8 | | | i 2.9 – i 8.1 | | | i 4.1 – i 9.0 | | | i 1.5 – i 8.1 |
Weighted average | | | i 8.1 | | | i 6.3 | | | i 8.3 | | | i 6.1 |
Per-loan annual cost of servicing: | | | | | | | | | | | | |
Range | | | $ i 80 – $ i 117 | | | $ i 79 – $ i 110 | | | $ i 81 – $ i 117 | | | $ i 77 – $ i 110 |
Weighted average | | | $ i 104 | | | $ i 101 | | | $ i 104 | | | $ i 99 |
| (1) | Weighted average inputs are based on the UPB of the underlying loans. |
| (2) | Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar London Interbank Offered Rate (“LIBOR”)/swap curve for purposes of discounting cash flows relating to MSRs. |
| (3) | Annual total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided for informational purposes. |
/34
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) | ||
Fair value | | $ i 3,412,648 | | $ i 2,581,174 |
Pool characteristics: | | | | |
Unpaid principal balance of underlying loans | | $ i 252,475,400 | | $ i 238,410,809 |
Weighted average note interest rate | | i 3.3% | | i 3.6% |
Weighted average servicing fee rate (in basis points) | | i 34 | | i 35 |
Key inputs (1): | | | | |
Pricing spread (2): | | | | |
Range | | i 6.3% – i 16.1% | | i 8.0% – i 17.6% |
Weighted average | | i 8.4% | | i 10.1% |
Effect on fair value of: | | | | |
5% adverse change | | ($ i 56,330) | | ($ i 46,356) |
10% adverse change | | ($ i 110,804) | | ($ i 90,936) |
20% adverse change | | ($ i 214,519) | | ($ i 175,137) |
Annual total prepayment speed (3): | | | | |
Range | | i 7.9% – i 29.1% | | i 10.1% – i 32.9% |
Weighted average | | i 10.5% | | i 13.7% |
Equivalent average life (in years): | | | | |
Range | | i 3.0 – i 7.8 | | i 2.3 – i 7.7 |
Weighted average | | i 6.9 | | i 6.0 |
Effect on fair value of: | | | | |
5% adverse change | | ($ i 72,028) | | ($ i 66,536) |
10% adverse change | | ($ i 141,434) | | ($ i 130,253) |
20% adverse change | | ($ i 272,904) | | ($ i 249,843) |
Annual per-loan cost of servicing: | | | | |
Range | | $ i 79 – $ i 117 | | $ i 79 – $ i 117 |
Weighted average | | $ i 107 | | $ i 107 |
Effect on fair value of: | | | | |
5% adverse change | | ($ i 31,198) | | ($ i 25,482) |
10% adverse change | | ($ i 62,395) | | ($ i 50,964) |
20% adverse change | | ($ i 124,790) | | ($ i 101,929) |
| (1) | Weighted average inputs are based on the UPB of the underlying loans. |
| (2) | The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to MSRs. |
| (3) | Annual total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided for informational purposes. |
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.
35
Excess Servicing Spread Financing at Fair Value
ESS is categorized as a “Level 3” fair value liability. Because 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 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 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 the fair value of this financing. 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. During the quarter ended March 31, 2021, the Company repaid its outstanding ESS financing payable to PMT.
Following are the key inputs used in determining the fair value of ESS financing:
i
| | |
| | |
|
| 2020 |
Fair value (in thousands) | | $ i 131,750 |
Pool characteristics: | | |
Unpaid principal balance of underlying loans (in thousands) | | $ i 15,833,050 |
Average servicing fee rate (in basis points) | | i 34 |
Average excess servicing spread (in basis points) | | i 19 |
Key inputs (1): | | |
Pricing spread (2): | | |
Range | | i 4.9% – i 5.3% |
Weighted average | | i 5.1% |
Annual total prepayment speed (3): | | |
Range | | i 9.6% – i 18.3% |
Weighted average | | i 11.7% |
Equivalent average life (in years): | | |
Range | | i 2.3 – i 6.6 |
Weighted average | | i 5.8 |
| (1) | Weighted average inputs are based on the UPB of the underlying loans. |
| (2) | The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to ESS. |
| (3) | Annual total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided for informational purposes. |
/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. The key inputs used in the estimation of the fair value of MSLs include the applicable pricing spread, prepayment speed, 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.
36
Following are the key inputs used in determining the fair value of MSLs:
i
| | | | | | |
| | | June 30, | | | |
| | | 2021 | | | 2020 |
Fair value (in thousands) | | $ | i 100,091 | | $ | i 45,324 |
Pool characteristics: | |
| | |
| |
Unpaid principal balance of underlying loans (in thousands) | | $ | i 6,135,249 | | $ | i 2,857,492 |
Servicing fee rate (in basis points) | | | i 25 | | | i 25 |
Key inputs: | | | | | | |
Pricing spread (1) | | | i 7.7% | | | i 7.6% |
Annual total prepayment speed (2) | | | i 31.8% | | | i 33.3% |
Equivalent average life (in years) | | | i 3.5 | | | i 3.2 |
Annual per-loan cost of servicing | | $ | i 278 | | $ | i 305 |
| (1) | The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to MSLs. |
| (2) | Annual total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided for informational purposes. |
iNote 7—Loans Held for Sale at Fair Value
Loans held for sale at fair value include the following:
i
| | | | | | |
| | June 30, | | December 31, | ||
Loan type |
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
Government-insured or guaranteed | | $ | i 5,115,678 | | $ | i 5,683,786 |
Conventional conforming | | | i 1,950,567 | | | i 1,257,445 |
Purchased from Ginnie Mae pools serviced by the Company | | | i 3,789,022 | | | i 4,661,378 |
Repurchased pursuant to representations and warranties | | | i 29,239 | | | i 13,791 |
| | $ | i 10,884,506 | | $ | i 11,616,400 |
Fair value of loans pledged to secure: | | | | | | |
Assets sold under agreements to repurchase | | $ | i 9,917,262 | | $ | i 10,912,178 |
Mortgage loan participation purchase and sale agreements | | | i 533,864 | | | i 545,500 |
| | $ | i 10,451,126 | | $ | i 11,457,678 |
/
iNote 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 the Company’s loan production activities 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 loan production activities are IRLCs that are created when the Company commits to purchase or originate a loan for sale.
The Company 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 certain of the its 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 its MSRs.
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.
37
Derivative Notional Amounts and Fair Value of Derivatives
The Company had the following derivative financial instruments recorded on its consolidated balance sheets:
i
| | | | | | | | | | | | | | | | |
| | | ||||||||||||||
| | | | Fair value | | | | Fair value | ||||||||
| | Notional | | Derivative | | Derivative | | Notional | | Derivative | | Derivative | ||||
Instrument |
| amount (1) |
| assets |
| liabilities |
| amount (1) |
| assets |
| liabilities | ||||
| | (in thousands) | ||||||||||||||
Not subject to master netting arrangements: | | | | | | | | | | | | | | | | |
Interest rate lock commitments | | i 13,879,343 | | $ | i 344,128 | | $ | i 518 | | i 20,624,535 | | $ | i 679,961 | | $ | i 2,935 |
Used for hedging purposes (2): | | | | | | | | | | | | | | | | |
Forward purchase contracts | | i 24,712,770 | | | i 55,765 | | | i 23,274 | | i 31,689,543 | | | i 133,267 | | | i 1,276 |
Forward sales contracts | | i 37,785,066 | | | i 39,597 | | | i 68,347 | | i 50,438,967 | | | i 1,451 | | | i 251,149 |
MBS put options | | i 11,450,000 | | | i 13,106 | | | — | | i 12,025,000 | | | i 14,302 | | | — |
MBS call options | | i 750,000 | | | i 687 | | | — | | — | | | — | | | — |
Swaption purchase contracts | | i 5,455,000 | | | i 11,041 | | | — | | i 3,375,000 | | | i 11,939 | | | — |
Put options on interest rate futures purchase contracts | | i 3,450,000 | | | i 2,664 | | | — | | i 4,750,000 | | | i 5,520 | | | — |
Call options on interest rate futures purchase contracts | | i 350,000 | | | i 2,297 | | | — | | i 850,000 | | | i 1,391 | | | — |
Treasury futures purchase contracts | | i 705,000 | | | — | | | — | | i 1,065,000 | | | — | | | — |
Treasury futures sale contracts | | i 1,480,000 | | | — | | | — | | i 1,555,000 | | | — | | | — |
Interest rate swap futures purchase contracts | | i 4,040,000 | | | — | | | — | | i 4,801,700 | | | — | | | — |
Interest rate swap futures sale contracts | | i 250,000 | | | — | | | — | | i 711,700 | | | — | | | — |
Total derivatives before netting | | | | | i 469,285 | | | i 92,139 | | | | | i 847,831 | | | i 255,360 |
Netting | | | | | ( i 98,016) | | | ( i 48,229) | | | | | ( i 136,593) | | | ( i 212,722) |
| | | | $ | i 371,269 | | $ | i 43,910 | | | | $ | i 711,238 | | $ | i 42,638 |
Deposits (received from) placed with derivative counterparties, net | | | | $ | ( i 49,787) | | | | | | | $ | i 76,129 | | | |
| (1) | Notional amounts provide an indication of the volume of the Company’s derivative activity. |
| (2) | All of the derivatives used for hedging purposes are interest rate derivatives and are used as economic hedges. |
38
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.
Offsetting of Derivative Assets
Following are summaries of derivative assets and related netting amounts:
i
| | | | | | | | | | | | | | | | | | |
| | | ||||||||||||||||
| | Gross | | Gross amount | | Net amount | | Gross | | Gross amount | | Net amount | ||||||
| | amount of | | offset in the | | of assets in the | | amount of | | offset in the | | of assets in the | ||||||
| | recognized | | consolidated | | consolidated | | recognized | | consolidated | | consolidated | ||||||
|
| assets |
| balance sheet |
| balance sheet |
| assets |
| balance sheet |
| balance sheet | ||||||
| | (in thousands) | ||||||||||||||||
Derivatives not subject to master netting arrangements - IRLCs | | $ | i 344,128 | | $ | — | | $ | i 344,128 | | $ | i 679,961 | | $ | — | | $ | i 679,961 |
Derivatives subject to master netting arrangements: | | | | | | | | | | | | | | | | | | |
Forward purchase contracts | | | i 55,765 | | | — | | | i 55,765 | | | i 133,267 | | | — | | | i 133,267 |
Forward sale contracts | | | i 39,597 | | | — | | | i 39,597 | | | i 1,451 | | | — | | | i 1,451 |
MBS put options | | | i 13,106 | | | — | | | i 13,106 | | | i 14,302 | | | — | | | i 14,302 |
MBS call options | | | i 687 | | | — | | | i 687 | | | — | | | — | | | — |
Swaption purchase contracts | | | i 11,041 | | | — | | | i 11,041 | | | i 11,939 | | | — | | | i 11,939 |
Put options on interest rate futures purchase contracts | | | i 2,664 | | | — | | | i 2,664 | | | i 5,520 | | | — | | | i 5,520 |
Call options on interest rate futures purchase contracts | | | i 2,297 | | | — | | | i 2,297 | | | i 1,391 | | | — | | | i 1,391 |
Netting | | | — | | | ( i 98,016) | | | ( i 98,016) | | | — | | | ( i 136,593) | | | ( i 136,593) |
| | | i 125,157 | | | ( i 98,016) | | | i 27,141 | | | i 167,870 | | | ( i 136,593) | | | i 31,277 |
| | $ | i 469,285 | | $ | ( i 98,016) | | $ | i 371,269 | | $ | i 847,831 | | $ | ( i 136,593) | | $ | i 711,238 |
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.
i
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | ||||||||||||||||||||||
| | | | Gross amount not | | | | | | Gross amount not | | | ||||||||||||
| | | | offset in the | | | | | | offset in the | | | ||||||||||||
| | | | consolidated | | | | | | consolidated | | | ||||||||||||
| | Net amount | | balance sheet | | | | Net amount | | balance sheet | | | ||||||||||||
| | of assets in the | | | | Cash | | | | of assets in the | | | | Cash | | | ||||||||
| | consolidated | | Financial | | collateral | | Net | | consolidated | | Financial | | collateral | | Net | ||||||||
|
| balance sheet |
| instruments |
| received |
| amount |
| balance sheet |
| instruments |
| received |
| amount | ||||||||
| | (in thousands) | ||||||||||||||||||||||
Interest rate lock commitments | | $ | i 344,128 | | $ | — | | $ | — | | $ | i 344,128 | | $ | i 679,961 | | $ | — | | $ | — | | $ | i 679,961 |
JPMorgan Chase Bank, N.A. | | | i 11,325 | | | — | | | — | | | i 11,325 | | | i 17,149 | | | — | | | — | | | i 17,149 |
Bank of America, N.A. | | | i 5,972 | | | — | | | — | | | i 5,972 | | | — | | | — | | | — | | | — |
RJ O'Brien | | | i 4,961 | | | — | | | — | | | i 4,961 | | | i 6,910 | | | — | | | — | | | i 6,910 |
Barclays Capital | | | i 3,166 | | | — | | | — | | | i 3,166 | | | — | | | — | | | — | | | — |
Morgan Stanley Bank, N.A. | | | — | | | — | | | — | | | — | | | i 2,443 | | | — | | | — | | | i 2,443 |
Citibank, N.A. | | | — | | | — | | | — | | | — | | | i 2,026 | | | — | | | — | | | i 2,026 |
Others | | | i 1,717 | | | — | | | — | | | i 1,717 | | | i 2,749 | | | — | | | — | | | i 2,749 |
| | $ | i 371,269 | | $ | — | | $ | — | | $ | i 371,269 | | $ | i 711,238 | | $ | — | | $ | — | | $ | i 711,238 |
39
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.
i
| | | | | | | | | | | | | | | | | | |
| | | ||||||||||||||||
| | | | | | Net | | | | | | Net | ||||||
| | | | | | amount | | | | | | amount | ||||||
| | Gross | | Gross amount | | of liabilities | | Gross | | Gross amount | | of liabilities | ||||||
| | amount of | | offset in the | | in the | | amount of | | offset in the | | in the | ||||||
| | recognized | | consolidated | | consolidated | | recognized | | consolidated | | consolidated | ||||||
|
| liabilities |
| balance sheet |
| balance sheet |
| liabilities |
| balance sheet |
| balance sheet | ||||||
| | (in thousands) | ||||||||||||||||
Derivatives not subject to master netting arrangements – Interest rate lock commitments | | $ | i 518 | | $ | — | | $ | i 518 | | $ | i 2,935 | | $ | — | | $ | i 2,935 |
Derivatives subject to a master netting arrangement: | | | | | | | | | | | | | | | | | | |
Forward purchase contracts | | | i 23,274 | | | — | | | i 23,274 | | | i 1,276 | | | — | | | i 1,276 |
Forward sale contracts | | | i 68,347 | | | — | | | i 68,347 | | | i 251,149 | | | — | | | i 251,149 |
Netting | | | — | | | ( i 48,229) | | | ( i 48,229) | | | — | | | ( i 212,722) | | | ( i 212,722) |
| | | i 91,621 | | | ( i 48,229) | | | i 43,392 | | | i 252,425 | | | ( i 212,722) | | | i 39,703 |
Total derivatives | | | i 92,139 | | | ( i 48,229) | | | i 43,910 | | | i 255,360 | | | ( i 212,722) | | | i 42,638 |
Assets sold under agreements to repurchase: | | | | | | | | | | | | | | | | | | |
Amount outstanding | | | i 8,262,251 | | | — | | | i 8,262,251 | | | i 9,663,995 | | | — | | | i 9,663,995 |
Unamortized debt issuance cost | | | ( i 7,708) | | | — | | | ( i 7,708) | | | ( i 9,198) | | | — | | | ( i 9,198) |
| | | i 8,254,543 | | | — | | | i 8,254,543 | | | i 9,654,797 | | | — | | | i 9,654,797 |
| | $ | i 8,346,682 | | $ | ( i 48,229) | | $ | i 8,298,453 | | $ | i 9,910,157 | | $ | ( i 212,722) | | $ | i 9,697,435 |
40
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.
i
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | ||||||||||||||||||||||
| | | | Gross amounts | | | | | | Gross amounts | | | ||||||||||||
| | | | not offset in the | | | | | | not offset in the | | | ||||||||||||
| | Net amount | | consolidated | | | | Net amount | | consolidated | | | ||||||||||||
| | of liabilities | | balance sheet | | | | of liabilities | | balance sheet | | | ||||||||||||
| | in the | | | | Cash | | | | in the | | | | Cash | | | ||||||||
| | consolidated | | Financial | | collateral | | Net | | consolidated | | Financial | | collateral | | Net | ||||||||
|
| balance sheet |
| instruments |
| pledged |
| amount |
| balance sheet |
| instruments |
| pledged |
| amount | ||||||||
| | (in thousands) | ||||||||||||||||||||||
Interest rate lock commitments | | $ | i 518 | | $ | — | | $ | — | | $ | i 518 | | $ | i 2,935 | | $ | — | | $ | — | | $ | i 2,935 |
JPMorgan Chase Bank, N.A. | | | i 2,214,762 | | | ( i 2,214,762) | | | — | | | — | | | i 2,752,279 | | | ( i 2,752,279) | | | — | | | — |
Credit Suisse First Boston Mortgage Capital LLC | | | i 1,873,730 | | | ( i 1,866,023) | | | — | | | i 7,707 | | | i 3,947,752 | | | ( i 3,943,149) | | | — | | | i 4,603 |
Bank of America, N.A. | | | i 1,053,871 | | | ( i 1,053,871) | | | — | | | — | | | i 634,523 | | | ( i 626,550) | | | — | | | i 7,973 |
Goldman Sachs | | | i 788,182 | | | ( i 788,182) | | | — | | | — | | | — | | | — | | | — | | | — |
Royal Bank of Canada | | | i 728,898 | | | ( i 728,898) | | | — | | | — | | | i 406,348 | | | ( i 406,348) | | | — | | | — |
BNP Paribas | | | i 372,377 | | | ( i 372,377) | | | — | | | — | | | i 337,823 | | | ( i 336,545) | | | — | | | i 1,278 |
Morgan Stanley Bank, N.A. | | | i 353,729 | | | ( i 353,729) | | | — | | | — | | | i 331,546 | | | ( i 331,546) | | | — | | | — |
Barclays Capital | | | i 348,272 | | | ( i 348,272) | | | — | | | — | | | i 596,729 | | | ( i 596,729) | | | — | | | — |
Wells Fargo Bank, N.A. | | | i 349,852 | | | ( i 342,509) | | | — | | | i 7,343 | | | i 169,085 | | | ( i 165,224) | | | — | | | i 3,861 |
Citibank, N.A. | | | i 204,515 | | | ( i 193,628) | | | — | | | i 10,887 | | | i 505,625 | | | ( i 505,625) | | | — | | | — |
Mizuho Securities | | | i 14,225 | | | — | | | — | | | i 14,225 | | | i 6,491 | | | — | | | — | | | i 6,491 |
Federal Home Loan Mortgage Corporation | | | — | | | — | | | — | | | — | | | i 12,928 | | | — | | | — | | | i 12,928 |
Others | | | i 3,230 | | | — | | | — | | | i 3,230 | | | i 2,569 | | | — | | | — | | | i 2,569 |
| | $ | i 8,306,161 | | $ | ( i 8,262,251) | | $ | — | | $ | i 43,910 | | $ | i 9,706,633 | | $ | ( i 9,663,995) | | $ | — | | $ | i 42,638 |
iFollowing are the gains (losses) recognized by the Company on derivative financial instruments and the income statement lines where such gains and losses are included:
| | | | | | | | | | | | | | |
| | | | Quarter ended June 30, | | Six months ended June 30, | ||||||||
Derivative activity |
| Income statement line |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | | | (in thousands) | ||||||||||
Interest rate lock commitments | | Net gains on loans held for sale at fair value (1) | | $ | i 5,670 | | $ | i 52,871 | | $ | ( i 333,416) | | $ | i 231,414 |
Hedged item: | | | | | | | | | | | | | | |
Interest rate lock commitments and loans held for sale | | Net gains on loans held for sale at fair value | | $ | ( i 167,734) | | $ | ( i 101,115) | | $ | i 294,804 | | $ | ( i 326,672) |
Mortgage servicing rights | | Net loan servicing fees–Hedging results | | $ | i 91,118 | | $ | ( i 15,764) | | $ | ( i 351,033) | | $ | i 1,020,806 |
| (1) | Represents net increase (decrease) in fair value of IRLCs from the beginning to the end of the period. Amounts recognized at the date of commitment and fair value changes recognized during the period until purchase of the underlying loans are shown in the rollforward of IRLCs for the period in Note 6 – Fair Value – Assets and Liabilities Measured at Fair Value on a Recurring Basis. |
41
iNote 9—Mortgage Servicing Rights and Mortgage Servicing Liabilities
Mortgage Servicing Rights at Fair Value
The activity in MSRs is as follows:
i
| | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | ||||||||||
Balance at beginning of period | | $ | i 3,268,910 | | $ | i 2,193,697 | | $ | i 2,581,174 | | $ | i 2,926,790 |
Additions: | | | | | | | | | | | | |
Resulting from loan sales | | | i 483,362 | | | i 225,534 | | | i 953,895 | | | i 507,849 |
Purchases | | | — | | | — | | | — | | | i 25,760 |
| | | i 483,362 | | | i 225,534 | | | i 953,895 | | | i 533,609 |
Change in fair value due to: | | | | | | | | | | | | |
Changes in valuation inputs used in valuation model (1) | | | ( i 239,514) | | | ( i 98,681) | | | i 73,376 | | | ( i 1,014,543) |
Other changes in fair value (2) | | | ( i 100,110) | | | ( i 107,011) | | | ( i 195,797) | | | ( i 232,317) |
Total change in fair value | | | ( i 339,624) | | | ( i 205,692) | | | ( i 122,421) | | | ( i 1,246,860) |
Balance at end of period | | $ | i 3,412,648 | | $ | i 2,213,539 | | $ | i 3,412,648 | | $ | i 2,213,539 |
| | | | | | | | | | | | |
| | | | | | | | June 30, | | |||
| | | | | | | | 2021 | | 2020 | ||
| | | | | | | | (in thousands) | ||||
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets | | | | | | | | $ | i 3,408,088 | | $ | i 2,577,964 |
| (1) | Principally reflects changes in discount rate, prepayment speed and servicing cost inputs. |
| (2) | Represents changes due to realization of cash flows. |
/
Mortgage Servicing Liabilities at Fair Value
The activity in MSLs is summarized below:
i
| | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | ||||||||||
Balance at beginning of period | | $ | i 46,026 | | $ | i 29,761 | | $ | i 45,324 | | $ | i 29,140 |
Mortgage servicing liabilities resulting from loan sales | | | i 57,421 | | | — | | | i 64,383 | | | i 6,576 |
Changes in fair value due to: | | | | | | | | | | | | |
Changes in valuation inputs used in valuation model (1) | | | i 11,083 | | | i 9,673 | | | i 17,847 | | | i 14,105 |
Other changes in fair value (2) | | | ( i 14,439) | | | ( i 9,576) | | | ( i 27,463) | | | ( i 19,963) |
Total change in fair value | | | ( i 3,356) | | | i 97 | | | ( i 9,616) | | | ( i 5,858) |
Balance at end of period | | $ | i 100,091 | | $ | i 29,858 | | $ | i 100,091 | | $ | i 29,858 |
| (1) | Principally reflects changes in expected borrower performance and servicer losses given default. |
| (2) | Represents changes due to realization of cash flows. |
/42
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:
i
| | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | ||||||||||
Contractual servicing fees | | $ | i 208,275 | | $ | i 199,178 | | $ | i 419,028 | | $ | i 397,831 |
Other fees: | | | | | | | | | | | |
|
Late charges | | | i 6,665 | | | i 8,490 | | | i 14,596 | | | i 21,103 |
Other | | | i 7,768 | | | i 5,971 | | | i 15,622 | | | i 10,821 |
| | $ | i 222,708 | | $ | i 213,639 | | $ | i 449,246 | | $ | i 429,755 |
iNote 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 i one year to i ten years; some of the operating lease agreements include options to i extend the term for up to i 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:
i
| | | | | | | | | | | | |
| | | | | | | | | ||||
| | Quarter ended June 30, |
| Six months ended June 30, | ||||||||
| | 2021 |
| 2020 | | 2021 |
| 2020 | ||||
| | (dollars in thousands) | ||||||||||
Lease expense: | | | | | | | | | | | | |
Operating leases | | $ | i 4,508 | | $ | i 4,034 | | $ | i 8,874 | | $ | i 7,966 |
Short-term leases | | | i 420 | | | i 224 | | | i 470 | | | i 480 |
Net lease expense included in Occupancy and equipment | | $ | i 4,928 | | $ | i 4,258 | | $ | i 9,344 | | $ | i 8,446 |
| | | | | | | | | | | | |
Other information: | | | | | | | | | | | | |
Payments for operating leases | | $ | i 5,149 | | $ | i 4,354 | | $ | i 10,185 | | $ | i 8,794 |
Operating lease right-of-use assets recognized | | $ | i 4,570 | | $ | i 4,964 | | $ | i 7,813 | | $ | i 6,498 |
Period end weighted averages: | | | | | | | | | | | | |
Remaining lease term (in years) | | | | | | | | | i 5.9 | | | i 6.6 |
Discount rate | | | | | | | | | i 4.1% | | | i 4.2% |
Lease payments of the Company’s operating lease liabilities are summarized below:
i
| | | |
Twelve months ended June 30, | | Operating leases | |
| | (in thousands) | |
2022 | | $ | i 19,401 |
2023 | | | i 18,968 |
2024 | | | i 17,503 |
2025 | | | i 15,929 |
2026 | | | i 14,324 |
Thereafter | | | i 20,945 |
Total lease payments | | | i 107,070 |
Less imputed interest | | | ( i 10,607) |
Operating lease liability | | $ | i 96,463 |
43
iNote 11—Other Assets
Other assets are summarized below:
i
| | | | | | |
| | | June 30, | | | |
| | 2021 |
| 2020 | ||
| | (in thousands) | ||||
Margin deposits | | $ | i 103,863 | | $ | i 116,881 |
Capitalized software, net | | | i 91,712 | | | i 81,434 |
Prepaid expenses | | | i 57,800 | | | i 53,975 |
Deposits securing Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets | | | i 49,934 | | | i 153,054 |
Net servicing fee receivables | | | i 31,012 | | | i 42,282 |
Furniture, fixture, equipment and building improvements, net | | | i 32,887 | | | i 32,217 |
Real estate acquired in settlement of loans | | | i 8,548 | | | i 12,158 |
Other | | | i 236,517 | | | i 200,168 |
| | $ | i 612,273 | | $ | i 692,169 |
Deposits pledged to secure Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets | | $ | i 49,934 | | $ | i 153,054 |
Assets pledged to secure Obligations under capital lease: | | | | | | |
Capitalized software, net | | | i 6,024 | | | i 7,675 |
Furniture, fixture, equipment and building improvements, net | | | i 4,899 | | | i 5,689 |
| | $ | i 60,857 | | $ | i 166,418 |
/
iNote 12—Short-Term Borrowings
The borrowing facilities described throughout these Notes 12 and 13 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 June 30, 2021.
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, assets purchased from PMT under agreements to resell or participation certificates backed by mortgage servicing assets. Eligible assets 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 LIBOR. Loans and MSRs financed under these agreements may be re-pledged by the lenders.
Fannie Mae MSR Facility
On April 28, 2021, the Company, through PLS, PennyMac, and PFSI Issuer Trust - FMSR, entered into a structured finance transaction, allowing PLS to finance Fannie Mae MSRs and ESS (the “Fannie Mae MSR Facility”). In connection with the Fannie Mae MSR Facility, PLS pledges and/or sells to PFSI Issuer Trust - FMSR participation certificates representing beneficial interests in MSRs and ESS pursuant to the terms of a master repurchase agreement, dated as of April 28, 2021, by and between PLS, PFSI Issuer Trust - FMSR and PennyMac (the “PC Repurchase Agreement”). In return, PFSI Issuer Trust - FMSR (a) has issued to PLS the Series 2021-MSRVF1 Note, dated April 28, 2021, known as the “PFSI ISSUER TRUST - FMSR Collateralized Notes, Series 2021-MSRVF1” (the “FMSR VFN”), and (b) may, from time to time, issue to institutional investors 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 FMSR VFN is $ i 1,000,000,000. The Company did not borrow under the facility during the quarter ended June 30, 2021.
/44
Under the PC Repurchase Agreement, PLS grants to PFSI Issuer Trust – FMSR a security interest in all of its right, title and interest in, to and under participation certificates representing beneficial interests in MSRs and ESS, including all of its rights and interests in any MSRs and ESS it thereafter owns or acquires. The principal amount paid by PFSI Issuer Trust - FMSR for the participation certificates under the PC Repurchase Agreement is based upon a percentage of the market value of the underlying MSRs (inclusive of the ESS). Upon PLS’s repurchase of the participation certificates, PLS is required to repay PFSI Issuer Trust - FMSR 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 FMSR VFN and any outstanding term notes) to the date of such repurchase.
PLS also entered into a master repurchase agreement on April 28, 2021 (the “FMSR VFN Repurchase Agreement”) with CSFB, as administrative agent, and Credit Suisse AG, Cayman Islands Branch (“CSCIB”), as purchaser, pursuant to which PLS sold the FMSR VFN to CSCIB with an agreement to repurchase such FMSR VFN at a later date. The FMSR VFN Repurchase Agreement has an initial term extending through March 31, 2023. The FMSR VFN Repurchase Agreement provides for a maximum purchase price of $ i 250 million, all of which is committed. The principal amount paid by CSCIB for the FMSR VFN is based upon a percentage of the market value of such FMSR VFN. Upon PLS’s repurchase of the FMSR VFN, PLS is required to repay CSCIB the principal amount relating thereto plus accrued interest (at a rate reflective of the current market based on a spread above LIBOR with index replacement provisions related to the transition from LIBOR) to the date of such repurchase. Under the FMSR VFN Repurchase Agreement, in the event any such transactions are deemed to be loans and not sales and purchases, PLS granted to CSCIB a security interest in all of its right, title and interest in, to and under the FMSR VFN and all rights to reimbursement or payment of the FMSR VFN and/or amounts due in respect thereof.
Ginnie Mae 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, 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 $ i 1,000,000,000.
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, acting as administrative agent on behalf of Credit Suisse AG, Cayman Islands Branch, as buyer (the “GMSR Servicing Advances Repurchase Agreement”).
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 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.
The borrowing capacity under the GMSR Servicing Advances Repurchase Agreement, shared with VFN financing capacity, is $ i 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 provided to the borrower in accordance with the CARES Act.
45
Assets sold under agreements to repurchase are summarized below:
i
| | | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
| | (dollars in thousands) | | ||||||||||
Average balance of assets sold under agreements to repurchase | | $ | i 7,571,340 | | $ | i 2,529,217 | | $ | i 7,999,580 | | $ | i 2,833,444 | |
Weighted average interest rate (1) | | | i 2.07 | % | | i 2.32 | % | | i 2.13 | % | | i 2.74 | % |
Total interest expense | | $ | i 44,623 | | $ | i 17,487 | | $ | i 96,802 | | $ | i 43,171 | |
Maximum daily amount outstanding | | $ | i 10,856,677 | | $ | i 3,769,495 | | $ | i 10,856,677 | | $ | i 3,769,495 | |
| | | | | | | | | | | | | |
| | | | | | | | | June 30, | | | | |
|
| | | | | | | 2021 |
| 2020 |
| ||
| | | | | | | | (dollars in thousands) | | ||||
Carrying value: | | | | | | | | | | | | | |
Unpaid principal balance | | | | | | | | $ | i 8,262,251 | | $ | i 9,663,995 | |
Unamortized debt issuance costs | | | | | | | | | ( i 7,708) | | | ( i 9,198) | |
| | | | | | | | $ | i 8,254,543 | | $ | i 9,654,797 | |
Weighted average interest rate | | | | | | | | | i 1.86 | % | | i 1.90 | % |
Available borrowing capacity (2): | | | | | | | | | | | | | |
Committed | | | | | | | | $ | i 666,772 | | $ | i 372,803 | |
Uncommitted | | | | | | | | | i 6,695,976 | | | i 2,163,202 | |
| | | | | | | | $ | i 7,362,748 | | $ | i 2,536,005 | |
Fair value of assets securing repurchase agreements: | | | | | | | | | | | | | |
Loans held for sale | | | | | | | | $ | i 9,917,262 | | $ | i 10,912,178 | |
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell | | | | | | | | $ | — | | $ | i 80,862 | |
Servicing advances (3) | | | | | | | | $ | i 311,896 | | $ | i 413,484 | |
Mortgage servicing rights (3) | | | | | | | | $ | i 3,209,383 | | $ | i 2,490,267 | |
Deposits (3) | | | | | | | | $ | i 49,934 | | $ | i 153,054 | |
Margin deposits placed with counterparties (4) | | | | | | | | $ | i 10,875 | | $ | i 5,625 | |
| (1) | Excludes the effect of amortization of net issuance costs and utilization fees of $ i 5.3 million and $ i 2.8 million for the quarters ended June 30, 2021 and 2020, respectively, and $ i 11.8 million and $ i 4.4 million for the six months ended June 30, 2021 and 2020, respectively. |
| (2) | 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. |
| (3) | Beneficial interests in the Ginnie Mae MSRs, servicing advances and deposits are pledged to the Issuer Trust and together serve as the collateral backing the VFN, GMSR Servicing Advance Notes, and the Term Notes described in Note 13 – Long-Term Debt- Notes payable secured by mortgage servicing assets. The VFN financing and the GMSR Servicing Advance Notes are included in Assets sold under agreements to repurchase and the Term Notes are included in Notes payable secured by mortgage servicing assets on the Company's consolidated balance sheets. |
| (4) | Margin deposits are included in Other assets on the Company’s consolidated balance sheets. |
46
Following is a summary of maturities of outstanding advances under repurchase agreements by maturity date:
i
| | | |
Remaining maturity at June 30, 2021 |
| Unpaid principal balance | |
| | (dollars in thousands) | |
Within 30 days | | $ | i 3,532,563 |
Over 30 to 90 days | | | i 3,396,557 |
Over 90 to 180 days | | | i 987,861 |
Over 180 days to one year | | | i 295,270 |
Over one year to two year | | | i 50,000 |
Total assets sold under agreements to repurchase | | $ | i 8,262,251 |
Weighted average maturity (in months) | | | i 2.2 |
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 June 30, 2021:
i
| | | | | | | |
| | | | | | | |
| | | | | Weighted average | | |
Counterparty |
| Amount at risk |
| maturity of advances |
| Facility maturity | |
| | (in thousands) | | | | | |
Credit Suisse First Boston Mortgage Capital LLC (1) | | $ | i 2,126,158 | | | ||
Credit Suisse First Boston Mortgage Capital LLC | | $ | i 724,309 | | | ||
Bank of America, N.A. | | $ | i 397,300 | | | ||
JP Morgan Chase Bank, N.A. | | $ | i 207,772 | | | ||
JP Morgan Chase Bank, N.A. | | $ | i 1,891 | | | ||
BNP Paribas | | $ | i 124,512 | | | ||
Goldman Sachs | | $ | i 77,468 | | | ||
Royal Bank of Canada | | $ | i 55,641 | | | ||
Morgan Stanley Bank, N.A. | | $ | i 44,701 | | | ||
Barclays Bank PLC | | $ | i 41,978 | | | ||
Wells Fargo Bank, N.A. | | $ | i 20,750 | | | ||
Citibank, N.A. | | $ | i 11,835 |
|
| ||
| (1) | 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, and the Term Notes described in Notes payable secured by mortgage servicing assets below. The VFN financing is included in Assets sold under agreements to repurchase and the Term 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 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.
47
The mortgage loan participation purchase and sale agreements are summarized below:
i
| | | | | | | | | | | | | | |
| | Quarter ended June 30, | | | Six months ended June 30, | |||||||||
|
| 2021 |
| 2020 |
| | 2021 |
| 2020 |
| ||||
| | (dollars in thousands) | ||||||||||||
Average balance | | $ | i 254,343 | | $ | i 240,119 | | | $ | i 265,390 | | $ | i 243,965 | |
Weighted average interest rate (1) | | | i 1.36 | % | | i 1.53 | % | | | i 1.35 | % | | i 2.09 | % |
Total interest expense | | $ | i 1,039 | | $ | i 1,061 | | | $ | i 2,134 | | $ | i 2,871 | |
Maximum daily amount outstanding | | $ | i 528,844 | | $ | i 540,977 | | | $ | i 528,844 | | $ | i 540,977 | |
| (1) | Excludes the effect of amortization of debt issuance costs totaling $ i 172,000 and $ i 145,000 for the quarters ended June 30, 2021 and 2020, respectively, and $ i 344,000 and $ i 318,000 for the six months ended June 30, 2021 and 2020, respectively. |
| | | | | | | | | | | | | | |
|
| | | | | | | | June 30, | | | |||
| | | | | | | | | 2021 |
| 2020 | | ||
| | | | | | | | | (dollars in thousands) | | ||||
Carrying value: | | | | | | | | | | | | | | |
Unpaid principal balance | | | | | | | | | $ | i 512,253 | | $ | i 521,477 | |
Unamortized debt issuance costs | | | | | | | | | | — | | | — | |
| | | | | | | | | $ | i 512,253 |
| $ | i 521,477 | |
Weighted average interest rate | | | | | | | | | | i 1.48 | % | | i 1.39 | % |
Fair value of loans pledged to secure mortgage loan participation purchase and sale agreements | | | | | | | | | $ | i 533,864 | | $ | i 545,500 | |
Corporate Revolving Line of Credit
The Company, through its subsidiary PennyMac, entered into an amended and restated credit agreement on November 18, 2016, as amended (the “Credit Agreement”) under which PennyMac established a revolving line of credit in an amount not to exceed $ i 150 million. PennyMac did not borrow under the revolving line of credit during the periods presented and terminated the Credit Agreement on September 29, 2020 concurrent with the issuance the Unsecured Senior Notes described below.
iNote 13—Long-Term Debt
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:
i
| | | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
| | (dollars in thousands) | |||||||||||
Average balance | | $ | i 9,072 | | $ | i 17,272 | | $ | i 10,169 | | $ | i 18,367 | |
Weighted average interest rate | | | i 2.10 | % | | i 2.70 | % | | i 2.12 | % | | i 3.05 | % |
Total interest expense | | $ | i 48 | | $ | i 104 | | $ | i 107 | | $ | i 271 | |
Maximum daily amount outstanding | | $ | i 10,468 | | $ | i 18,145 | | $ | i 11,864 | | $ | i 20,810 | |
/ /48
| | | | | | | | | | | | | |
| | | | | | | | June 30, | | | |||
| | | | | | | | 2021 |
| 2020 | | ||
| | | | | | | | (dollars in thousands) | | ||||
Unpaid principal balance | | | | | | | | $ | i 7,677 |
| $ | i 11,864 | |
Weighted average interest rate | | | | | | | | | i 2.07 | % | | i 2.15 | % |
Assets pledged to secure obligations under capital lease: | | | | | | | | | | | | | |
Capitalized software | | | | | | | | $ | i 6,024 | | $ | i 7,675 | |
Furniture, fixtures and equipment | | | | | | | | $ | i 4,899 | | $ | i 5,689 | |
Notes Payable Secured by Mortgage Servicing Assets
Term Notes
The Company, through the Issuer Trust described in Note 12—Short-Term Borrowings—Assets Sold Under Agreements to Repurchase, issued term notes (the “Term Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”). 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 mortgage servicing assets that are financed pursuant to the GNMA MSR Facility.
Following is a summary of the issued and outstanding Term Notes:
i
| | | | | | | |
Issuance date | | Principal balance | | Stated interest rate (1) | | Stated maturity date (2) | |
| | (in thousands) | | (Annual) | | | |
February 28, 2018 (the "GT1 Notes") | | $ | i 650,000 | | i 2.85% | | 2/25/2023 |
August 10, 2018 (the "GT2 Notes") | | | i 650,000 | | i 2.65% | | 8/25/2023 |
| | $ | i 1,300,000 | | | | |
| (1) | Spread over one-month LIBOR. |
| (2) | The Term Notes’ indentures provide the Company with the option to extend the maturity of the Term Notes by i two years after the stated maturity. |
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 March 31, 2023. The maximum amount that the Company may borrow under the note payable is $ i 600 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 periods presented.
Notes payable secured by mortgage servicing assets are summarized below:
i
| | | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | | ||||||||
|
| 2021 |
| 2020 | | 2021 |
| 2020 | | ||||
| | (dollars in thousands) | | ||||||||||
Average balance | | $ | i 1,300,000 | | $ | i 1,300,000 | | $ | i 1,300,000 | | $ | i 1,300,000 | |
Weighted average interest rate (1) | | | i 2.91 | % | | i 3.28 | % | | i 2.90 | % | | i 3.86 | % |
Total interest expense | | $ | i 10,104 | | $ | i 11,109 | | $ | i 19,992 | | $ | i 25,955 | |
| (1) | Excludes the effect of amortization of debt issuance costs totaling $ i 634,000 and $ i 451,000 for the quarters ended June 30, 2021 and 2020, respectively, and $ i 1.2 million and $ i 896,000 for the six months ended June 30, 2021 and 2020, respectively. |
| | | | | | | | | | | | | |
49
| | | | | | | | June 30, | | | |||
|
| | | | | | | 2021 |
| 2020 | | ||
| | | | | | | | (dollars in thousands) | | ||||
Carrying value: | | | | | | | | | | | | | |
Unpaid principal balance | | | | | | | | $ | i 1,300,000 |
| $ | i 1,300,000 | |
Unamortized debt issuance costs | | | | | | | | | ( i 3,269) | | | ( i 4,160) | |
| | | | | | | | $ | i 1,296,731 | | $ | i 1,295,840 | |
Weighted average interest rate | | | | | | | | | i 2.84 | % | | i 2.93 | % |
Assets pledged to secure notes payable (1): | | | | | | | | | | | | | |
Servicing advances | | | | | | | | $ | i 311,896 | | $ | i 413,484 | |
Mortgage servicing rights | | | | | | | | $ | i 3,164,980 | | $ | i 2,421,326 | |
Deposits | | | | | | | | $ | i 49,934 | | $ | i 153,054 | |
| (1) | Beneficial interests in the Ginnie Mae MSRs, servicing advances and deposits are pledged to the Issuer Trust and together serve as the collateral backing the VFN, GMSR Servicing Advance Notes and the Term Notes. The VFN financing and the GMSR Servicing Advance Notes are included in Assets sold under agreements to repurchase and the Term Notes are included in Notes payable secured by mortgage servicing assets on the Company's consolidated balance sheets. |
Unsecured Senior Notes
The Company issued unsecured senior notes (the “Unsecured Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The Unsecured Notes are senior unsecured obligations of the Company and will rank senior in right of payment to any future subordinated indebtedness of the Company, equally in right of payment with all existing and future senior indebtedness of the Company and effectively subordinated to any future secured indebtedness of the Company to the extent of the fair value of collateral securing such indebtedness.
The Unsecured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by PFSI’s existing and future wholly-owned domestic subsidiaries (other than certain excluded subsidiaries defined in the indenture under which the Unsecured Notes were issued). The guarantees are senior unsecured obligations of the guarantors and will rank senior in right of payment to any future subordinated indebtedness of the guarantors, equally in right of payment with all existing and future senior indebtedness of the guarantors and effectively subordinated to any future secured indebtedness of the guarantors to the extent of the fair value of collateral securing such indebtedness. The Unsecured Notes and the guarantees are structurally subordinated to the indebtedness and liabilities of the Company’s subsidiaries that do not guarantee the Unsecured Notes.
Following is a summary of the Unsecured Notes issued:
i
| | | | | | | |
Issuance date | | Principal balance | | Coupon interest rate | | Maturity date | |
| | (in thousands) | | (Annual) | | | |
| $ | i 500,000 | | i 5.38% | | ||
| | i 150,000 | | i 5.38% | | ||
| | i 650,000 | | i 4.25% | | ||
| | $ | i 1,300,000 | | | | |
Before October 15, 2022 or February 15, 2024 for the Unsecured Notes issued during 2020 and 2021, respectively, the Company may, at its option redeem earlier in accordance with the terms of the Unsecured Notes:
/
| ● | some or all of the Unsecured Notes at a price equal to i 100% of the principal amount of the Unsecured Notes redeemed, plus accrued and unpaid interest to, but excluding, the redemption date, plus a make-whole premium; and |
| ● | up to i 40% of the aggregate principal amount of the Unsecured Notes with an amount equal to or less than the net proceeds from certain equity offerings at a redemption price of i 105.375% and i 104.25% for the Unsecured Notes issued during 2020, and 2021, respectively, plus accrued and unpaid interest to, but excluding, the redemption date. |
50
| ● | If a “change of control” (as defined in the indenture under which the Unsecured Notes were issued) occurs, the holders of the Unsecured Notes may require the Company to purchase for cash all or a portion of their Unsecured Notes at a purchase price equal to i 101% of the principal amount of the Unsecured Notes, plus accrued and unpaid interest to, but excluding, the repurchase date. |
| | | | | | | |
| | Quarter ended | | Six months ended | | ||
|
| | | ||||
| | (dollars in thousands) | | ||||
Average balance | | $ | i 1,300,000 | | $ | i 1,152,762 | |
Weighted average interest rate (1) | | | i 4.81 | % | | i 4.81 | % |
Total interest expense | | $ | i 16,169 | | $ | i 28,839 | |
| (1) | Excludes the effect of amortization of debt issuance costs of $ i 571,000 and $ i 918,000 for the quarter and six months ended June 30, 2021, respectively. |
| | | | | | | |
| | June 30, | | | |||
|
| 2021 |
| 2020 | | ||
| | (dollars in thousands) | | ||||
Carrying value: | | | | | | | |
Unpaid principal balance | | $ | i 1,300,000 | | $ | i 650,000 | |
Unamortized debt issuance costs, net of issuance premiums | | | ( i 11,231) | | | ( i 4,180) | |
| | $ | i 1,288,769 | | $ | i 645,820 | |
Weighted average interest rate | | | i 4.81 | % | | i 5.38 | % |
Maturities of Long-Term Debt
Maturities of long-term debt obligations (based on final maturity dates) are as follows:
i
| | | | | | | | | | | | | | | | | | | | | |
| | Twelve months ended June 30, | | | | ||||||||||||||||
|
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| Thereafter |
| Total | |||||||
| | (in thousands) | |||||||||||||||||||
Obligations under capital lease | | $ | i 7,677 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | i 7,677 |
Notes payable secured by mortgage servicing assets | | | — | | | i 650,000 | | | i 650,000 | | | — | | | — | | | — | | | i 1,300,000 |
Unsecured Notes | | | — | | | — | | | — | | | — | | | i 650,000 | | | i 650,000 | | | i 1,300,000 |
Total | | $ | i 7,677 | | $ | i 650,000 | | $ | i 650,000 | | $ | — | | $ | i 650,000 | | $ | i 650,000 | | $ | i 2,607,677 |
iNote 14—Liability for Losses Under Representations and Warranties
Following is a summary of the Company’s liability for losses under representations and warranties:
i
| | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | ||||||||||
Balance at beginning of period | | $ | i 38,428 | | $ | i 23,202 | | $ | i 32,688 | | $ | i 21,446 |
Provision for losses on loans sold: | | | | | | | | | | | | |
Resulting from sales of loans | | | i 10,304 | | | i 4,189 | | | i 20,357 | | | i 7,901 |
Reduction in liability due to change in estimate | | | ( i 3,640) | | | ( i 1,270) | | | ( i 7,325) | | | ( i 2,946) |
Losses incurred, net | | | ( i 757) | | | ( i 212) | | | ( i 1,385) | | | ( i 492) |
Balance at end of period | | $ | i 44,335 | | $ | i 25,909 | | $ | i 44,335 | | $ | i 25,909 |
Unpaid principal balance of loans subject to representations and warranties at end of period | | $ | i 234,327,924 | | $ | i 192,064,630 | | | | | | |
/
51
Note 15—Income Taxes
The Company’s effective income tax rates were i 26.9% and i 26.6% for the quarters ended June 30, 2021 and 2020, respectively, and i 26.0% and i 26.4% for the six months ended June 30, 2021 and 2020, respectively. The difference in the effective tax rates for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily due to an increase in tax deductions in 2021 related to equity compensation. Substantially all of this increase in tax deductions related to equity compensation was realized in the quarter ended March 31, 2021.
The CARES Act, passed in March 2020, introduced a number of tax law changes which are generally taxpayer favorable and in December 2020, the Taxpayer Certainty and Disaster Tax Relief Act was signed into law. No material changes in our effective income tax rates resulted from either Act.
/ i
Note 16—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 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 March 30, 2020, the Florida State Court granted a motion to compel arbitration filed by the Company. Consequently, on April 27, 2020, PennyMac dismissed its federal court action without prejudice to pursue those claims in arbitration as well. 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 BKI Complaint is without merit and plans to vigorously defend the matter, which remains pending.
52
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 (“CFPB”), 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.
On January 7, 2021, PLS received a letter from the CFPB notifying PLS that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, the CFPB’s Office of Enforcement was considering recommending that the CFPB take legal action against PLS for alleged violations of the Real Estate Settlement Procedures Act and Truth in Lending Act. The CFPB's examination covered the period from March 2015 through September 2016. Should the CFPB commence an action, it may seek restitution, civil monetary penalties, injunctive relief, or other corrective action, the extent of which remains uncertain at this time. Notably, certain of the alleged violations were originally self-identified by PLS and remediated prior to the CFPB's examination, and all alleged violations were fully remediated as of August 2017. PLS confirmed these remediation actions as well as full restitution to any affected borrowers in its response to the NORA letter submitted on February 8, 2021. While the NORA process remains open and pending at this time, and there can be no assurance as to the nature or extent of any actions taken by the CFPB with regard to these alleged violations, the Company does not believe that the ultimate resolution of this matter will have a material adverse effect on its financial statements or operations.
Commitments to Purchase and Fund Mortgage Loans
The Company’s commitments to purchase and fund loans totaled $ i 13.9 billion as of June 30, 2021.
iNote 17—Stockholders’ Equity
In February 2021, the Company’s board of directors approved an increase to the Company’s common stock repurchase program from $ i 500 million to $ i 1 billion.
Following is a summary of activity under the stock repurchase program:
i | | | | | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | | Cumulative | |||||||||
| | 2021 |
| 2020 |
| 2021 |
| 2020 |
| total (1) | |||||
| | (in thousands) | |||||||||||||
Shares of common stock repurchased | | | i 2,574 | | | i 6,975 | | | i 7,227 | | | i 7,213 | | | i 16,933 |
Cost of shares of common stock repurchased | | $ | i 154,920 | | $ | i 237,162 | | $ | i 443,439 | | $ | i 241,283 | | $ | i 795,866 |
| (1) | Amounts represent the total shares of common stock repurchased under the stock repurchase program from inception through June 30, 2021. |
53
Note 18—Net Gains on Loans Held for Sale
Net gains on loans held for sale at fair value is summarized below:
i
| | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | ||||||||||
From non-affiliates: | | | | | | | | | | | | |
Cash gains: | | | | | | | | | | | | |
Loans | | $ | i 387,305 | | $ | i 502,416 | | $ | i 470,017 |
| $ | i 614,173 |
Hedging activities | | | ( i 325,651) | | | ( i 227,013) | | | i 410,574 | | | ( i 349,679) |
| | | i 61,654 | | | i 275,403 | | | i 880,591 | | | i 264,494 |
Non-cash gains: | | | | | | | | | | | | |
Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales | | | i 425,941 | | | i 225,534 | | | i 889,512 | | | i 501,273 |
Provisions for losses relating to representations and warranties: | | | | | | | | | | | | |
Pursuant to loan sales | | | ( i 10,304) | | | ( i 4,189) | | | ( i 20,357) | | | ( i 7,901) |
Reductions in liability due to change in estimate | | | i 3,640 | | | i 1,270 | | | i 7,325 | | | i 2,946 |
Changes in fair values of loans and derivatives held at period end: | | | | | | | | | | | | |
Interest rate lock commitments | | | i 5,670 | | | i 52,871 | | | ( i 333,416) | | | i 231,414 |
Loans | | | ( i 50,322) | | | i 10,978 | | | i 54,900 | | | ( i 61,102) |
Hedging derivatives | | | i 157,917 | | | i 125,898 | | | ( i 115,770) | | | i 23,007 |
| | | i 594,196 | | | i 687,765 | | | i 1,362,785 | | | i 954,131 |
From PennyMac Mortgage Investment Trust (1) | | | ( i 11,548) | | | ( i 5,592) | | | ( i 25,796) | | | i 72,324 |
| | $ | i 582,648 | | $ | i 682,173 | | $ | i 1,336,989 | | $ | i 1,026,455 |
/| (1) | Gains on sale of loans to PMT are described in Note 4–Related Party Transactions. |
54
Note 19—Net Interest (Expense) Income
Net interest (expense) income is summarized below:
i
| | | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
| | (in thousands) | | ||||||||||
Interest income: | | | | | | | | | | | | | |
From non-affiliates: | | | | | | | | | | | | | |
Cash and short-term investments | | $ | i 747 | | $ | i 1,893 | | $ | i 1,734 | | $ | i 3,604 | |
Loans held for sale at fair value | | | i 76,453 | | | i 32,586 | | | i 151,277 | | | i 79,012 | |
Placement fees relating to custodial funds | | | i 3,597 | | | i 12,047 | | | i 9,480 | | | i 35,256 | |
| | | i 80,797 | | | i 46,526 | | | i 162,491 | | | i 117,872 | |
From PennyMac Mortgage Investment Trust—Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell | | | — | | | i 792 | | | i 387 | | | i 2,010 | |
| | | i 80,797 | | | i 47,318 | | | i 162,878 | | | i 119,882 | |
| | | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | | |
To non-affiliates: | | | | | | | | | | | | | |
Assets sold under agreements to repurchase | | | i 44,623 | | | i 17,487 | | | i 96,802 | | | i 43,171 | |
Mortgage loan participation purchase and sale agreements | | | i 1,039 | | | i 1,061 | | | i 2,134 | | | i 2,871 | |
Obligations under capital lease | | | i 48 | | | i 104 | | | i 107 | | | i 271 | |
Notes payable secured by mortgage servicing assets | | | i 10,104 | | | i 11,109 | | | i 19,992 | | | i 25,955 | |
Unsecured senior notes | | | i 16,169 | | | — | | | i 28,839 | | | — | |
Corporate revolving line of credit | | | — | | | i 472 | | | — | | | i 975 | |
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations | | | i 29,144 | | | i 18,954 | | | i 58,580 | | | i 33,825 | |
Interest on mortgage loan impound deposits | | | i 1,304 | | | i 1,648 | | | i 2,410 | | | i 3,305 | |
| | | i 102,431 | | | i 50,835 | | | i 208,864 | | | i 110,373 | |
To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value | | | — | | | i 2,372 | | | i 1,280 | | | i 4,346 | |
| | | i 102,431 | | | i 53,207 | | | i 210,144 | | | i 114,719 | |
| | $ | ( i 21,634) | | $ | ( i 5,889) | | $ | ( i 47,266) | | $ | i 5,163 | |
/
55
Note 20—Stock-based Compensation
As of June 30, 2021, the Company had i one stock-based compensation plan. Following is a summary of the stock-based compensation activity:
i
| | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | ||||||||||
Grants: | | | | | | | | | | | | |
Units: | | | | | | | | | | | | |
Performance-based restricted share units ("RSUs") | | | — | | | — | | | i 310 | | | i 422 |
Stock options | | | — | | | — | | | i 249 | | | i 273 |
Time-based RSUs | | | — | | | i 5 | | | i 171 | | | i 310 |
Grant date fair value: | | | | | | | | | | | | |
Performance-based RSUs | | $ | — | | $ | — | | $ | i 18,237 | | $ | i 14,788 |
Stock options | | | — | | | — | | | i 5,116 | | | i 2,770 |
Time-based RSUs | | | — | | | i 150 | | | i 10,066 | | | i 10,823 |
Total | | $ | — | | $ | i 150 | | $ | i 33,419 | | $ | i 28,381 |
Vestings and exercises: | | | | | | | | | | | | |
Performance-based RSUs vested | | | — | | | — | | | i 640 | | | i 603 |
Stock options exercised | | | i 97 | | | i 144 | | | i 185 | | | i 324 |
Time-based RSUs vested | | | i 2 | | | — | | | i 307 | | | i 348 |
Compensation expense | | $ | i 8,894 | | $ | i 6,757 | | $ | i 19,771 | | $ | i 19,125 |
/
iNote 21—Earnings Per Share of Common Stock
Basic earnings per share of common stock is determined by dividing net income by the weighted average number of shares of common stock outstanding during the quarter. Diluted earnings per share of common stock is determined by dividing net income by the weighted average number of shares of common stock outstanding, assuming all dilutive securities were issued.
Potentially dilutive securities include non-vested stock-based compensation awards. The Company applies the treasury stock method to determine the diluted weighted average number of 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:
i
| | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands, except per share amounts) | ||||||||||
Net income | | $ | i 204,229 |
| $ | i 352,677 | | $ | i 581,097 |
| $ | i 658,920 |
| | | | | | | | | | | | |
Weighted average basic shares of common stock outstanding | | | i 65,890 | | | i 77,790 | | | i 67,493 | | | i 78,240 |
Effect of dilutive securities: | | | | | | | | | | | | |
Common shares issuable under stock-based compensation plan | | | i 3,509 | | | i 2,634 | | | i 3,755 | | | i 3,001 |
Weighted average shares of common stock applicable to diluted earnings per share | | | i 69,399 | | | i 80,424 | | | i 71,248 | | | i 81,241 |
Basic earnings per share of common stock | | $ | i 3.10 | | $ | i 4.53 | | $ | i 8.61 | | $ | i 8.42 |
Diluted earnings per share of common stock | | $ | i 2.94 | | $ | i 4.39 | | $ | i 8.16 | | $ | i 8.11 |
/56
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 weighted-average number of anti-dilutive outstanding performance-based RSUs and stock options excluded from the calculation of diluted earnings per share:
i
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands except for weighted-average exercise price) | ||||||||||
Performance-based RSUs (1) | | | i 308 | | | i 422 | | | i 215 | | | i 292 |
Time-based RSUs | | | — | | | i 79 | | | — | | | i 110 |
Stock options (2) | | | i 249 | | | i 273 | | | i 173 | | | i 189 |
Total anti-dilutive shares and units | | | i 557 | | | i 774 | | | i 388 | | | i 591 |
Weighted average exercise price of anti-dilutive stock options (2) | | $ | i 58.85 | | $ | i 35.03 | | $ | i 58.85 | | $ | i 35.03 |
| (1) | Certain performance-based RSUs were outstanding but not included in the computation of earnings per share because the performance thresholds included in such RSUs have not been achieved. |
| (2) | Certain stock options were outstanding but not included in the computation of diluted earnings per share because the weighted-average exercise prices were above the average stock prices for the period. |
iNote 22—Supplemental Cash Flow Information
i
| | | | | | |
| | Six months ended June 30, | ||||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
Cash paid for interest | | $ | i 208,015 |
| $ | i 127,806 |
Cash paid for income taxes, net | | $ | i 257,074 | | $ | i 3,871 |
Non-cash investing activity: | | | | | | |
Mortgage servicing rights resulting from loan sales | | $ | i 953,895 | | $ | i 507,849 |
Unsettled portion of MSR acquisitions | | $ | — | | $ | i 1,053 |
Operating right-of-use assets recognized | | $ | i 7,813 | | $ | i 6,498 |
Non-cash financing activity: | | | | | | |
Mortgage servicing liabilities resulting from loan sales | | $ | i 64,383 | | $ | i 6,576 |
Issuance of Excess servicing spread payable to PennyMac Mortgage Investment Trust pursuant to a recapture agreement | | $ | i 557 | | $ | i 862 |
Issuance of common stock in settlement of directors' fees | | $ | i 101 | | $ | i 96 |
/
iNote 23—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, loan origination volume and delinquency rates.
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 $ i 2.5 million plus i 25 basis points of the UPB of the Company’s total 1-4 unit servicing portfolio, excluding mortgage loans subserviced for others; |
| ● | a liquidity requirement equal to i 3.5 basis points of the aggregate UPB serviced for the Agencies plus i 200 basis points of total nonperforming Agency servicing UPB less i 70% of such nonperforming Agency servicing UPB in excess of 600 basis points where the underlying loans are in COVID-19 forbearance but were current at the time they entered forbearance. |
/57
The Company is also subject to financial eligibility requirements for Ginnie Mae single-family issuers. The eligibility requirements include net worth of $ i 2.5 million plus i 35 basis points of PLS' outstanding Ginnie Mae single-family obligations and a liquidity requirement equal to the greater of $ i 1.0 million or i 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:
i
| | | | | | | | | | | | | |
| | | | ||||||||||
Agency–company subject to requirement |
| Actual (1) |
| Requirement (1) |
| Actual (1) |
| Requirement (1) |
| ||||
| | (dollars in thousands) | | ||||||||||
Capital | | | | | | | | | | | | | |
Fannie Mae & Freddie Mac – PLS | | $ | i 5,243,429 | | $ | i 658,510 | | $ | i 4,454,680 | | $ | i 633,331 | |
Ginnie Mae – PLS | | $ | i 4,785,193 | | $ | i 977,600 | | $ | i 3,794,112 | | $ | i 1,058,641 | |
HUD – PLS | | $ | i 4,785,193 | | $ | i 2,500 | | $ | i 3,794,112 | | $ | i 2,500 | |
Liquidity | | | | | | | | | | | | | |
Fannie Mae & Freddie Mac – PLS | | $ | i 317,877 | | $ | i 88,189 | | $ | i 506,096 | | $ | i 84,444 | |
Ginnie Mae – PLS | | $ | i 317,877 | | $ | i 217,186 | | $ | i 506,096 | | $ | i 215,722 | |
Adjusted net worth / Total assets ratio | | | | | | | | | | | | | |
Ginnie Mae – PLS | | | i 20 | % | | i 6 | % | | i 12 | % | | i 6 | % |
Tangible net worth / Total assets ratio | | | | | | | | | | | | | |
Fannie Mae & Freddie Mac – PLS | | | i 22 | % | | i 6 | % | | i 14 | % | | i 6 | % |
| (1) | Calculated in compliance with the respective Agency’s requirements. |
Noncompliance with an Agency’s requirements can result in such Agency taking various remedial actions up to and including terminating PennyMac’s ability to sell loans to and service loans on behalf of the respective Agency.
iNote 24—Segments
The Company operates in i three segments: production, servicing and investment management.
i 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.
/58
Financial performance and results by segment are as follows:
| | | | | | | | | | | | | | | | |
| | Quarter ended June 30, 2021 | | |||||||||||||
| | Mortgage Banking | | Investment | | | | | ||||||||
|
| Production |
| Servicing |
| Total |
| Management |
| Total |
| |||||
| | (in thousands) | | |||||||||||||
Revenue: (1) | | | | | | | | | | | |
| | | | |
Net gains on loans held for sale at fair value | | $ | i 419,293 | | $ | i 163,355 | | $ | i 582,648 | | $ | — | | $ | i 582,648 | |
Loan origination fees | | | i 97,291 | | | — | | | i 97,291 | | | — | | | i 97,291 | |
Fulfillment fees from PennyMac Mortgage Investment Trust | | | i 54,020 | | | — | | | i 54,020 | | | — | | | i 54,020 | |
Net loan servicing fees | | | — | | | i 14,871 | | | i 14,871 | | | — | | | i 14,871 | |
Net interest income (expense): | | | | | | | | | | | | | | | | |
Interest income | | | i 31,830 | | | i 48,967 | | | i 80,797 | | | — | | | i 80,797 | |
Interest expense | | | i 36,913 | | | i 65,515 | | | i 102,428 | | | i 3 | | | i 102,431 | |
| | | ( i 5,083) | | | ( i 16,548) | | | ( i 21,631) | | | ( i 3) | | | ( i 21,634) | |
Management fees | | | — | | | — | | | — | | | i 11,913 | | | i 11,913 | |
Other | | | i 630 | | | i 925 | | | i 1,555 | | | i 1,588 | | | i 3,143 | |
Total net revenue | | | i 566,151 | | | i 162,603 | | | i 728,754 | | | i 13,498 | | | i 742,252 | |
Expenses | | | i 321,709 | | | i 131,679 | | | i 453,388 | | | i 9,349 | | | i 462,737 | |
Income before provision for income taxes | | $ | i 244,442 | | $ | i 30,924 | | $ | i 275,366 | | $ | i 4,149 | | $ | i 279,515 | |
Segment assets at quarter end | | $ | i 7,670,877 | | $ | i 16,185,956 | | $ | i 23,856,833 | | $ | i 23,305 | | $ | i 23,880,138 | |
| (1) | All revenues are from external customers. |
| | | | | | | | | | | | | | | | |
| | Quarter ended June 30, 2020 | | |||||||||||||
| | Mortgage Banking | | Investment | | | | | ||||||||
|
| Production |
| Servicing |
| Total |
| Management |
| Total |
| |||||
| | (in thousands) | | |||||||||||||
Revenue: (1) | | | | | | | | | | | | | | | | |
Net gains on loans held for sale at fair value | | $ | i 619,728 | | $ | i 62,445 | | $ | i 682,173 | | $ | — | | $ | i 682,173 | |
Loan origination fees | | | i 58,948 | | | — | | | i 58,948 | | | — | | | i 58,948 | |
Fulfillment fees from PennyMac Mortgage Investment Trust | | | i 52,815 | | | — | | | i 52,815 | | | — | | | i 52,815 | |
Net loan servicing fees | | | — | | | i 22,337 | | | i 22,337 | | | — | | | i 22,337 | |
Net interest income (expense): | | | | | | | | | | | | | | | | |
Interest income | | | i 19,205 | | | i 28,113 | | | i 47,318 | | | — | | | i 47,318 | |
Interest expense | | | i 12,642 | | | i 40,560 | | | i 53,202 | | | i 5 | | | i 53,207 | |
| | | i 6,563 | | | ( i 12,447) | | | ( i 5,884) | | | ( i 5) | | | ( i 5,889) | |
Management fees | | | — | | | — | | | — | | | i 8,288 | | | i 8,288 | |
Other | | | i 361 | | | i 351 | | | i 712 | | | i 2,250 | | | i 2,962 | |
Total net revenue | | | i 738,415 | | | i 72,686 | | | i 811,101 | | | i 10,533 | | | i 821,634 | |
Expenses | | | i 200,352 | | | i 135,098 | | | i 335,450 | | | i 5,822 | | | i 341,272 | |
Income before provision for income taxes | | $ | i 538,063 | | $ | ( i 62,412) | | $ | i 475,651 | | $ | i 4,711 | | $ | i 480,362 | |
Segment assets at quarter end | | $ | i 5,419,219 | | $ | i 17,789,046 | | $ | i 23,208,265 | | $ | i 18,210 | | $ | i 23,226,475 | |
| (1) | All revenues are from external customers. |
/59
| | | | | | | | | | | | | | | | |
| | Six months ended June 30, 2021 | | |||||||||||||
| | Mortgage Banking | | Investment | | | | | ||||||||
|
| Production |
| Servicing |
| Total |
| Management |
| Total |
| |||||
| | (in thousands) | | |||||||||||||
Revenue: (1) | | | | | | | | | | | |
| | | | |
Net gains on loans held for sale at fair value | | $ | i 935,256 | | $ | i 401,733 | | $ | i 1,336,989 | | $ | — | | $ | i 1,336,989 | |
Loan origination fees | | | i 201,328 | | | — | | | i 201,328 | | | — | | | i 201,328 | |
Fulfillment fees from PennyMac Mortgage Investment Trust | | | i 114,855 | | | — | | | i 114,855 | | | — | | | i 114,855 | |
Net loan servicing fees | | | — | | | i 54,591 | | | i 54,591 | | | — | | | i 54,591 | |
Net interest income (expense): | | | | | | | | | | | | | | | | |
Interest income | | | i 61,361 | | | i 101,517 | | | i 162,878 | | | — | | | i 162,878 | |
Interest expense | | | i 74,985 | | | i 135,153 | | | i 210,138 | | | i 6 | | | i 210,144 | |
| | | ( i 13,624) | | | ( i 33,636) | | | ( i 47,260) | | | ( i 6) | | | ( i 47,266) | |
Management fees | | | — | | | — | | | — | | | i 20,362 | | | i 20,362 | |
Other | | | i 1,227 | | | i 2,122 | | | i 3,349 | | | i 2,730 | | | i 6,079 | |
Total net revenue | | | i 1,239,042 | | | i 424,810 | | | i 1,663,852 | | | i 23,086 | | | i 1,686,938 | |
Expenses | | | i 631,705 | | | i 252,142 | | | i 883,847 | | | i 17,568 | | | i 901,415 | |
Income before provision for income taxes | | $ | i 607,337 | | $ | i 172,668 | | $ | i 780,005 | | $ | i 5,518 | | $ | i 785,523 | |
Segment assets at year end | | $ | i 7,670,877 | | $ | i 16,185,956 | | $ | i 23,856,833 | | $ | i 23,305 | | $ | i 23,880,138 | |
| (1) | All revenues are from external customers |
| | | | | | | | | | | | | | | | |
| | Six months ended June 30, 2020 | | |||||||||||||
| | Mortgage Banking | | Investment | | | | | ||||||||
|
| Production |
| Servicing |
| Total |
| Management |
| Total |
| |||||
| | (in thousands) | | |||||||||||||
Revenue: (1) | | | | | | | | | | | | | | | | |
Net gains on loans held for sale at fair value | | $ | i 936,363 | | $ | i 90,092 | | $ | i 1,026,455 | | $ | — | | $ | i 1,026,455 | |
Loan origination fees | | | i 116,519 | | | — | | | i 116,519 | | | — | | | i 116,519 | |
Fulfillment fees from PennyMac Mortgage Investment Trust | | | i 94,755 | | | — | | | i 94,755 | | | — | | | i 94,755 | |
Net loan servicing fees | | | — | | | i 280,145 | | | i 280,145 | | | — | | | i 280,145 | |
Net interest income (expense): | | | | | | | | | | | | | | | | |
Interest income | | | i 45,790 | | | i 74,092 | | | i 119,882 | | | — | | | i 119,882 | |
Interest expense | | | i 32,799 | | | i 81,906 | | | i 114,705 | | | i 14 | | | i 114,719 | |
| | | i 12,991 | | | ( i 7,814) | | | i 5,177 | | | ( i 14) | | | i 5,163 | |
Management fees | | | — | | | — | | | — | | | i 17,343 | | | i 17,343 | |
Other | | | i 351 | | | ( i 329) | | | i 22 | | | i 3,057 | | | i 3,079 | |
Total net revenue | | | i 1,160,979 | | | i 362,094 | | | i 1,523,073 | | | i 20,386 | | | i 1,543,459 | |
Expenses | | | i 382,785 | | | i 253,664 | | | i 636,449 | | | i 11,918 | | | i 648,367 | |
Income before provision for income taxes | | $ | i 778,194 | | $ | i 108,430 | | $ | i 886,624 | | $ | i 8,468 | | $ | i 895,092 | |
Segment assets at year end | | $ | i 5,419,219 | | $ | i 17,789,046 | | $ | i 23,208,265 | | $ | i 18,210 | | $ | i 23,226,475 | |
| (1) | All revenues are from external customers. |
60
Note 25—Subsequent Events
Management has evaluated all events and transactions through the date the Company issued these consolidated financial statements. During this period:
| ● | On August 4, 2021, the Company’s board of directors approved an increase to the Company’s common stock repurchase program from $ i 1 billion to $ i 2 billion. |
| ● | On August 4, 2021, the Company’s board of directors declared a cash dividend of $ i 0.20 per common share. The dividend will be paid on August 26, 2021 to common shareholders of record as of August 16, 2021. |
| ● | On July 30, 2021, the Company through i two of its indirect, wholly owned subsidiaries, Issuer Trust and PLS, and its direct wholly owned subsidiary, PennyMac, entered into agreements to syndicate i two existing variable funding note repurchase agreements, as part of the structured finance transaction that PLS uses to finance Ginnie Mae mortgage servicing rights and related excess servicing spread and servicing advance receivables. The Company entered into (i) an Amended and Restated Series 2016-MSRVF1 Master Repurchase Agreement by and among PLS, as seller, CSFB, as administrative agent to the buyers, CSCIB, as a buyer, Citibank, N.A., as a buyer, and PennyMac, as a guarantor (the “Syndicated GMSR Servicing Spread Agreement”), related to the servicing spread; and (ii) an Amended and Restated Series 2020-MSRVF1 Master Repurchase Agreement by and among PLS, as seller, CSFB, as administrative agent to the buyers, CSCIB, as a buyer, Citibank, as a buyer, and PennyMac, as a guarantor (the “Syndicated GMSR SAR Agreement”), related to the servicing advance receivables. |
The purposes of the Syndicated GMSR Servicing Spread Agreement are to (1) add Citibank as a syndicate buyer, and (2) increase the maximum purchase price from $ i 400 to $ i 500 million, all of which is committed on a 50-50 pro rata basis between CSCIB and Citibank. The purpose of the Syndicated GMSR SAR Agreement is to add Citibank as a syndicate buyer, with the maximum purchase price of $ i 600 million unchanged, all of which is committed on a 50-50 pro rata basis between CSCIB and Citibank. Each syndicated facility is subject to certain terms and limitations as further described in the Company’s Current Report on Form 8-K filed with the SEC on August 5, 2021.
| ● | The FHFA announced the elimination of a i 50 basis point adverse market refinance fee on Fannie Mae and Freddie Mac mortgage refinance transactions effective August 1, 2021. |
| ● | All agreements to repurchase assets that matured before the date of this Report were extended or renewed. |
/
61
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.
We are a specialty financial services firm primarily focused on the production and servicing of U.S. residential mortgage loans (activities which we refer to as mortgage banking) and the management of investments related to the U.S. mortgage market. We believe that our operating capabilities, specialized expertise, access to long-term investment capital, and our management’s experience across all aspects of the mortgage business will allow us to profitably grow these activities and capitalize on other related opportunities as they arise in the future.
We operate and control all of the business and affairs and consolidate the financial results of Private National Mortgage Acceptance Company, LLC (“PennyMac”). 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 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. 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.
62
Our investment management subsidiary is PNMAC Capital Management, LLC (“PCM”), a Delaware limited liability company registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended. PCM has an investment management contract with PennyMac Mortgage Investment Trust (“PMT”), a mortgage real estate investment trust listed on the New York Stock Exchange under the ticker symbol PMT.
Results of Operations
Our results of operations are summarized below:
| | | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
| | (dollars in thousands, except per share amounts) | | ||||||||||
Revenues: | | | | | | | | | | | | | |
Net gains on loans held for sale at fair value | | $ | 582,648 | | $ | 682,173 | | $ | 1,336,989 | | $ | 1,026,455 | |
Loan origination fees | | | 97,291 | | | 58,948 | | | 201,328 | | | 116,519 | |
Fulfillment fees from PennyMac Mortgage Investment Trust | | | 54,020 | | | 52,815 | | | 114,855 | | | 94,755 | |
Net loan servicing fees | | | 14,871 | | | 22,337 | | | 54,591 | | | 280,145 | |
Net interest (expense) income | | | (21,634) | | | (5,889) | | | (47,266) | | | 5,163 | |
Management fees | | | 11,913 | | | 8,288 | | | 20,362 | | | 17,343 | |
Other | | | 3,143 | | | 2,962 | | | 6,079 | | | 3,079 | |
Total net revenue | | | 742,252 | | | 821,634 | | | 1,686,938 | | | 1,543,459 | |
Expenses: | | | | | | | | | | | | | |
Compensation | | | 265,067 | | | 179,886 | | | 523,896 | | | 348,322 | |
Loan origination | | | 75,675 | | | 50,921 | | | 163,067 | | | 96,925 | |
Technology | | | 34,236 | | | 21,905 | | | 67,908 | | | 41,012 | |
Servicing | | | 31,290 | | | 56,503 | | | 50,473 | | | 98,669 | |
Other | | | 56,469 | | | 32,057 | | | 96,071 | | | 63,439 | |
Total expenses | | | 462,737 | | | 341,272 | | | 901,415 | | | 648,367 | |
Income before provision for income taxes | | | 279,515 | | | 480,362 | | | 785,523 | | | 895,092 | |
Provision for income taxes | | | 75,286 | | | 127,685 | | | 204,426 | | | 236,172 | |
Net income | | $ | 204,229 | | $ | 352,677 | | $ | 581,097 | | $ | 658,920 | |
Earnings per share | | | | | | | | | | | | | |
Basic | | $ | 3.10 | | $ | 4.53 | | $ | 8.61 | | $ | 8.42 | |
Diluted | | $ | 2.94 | | $ | 4.39 | | $ | 8.16 | | $ | 8.11 | |
Annualized return on average common stockholders' equity | | | 23.3 | % | | 56.0 | % | | 33.2 | % | | 56.0 | % |
Income before provision for income taxes by segment: | | | | | | | | | | | | | |
Mortgage banking: | | | | | | | | | | | | | |
Production | | $ | 244,442 | | $ | 538,063 | | $ | 607,337 | | $ | 778,194 | |
Servicing | | | 30,924 | | | (62,412) | | | 172,668 | | | 108,430 | |
Total mortgage banking | | | 275,366 | | | 475,651 | | | 780,005 | | | 886,624 | |
Investment management | | | 4,149 | | | 4,711 | | | 5,518 | | | 8,468 | |
| | $ | 279,515 | | $ | 480,362 | | $ | 785,523 | | $ | 895,092 | |
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") (1) | | $ | 471,440 | | $ | 616,550 | | $ | 1,145,748 | | $ | 918,872 | |
During the period: | | | | | | | | | | | | | |
Interest rate lock commitments issued | | $ | 34,271,160 | | $ | 25,964,546 | | $ | 70,389,873 | | $ | 50,769,540 | |
At end of period: | | | | | | | | | | | | | |
Interest rate lock commitments outstanding | | $ | 13,879,343 | | $ | 12,245,054 | | | | | | | |
Unpaid principal balance of loan servicing portfolio: | | | | | | | | | | | | | |
Owned: | | | | | | | | | | | | | |
Mortgage servicing rights | | $ | 252,475,400 | | $ | 233,807,729 | | | | | | | |
Mortgage servicing liabilities | | | 6,135,249 | | | 2,130,520 | | | | | | | |
Loans held for sale | | | 10,438,935 | | | 4,672,171 | | | | | | | |
| | | 269,049,584 | | | 240,610,420 | | | | | | | |
Subserviced for PMT | | | 204,174,462 | | | 147,695,455 | | | | | | | |
| | $ | 473,224,046 | | $ | 388,305,875 | | | | | | | |
| | | | | | | | | | | | | |
Net assets of PennyMac Mortgage Investment Trust | | $ | 2,343,390 | | $ | 2,235,277 | | | | | | | |
Book value per share | | $ | 54.49 | | $ | 34.26 | | | | | | | |
| (1) | To provide investors with information in addition to our results as determined by accounting principles generally accepted in the United States (“GAAP”), we disclose Adjusted EBITDA as a non-GAAP measure. Adjusted EBITDA is a measure that is frequently used in our industry to measure performance and we believe that this measure provides supplemental information that is useful to investors. Adjusted EBITDA is not a financial measure |
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| calculated in accordance with GAAP and should not be considered as a substitute for net income, or any other performance measure calculated in accordance with GAAP. |
We define “Adjusted EBITDA” as net income plus provision for income taxes, depreciation and amortization, excluding decrease (increase) in fair value of MSRs and mortgage servicing liabilities (“MSLs”), due to changes in valuation inputs used in valuation model, increase (decrease) in fair value of ESS payable to PMT, hedging losses (gains) associated with MSRs, stock-based compensation and interest expense on corporate debt or corporate revolving credit facilities and capital leases.
We believe that the presentation of Adjusted EBITDA provides useful information to investors regarding our results of operations because each measure assists both investors and management in analyzing and benchmarking the performance and value of our business. However, other companies may define Adjusted EBITDA differently, and as a result, our measures of Adjusted EBITDA may not be directly comparable to those of other companies.
Adjusted EBITDA measures have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
| a) | they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments; |
| b) | they do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payment on our debt; and |
| c) | they are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows. |
Because of these limitations, Adjusted EBITDA measures are not intended as alternatives to net income as an indicator of our operating performance and should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations.
The following table presents a reconciliation of Adjusted EBITDA to our net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, for each of the periods indicated:
| | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | ||||||||||
Net income | | $ | 204,229 | | $ | 352,677 | | $ | 581,097 | | $ | 658,920 |
Provision for income taxes | | | 75,286 | | | 127,685 | | | 204,426 | | | 236,172 |
Income before provisions for income taxes | | | 279,515 | | | 480,362 | | | 785,523 | | | 895,092 |
Depreciation and amortization | | | 7,335 | | | 5,373 | | | 14,967 | | | 10,725 |
Decrease (increase) in fair value of MSRs and MSLs due to changes in valuation inputs used in valuation model | | | 250,597 | | | 108,354 | | | (55,529) | | | 1,028,648 |
(Increase) decrease in fair value of ESS payable to PennyMac Mortgage Investment Trust | | | — | | | (636) | | | 1,037 | | | (15,158) |
Hedging (gains) losses associated with MSRs | | | (91,118) | | | 15,764 | | | 351,033 | | | (1,020,806) |
Stock‑based compensation | | | 8,894 | | | 6,757 | | | 19,771 | | | 19,125 |
Interest expense on corporate debt or corporate revolving credit facilities and capital lease | | | 16,217 | | | 576 | | | 28,946 | | | 1,246 |
Adjusted EBITDA | | $ | 471,440 | | $ | 616,550 | | $ | 1,145,748 | | $ | 918,872 |
The United States continues to be impacted by the COVID-19 pandemic (the “Pandemic” or “COVID-19”) and the effects of market and government responses to the Pandemic. These developments have resulted in continued economic uncertainty, financial hardships and unemployment for many existing borrowers.
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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 loans we service for the Agencies with substantial payment forbearance. As a result of the CARES Act and other regulatory requirements, our costs to service delinquent loans in our servicing portfolio have increased and may require us to finance advances of principal and interest payments to the investors holding these loans, as well as property taxes, insurance and other costs to protect investors’ interest in the properties collateralizing the loans. As of June 30, 2021, 4.5% of loans in our predominately government-insured or guaranteed MSR portfolio were in forbearance plans and delinquent resulting in an increase in the level of servicing advances we have been required to make in order to fund borrower delinquencies.
The Pandemic has had a mixed effect on the earnings of our servicing segment by reducing the amount of placement fees we earn on custodial deposits related to these loans and increasing our cost to service due to higher delinquency and default rates, offset by gains we recognize when we are able to modify and resell previously delinquent government loans. In order to mitigate the risks and costs of maintaining delinquent government loans in Ginnie Mae securities or in our loan inventory, we sell a portion of those loans to third-party investors; we increased the volume of our sales of these loans in the quarter ended June 30, 2021, and serviced $6.1 billion in UPB of these loans for third-party investors at the end of the period.
In our production segment, gain on sale margins reflect both the strong but moderating demand for loans due to historically low interest rates as well as growth in loan production from our consumer direct and broker direct channels from the same periods in 2020. The mortgage origination market for 2020 was estimated at $4.0 trillion and current forecasts estimate of the origination market range from $3.6 trillion to $4.2 trillion for 2021. The increase in demand for mortgage loans in 2020, combined with constraints on mortgage industry origination capacity that existed before the Pandemic, allowed us to realize higher gain-on sale margins in our production segment in 2020. As industry capacity has adjusted to demand, our gain on sale margins have moderated from 2020 levels, and in certain channels reflect the effects of significant competitive pressures.
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 on our future prospects are difficult to anticipate. For further discussion of the potential impacts of the Pandemic please also see the section entitled “Risk Factors” in Part II. Item 1A. and in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on February 25, 2021.
For the quarter ended June 30, 2021, income before provision for income taxes decreased $200.8 million compared to the same period in 2020. The decrease was primarily due to a $99.5 million decrease in Net gains on loans held for sale at fair value due to lower gain on sale margins across all production channels during the quarter ended June 30, 2021 compared to the same period in 2020 and a $121.5 million increase in total expenses, partially offset by a $38.3 million increase in origination fees due to an increase in production volume. The increase in total expenses was mainly due to increases in compensation and origination expenses reflecting the growth of our mortgage banking activities.
For the six months ended June 30, 2021, income before provision for income taxes decreased $109.6 million compared to the same period in 2020. The decrease was primarily due to an increase in total expenses and a decrease in net loan servicing fees, partially offset by an increase in production revenue (Net gains on loans held for sale at fair value, Loan origination fees and Fulfillment fees from PennyMac Mortgage Investment Trust), which reflects higher production volume during the six months ended June 30, 3021 compared to the same period in 2020. The decrease in net servicing fees reflects negative valuation adjustments net of hedging results during the six months ended June 30, 2021 as compared to the same period in 2020. The increase in total expenses was mainly due to increases in compensation and origination expenses reflecting the growth of our mortgage banking activities.
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Net Gains on Loans Held for Sale at Fair Value
During the quarter and six months ended June 30, 2021, we recognized Net gains on loans held for sale at fair value totaling $582.6 million and $1.3 billion, respectively, a decrease of $99.5 million during the quarter ended June 30, 2021 compared to the same period in 2020 and an increase of $310.5 million during the six months ended June 30, 2021 compared to the same period in 2020. The decrease during the quarter ended June 30, 2021compared to the same period in 2020 was primarily due to decreases in gain on sale margins across all channels and the increase during the six months ended June 30, 2021 compared to the same period in 2020 was primarily due to an increase in production volume.
Our net gains on loans held for sale are summarized below:
| | | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
| | (in thousands) | | ||||||||||
From non-affiliates: | | | | | | | | | | | | | |
Cash gains: | | |
| | |
| | |
| | |
| |
Loans | | $ | 387,305 | | $ | 502,416 | | $ | 470,017 | | $ | 614,173 | |
Hedging activities | | | (325,651) | | | (227,013) | | | 410,574 | | | (349,679) | |
Total cash gains | | | 61,654 | | | 275,403 | | | 880,591 | | | 264,494 | |
Non-cash gains: | | | | | | | | | | | | | |
Change in fair value of loans and derivative financial instruments outstanding at end of period: | | | | | | | | | | | | | |
Interest rate lock commitments | | | 5,670 | | | 52,871 | | | (333,416) | | | 231,414 | |
Loans | | | (50,322) | | | 10,978 | | | 54,900 | | | (61,102) | |
Hedging derivatives | | | 157,917 | | | 125,898 | | | (115,770) | | | 23,007 | |
| | | 113,265 | | | 189,747 | | | (394,286) | | | 193,319 | |
Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales | | | 425,941 | | | 225,534 | | | 889,512 | | | 501,273 | |
Provisions for losses relating to representations and warranties: | | | | | | | | | | | | | |
Pursuant to loan sales | | | (10,304) | | | (4,189) | | | (20,357) | | | (7,901) | |
Reductions in liability due to change in estimate | | | 3,640 | | | 1,270 | | | 7,325 | | | 2,946 | |
Total non-cash gains | | | 532,542 | | | 412,362 | | | 482,194 | | | 689,637 | |
Total gains on sale from non-affiliates | | | 594,196 | | | 687,765 | | | 1,362,785 | | | 954,131 | |
From PennyMac Mortgage Investment Trust (primarily cash) | | | (11,548) | | | (5,592) | | | (25,796) | | | 72,324 | |
| | $ | 582,648 | | $ | 682,173 | | $ | 1,336,989 | | $ | 1,026,455 | |
During the period: | | | | | | | | | | | | | |
Interest rate lock commitments issued: | | | | | | | | | | | | | |
Government-insured or guaranteed mortgage loans | | $ | 23,397,624 | | $ | 18,069,299 | | $ | 48,544,503 | | $ | 37,098,437 | |
Conventional mortgage loans | | | 10,873,536 | | | 7,895,247 | | | 21,845,370 | | | 13,661,123 | |
Jumbo mortgage loans | | | — | | | — | | | — | | | 8,304 | |
Home equity lines of credit | | | — | | | — | | | — | | | 1,676 | |
| | $ | 34,271,160 | | $ | 25,964,546 | | $ | 70,389,873 | | $ | 50,769,540 | |
At end of period: | | | | | | | | | | | | | |
Loans held for sale at fair value | | $ | 10,884,506 | | $ | 4,918,253 | | | | | | | |
Commitments to fund and purchase loans | | $ | 13,879,343 | | $ | 12,245,054 | | | | | | | |
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Our gains on loans held for sale include both cash and non-cash elements. We recognize a significant portion of our gains on loans held for sale when we make a commitment to purchase or fund a mortgage loan. We recognize this gain in the form of an interest rate lock commitment. We adjust our initial gain amount as the loan purchase or origination process progresses until the loan is either funded or cancelled. We also receive non-cash proceeds on sale that include our estimate of the fair value of MSRs and we incur liabilities for mortgage servicing liabilities (which represent the fair value of the costs we expect to incur in excess of the fees we receive for the early buyout of delinquent loans (“EBO loans”) we have resold to third party investors) and for the fair value of our estimate of the losses we expect to incur relating to the representations and warranties we provide in our loan sale transactions.
Non-cash elements of gain on sale of loans held for sale
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 72% and 66% of our gain on sale of loans held for sale at fair value for the quarter and six months ended June 30, 2021, respectively, as compared to 33% and 48% for the quarter and six months ended June 30, 2020, respectively. These estimates change as circumstances change and changes in these estimates are recognized in income in subsequent periods. How we measure and update our measurements of IRLCs, 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 losses on the loans. Our credit losses 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.
Our representations and warranties are generally not subject to stated limits of exposure. However, we believe that the current UPB of loans sold by us and subject to representation and warranty liability to date represents the maximum exposure to repurchases related to representations and warranties.
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.
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 $10.3 million and $20.4 million for the quarter and six months ended June 30, 2021, respectively, compared to $4.2 million and $7.9 million for the quarter and six months ended June 30, 2020, respectively. The increase in the provision relating to current loan sales is primarily attributable to increased sales of loans supplemented by increased loss assumptions relating to our securitizations of reperforming early buyout loans. We also recorded reductions in the liability of $3.6 million and $7.3 million during the quarter and six months ended June 30, 2021, respectively, compared to $1.3 million and $2.9 million during the quarter and six months ended June 30, 2020, respectively. The reductions in the liability resulted from previously sold loans meeting performance criteria established by the Agencies which significantly limit 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:
| | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | ||||||||||
During the period: | | |
| | |
| | |
| | |
|
Indemnification activity: | | | | | | | | | | | | |
Loans indemnified by PFSI at beginning of period | | $ | 14,239 | | $ | 16,245 | | $ | 13,788 | | $ | 15,366 |
New indemnifications | | | 5,100 | | | 1,567 | | | 7,255 | | | 2,446 |
Less indemnified loans sold, repaid or refinanced | | | 2,805 | | | 1,416 | | | 4,509 | | | 1,416 |
Loans indemnified by PFSI at end of period | | $ | 16,534 | | $ | 16,396 | | $ | 16,534 | | $ | 16,396 |
Repurchase activity: | | | | | | | | | | | | |
Total loans repurchased by PFSI | | $ | 25,928 | | $ | 18,271 | | $ | 43,914 | | $ | 34,553 |
Less: | | | | | | | | | | | | |
Loans repurchased by correspondent lenders | | | 13,763 | | | 10,353 | | | 22,452 | | | 16,506 |
Loans repaid by borrowers or resold with defects resolved | | | 1,927 | | | 5,921 | | | 4,576 | | | 7,367 |
Net loans repurchased with losses chargeable to liability for representations and warranties | | $ | 10,238 | | $ | 1,997 | | $ | 16,886 | | $ | 10,680 |
Net losses charged to liability for representations and warranties | | $ | 757 | | $ | 212 | | $ | 1,385 | | $ | 492 |
| | | | | | | | | | | | |
At end of period: | | | | | | | | | | | ||
Unpaid principal balance of loans subject to representations and warranties | | $ | 234,327,924 | | $ | 192,064,630 | | | | | | |
Liability for representations and warranties | | $ | 44,335 | | $ | 25,909 | | | | | | |
During the quarter and six months ended June 30, 2021, we repurchased loans totaling $25.9 million and $43.9 million in UPB, respectively. We recorded losses of $757,000 and $1.4 million net of recoveries during the quarter and six months ended June 30, 2021, respectively. 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, correspondent lenders become unwilling or unable to repurchase defective loans, or investor and insurer loss mitigation strategies are adjusted, the level of repurchase and loss activity may increase.
Loan origination fees
Loan origination fees increased $38.3 million and $84.8 million during the quarter and six months ended June 30, 2021, respectively, compared to the same periods in 2020. The increases were primarily due to an increase in volume of loans we produced.
Fulfillment fees from PennyMac Mortgage Investment Trust
Fulfillment fees from PMT represent fees we collect for services we perform on behalf of PMT in connection with the acquisition, packaging and sale of loans. The fulfillment fees were calculated as a percentage of the UPB of the loans we fulfilled for PMT through June 30, 2020. Effective July 1, 2020, fulfillment fees are calculated based on the number of loans we fulfill for PMT.
Fulfillment fees increased $1.2 million and $20.1 million during the quarter and six months ended June 30, 2021 compared to the same periods in 2020. The increases were primarily due to an increase in PMT’s loan production volume, partially offset by the effect of the amendment to the fulfillment fee structure noted above, which generally reduced the fulfillment fees collected per loan fulfilled.
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Net Loan Servicing Fees
Following is a summary of our net loan servicing fees:
| | | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
| | (in thousands) | | ||||||||||
Net loan servicing fees: | | | | | | | | | | | | | |
Loan servicing fees: | | | | | | | | | | | | | |
From non-affiliates | | $ | 208,275 | | $ | 199,178 | | $ | 419,028 | | $ | 397,831 | |
From PennyMac Mortgage Investment Trust | | | 20,015 | | | 15,533 | | | 39,108 | | | 30,054 | |
Other | | | 31,731 | | | 28,543 | | | 61,330 | | | 57,298 | |
| | | 260,021 | | | 243,254 | | | 519,466 | | | 485,183 | |
Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing net of hedging results | | | (245,150) | | | (220,917) | | | (464,875) | | | (205,038) | |
Net loan servicing fees | | $ | 14,871 | | $ | 22,337 | | $ | 54,591 | | $ | 280,145 | |
Average loan servicing portfolio | | $ | 461,498,813 | | $ | 386,455,938 | | $ | 449,782,033 | | $ | 381,539,569 | |
Change in fair value of MSRs, MSLs and excess servicing spread are summarized below:
| | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | ||||||||||
Realization of cash flows | | $ | (85,671) | | $ | (97,435) | | $ | (168,334) | | $ | (212,354) |
Other changes in fair value of mortgage servicing rights and mortgage servicing liabilities | | | (250,597) | | | (108,354) | | | 55,529 | | | (1,028,648) |
Change in fair value of excess servicing spread | | | — | | | 636 | | | (1,037) | | | 15,158 |
Hedging results | | | 91,118 | | | (15,764) | | | (351,033) | | | 1,020,806 |
Total change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing net of hedging results | | $ | (245,150) | | $ | (220,917) | | $ | (464,875) | | $ | (205,038) |
Average balances: | | | | | | | | | | | | |
Mortgage servicing rights | | $ | 3,346,877 | | $ | 2,198,533 | | $ | 3,120,761 | | $ | 2,407,037 |
Mortgage servicing liabilities | | $ | 62,098 | | $ | 28,537 | | $ | 55,229 | | $ | 28,847 |
Excess servicing spread financing | | $ | — | | $ | 154,745 | | $ | 43,484 | | $ | 164,115 |
At end of period: | | | | | | | | | | | | |
Mortgage servicing rights | | $ | 3,412,648 | | $ | 2,213,539 | | | | | | |
Mortgage servicing liabilities | | $ | 100,091 | | $ | 29,858 | | | | | | |
Excess servicing spread financing | | $ | — | | $ | 151,206 | | | | | | |
| | | | | | | | | | | | |
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Following is a summary of our loan servicing portfolio:
| | | | | | |
| | | | | | |
| | June 30, | | |||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
Loans serviced | | | | | | |
Prime servicing: | | | | | | |
Owned: | | | | | | |
Mortgage servicing rights | | | | | | |
Originated | | $ | 221,492,618 | | $ | 196,873,590 |
Acquired | | | 30,982,782 | | | 41,537,219 |
| | | 252,475,400 | | | 238,410,809 |
Mortgage servicing liabilities | | | 6,135,249 | | | 2,857,492 |
Loans held for sale | | | 10,438,935 | | | 11,063,938 |
| | | 269,049,584 | | | 252,332,239 |
Subserviced for PMT | | | 204,132,766 | | | 174,360,317 |
Total prime servicing | | | 473,182,350 | | | 426,692,556 |
Special servicing subserviced for PMT | | | 41,696 | | | 58,274 |
Total loans serviced | | $ | 473,224,046 | | $ | 426,750,830 |
Delinquencies: | | | | | | |
Owned servicing: | | | | | | |
30-89 days (1) | | $ | 5,607,408 | | $ | 7,611,216 |
90 days or more (1) | | | 15,995,816 | | | 22,545,750 |
| | $ | 21,603,224 | | $ | 30,156,966 |
Delinquent loans in COVID-19 pandemic-related forbearance: | | | | | | |
30-89 days | | $ | 1,645,432 | | $ | 3,225,010 |
90 days or more | | | 10,402,947 | | | 14,904,052 |
| | $ | 12,048,379 | | $ | 18,129,062 |
Subserviced for PMT: | | | | | | |
30-89 days (1) | | $ | 906,922 | | $ | 1,250,381 |
90 days or more (1) | | | 3,038,845 | | | 4,543,660 |
| | $ | 3,945,767 | | $ | 5,794,041 |
Delinquent loans in COVID-19 pandemic-related forbearance: | | | | | | |
30-89 days | | $ | 274,479 | | $ | 593,517 |
90 days or more | | | 2,467,315 | | | 3,690,505 |
| | $ | 2,741,794 | | $ | 4,284,022 |
| (1) | Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act. |
Net loan servicing fees decreased $7.5 million during the quarter ended June 30, 2021 compared to the same period in 2020. The decrease was due to an increase of $24.2 million in fair value losses relating to MSRs, MSLs, and ESS, net of hedging results, partially offset by an increase of $16.8 million in loan servicing fees resulting from an increase in our average servicing portfolio during the quarter ended, June 30, 2021 compared to the same period in 2020. The increase in fair value losses was primarily due to a decrease of $142.2 million in fair value of MSRs and MSLs, reflecting the effect on prepayment experience and expectations on the fair value of our investments in MSRs as a result of decreasing interest rates during the quarter ended June 30, 2021 as compared to the quarter ended June 30, 2020, partially offset by an increase of $106.9 million in hedging results.
Net loan servicing fees decreased $225.6 million during the six months ended June 30, 2021 compared to the same period in 2020. The decrease was due to an increase of $259.8 million in fair value losses relating to MSRs, MSLs, and ESS, net of hedging results, partially offset by an increase of $34.3 million in loan servicing fees resulting from an increase in our average servicing portfolio during the six months ended, June 30, 2021 compared to the same period in 2020.
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Net Interest (Expense) Income
Net interest (expense) income decreased $15.7 million and $52.4 million, during the quarter and six months ended June 30, 2021, respectively, compared to the same periods in 2020. The decreases were primarily due to:
| ● | a decrease in placement fees we receive relating to custodial funds that we manage due to decreased earning rates; |
| ● | an increase in interest shortfall on repayments of loans serviced for Agency securitizations, reflecting increased loan payoffs as a result of increased borrower refinancing activity due to the lower interest rate environment; and |
| ● | interest on Unsecured Notes that were not outstanding during the six months ended June 30, 2020. |
Management fees
Management fees are summarized below:
| | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | ||||||||
| | 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | ||||||||||
Management fees: | | | | | | | | | | | | |
PennyMac Mortgage Investment Trust: | | | | | | | | | | | | |
Base management |
| $ | 8,648 |
| $ | 8,288 | | $ | 17,097 |
| $ | 17,343 |
Performance incentive | | | 3,265 | | | — | | | 3,265 | | | — |
| | $ | 11,913 | | $ | 8,288 | | $ | 20,362 | | $ | 17,343 |
Net assets of PMT at end of period | | $ | 2,343,390 | | $ | 2,235,277 | | | | | | |
Management fees increased $3.6 million and $3.0 million during the quarter and six months ended June 30, 2021, respectively, compared to the same periods in 2020. The increases were primarily due to $3.3 million of performance incentive fees earned during the quarter ended June 30, 2021, as result of PMT’s increased profitability during the measurement period ended June 30, 2021, on which its performance incentive fee is based.
Expenses
Compensation
Compensation expenses are summarized below:
| | | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||||
| | (in thousands) | | ||||||||||
Salaries and wages | | $ | 154,406 | | $ | 102,084 | | $ | 298,106 | | $ | 191,399 | |
Incentive compensation | | | 71,888 | | | 51,359 | | | 144,543 | | | 97,340 | |
Taxes and benefits | | | 29,879 | | | 19,686 | | | 61,476 | | | 40,458 | |
Stock and unit-based compensation | | | 8,894 | | | 6,757 | | | 19,771 | | | 19,125 | |
| | $ | 265,067 | | $ | 179,886 | | $ | 523,896 | | $ | 348,322 | |
Head count: | | | | | | | | | | | | | |
Average | | | 7,151 | | | 4,937 | | | 7,008 | | | 4,635 | |
Period end | | | 7,231 | | | 5,353 | | | | | | | |
Compensation expense increased $85.2 million and $175.6 million, respectively, during the quarter and six months ended June 30, 2021 compared to the same period in 2020. The increases were primarily due to growth in head count made to accommodate the growth in our loan production and servicing activities.
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Loan origination
Loan origination expense increased $24.8 million and $66.1 million, respectively, during the quarter and six months ended June 30, 2021 compared to the same periods in 2020. The increases were primarily due to increased lending activities during the quarter and six months ended June 30, 2021 compared to the same periods during 2020.
Technology
Technology expense increased $12.3 million and $26.9 million, respectively, during the quarter and six months ended June 30, 2021, compared to the same periods in 2020. The increases were primarily due to growth in our loan servicing operations and continued investment in our loan production and servicing infrastructure.
Servicing
Servicing expenses decreased $25.2 million and $48.2 million, respectively, during the quarter and six months ended June 30, 2021, compared to the same periods in 2020. This decreases in servicing expenses were primarily due to reversal of the provision for estimated servicing advances losses recorded in prior periods in the amount of $13.1 million and $33.6 million, respectively, during the quarter and six months ended June 30, 2021, respectively. The reduction reflects the recent improvements in the performance of our servicing portfolio.
Professional services
Professional expenses increased $12.3 million and $12.2 million, respectively, during the quarter and six months ended June 30, 2021, compared to the same periods in 2020. The increases were primarily due to increases in legal fees and consulting fees related to our investments in technology infrastructure.
Provision for Income Taxes
Our effective income tax rates were 26.9% and 26.0% during the quarter and six months ended June 30, 2021, respectively, compared to 26.6% and 26.4% during the same periods in 2020. The difference in the effective tax rates for the quarter ended June 30, 2021 compared to the six months ended June 30, 2021 was primarily due to an increase in tax deductions in 2021 related to equity compensation. Substantially all of this increase in tax deductions related to equity compensation was realized in the quarter ended March 31, 2021.
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Balance Sheet Analysis
Following is a summary of key balance sheet items as of the dates presented:
| | | | | | |
| | June 30, | | |||
|
| 2021 |
| 2020 | ||
| | (in thousands) | ||||
ASSETS | | | | | | |
Cash and short-term investments | | $ | 327,878 | | $ | 547,933 |
Loans held for sale at fair value | | | 10,884,506 | | | 11,616,400 |
Derivative assets | | | 371,269 | | | 711,238 |
Servicing advances, net | | | 519,028 | | | 579,528 |
Investments in and advances to affiliates | | | 63,463 | | | 168,972 |
Mortgage servicing rights | | | 3,412,648 | | | 2,581,174 |
Loans eligible for repurchase | | | 7,613,244 | | | 14,625,447 |
Other | | | 688,102 | | | 767,103 |
Total assets | | $ | 23,880,138 | | $ | 31,597,795 |
| | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | |
Short-term debt | | $ | 8,766,796 | | $ | 10,176,274 |
Long-term debt | | | 2,593,177 | | | 2,085,274 |
Liability for loans eligible for repurchase | | | 7,613,244 | | | 14,625,447 |
Income taxes payable | | | 570,052 | | | 622,700 |
Other | | | 823,040 | | | 698,712 |
Total liabilities | | | 20,366,309 | | | 28,208,407 |
Stockholders' equity | | | 3,513,829 | | | 3,389,388 |
Total liabilities and stockholders' equity | | $ | 23,880,138 | | $ | 31,597,795 |
Total assets decreased $7.7 billion from $31.6 billion at December 31, 2020 to $23.9 billion at June 30, 2021. The decrease was primarily due to a decrease of $7.0 billion in loans eligible for repurchase, $731.9 million in loans held for sale at fair value, $340.0 million in derivative assets, $220.1 million in cash and short-term investments, partially offset by an increase of $831.5 million in MSRs. The decrease in loans eligible for repurchase was primarily due to increased early buyout activity and a decrease in delinquent loans in the servicing portfolio during the six months ended June 30, 2021.
Total liabilities decreased $7.8 billion from $28.2 billion at December 31, 2020 to $20.4 billion at June 30, 2021. The decrease was primarily due to the decrease in liability for loans eligible for repurchase.
Cash Flows
Our cash flows are summarized below:
| | | | | | | | | | |
|
| Six months ended June 30, | | | |
| ||||
| | 2021 |
| 2020 |
| Change |
| |||
| | (in thousands) | | |||||||
Operating | | $ | 1,331,598 | | $ | 365,597 | | $ | 966,001 | |
Investing | | | (145,239) | |
| 986,137 | |
| (1,131,376) | |
Financing | | | (1,394,954) | |
| (629,923) | |
| (765,031) | |
Net (decrease) increase in cash and restricted cash | | $ | (208,595) | | $ | 721,811 | | $ | (930,406) | |
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Our cash flows resulted in a net decrease in cash and restricted cash of $208.6 million during the six months ended June 30, 2021 as discussed below.
Operating activities
Net cash provided by operating activities totaled $1.3 billion during the six months ended June 30, 2021 compared with net cash provided by operating activities of $365.6 million during the same period in 2020. Our cash flows from operating activities are primarily influenced by changes in the levels of our inventory of mortgage loans as shown below:
| | | | | | | | | |
| | | | | Six months ended June 30, | ||||
| | | | | 2021 |
| 2020 | ||
| | | | | (in thousands) | ||||
Cash flows from: | | | | | | | | | |
Loans held for sale | | | | | $ | 1,659,510 | | $ | 350,725 |
Other operating sources | | | | | | (327,912) | | | 14,872 |
| | | | | $ | 1,331,598 | | $ | 365,597 |
Net cash used in other operating activities totaled $327.9 million during the six months ended June 30, 2021, primarily due to $207.6 million in capitalized interest and advances on loans held for sale.
Investing activities
Net cash used in investing activities during the six months ended June 30, 2021 totaled $145.2 million, primarily due to $345.6 million in net settlement of derivative financial instruments used to hedge our investment in MSRs, partially offset by a $134.7 million decrease in margin deposits. Net cash provided by investing activities during the six months ended June 30, 2020 totaled $986.1 million, primarily due to $995.2 million in net settlement of derivative financial instruments used to hedge our investment in MSRs.
Financing activities
Net cash used in financing activities totaled $1.4 billion during the six months ended June 30, 2021, primarily due to a decrease of $761.0 million in borrowings, $443.4 million of repurchase of our common stock and $134.6 million of repayment of ESS financing. The reduction in borrowings reflects reduced inventory of loans held for sale, combined with repurchase of common stock. Net cash used in financing activities totaled $629.9 million during the six months ended June 30, 2020, primarily due to net repurchase of assets sold under agreements to repurchase, reflecting a reduction in our financing of mortgage loans held for sale and repurchase of common stock.
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 equity or debt offerings. We believe that our liquidity is sufficient to meet our current liquidity needs.
The effect 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 the section entitled “Risk Factors” in Part II. Item 1A. and in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 25, 2021.
The CARES Act allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from the COVID-19 pandemic and may require us as the servicer to advance principal and interest to investors for up to four months on Fannie Mae and Freddie Mac loans and longer on
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Ginnie Mae and other government agency backed loans, as well as advancing property taxes, insurance premiums and other expenses. In April 2020, the Company entered into a new Ginnie Mae servicing advance financing transaction allowing the Company to borrow $600 million in excess of our currently outstanding MSR term notes against Ginnie Mae MSRs and servicing advances. The Ginnie Mae servicing advances eligible for financing include advances made to support regularly scheduled monthly principal and interest to mortgage-backed securities holders, taxes, homeowners insurance and escrowed items and other costs related to servicing delinquent loans. We are also in ongoing discussions with our lending partners to align our servicing advance assets and financing capacity, and to further diversify our financing alternatives.
The COVID-19 pandemic has significantly increased the number of loans that are delinquent in our Ginnie Mae MSR portfolio. The Ginnie Mae guidelines provides us with the option to purchase loans that are at least three months delinquent out of the underlying Ginnie Mae securities as an alternative to continuing to advance principal and interest payments to the holders of the Ginnie Mae securities. We refer to such loans as “early buyout” or EBO loans.
During the six months ended June 30, 2021, we purchased $10.9 billion in UPB of EBO loans from our Ginnie Mae MSR portfolio. Our objective is to work with the borrowers to cure the loan delinquency through either borrower reperformance or modification of the loans’ terms. When curing the delinquency is not feasible, we work to settle the loan and collect our claims from the applicable insurer or guarantor. When we are able to cure the delinquency, we are able to re-deliver the cured loan into another Ginnie Mae guaranteed security. Depending on the method used to cure a borrower delinquency, the Ginnie Mae program may require at least a six month period of timely borrower payments before we are able to re-deliver the loan. Therefore, regardless of whether we cure or settle the repurchased loan, our investment in the EBO loans may require a substantial holding period. We have financed our EBO purchases by expanding our borrowing capacity under existing facilities and by procuring a dedicated EBO repurchase agreement facility.
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, notes payable, a capital lease and unsecured senior notes. A significant amount of our borrowings have short-term maturities and provide for advances with terms ranging from 45 days to 240 days. 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.
On April 28, 2021, the Company, through PLS, PennyMac, and PFSI Issuer Trust - FMSR, entered into a structured finance transaction, allowing PLS to finance Fannie Mae MSRs and ESS (the “Fannie Mae MSR Facility”). In connection with the Fannie Mae MSR Facility, PLS pledges and/or sells to PFSI Issuer Trust - FMSR participation certificates representing beneficial interests in MSRs and ESS pursuant to the terms of a master repurchase agreement, dated as of April 28, 2021, by and between PLS, PFSI Issuer Trust - FMSR and PennyMac (the “PC Repurchase Agreement”). In return, PFSI Issuer Trust - FMSR (a) has issued to PLS the Series 2021-MSRVF1 Note, dated April 28, 2021, known as the “PFSI ISSUER TRUST - FMSR Collateralized Notes, Series 2021-MSRVF1” (the “FMSR VFN”), and (b) may, from time to time, issue to institutional investors 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 FMSR VFN is $1,000,000,000. We did not borrow under the Fannie Mae MSR Facility during the quarter ended June 30, 2021.
Under the PC Repurchase Agreement, PLS grants to PFSI Issuer Trust – FMSR a security interest in all of its right, title and interest in, to and under participation certificates representing beneficial interests in MSRs and ESS, including all of its rights and interests in any MSRs and ESS it thereafter owns or acquires. The principal amount paid by PFSI Issuer Trust - FMSR for the participation certificates under the PC Repurchase Agreement is based upon a percentage of the market value of the underlying MSRs (inclusive of the ESS). Upon PLS’s repurchase of the participation certificates, PLS is required to repay PFSI Issuer Trust - FMSR 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 FMSR VFN and any outstanding term notes) to the date of such repurchase.
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PLS also entered into a master repurchase agreement on April 28, 2021 (the “FMSR VFN Repurchase Agreement”) with CSFB, as administrative agent, and Credit Suisse AG, Cayman Islands Branch (“CSCIB”), as purchaser, pursuant to which PLS sold the FMSR VFN to CSCIB with an agreement to repurchase such FMSR VFN at a later date. The FMSR VFN Repurchase Agreement has an initial term extending through March 31, 2023. The FMSR VFN Repurchase Agreement provides for a maximum purchase price of $250 million, all of which is committed. The principal amount paid by CSCIB for the FMSR VFN is based upon a percentage of the market value of such FMSR VFN. Upon PLS’s repurchase of the FMSR VFN, PLS is required to repay CSCIB the principal amount relating thereto plus accrued interest (at a rate reflective of the current market based on a spread above LIBOR with index replacement provisions related to the transition from LIBOR) to the date of such repurchase. Under the FMSR VFN Repurchase Agreement, in the event any such transactions are deemed to be loans and not sales and purchases, PLS granted to CSCIB a security interest in all of its right, title and interest in, to and under the FMSR VFN and all rights to reimbursement or payment of the FMSR VFN and/or amounts due in respect thereof.
Our repurchase agreements represent the sales of assets together with agreements for us to buy back the respective assets at a later date. The table below presents the average, maximum daily and ending balances:
| | | | | | | | | | | | |
| | Quarter ended June 30, | | Six months ended June 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
| | (in thousands) | ||||||||||
Average balance | | $ | 7,571,340 | | $ | 2,529,217 | | $ | 7,999,580 | | $ | 2,833,444 |
Maximum daily balance | | $ | 10,856,677 | | $ | 3,769,495 | | $ | 10,856,677 | | $ | 3,769,495 |
Balance at period end | | $ | 8,262,251 | | $ | 3,769,495 | | | | | | |
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:
| ● | a minimum in unrestricted cash and cash equivalents of $100 million; |
| ● | a minimum tangible net worth of $1.25 billion; |
| ● | a maximum ratio of total liabilities to tangible net worth of 10:1; and |
| ● | at least one other warehouse or repurchase facility that finances amounts and assets that are similar to those being financed under certain of our existing secured financing agreements. |
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, the indenture governing our Unsecured Notes contains covenants that limit the Company and our restricted subsidiaries’ ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries’ ability to, among other things:
| ● | pay dividends or distributions, redeem or repurchase equity, prepay subordinated debt and make certain loans or investments; |
| ● | incur, assume or guarantee additional debt or issue preferred stock; |
| ● | incur liens on assets; |
| ● | merge or consolidate with another person or sell all or substantially all of our assets to another person; |
| ● | transfer, sell or otherwise dispose of certain assets including capital stock of subsidiaries; |
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| ● | enter into transactions with affiliates; and |
| ● | allow to exist certain restrictions on the ability of our non-guarantor restricted subsidiaries to pay dividends or make other payments to us. |
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 repurchase financing agreements also contain margin call provisions that, upon notice from the applicable lender at its option, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. A margin deficit will generally result from any decline in the market value (as determined by the applicable lender) of the assets subject to the related financing agreement. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.
We are also subject to liquidity and net worth requirements established by the Federal Housing Finance Agency (“FHFA”) for Agency seller/servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established minimum liquidity 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:
| ● | Effective June 30, 2020, 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 (reduced by 70% of the UPB of nonperforming Agency loans that are in COVID-19 payment forbearance and were current when they entered such forbearance) exceeds 6% of the applicable Agency servicing UPB; allowable assets to satisfy liquidity requirement include cash and cash equivalents (unrestricted), certain investment-grade securities that are available for sale or held for trading including Agency mortgage-backed securities, obligations of Fannie Mae or Freddie Mac, and U.S. Treasury obligations, and unused and available portions of committed servicing advance lines; |
| ● | FHFA net worth requirement is a minimum net worth of $2.5 million plus 0.25% (25 basis points) of UPB for total 1-4 unit residential mortgage loans serviced and a tangible net worth/total assets ratio greater than or equal to 6%; |
| ● | Ginnie Mae single-family issuer minimum liquidity requirement is equal to the greater of $1.0 million or 0.10% (10 basis points) of the issuer’s outstanding Ginnie Mae single-family securities, which must be met with cash and cash equivalents; and |
| ● | Ginnie Mae net worth requirement is equal to $2.5 million plus 0.35% (35 basis points) of the issuer’s outstanding Ginnie Mae single-family obligations. |
We believe that we are currently in compliance with the applicable Agency requirements.
On August 4, 2021, our Board of Directors increased our common stock repurchase program from $1 billion to $2 billion. Share repurchases may be effected through open market 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. From inception through June 30, 2021, we have repurchased $795.9 million of shares under our stock repurchase program.
We continue to explore a variety of means of financing our continued growth, including debt financing through bank warehouse lines of credit, bank loans, repurchase agreements, securitization transactions and corporate debt. However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing will take or whether such efforts will be successful.
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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Off-Balance Sheet Arrangements and Guarantees
As of June 30, 2021, we have not entered into any off-balance sheet arrangements.
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 and a capital lease. The borrower under each of these facilities is PLS or the Issuer Trust with the exception of the capital lease where the borrower is PennyMac. All PLS obligations 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 June 30, 2021, we believe we were in compliance in all material respects with these covenants.
The repurchase agreements also contain margin call provisions that, upon notice from the applicable lender, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.
In addition, the agreements contain events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, servicer termination events and defaults, material adverse changes, bankruptcy or insolvency proceedings and other events of default customary for these types of transactions. The remedies for such events of default are also customary for these types of transactions and include the acceleration of the principal amount outstanding under the agreements and the liquidation by our lenders of the mortgage loans or other collateral then subject to the agreements.
The Company also issued Unsecured Notes that are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the Company’s existing and future wholly-owned domestic subsidiaries (other than certain excluded subsidiaries defined in the indenture under which the Unsecured Notes were issued). The Company is required to maintain certain financial covenants under terms of the Unsecured Notes. We believe the Company was in compliance with all financial covenants in the Unsecured Notes as of June 30, 2021.
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Our debt obligations have the following size and maturities:
| | | | | | | | | | | |
| | Outstanding | | Total | | Committed | | | |||
Lender |
| indebtedness (1) |
| facility size (2) |
| facility (2) |
| Maturity date (2) | |||
| | (dollar amounts in thousands) | |
| |||||||
Assets sold under agreements to repurchase | | | | | | | | | | | |
Credit Suisse First Boston Mortgage Capital LLC (3) | | $ | 1,816,022 | | $ | 4,950,000 | | $ | 1,950,000 | | |
Credit Suisse First Boston Mortgage Capital LLC (3) | | $ | 50,000 | | $ | 50,000 | | $ | 50,000 | | |
JPMorgan Chase Bank, N.A. | | $ | 2,214,458 | | $ | 3,000,000 | | $ | — | | |
JPMorgan Chase Bank, N.A. | | $ | 304 | | $ | 750,000 | | $ | 50,000 | | |
Bank of America, N.A. | | $ | 1,053,871 | | $ | 1,800,000 | | $ | 540,000 | | |
Goldman Sachs Bank USA | | $ | 788,182 | | $ | 1,000,000 | | $ | 500,000 | | |
Royal Bank of Canada | | $ | 728,899 | | $ | 1,000,000 | | $ | 500,000 | | |
BNP Paribas | | $ | 372,377 | | $ | 600,000 | | $ | 200,000 | | |
Morgan Stanley Bank, N.A. | | $ | 353,729 | | $ | 600,000 | | $ | 300,000 | | |
Barclays Bank PLC | | $ | 348,272 | | $ | 750,000 | | $ | 375,000 | | |
Wells Fargo Bank, N.A. | | $ | 342,509 | | $ | 350,000 | | $ | 175,000 | | |
Citibank, N.A. | | $ | 193,628 | | $ | 1,000,000 | | $ | 650,000 | | |
Mortgage loan participation purchase and sale agreements | | | | | | | | | | | |
Bank of America, N.A. | | $ | 512,253 | | $ | 550,000 | | $ | — | | |
Notes payable | | | | | | | | | | | |
GMSR 2018-GT1 Notes | | $ | 650,000 | | $ | 650,000 | | | | | |
GMSR 2018-GT2 Notes | | $ | 650,000 | | $ | 650,000 | | | | | |
Unsecured Senior Notes - 5.375% | | $ | 650,000 | | $ | 650,000 | | | | | |
Unsecured Senior Notes - 4.25% | | $ | 650,000 | | $ | 650,000 | | | | | |
Credit Suisse AG (3) | | $ | — | | $ | — | | $ | — | | |
Obligations under capital lease | | | | | | | | | | | |
Banc of America Leasing and Capital LLC | | $ | 7,677 | | $ | 25,000 | | $ | — | | |
| (1) | Outstanding indebtedness as of June 30, 2021. |
| (2) | Total facility size, committed facility and maturity date include contractual changes through the date of this Report. |
| (3) | 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, an agreement to repurchase relating to the financing of Fannie Mae MSRs and an agreement to repurchase relating to the financing of GNMA servicing advances. |
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The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to our assets sold under agreements to repurchase is summarized by counterparty below as of June 30, 2021:
| | | | | | | |
| | | | | Weighted average | | |
| | | | | maturity of | | |
| | | | | advances under | | |
Counterparty |
| Amount at risk |
| repurchase agreement |
| Facility maturity | |
| | (in thousands) | | | | | |
Credit Suisse First Boston Mortgage Capital LLC (1) | | $ | 2,126,158 | | | ||
Credit Suisse First Boston Mortgage Capital LLC | | $ | 724,309 | | | ||
Bank of America, N.A. | | $ | 397,300 | | | ||
JP Morgan Chase Bank, N.A. | | $ | 207,772 | | | ||
JP Morgan Chase Bank, N.A. | | $ | 1,891 | | | ||
BNP Paribas | | $ | 124,512 | | | ||
Goldman Sachs | | $ | 77,468 | | | ||
Royal Bank of Canada | | $ | 55,641 | | | ||
Morgan Stanley Bank, N.A. | | $ | 44,701 | | | ||
Barclays Bank PLC | | $ | 41,978 | | | ||
Wells Fargo Bank, N.A. | | $ | 20,750 | | | ||
Citibank, N.A. | | $ | 11,835 | | | ||
| (1) | The borrowing facility with Credit Suisse First Boston Mortgage Capital LLC is in the form of a sale of a variable funding note under an agreement to repurchase. |
| (2) | The borrowing facility with Credit Suisse First Boston Mortgage Capital LLC is in the form of an asset sale under agreement to repurchase. |
All debt financing arrangements that matured between June 30, 2021 and the date of this Report have been renewed or extended and are described in Note 12—Short-Term Borrowings to the accompanying consolidated financial statements.
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 fair value risk, interest rate risk and prepayment risk.
Fair Value Risk
Our IRLCs, mortgage loans held for sale, MSRs and MSLs are reported at their fair values. The fair value of these assets fluctuates primarily due to changes in interest rates. The fair value risk we face is primarily attributable to interest rate risk and prepayment risk.
Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. Changes in interest rates affect both the fair value of, and interest income we earn from, our mortgage-related investments and our derivative financial instruments. This effect is most pronounced with fixed-rate mortgage assets.
In general, rising interest rates negatively affect the fair value of our IRLCs and inventory of mortgage loans held for sale and positively affect the fair value of our MSRs. Changes in interest rate significantly influence the prepayment speeds of the loans underlying our investments in MSRs and ESS, which can have a significant effect on their fair values. Changes in interest rate are most prominently reflected in the prepayment speeds of the loans underlying our investments in MSRs and ESS and the discount rate used in their valuation.
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Our operating results will depend, in part, on differences between the income from our investments and our financing costs. Presently our debt financing is based on a floating rate of interest calculated on a fixed spread over the relevant index, as determined by the particular financing arrangement.
Prepayment Risk
To the extent that the actual prepayment rate on the mortgage loans underlying our MSRs differs from what we projected when we initially recognized these assets and liabilities when we measure fair value as of the end of each reporting period, the carrying value of these assets and liabilities will be affected. In general, a decrease in the principal balances of the mortgage loans underlying our MSRs or an increase in prepayment expectations will decrease our estimates of the fair value of the MSRs, thereby reducing net servicing income, partially offset by the beneficial effect on net servicing income of a corresponding reduction in the fair value of our MSLs and ESS.
Risk Management Activities
We engage in risk management activities primarily in an effort to mitigate the effect of changes in interest rates on the fair value of our assets. To manage this price risk, we use derivative financial instruments acquired with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the fair value of our assets, primarily prepayment exposure on our MSR investments as well as IRLCs and our inventory of loans held for sale. Our objective is to minimize our hedging expense and maximize our loss coverage based on a given hedge expense target. We do not use derivative financial instruments other than IRLCs and repurchase agreement derivatives (both of which arise from our operations) for purposes other than in support of our risk management activities.
Our strategies are reviewed daily within a disciplined risk management framework. We use a variety of interest rate and spread shifts and scenarios and define target limits for market value and liquidity loss in those scenarios. With respect to our IRLCs and inventory of loans held for sale, we use MBS forward sale contracts to lock in the price at which we will sell the mortgage loans or resulting MBS, and further use MBS put options to mitigate the risk of our IRLCs not closing at the rate we expect. With respect to our MSRs, we seek to mitigate mortgage-based loss exposure utilizing MBS forward purchase and sale contracts, address exposures to smaller interest rate shifts with Treasury and interest rate swap futures, and use options and swaptions to achieve target coverage levels for larger interest rate shocks.
Fair Value Sensitivities
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 inputs used; and do not incorporate other factors that would affect our overall financial performance in such scenarios, including operational adjustments made by management to account for changing circumstances. For these reasons, the following estimates should not be viewed as earnings forecasts.
Mortgage Servicing Rights
The following tables summarize the estimated change in fair value of MSRs as of June 30, 2021, given several shifts in pricing spreads, prepayment speed and annual per loan cost of servicing:
| | | | | | | | | | | | | | | | | | | |
Change in fair value attributable to shift in: |
| -20% |
| -10% |
| -5% |
| +5% |
| +10% |
| +20% |
| ||||||
| | (in thousands) | | ||||||||||||||||
Pricing spread | | $ | 245,747 | | $ | 118,589 | | $ | 58,275 | | $ | (56,330) | | $ | (110,804) | | $ | (214,519) | |
Prepayment speed | | $ | 317,347 | | $ | 152,504 | | $ | 74,793 | | $ | (72,028) | | $ | (141,434) | | $ | (272,904) | |
Annual per-loan cost of servicing | | $ | 124,790 | | $ | 62,395 | | $ | 31,198 | | $ | (31,198) | | $ | (62,395) | | $ | (124,790) | |
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. However, no matter how well a control system is designed and operated, it can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports.
Our management has conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report as required by paragraph (b) of Rule 13a-15 under the Exchange Act. Based on our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this Report, to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the three months ended June 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company may be involved in various legal and regulatory proceedings, lawsuits and other claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on the financial condition, results of operations, or cash flows of the Company. Set forth below are material updates to legal proceedings of the Company.
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 March 30, 2020, the Florida State Court granted a motion to compel arbitration filed by the Company. Consequently, on April 27, 2020, PennyMac dismissed its federal court action without prejudice to pursue those claims in arbitration as well. 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 BKI Complaint is without merit and plans to vigorously defend the matter, which remains pending.
On January 7, 2021, PLS received a letter from the CFPB notifying PLS that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, the CFPB’s Office of Enforcement was considering recommending that the CFPB take legal action against PLS for alleged violations of the Real Estate Settlement Procedures Act and Truth in Lending Act. The CFPB's examination covered the period from March 2015 through September 2016. Should the CFPB commence an action, it may seek restitution, civil monetary penalties, injunctive relief, or other corrective action, the extent of which remains uncertain at this time. Notably, certain of the alleged violations were originally self-identified by PLS and remediated prior to the CFPB's examination, and all alleged violations were fully remediated as of August 2017. PLS confirmed these remediation actions as well as full restitution to any affected borrowers in its response to the NORA letter on February 8, 2021. While the NORA process remains open and pending at this time, and there can be no assurance as to the nature or extent of any actions taken by the CFPB with regard to these alleged violations, we do not believe that the ultimate resolution of this matter will have a material adverse effect on our financial statements or operations.
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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, 2020, filed with the SEC on February 25, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered equity securities during the quarter ended June 30, 2021.
The following table summarizes information about our stock repurchase during the quarter ended June 30, 2021:
| | | | | | | | | | | | |
|
| Total
number |
| |
| Total number of | | Approximate dollar | ||||
| | 269,832 | | $ | 59.12 | | | 269,832 | | $ | 343,212,099 | |
| | 1,290,187 | | $ | 60.23 | | | 1,290,187 | | $ | 266,551,209 | |
| | 1,014,097 | | $ | 62.01 | | | 1,014,097 | | $ | 204,133,351 | |
Total | | | 2,574,116 | | $ | 60.50 | | | 2,574,116 | | $ | 204,133,351 |
| (1) | In August 2021, the Company’s board of directors approved an increase to the Company’s common stock repurchase program from $1 billion to $2 billion. The stock repurchase program does not require the Company 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 privately 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
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Item 6. Exhibits
| | Incorporated by Reference from the Below-Listed Form (Each Filed under SEC File Number 15-68669 or 001-38727) | |
|---|---|---|---|
| | | |
Exhibit No. | Exhibit Description | Form | Filing Date |
2.1 | 8-K12B | ||
| | | |
3.1 | Amended and Restated Certificate of Incorporation of New PennyMac Financial Services, Inc. | 8-K12B | |
| | | |
3.1.1 | 8-K12B | ||
| | | |
3.2 | Amended and Restated Bylaws of New PennyMac Financial Services, Inc. | 8-K12B | |
| | | |
3.2.1 | 10-Q | ||
| | | |
4.1 | 8-K | ||
| | | |
10.1 | 8-K | ||
| | | |
10.2 | 8-K | ||
| | | |
10.3 | 8-K | ||
| | | |
10.4 | 8-K | ||
| | | |
| | | |
10.5 | 10-Q | ||
| | | |
10.6 | 10-Q | ||
| | | |
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| | Incorporated by Reference from the Below-Listed Form (Each Filed under SEC File Number 15-68669 or 001-38727) | |
|---|---|---|---|
| | | |
Exhibit No. | Exhibit Description | Form | Filing Date |
10.7 | * | | |
| | | |
10.8† | PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of Stock Option Award Agreement. | * | |
| | | |
10.9† | * | | |
| | | |
| | | |
31.1 | * | | |
| | | |
31.2 | * | | |
| | | |
32.1 | ** | | |
| | | |
32.2 | ** | | |
| | | |
101 | Interactive data files pursuant to Rule 405 of Regulation S-T, formatted in Inline XBRL: (i) the Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020 (ii) the Consolidated Statements of Income for the quarters ended June 30, 2021 and June 30, 2020, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended June 30, 2021 and June 30, 2020, (iv) the Consolidated Statements of Cash Flows for the quarters ended June 30, 2021 and June 30, 2020 and (v) the Notes to the Consolidated Financial Statements. | | |
| | | |
101.INS | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | |
| | | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | |
101.DEF 101.LAB 101.PRE | Inline XBRL Taxonomy Extension Definition Linkbase Document Inline XBRL Taxonomy Extension Label Linkbase Document Inline XBRL Taxonomy Extension Presentation Linkbase Document | | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document). | | |
| | | |
| | | |
**The certifications attached hereto as Exhibits 32.1 and 32.2 are furnished to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.
†Indicates management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PENNYMAC FINANCIAL SERVICES, INC. | |
| (Registrant) | |
| | |
Dated: August 5, 2021 | By: | /s/ DAVID A. SPECTOR |
| | |
| | Chairman and Chief Executive Officer |
| | |
Dated: August 5, 2021 | By: | |
| | |
| | Senior Managing Director and Chief Financial Officer |
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| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 2/15/29 | ||||
| 10/15/25 | ||||
| 2/15/24 | ||||
| 8/25/23 | ||||
| 6/7/23 | ||||
| 6/6/23 | ||||
| 3/31/23 | ||||
| 2/25/23 | ||||
| 12/23/22 | ||||
| 11/3/22 | ||||
| 11/2/22 | ||||
| 10/15/22 | ||||
| 10/6/22 | ||||
| 9/30/22 | ||||
| 6/30/22 | ||||
| 6/14/22 | 8-K | |||
| 6/13/22 | ||||
| 6/8/22 | 8-K | |||
| 12/31/21 | 10-K, 5 | |||
| 10/8/21 | 8-K | |||
| 9/26/21 | ||||
| 9/20/21 | ||||
| 9/16/21 | 8-K | |||
| 8/28/21 | ||||
| 8/27/21 | ||||
| 8/26/21 | ||||
| 8/18/21 | ||||
| 8/16/21 | ||||
| 8/10/21 | ||||
| 8/6/21 | ||||
| Filed on: | 8/5/21 | 8-K | ||
| 8/4/21 | ||||
| 8/3/21 | ||||
| 8/1/21 | ||||
| 7/31/21 | ||||
| 7/30/21 | 8-K | |||
| 7/18/21 | ||||
| For Period end: | 6/30/21 | |||
| 6/1/21 | 4 | |||
| 5/31/21 | ||||
| 5/6/21 | 10-Q, 8-K | |||
| 5/3/21 | 4, 8-K | |||
| 5/1/21 | ||||
| 4/30/21 | ||||
| 4/28/21 | 8-K | |||
| 4/1/21 | 3 | |||
| 3/31/21 | 10-Q | |||
| 2/25/21 | 10-K, 4 | |||
| 2/11/21 | 8-K | |||
| 2/8/21 | 4, 8-K | |||
| 1/7/21 | 4 | |||
| 12/31/20 | 10-K, 5 | |||
| 10/19/20 | ||||
| 9/29/20 | 8-K | |||
| 7/1/20 | 4 | |||
| 6/30/20 | 10-Q, 8-K | |||
| 4/27/20 | ||||
| 4/1/20 | 8-K | |||
| 3/31/20 | 10-Q | |||
| 3/30/20 | ||||
| 12/31/19 | 10-K, 4, 5 | |||
| 11/5/19 | ||||
| 11/4/19 | 10-Q, 4 | |||
| 11/1/18 | 4, 8-K, 8-K12B, S-8 POS | |||
| 8/10/18 | ||||
| 2/28/18 | ||||
| 2/1/18 | ||||
| 12/19/16 | ||||
| 11/18/16 | ||||
| 5/8/13 | ||||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 2/21/24 PennyMac Financial Services, Inc. 10-K 12/31/23 148:34M Toppan Merrill Bridge/FA 2/22/23 PennyMac Financial Services, Inc. 10-K 12/31/22 138:33M Toppan Merrill Bridge/FA 2/23/22 PennyMac Financial Services, Inc. 10-K 12/31/21 144:34M Toppan Merrill Bridge/FA |
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 5/06/21 PennyMac Financial Services, Inc. 10-Q 3/31/21 122:25M Toppan Merrill Bridge/FA 5/03/21 PennyMac Financial Services, Inc. 8-K:1,2,9 4/28/21 6:2.7M Toppan Merrill/FA 11/04/19 PennyMac Financial Services, Inc. 10-Q 9/30/19 133:36M Toppan Merrill Bridge/FA 11/01/18 PennyMac Financial Services, Inc. 8-K12B:1,2,10/31/18 8:858K Toppan Merrill/FA 9/12/18 PennyMac Financial Services, Inc. S-4/A 8:2.2M Toppan Merrill-FA |