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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 11/06/20 PennyMac Financial Services, Inc. 10-Q 9/30/20 127:33M Toppan Merrill Bridge/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 3.92M
2: EX-4.3 Instrument Defining the Rights of Security Holders HTML 109K
3: EX-10.1 Material Contract HTML 54K
12: EX-10.10 Material Contract HTML 51K
4: EX-10.2 Material Contract HTML 40K
5: EX-10.3 Material Contract HTML 42K
6: EX-10.4 Material Contract HTML 61K
7: EX-10.5 Material Contract HTML 67K
8: EX-10.6 Material Contract HTML 61K
9: EX-10.7 Material Contract HTML 66K
10: EX-10.8 Material Contract HTML 508K
11: EX-10.9 Material Contract HTML 50K
13: EX-31.1 Certification -- §302 - SOA'02 HTML 40K
14: EX-31.2 Certification -- §302 - SOA'02 HTML 40K
15: EX-32.1 Certification -- §906 - SOA'02 HTML 37K
16: EX-32.2 Certification -- §906 - SOA'02 HTML 37K
23: R1 Document and Entity Information HTML 85K
24: R2 Consolidated Balance Sheets HTML 129K
25: R3 Consolidated Balance Sheets (Parenthetical) HTML 53K
26: R4 Consolidated Statements of Income HTML 152K
27: R5 Consolidated Statements of Changes in HTML 78K
Stockholders' Equity
28: R6 Consolidated Statements of Changes in HTML 34K
Stockholders' Equity (Parenthetical)
29: R7 Consolidated Statements of Cash Flows HTML 169K
30: R8 Organization HTML 40K
31: R9 Basis of Presentation and Recently Adopted HTML 38K
Accounting Pronouncements
32: R10 Concentration of Risk HTML 35K
33: R11 Related Party Transactions HTML 310K
34: R12 Loan Sales and Servicing Activities HTML 236K
35: R13 Fair Value HTML 1.10M
36: R14 Loans Held for Sale at Fair Value HTML 57K
37: R15 Derivative Financial Instruments HTML 688K
38: R16 Mortgage Servicing Rights and Mortgage Servicing HTML 149K
Liabilities
39: R17 Leases HTML 98K
40: R18 Other Assets HTML 60K
41: R19 Borrowings HTML 371K
42: R20 Liability for Losses Under Representations and HTML 65K
Warranties
43: R21 Income Taxes HTML 35K
44: R22 Commitments and Contingencies HTML 41K
45: R23 Stockholders' Equity HTML 54K
46: R24 Net Gains on Loans Held for Sale HTML 95K
47: R25 Net Interest Income HTML 110K
48: R26 Stock-based Compensation HTML 91K
49: R27 Earnings Per Share of Common Stock HTML 95K
50: R28 Supplemental Cash Flow Information HTML 55K
51: R29 Regulatory Capital and Liquidity Requirements HTML 91K
52: R30 Segments HTML 333K
53: R31 Subsequent Events HTML 38K
54: R32 Related Party Transactions (Tables) HTML 265K
55: R33 Loan Sales and Servicing Activities (Tables) HTML 238K
56: R34 Fair Value (Tables) HTML 1.09M
57: R35 Loans Held for Sale at Fair Value (Tables) HTML 56K
58: R36 Derivative Financial Instruments (Tables) HTML 695K
59: R37 Mortgage Servicing Rights and Mortgage Servicing HTML 152K
Liabilities (Tables)
60: R38 Leases (Tables) HTML 99K
61: R39 Other Assets (Tables) HTML 60K
62: R40 Borrowings (Tables) HTML 365K
63: R41 Liability for Losses Under Representations and HTML 64K
Warranties (Tables)
64: R42 Stockholders' Equity (Tables) HTML 53K
65: R43 Net Gains on Loans Held for Sale (Tables) HTML 94K
66: R44 Net Interest Income (Tables) HTML 109K
67: R45 Stock-based Compensation (Tables) HTML 91K
68: R46 Earnings Per Share of Common Stock (Tables) HTML 96K
69: R47 Supplemental Cash Flow Information (Tables) HTML 54K
70: R48 Regulatory Capital and Liquidity Requirements HTML 81K
(Tables)
71: R49 Segments (Tables) HTML 331K
72: R50 Concentration of Risk (Details) HTML 38K
73: R51 Related Party Transactions - Correspondent HTML 125K
Production (Details)
74: R52 Related Party Transactions - Mortgage Loan HTML 92K
Servicing (Details)
75: R53 Related Party Transactions - Management Fees HTML 89K
(Details)
76: R54 Related Party Transactions - Other Transactions, HTML 56K
Reimbursement of Common Overhead Expenses
(Details)
77: R55 Related Party Transactions - Other Transactions, HTML 40K
Conditional Reimbursement (Details)
78: R56 Related Party Transactions - Investing Activities HTML 69K
(Details)
79: R57 Related Party Transactions - Financing Activities HTML 59K
(Details)
80: R58 Related Party Transactions - Amounts due from HTML 62K
Affiliate (Details)
81: R59 Related Party Transactions - Exchanged Private HTML 43K
National Mortgage Acceptance Company, LLC
Unitholders (Details)
82: R60 Loan Sales and Servicing Activities - Summary of HTML 55K
Cash Flows with Transferees (Details)
83: R61 Loan Sales and Servicing Activities - Summary of HTML 93K
Mortgage Servicing Portfolio (Details)
84: R62 Loan Sales and Servicing Activities - Geographical HTML 47K
Distribution of Loans (Details)
85: R63 Fair Value - Financial Statement Items Measured at HTML 146K
Fair Value on a Recurring Basis (Details)
86: R64 Fair Value - Level 3 Input Roll Forward, Recurring HTML 124K
Basis (Details)
87: R65 Fair Value - Changes in Fair Value, Fair Value HTML 63K
Option, Recurring Basis (Details)
88: R66 Fair Value - Fair Value Option Maturities, HTML 65K
Recurring Basis (Details)
89: R67 Fair Value - Measurement Basis, Nonrecurring HTML 56K
(Details)
90: R68 Fair Value - Level 3 Unobservable Inputs, Mortgage HTML 83K
Loans and IRLC (Details)
91: R69 Fair Value - Level 3 Unobservable Inputs, Mortgage HTML 98K
Servicing Rights - Initial Recognition (Details)
92: R70 Fair Value - Level 3 Unobservable Inputs, Mortgage HTML 99K
Servicing Rights, Effect of Change In Inputs on
Fair Value (Details)
93: R71 Fair Value - Level 3 Unobservable Inputs, ESS HTML 63K
(Details)
94: R72 Fair Value - Level 3 Unobservable Inputs, Mortgage HTML 53K
Servicing Liabilities (Details)
95: R73 Loans Held for Sale at Fair Value (Details) HTML 53K
96: R74 Derivative Financial Instruments - Other HTML 189K
Information (Details)
97: R75 Derivative Financial Instruments - Offsetting of HTML 80K
Derivative Assets (Details)
98: R76 Derivative Financial Instruments - Offsetting of HTML 57K
Derivative Assets - Derivative Assets, Financial
Assets, and Collateral Held by Counterparty
(Details)
99: R77 Derivative Financial Instruments - Offsetting of HTML 100K
Derivative Assets - Offsetting of Derivative and
Financial Liabilities (Details)
100: R78 Derivative Financial Instruments - Offsetting of HTML 75K
Derivative Assets - Derivative Liabilities,
Financial Liabilities, and Collateral Held by
Counterparty (Details)
101: R79 Mortgage Servicing Rights and Mortgage Servicing HTML 56K
Liabilities - Activity in MSRs at Fair Value
(Details)
102: R80 Mortgage Servicing Rights and Mortgage Servicing HTML 48K
Liabilities - Mortgage Servicing Liabilities
Carried at FV (Details)
103: R81 Mortgage Servicing Rights and Mortgage Servicing HTML 45K
Liabilities - Servicing, Late, Ancillary and Other
Fees Relating to MSRs (Details)
104: R82 Leases (Details) HTML 91K
105: R83 Other Assets (Details) HTML 54K
106: R84 Borrowings - Assets Sold Under Agreement to HTML 103K
Repurchase (Details)
107: R85 Borrowings - Maturities of Outstanding Advances HTML 46K
Under Repurchase Agreements (Details)
108: R86 Borrowings - Mortgage Loans Sold Under Agreement HTML 51K
to Repurchase by Counterparty (Details)
109: R87 Borrowings - Mortgage Loan Participation and Sale HTML 63K
Agreement (Details)
110: R88 Borrowings - Obligations Under Capital Lease HTML 52K
(Details)
111: R89 Borrowings - Note Payable (Details) HTML 127K
112: R90 Liability for Losses Under Representations and HTML 43K
Warranties (Details)
113: R91 Income Taxes - General (Details) HTML 35K
114: R92 Commitments and Contingencies - Other (Details) HTML 41K
115: R93 Stockholders' Equity (Details) HTML 48K
116: R94 Net Gains on Loans Held for Sale (Details) HTML 62K
117: R95 Net Interest Income (Details) HTML 75K
118: R96 Stock-based Compensation - Other (Details) HTML 60K
119: R97 Earnings Per Share of Common Stock (Details) HTML 68K
120: R98 Supplemental Cash Flow Information (Details) HTML 50K
121: R99 Regulatory Capital and Liquidity Requirements HTML 78K
(Details)
122: R100 Segments (Details) HTML 110K
123: R101 Subsequent Events (Details) HTML 39K
125: XML IDEA XML File -- Filing Summary XML 226K
22: XML XBRL Instance -- pfsi-20200930x10q_htm XML 11.63M
124: EXCEL IDEA Workbook of Financial Reports XLSX 190K
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127: ZIP XBRL Zipped Folder -- 0001558370-20-013132-xbrl Zip 839K
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 September 30, 2020
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.
(formerly known as New 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.
| | |
Large accelerated filer ☐ | | i 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 November 4, 2020 |
Common Stock, $0.0001 par value | | i 72,444,213 |
PENNYMAC FINANCIAL SERVICES, INC.
FORM 10-Q
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 61 | |
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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, 2019, filed with the Securities and Exchange Commission (“SEC”) on February 28, 2020.
Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:
| ● | our exposure to risks of loss resulting from adverse weather conditions, man-made or natural disasters, the effect of climate change, and pandemics, such as COVID-19; |
| ● | 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; |
| ● | foreclosure delays and changes in foreclosure practices; |
| ● | the licensing and operational requirements of states and other jurisdictions applicable to our businesses, to which our bank competitors are not subject; |
| ● | our ability to manage third-party service providers and vendors and their compliance with laws, regulations and investor requirements; |
| ● | changes in macroeconomic and U.S. real estate market conditions; |
3
| ● | 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; |
| ● | increases in loan delinquencies and defaults; |
| ● | our reliance on PennyMac Mortgage Investment Trust (“PMT”) as a significant source of financing for, and revenue related to, our mortgage banking business; |
| ● | our obligation to indemnify third-party purchasers or repurchase loans if loans that we originate, acquire, service or assist in the fulfillment of, fail to meet certain criteria or characteristics or under other circumstances; |
| ● | our exposure to counterparties that are unwilling or unable to honor contractual obligations, including their obligation to indemnify us or repurchase defective mortgage loans; |
| ● | our ability to realize the anticipated benefit of potential future acquisitions of mortgage servicing rights (“MSRs”); |
| ● | our obligation to indemnify PMT if our services fail to meet certain criteria or characteristics or under other circumstances; |
| ● | decreases in the returns on the assets that we select and manage for our clients, and our resulting management and incentive fees; |
| ● | the extensive amount of regulation applicable to our investment management segment; |
| ● | conflicts of interest in allocating our services and investment opportunities among ourselves and PMT; |
| ● | the effect of public opinion on our reputation; |
| ● | our recent growth; |
| ● | our ability to effectively identify, manage, monitor and mitigate financial risks; |
| ● | our initiation of new business activities or expansion of existing business activities; |
| ● | our ability to detect misconduct and fraud; |
| ● | our ability to effectively deploy new information technology applications and infrastructure; |
| ● | our ability to mitigate cybersecurity risks and cyber incidents; |
| ● | our ability to pay dividends to our stockholders; and |
| ● | our organizational structure and certain requirements in our charter documents. |
Other factors that could also cause results to differ from our expectations may not be described in this Report or any other document. Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.
4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| | | | | | |
|
| September 30, |
| |||
|
| 2020 |
| 2019 | ||
| | (in thousands, except share amounts) | ||||
ASSETS | | | | | | |
Cash (includes $ i 52,599 pledged to creditors at December 31, 2019) | | $ | i 529,166 | | $ | i 188,291 |
Short-term investments at fair value | | | i 102,136 | | | i 74,611 |
Loans held for sale at fair value (includes $ i 9,011,545 and $ i 4,846,138 pledged to creditors) | | | i 9,126,172 | | | i 4,912,953 |
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors | | | i 86,958 | | | i 107,512 |
Derivative assets | | | i 578,254 | | | i 159,686 |
Servicing advances, net (includes valuation allowance of $ i 141,964 and $ i 82,157; $ i 232,519 and $ i 207,460 pledged to creditors) | | | i 393,654 | | | i 331,169 |
Mortgage servicing rights at fair value (includes $ i 2,330,600 and $ i 2,920,603 pledged to creditors) | | | i 2,333,821 | | | i 2,926,790 |
Operating lease right-of-use assets | | | i 72,133 | | | i 73,090 |
Investment in PennyMac Mortgage Investment Trust at fair value | | | i 991 | | | i 1,672 |
Receivable from PennyMac Mortgage Investment Trust | | | i 122,478 | | | i 48,159 |
Loans eligible for repurchase | | | i 17,183,873 | | | i 1,046,527 |
Other (includes $ i 207,547 and $ i 32,598 pledged to creditors) | | | i 651,229 | | | i 333,557 |
Total assets | | $ | i 31,180,865 | | $ | i 10,204,017 |
| | | | | | |
Assets sold under agreements to repurchase | | $ | i 7,259,188 | | $ | i 4,141,053 |
Mortgage loan participation purchase and sale agreements | | | i 535,063 | | | i 497,948 |
Obligations under capital lease | | | i 13,957 | | | i 20,810 |
Notes payable secured by mortgage servicing assets | | | i 1,295,143 | | | i 1,294,070 |
Unsecured senior notes | | | i 492,358 | | | — |
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value | | | i 142,990 | | | i 178,586 |
Derivative liabilities | | | i 24,537 | | | i 22,330 |
Mortgage servicing liabilities at fair value | | | i 31,698 | | | i 29,140 |
Operating lease liabilities | | | i 92,005 | | | i 91,320 |
Accounts payable and accrued expenses | | | i 278,403 | | | i 175,273 |
Payable to PennyMac Mortgage Investment Trust | | | i 77,136 | | | i 73,280 |
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement | | | i 35,784 | | | i 46,158 |
Income taxes payable | | | i 673,149 | | | i 504,569 |
Liability for loans eligible for repurchase | | | i 17,183,873 | | | i 1,046,527 |
Liability for losses under representations and warranties | | | i 28,504 | | | i 21,446 |
Total liabilities | | | i 28,163,788 | | | i 8,142,510 |
| | | | | | |
Commitments and contingencies – Note 15 | | | | | | |
| | | | | | |
STOCKHOLDERS’ EQUITY | | | | | | |
Common stock—authorized i i 200,000,000 / shares of $ i i 0.0001 / par value; issued and outstanding, i 72,400,490 and i 78,515,047 shares, respectively | | | i 7 | | | i 8 |
Additional paid-in capital | | | i 1,116,428 | | | i 1,335,107 |
Retained earnings | | | i 1,900,642 | | | i 726,392 |
Total stockholders' equity | | | i 3,017,077 | | | i 2,061,507 |
Total liabilities and stockholders’ equity | | $ | i 31,180,865 | | $ | i 10,204,017 |
The accompanying notes are an integral part of these consolidated financial statements.
5
PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
| | | | | | | | | | | | |
| | Quarter ended September 30, |
| Nine months ended September 30, | ||||||||
| | 2020 | | 2019 |
| 2020 | | 2019 | ||||
| | (in thousands, except per share amounts) | ||||||||||
Revenues | | | | | | | | | | | | |
Net gains on loans held for sale at fair value: | | | | | | | | | | | | |
From non-affiliates | | $ | i 865,044 | | $ | i 175,070 | | $ | i 1,819,175 | | $ | i 345,045 |
From PennyMac Mortgage Investment Trust | | | ( i 9,775) | | | i 60,662 | | | i 62,549 | | | i 122,996 |
| | | i 855,269 | | | i 235,732 | | | i 1,881,724 | | | i 468,041 |
Loan origination fees: | | | | | | | | | | | | |
From non-affiliates | | | i 69,496 | | | i 45,212 | | | i 177,747 | | | i 100,721 |
From PennyMac Mortgage Investment Trust | | | i 6,076 | | | i 4,222 | | | i 14,344 | | | i 9,567 |
| | | i 75,572 | | | i 49,434 | | | i 192,091 | | | i 110,288 |
Fulfillment fees from PennyMac Mortgage Investment Trust | | | i 54,839 | | | i 45,149 | | | i 149,594 | | | i 102,313 |
Net loan servicing fees: | | | | | | | | | | | | |
Loan servicing fees: | | | | | | | | | | | | |
From non-affiliates | | | i 203,696 | | | i 185,967 | | | i 601,527 | | | i 533,510 |
From PennyMac Mortgage Investment Trust | | | i 18,752 | | | i 12,964 | | | i 48,806 | | | i 35,102 |
Other | | | i 27,920 | | | i 26,018 | | | i 85,218 | | | i 74,043 |
| | | i 250,368 | | | i 224,949 | | | i 735,551 | | | i 642,655 |
Change in fair value of mortgage servicing rights and mortgage servicing liabilities | | | ( i 127,217) | | | ( i 412,730) | | | ( i 1,368,219) | | | ( i 1,036,123) |
Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust | | | i 3,135 | | | i 3,864 | | | i 18,293 | | | i 11,519 |
Hedging results | | | i 6,521 | | | i 250,146 | | | i 1,027,327 | | | i 587,883 |
| | | ( i 117,561) | | | ( i 158,720) | | | ( i 322,599) | | | ( i 436,721) |
Net loan servicing fees | | | i 132,807 | | | i 66,229 | | | i 412,952 | | | i 205,934 |
Net interest (expense) income: | | | | | | | | | | | | |
Interest income: | | | | | | | | | | | | |
From non-affiliates | | | i 52,276 | | | i 81,925 | | | i 170,148 | | | i 207,670 |
From PennyMac Mortgage Investment Trust | | | i 676 | | | i 1,527 | | | i 2,686 | | | i 5,015 |
| | | i 52,952 | | | i 83,452 | | | i 172,834 | | | i 212,685 |
Interest expense: | | | | | | | | | | | | |
To non-affiliates | | | i 61,109 | | | i 54,089 | | | i 171,482 | | | i 138,723 |
To PennyMac Mortgage Investment Trust | | | i 2,070 | | | i 2,291 | | | i 6,416 | | | i 8,124 |
| | | i 63,179 | | | i 56,380 | | | i 177,898 | | | i 146,847 |
Net interest (expense) income | | | ( i 10,227) | | | i 27,072 | | | ( i 5,064) | | | i 65,838 |
Management fees from PennyMac Mortgage Investment Trust | | | i 8,508 | | | i 10,098 | | | i 25,851 | | | i 26,178 |
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust | | | ( i 288) | | | i 66 | | | ( i 602) | | | i 377 |
Results of real estate acquired in settlement of loans | | | i 1,214 | | | i 188 | | | i 803 | | | i 1,205 |
Other | | | i 2,298 | | | i 2,379 | | | i 6,102 | | | i 6,855 |
Total net revenues | | | i 1,119,992 | | | i 436,347 | | | i 2,663,451 | | | i 987,029 |
Expenses | | | | | | | | | | | | |
Compensation | | | i 202,440 | | | i 141,132 | | | i 550,762 | | | i 362,449 |
Servicing | | | i 71,110 | | | i 47,909 | | | i 169,779 | | | i 107,210 |
Loan origination | | | i 53,752 | | | i 34,851 | | | i 150,677 | | | i 72,419 |
Technology | | | i 28,964 | | | i 20,385 | | | i 69,976 | | | i 52,431 |
Professional services | | | i 18,307 | | | i 9,682 | | | i 44,211 | | | i 21,876 |
Occupancy and equipment | | | i 8,491 | | | i 7,257 | | | i 24,822 | | | i 21,075 |
Other | | | i 8,637 | | | i 8,934 | | | i 29,841 | | | i 23,491 |
Total expenses | | | i 391,701 | | | i 270,150 | | | i 1,040,068 | | | i 660,951 |
Income before provision for income taxes | | | i 728,291 | | | i 166,197 | | | i 1,623,383 | | | i 326,078 |
Provision for income taxes | | | i 193,131 | | | i 44,724 | | | i 429,303 | | | i 85,774 |
Net income | | $ | i 535,160 | | $ | i 121,473 | | $ | i 1,194,080 | | $ | i 240,304 |
Earnings per share | | | | | | | | | | | | |
Basic | | $ | i 7.39 | | $ | i 1.55 | | $ | i 15.65 | | $ | i 3.08 |
Diluted | | $ | i 7.03 | | $ | i 1.51 | | $ | i 15.00 | | $ | i 3.01 |
Weighted average shares outstanding | | | | | | | | | | | | |
Basic | | | i 72,439 | | | i 78,361 | | | i 76,292 | | | i 78,119 |
Diluted | | | i 76,138 | | | i 80,382 | | | i 79,618 | | | i 79,821 |
Dividend declared per share | | $ | i 0.15 | | $ | — | | $ | i 0.39 | | $ | — |
The accompanying notes are an integral part of these consolidated financial statements.
6
PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
| | | | | | | | | | | | | | |
| | Quarter ended September 30, 2020 | ||||||||||||
| | | | | | Additional | | | | Total | ||||
| | Number of | | Par | | paid-in | | Retained | | stockholders' | ||||
|
| shares |
| value |
| capital |
| earnings |
| equity | ||||
| | (in thousands) | ||||||||||||
Balance, June 30, 2020 | | i 72,358 | | $ | i 7 | | $ | i 1,113,412 | | $ | i 1,365,774 | | $ | i 2,479,193 |
Net income | | — | | | — | | | — | | | i 535,160 | | | i 535,160 |
Stock-based compensation | | i 159 | | | — | | | i 9,895 | | | — | | | i 9,895 |
Issuance of common stock in settlement of directors' fees | | i 1 | | | — | | | i 48 | | | — | | | i 48 |
Repurchase of common stock | | ( i 118) | | | — | | | ( i 6,927) | | | — | | | ( i 6,927) |
Common stock dividend ($ i 0.15 per share) | | — | | | — | | | — | | | ( i 292) | | | ( i 292) |
Balance, September 30, 2020 | | i 72,400 | | $ | i 7 | | $ | i 1,116,428 | | $ | i 1,900,642 | | $ | i 3,017,077 |
| | | | | | | | | | | | | | |
| | Quarter ended September 30, 2019 | ||||||||||||
| | | | | | Additional | | | | Total | ||||
| | Number of | | Par | | paid-in | | Retained | | stockholders' | ||||
|
| shares |
| value |
| capital |
| earnings |
| equity | ||||
| | (in thousands) | ||||||||||||
Balance, June 30, 2019 | | i 78,305 | | $ | i 8 | | $ | i 1,317,023 | | $ | i 461,966 | | $ | i 1,778,997 |
Net income | | — | | | — | | | — | | | i 121,473 | | | i 121,473 |
Stock-based compensation | | i 128 | | | — | | | i 11,095 | | | — | | | i 11,095 |
Issuance of common stock in settlement of directors' fees | | i 2 | | | — | | | i 48 | | | — | | | i 48 |
Balance, September 30, 2019 | | i 78,435 | | $ | i 8 | | $ | i 1,328,166 | | $ | i 583,439 | | $ | i 1,911,613 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Nine months ended September 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 1,194,080 | | | i 1,194,080 |
Stock-based compensation | | i 1,212 | | | — | | | i 29,386 | | | — | | | i 29,386 |
Issuance of common stock in settlement of directors' fees | | i 4 | | | — | | | i 144 | | | — | | | i 144 |
Repurchase of common stock | | ( i 7,331) | | | ( i 1) | | | ( i 248,209) | | | — | | | ( i 248,210) |
Common stock dividends ($ i 0.39 per share) | | — | | | — | | | — | | | ( i 19,830) | | | ( i 19,830) |
Balance, September 30, 2020 | | i 72,400 | | $ | i 7 | | $ | i 1,116,428 | | $ | i 1,900,642 | | $ | i 3,017,077 |
| | | | | | | | | | | | | | |
| | Nine months ended September 30, 2019 | ||||||||||||
| | | | | | Additional | | | | Total | ||||
| | Number of | | Par | | paid-in | | Retained | | stockholders' | ||||
|
| shares |
| value |
| capital |
| earnings |
| equity | ||||
| | (in thousands) | ||||||||||||
Balance, December 31, 2018 | | i 77,494 | | $ | i 8 | | $ | i 1,310,648 | | $ | i 343,135 | | $ | i 1,653,791 |
Net income | | — | | | — | | | — | | | i 240,304 | | | i 240,304 |
Stock-based compensation | | i 984 | | | — | | | i 18,390 | | | — | | | i 18,390 |
Issuance of common stock in settlement of directors' fees | | i 8 | | | — | | | i 184 | | | — | | | i 184 |
Repurchase of common stock | | ( i 51) | | | — | | | ( i 1,056) | | | — | | | ( i 1,056) |
Balance, September 30, 2019 | | i 78,435 | | $ | i 8 | | $ | i 1,328,166 | | $ | i 583,439 | | $ | i 1,911,613 |
| | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
7
PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| | | | | | |
| | Nine months ended September 30, | ||||
|
| 2020 |
| 2019 | ||
| | (in thousands) | ||||
Cash flow from operating activities | | | | | | |
Net income | | $ | i 1,194,080 | | $ | i 240,304 |
Adjustments to reconcile net income to net cash used in operating activities: | | | | | | |
Net gains on loans held for sale at fair value | | | ( i 1,881,724) | | | ( i 468,041) |
Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread | | | i 1,349,926 | | | i 1,024,604 |
Mortgage servicing rights hedging gains | | | ( i 1,027,327) | | | ( i 587,883) |
Capitalization of interest and advance on loans held for sale at fair value | | | ( i 55,920) | | | ( i 56,800) |
Accrual of interest on excess servicing spread financing payable to PennyMac Mortgage Investment Trust | | | i 6,416 | | | i 8,124 |
Amortization of net debt issuance costs and (premiums) | | | i 12,163 | | | ( i 6,601) |
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust | | | i 681 | | | ( i 270) |
Results of real estate acquired in settlement in loans | | | ( i 803) | | | ( i 1,205) |
Stock-based compensation expense | | | i 26,220 | | | i 19,124 |
Provision for servicing advance losses | | | i 79,402 | | | i 19,973 |
Depreciation and amortization | | | i 17,126 | | | i 10,650 |
Amortization of right-of-use assets | | | i 9,176 | | | i 7,258 |
Purchase of loans held for sale from PennyMac Mortgage Investment Trust | | | ( i 43,721,458) | | | ( i 32,619,639) |
Origination of loans held for sale | | | ( i 20,580,388) | | | ( i 7,249,762) |
Purchase of loans held for sale from non-affiliates | | | ( i 2,515,624) | | | ( i 1,132,749) |
Purchase of loans from Ginnie Mae securities and early buyout investors for modification and subsequent sale | | | ( i 5,980,081) | | | ( i 4,172,281) |
Sale to non-affiliates and principal payments of loans held for sale | | | i 67,209,239 | | | i 39,084,441 |
Sale of loans held for sale to PennyMac Mortgage Investment Trust | | | i 2,248,896 | | | i 4,095,079 |
Repurchase of loans subject to representations and warranties | | | ( i 43,664) | | | ( i 15,427) |
Settlement of repurchase agreement derivatives | | | i 8,270 | | | i 31,993 |
Increase in servicing advances | | | ( i 156,964) | | | ( i 9,871) |
Increase in receivable from PennyMac Mortgage Investment Trust | | | ( i 80,531) | | | ( i 9,598) |
Sale of real estate acquired in settlement of loans | | | i 27,842 | | | i 17,141 |
Increase in other assets | | | ( i 305,100) | | | ( i 22,415) |
Decrease in operating lease liabilities | | | ( i 10,378) | | | ( i 9,234) |
Increase in accounts payable and accrued expenses | | | i 102,789 | | | i 78,800 |
Decrease in payable to PennyMac Mortgage Investment Trust | | | ( i 14,001) | | | ( i 45,869) |
Payments to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement | | | ( i 10,374) | | | — |
Increase in income taxes payable | | | i 168,580 | | | i 80,013 |
Net cash used in operating activities | | | ( i 3,923,531) | | | ( i 1,690,141) |
Cash flow from investing activities | | | | | | |
(Increase) decrease in short-term investments | | | ( i 27,525) | | | i 27,161 |
Net change in assets purchased from PMT under agreement to resell | | | i 20,554 | | | i 23,347 |
Net settlement of derivative financial instruments used for hedging of mortgage servicing rights | | | i 1,000,865 | | | i 542,139 |
Purchase of mortgage servicing rights | | | ( i 25,473) | | | ( i 227,445) |
Purchase of furniture, fixtures, equipment and leasehold improvements | | | ( i 5,584) | | | ( i 5,534) |
Acquisition of capitalized software | | | ( i 38,443) | | | ( i 22,190) |
Decrease (increase) in margin deposits | | | i 205 | | | ( i 168,062) |
Net cash provided by investing activities | | | i 924,599 | | | i 169,416 |
Cash flow from financing activities | | | | | | |
Sale of assets under agreements to repurchase | | | i 68,122,809 | | | i 41,296,345 |
Repurchase of assets sold under agreements to repurchase | | | ( i 64,997,443) | | | ( i 39,692,086) |
Issuance of mortgage loan participation purchase and sale certificates | | | i 17,814,845 | | | i 17,498,589 |
Repayment of mortgage loan participation purchase and sale certificates | | | ( i 17,777,414) | | | ( i 17,516,431) |
Advance of obligations under capital lease | | | — | | | i 25,123 |
Repayment of obligations under capital lease | | | ( i 6,853) | | | ( i 7,847) |
Issuance of unsecured senior notes | | | i 500,000 | | | — |
Repayment of excess servicing spread financing | | | ( i 25,112) | | | ( i 30,901) |
Payment of debt issuance costs | | | ( i 26,362) | | | ( i 4,489) |
Issuance of common stock pursuant to exercise of stock options | | | i 8,431 | | | i 3,900 |
Payment of withholding taxes relating to stock-based compensation | | | ( i 5,265) | | | ( i 4,634) |
Payment of dividend to holders of common stock | | | ( i 19,830) | | | — |
Repurchase of common stock | | | ( i 248,210) | | | ( i 1,056) |
Net cash provided by financing activities | | | i 3,339,596 | | | i 1,566,513 |
Net increase in cash and restricted cash | | | i 340,664 | | | i 45,788 |
Cash and restricted cash at beginning of period | | | i 188,578 | | | i 155,924 |
Cash and restricted cash at end of period | | $ | i 529,242 | | $ | i 201,712 |
Cash and restricted cash at end of period are comprised of the following: | | | | | | |
Cash | | $ | i 529,166 | | $ | i 201,268 |
Restricted cash included in Other assets | | | i 76 | | | i 444 |
| | $ | i 529,242 | | $ | i 201,712 |
The accompanying notes are an integral part of these consolidated financial statements.
8
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 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 and home equity loans and engages in other mortgage banking activities for its own account and the account of PMT. |
PLS is approved as a seller/servicer of mortgage loans by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and as an issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”). PLS is a licensed Federal Housing Administration (“FHA”) Nonsupervised Title II Lender with the U.S. Department of Housing and Urban Development (“HUD”) and a lender/servicer with the Veterans Administration (“VA”) and U.S. Department of Agriculture (“USDA”) (each an “Agency” and collectively the “Agencies”).
| ● | PNMAC Capital Management, LLC (“PCM”)— a Delaware limited liability company registered with the Securities and Exchange Commission 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, 2019.
The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, income, and cash flows for the interim periods presented, but are not necessarily indicative of income to be anticipated for the full year ending December 31, 2020. 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.
Certain asset amounts separately presented in prior periods have been reclassified to Other assets to conform to the current period presentation. Such amounts are detailed in Note 11—Other Assets.
9
Accounting Change
Effective January 1, 2020, the Company adopted FASB Accounting Standards Update 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended (“ASU 2016-13”), using the modified retrospective approach. The adoption of ASU 2016-13 did not have any effect on the Company’s consolidated statements of income, stockholder’s equity or cash flows.
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 7% and i 32% of total net revenue for the quarters ended September 30, 2020 and 2019, respectively, and i 12% and i 31% for the nine months ended September 30, 2020 and 2019, 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 further 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.
/10
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. |
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 up to the and including i 16,500 per quarter and $ i 195 multiplied by the number of 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 September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
Net gains on loans held for sale at fair value: | | | | | | | | | | | | |
Net gains on loans held for sale to PMT | | $ | i 1 | | $ | i 62,558 | | $ | i 81,295 | | $ | i 127,423 |
Mortgage servicing rights and excess servicing spread recapture incurred | | | ( i 9,776) | | | ( i 1,896) | | | ( i 18,746) | | | ( i 4,427) |
| | $ | ( i 9,775) | | $ | i 60,662 | | $ | i 62,549 | | $ | i 122,996 |
Sale of loans held for sale to PMT | | $ | i 27 | | $ | i 1,876,358 | | $ | i 2,248,896 | | $ | i 4,095,079 |
| | | | | | | | | | | | |
Tax service fees earned from PMT included in Loan origination fees | | $ | i 6,076 | | $ | i 4,222 | | $ | i 14,344 | | $ | i 9,567 |
| | | | | | | | | | | | |
Fulfillment fee revenue |
| $ | i 54,839 |
| $ | i 45,149 |
| $ | i 149,594 | | $ | i 102,313 |
| | | | | | | | | | | | |
Sourcing fees paid to PMT | | $ | i 1,658 | | $ | i 4,206 | | $ | i 9,143 | | $ | i 9,355 |
Unpaid principal balance of loans purchased from PMT | | $ | i 16,690,482 | | $ | i 14,022,222 | | $ | i 41,641,327 | | $ | i 31,183,950 |
11
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 and 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 85 per month for loans where the borrower has declared bankruptcy. The base servicing fee rate for REO is $ i 75 per month. |
| ● | Because PMT has a small number of employees and limited infrastructure, the Company is required to provide a range of services and activities significantly greater in scope than the services provided in connection with a customary servicing arrangement. For these services, the Company receives a supplemental servicing fee of $ i 25 per month for each distressed loan. The Company is entitled to reimbursement for all customary, good faith reasonable and necessary out-of-pocket expenses incurred by the Company in the performance of its servicing obligations. |
| ● | The Company is also entitled to certain activity-based fees for distressed loans that are charged based on the achievement of certain events. These fees range from $ i 750 for a streamline modification to $ i 1,750 for a full modification or liquidation and $ i 500 for a deed-in-lieu of foreclosure. The Company is not entitled to earn more than i one liquidation fee, reperformance fee or modification fee per loan in any i 18-month period. |
| ● | To the extent the Company facilitates rentals of PMT's REO under its REO rental program, the Company collects an REO rental fee of $ i 30 per month per REO, an REO property lease renewal fee of $ i 100 per lease renewal, and a property management fee in an amount equal to the Company’s cost if property management services and/or any related software costs are outsourced to a third-party property management firm or i 9% of gross rental income if the Company provides property management services directly. The Company is also entitled to retain any tenant paid application fees and late rent fees and seek reimbursement for certain third-party vendor fees. |
12
| ● | Except as otherwise provided in the MSR recapture agreement, when the Company effects a refinancing of a loan on behalf of PMT and not through a third-party lender and the resulting loan is readily saleable, or the Company originates a loan to facilitate the disposition of a REO, the Company is entitled to receive from PMT market-based fees and compensation consistent with pricing and terms the Company offers unaffiliated parties on a retail basis. |
| ● | The Company is entitled to retain any incentive payments made to it and to which it is entitled under the U.S. Department of Treasury’s Home Affordable Modification Plan; provided, however, that with respect to any such incentive payments paid to the Company in connection with a loan modification for which PMT previously paid the Company a modification fee, the Company is required to reimburse PMT an amount equal to the incentive payments. |
Following is a summary of loan servicing and property management fees earned from PMT:
i
| | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
Loan type serviced: | | | | | | | | | | | | |
Loans acquired for sale at fair value | | $ | i 452 | | $ | i 507 | | $ | i 1,595 | | $ | i 1,131 |
Loans at fair value | | | i 187 | | | i 858 | | | i 675 | | | i 1,938 |
Mortgage servicing rights | | | i 18,113 | | | i 11,599 | | | i 46,536 | | | i 32,033 |
| | $ | i 18,752 | | $ | i 12,964 | | $ | i 48,806 | | $ | i 35,102 |
Property management fees received from PMT included in Other income | | $ | — | | $ | i 70 | | $ | — | | $ | i 295 |
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 the fees described above relating to COVID-19 related forbearance and modification activities provided for under the CARES Act.
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.”
13
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.
Following is a summary of the base management and performance incentive fees earned from PMT:
i
| | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
Base management | | $ | i 8,508 | | $ | i 7,914 | | $ | i 25,851 |
| $ | i 20,862 |
Performance incentive | | | — | | | i 2,184 | | | — | | | i 5,316 |
| | $ | i 8,508 | | $ | i 10,098 | | $ | i 25,851 | | $ | i 26,178 |
| | | | | | | | | | | | |
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.
14
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 affiliate’s 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 September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
Reimbursement of: |
| |
|
| |
|
| |
| | | |
Common overhead incurred by the Company | | $ | i 1,389 | | $ | i 1,543 | | $ | i 4,514 | | $ | i 4,055 |
Compensation | | | i 165 | | | i 120 | | | i 405 | | | i 360 |
Expenses incurred on PMT's behalf, net | | | i 2,852 | | | i 1,942 | | | i 5,561 | | | i 3,001 |
| | $ | i 4,406 | | $ | i 3,605 | | $ | i 10,480 | | $ | i 7,416 |
Payments and settlements during the quarter (1) | | $ | i 58,479 | | $ | i 68,191 | | $ | i 228,514 | | $ | i 111,411 |
| (1) | Payments and settlements include payments for management fees and correspondent production activities itemized in the preceding tables and netting settlements made pursuant to master netting agreements between the Company and PMT. |
Conditional Reimbursement of Underwriting Fees
In connection with its initial public offering of common shares of beneficial interest on August 4, 2009 (“IPO”), PMT conditionally agreed to reimburse the Company up to $ i 2.9 million for underwriting fees paid to the IPO underwriters by the Company on PMT’s behalf. In the event a termination fee is payable to the Company under the Management Agreement, and the Company has not received the full amount of the reimbursements and payments under the reimbursement agreement, such amount will be paid in full. On February 1, 2019, the term of the reimbursement agreement was extended to February 1, 2023. The Company received $ i 211,000 and $ i 219,000 in reimbursement of underwriting fees from PMT during the nine months ended September 30, 2020 and 2019, respectively.
Investing Activities
Master Repurchase Agreement
On December 19, 2016, the Company, through PLS, entered into a master repurchase agreement with i one of PMT’s wholly-owned subsidiaries, PennyMac Holdings, LLC (“PMH”) (the “PMH Repurchase Agreement”), pursuant to which PMH may borrow from the Company for the purpose of financing PMH’s participation certificates representing beneficial ownership in ESS. PLS then re-pledges such participation certificates to PNMAC GMSR ISSUER TRUST (the “Issuer Trust”) under a master repurchase agreement by and among PLS, the Issuer Trust and PennyMac, as guarantor (the “PC Repurchase Agreement”). The Issuer Trust was formed for the purpose of allowing PLS to finance MSRs and ESS relating to such MSRs (the “GNMA MSR Facility”).
In connection with the GNMA MSR Facility, PLS pledges and/or sells to the Issuer Trust participation certificates representing beneficial interests in MSRs and ESS pursuant to the terms of the PC Repurchase Agreement. In return, the Issuer Trust (a) has issued to PLS, pursuant to the terms of an indenture, the Series 2016-MSRVF1 Variable Funding Note, dated December 19, 2016, known as the “PNMAC GMSR ISSUER TRUST MSR Collateralized Notes, Series 2016-MSRVF1” (the “VFN”), and (b) has issued and may, from time to time pursuant to the terms of any supplemental indenture, issue to institutional investors additional term notes, 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.
15
The principal amount paid by PLS for the participation certificates under the PMH Repurchase Agreement is based upon a percentage of the market value of the underlying ESS. Upon PMH’s repurchase of the participation certificates, PMH is required to repay PLS the principal amount relating thereto plus accrued interest (at a rate reflective of the current market and consistent with the weighted average note rate of the VFN and any outstanding term notes) to the date of such repurchase. PLS is then required to repay the Issuer Trust the corresponding amount under the PC Repurchase Agreement.
Common Shares of Beneficial Interest of PennyMac Mortgage Investment Trust
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 September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
Interest income relating to Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell | | $ | i 676 | | $ | i 1,527 | | $ | i 2,686 | | $ | i 5,015 |
Common shares of beneficial interest of PennyMac Mortgage Investment Trust: | | | | | | | | | | | | |
Dividends received | | $ | i 31 | | $ | i 36 | | $ | i 79 | | $ | i 107 |
Change in fair value of investment | | | ( i 319) | | | i 30 | | | ( i 681) | | | i 270 |
| | $ | ( i 288) | | $ | i 66 | | $ | ( i 602) | | $ | i 377 |
| | | | | | |
| | September 30, | | |||
|
| 2020 |
| 2019 | ||
| | (in thousands) | ||||
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell | | $ | i 86,958 | | $ | i 107,512 |
Common shares of beneficial interest of PennyMac Mortgage Investment Trust: | | | | | | |
Fair value | | $ | i 991 | | $ | i 1,672 |
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.
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.
16
Following is a summary of financing activities between the Company and PMT:
i
| | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
Excess servicing spread financing: | | | | | | | | | | | | |
Balance at beginning of period | | $ | i 151,206 | | $ | i 194,156 | | $ | i 178,586 | | $ | i 216,110 |
Issuance pursuant to recapture agreement | | | i 531 | | | i 377 |
| | i 1,393 |
| | i 1,327 |
Accrual of interest | | | i 2,070 | | | i 2,291 | | | i 6,416 | | | i 8,124 |
Repayment | | | ( i 7,682) | | | ( i 9,819) | | | ( i 25,112) | | | ( i 30,901) |
Change in fair value | | | ( i 3,135) | | | ( i 3,864) | | | ( i 18,293) | | | ( i 11,519) |
Balance at end of period | | $ | i 142,990 | | $ | i 183,141 | | $ | i 142,990 | | $ | i 183,141 |
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 525 | | $ | i 429 | | $ | i 1,441 | | $ | i 1,311 |
Receivable from and Payable to PMT
Amounts receivable from and payable to PMT are summarized below:
i
| | | | | | |
| | September 30, | | |||
|
| 2020 |
| 2019 | ||
| | (in thousands) | ||||
Receivable from PMT: | | | | | | |
Margin settlements relating to loan sales | | $ | i 48,243 | | $ | — |
Allocated expenses and expenses incurred on PMT's behalf | | | i 30,207 | | | i 3,724 |
Fulfillment fees | | | i 18,060 | | | i 18,285 |
Correspondent production fees | | | i 11,285 | | | i 10,606 |
Management fees | | | i 8,509 | | | i 10,579 |
Servicing fees | | | i 6,121 | | | i 4,659 |
Interest on assets purchased under agreements to resell | | | i 43 | | | i 85 |
Conditional reimbursement | | | i 10 | | | i 221 |
| | $ | i 122,478 | | $ | i 48,159 |
Payable to PMT: | | | | | | |
Amounts advanced by PMT to fund its servicing advances | | $ | i 58,264 | | $ | i 70,520 |
Mortgage servicing rights recapture payable | | | i 197 | | | i 149 |
Other | | | i 18,675 | | | i 2,611 |
| | $ | i 77,136 | | $ | i 73,280 |
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.
17
The Company has recorded $ i 35.8 million and $ i 46.2 million Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement as of September 30, 2020 and December 31, 2019, respectively. The Company made $ i 10.4 million of payments under the tax receivable agreement during the nine months ended September 30, 2020 and did i not make any payments during the nine months ended September 30, 2019.
.
iNote 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 September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
Cash flows: |
| | |
| | | | | |
| | |
Sales proceeds | | $ | i 26,683,234 | | $ | i 17,897,693 | | $ | i 67,209,239 | | $ | i 39,084,441 |
Servicing fees received (1) | | $ | i 166,316 | | $ | i 149,210 | | $ | i 491,743 | | $ | i 426,774 |
Net servicing advances (recoveries) | | $ | i 71,890 | | $ | i 8,605 | | $ | i 68,992 | | $ | ( i 23,583) |
| (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
| | | | | | | | | | | | |
| | | | | | | | September 30, | | |||
|
| | | | | |
| 2020 |
| 2019 | ||
| | | | | | | | (in thousands) | ||||
Unpaid principal balance of loans outstanding | | | | | | | | $ | i 188,854,796 | | $ | i 168,842,011 |
Delinquencies: | | | | | | | | | | | | |
30-89 days | | | | | | | | $ | i 7,237,198 | | $ | i 7,947,560 |
90 days or more: | | | | | | | | | | | | |
Not in foreclosure | | | | | | | | $ | i 19,423,346 | | $ | i 3,237,563 |
In foreclosure | | | | | | | | $ | i 621,649 | | $ | i 888,136 |
Foreclosed | | | | | | | | $ | i 13,730 | | $ | i 15,387 |
Bankruptcy | | | | | | | | $ | i 1,288,443 | | $ | i 1,343,816 |
/18
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 188,854,796 |
| $ | — |
| $ | i 188,854,796 |
Purchased | | | i 47,795,763 | | | — | | | i 47,795,763 |
| | | i 236,650,559 | | | — | | | i 236,650,559 |
PennyMac Mortgage Investment Trust | | | | | | i 156,496,568 | | | i 156,496,568 |
Loans held for sale | | | i 8,749,673 | | | — | | | i 8,749,673 |
| | $ | i 245,400,232 | | $ | i 156,496,568 | | $ | i 401,896,800 |
Delinquent loans (1): | | | | | | | | | |
30 days | | $ | i 5,924,488 | | $ | i 1,435,686 | | $ | i 7,360,174 |
60 days | | | i 3,178,614 | | | i 621,723 | | | i 3,800,337 |
90 days or more: | | | | | | | | | |
Not in foreclosure | | | i 24,324,945 | | | i 5,622,954 | | | i 29,947,899 |
In foreclosure | | | i 831,239 | | | i 37,293 | | | i 868,532 |
Foreclosed | | | i 16,409 | | | i 45,925 | | | i 62,334 |
| | $ | i 34,275,695 | | $ | i 7,763,581 | | $ | i 42,039,276 |
Bankruptcy | | $ | i 1,815,833 | | $ | i 158,182 | | $ | i 1,974,015 |
Delinquent loans in COVID-19 related forbearance: | | | | | | | | | |
30 days | | $ | i 2,344,986 | | $ | i 474,168 | | $ | i 2,819,154 |
60 days | | | i 2,289,880 | | | i 476,220 | | | i 2,766,100 |
90 days or more not in foreclosure | | | i 17,827,122 | | | i 4,716,956 | | | i 22,544,078 |
| | $ | i 22,461,988 | | $ | i 5,667,344 | | $ | i 28,129,332 |
Custodial funds managed by the Company (2) | | $ | i 10,364,855 | | $ | i 6,347,559 | | $ | i 16,712,414 |
| (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. |
/19
| | | | | | | | | |
| | ||||||||
| | | | | | ||||
| | Servicing | | servicing and | | Total | |||
|
| rights owned |
| subservicing |
| loans serviced | |||
| | (in thousands) | |||||||
Investor: | | | | | | | | | |
Non-affiliated entities: | | | | | | | | | |
Originated | | $ | i 168,842,011 |
| $ | — |
| $ | i 168,842,011 |
Purchased | | | i 59,703,547 | | | — | | | i 59,703,547 |
| | | i 228,545,558 | | | — | | | i 228,545,558 |
PennyMac Mortgage Investment Trust | | | — | | | i 135,414,668 | | | i 135,414,668 |
Loans held for sale | | | i 4,724,006 | | | — | | | i 4,724,006 |
| | $ | i 233,269,564 | | $ | i 135,414,668 | | $ | i 368,684,232 |
Delinquent loans: | | | | | | | | | |
30 days | | $ | i 7,987,132 | | $ | i 857,660 | | $ | i 8,844,792 |
60 days | | | i 2,490,797 | | | i 172,263 | | | i 2,663,060 |
90 days or more: | | | | | | | | | |
Not in foreclosure | | | i 4,070,482 | | | i 274,592 | | | i 4,345,074 |
In foreclosure | | | i 1,113,806 | | | i 68,331 | | | i 1,182,137 |
Foreclosed | | | i 18,315 | | | i 89,421 | | | i 107,736 |
| | $ | i 15,680,532 | | $ | i 1,462,267 | | $ | i 17,142,799 |
Bankruptcy | | $ | i 1,898,367 | | $ | i 136,818 | | $ | i 2,035,185 |
Custodial funds managed by the Company (1) | | $ | i 6,412,291 | | $ | i 2,529,984 | | $ | i 8,942,275 |
| (1) | Custodial funds include cash accounts holding funds on behalf of borrowers and investors relating to loans serviced under servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns placement fees on certain of the custodial funds it manages on behalf of the loans’ borrowers and investors, which are included in Interest income in the Company’s consolidated statements of income. |
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
| | | | | | | |
| | September 30, | | December 31, | | ||
State |
| 2020 |
| 2019 |
| ||
| | (in thousands) | | ||||
California | | $ | i 58,062,643 | | $ | i 57,311,867 |
|
Florida | | | i 33,545,822 | | | i 28,940,696 | |
Texas | | | i 31,893,436 | | | i 27,909,821 | |
Virginia | | | i 24,378,162 | | | i 22,115,619 | |
Maryland | | | i 18,700,592 | | | i 16,829,320 | |
All other states | | | i 235,316,145 | | | i 215,576,909 | |
| | $ | i 401,896,800 | | $ | i 368,684,232 | |
20
Note 6—Fair Value
Most of the Company’s assets and certain of its liabilities are measured at or based on their fair values. The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the 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.
21
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Following is a summary of assets and liabilities that are measured at fair value on a recurring basis:
i
| | | | | | | | | | | | |
| | |||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
| | (in thousands) | ||||||||||
Assets: | | | | | | | | | | | | |
Short-term investments | | $ | i 102,136 | | $ | — | | $ | — | | $ | i 102,136 |
Loans held for sale at fair value | | | — | | | i 6,351,175 | | | i 2,774,997 | | | i 9,126,172 |
Derivative assets: | | | | | | | | | | | | |
Interest rate lock commitments | | | — | | | — | | | i 544,151 | | | i 544,151 |
Forward purchase contracts | | | — | | | i 72,640 | | | — | | | i 72,640 |
Forward sales contracts | | | — | | | i 21,652 | | | — | | | i 21,652 |
MBS put options | | | — | | | i 27,336 | | | — | | | i 27,336 |
MBS call options | | | — | | | i 4,255 | | | — | | | i 4,255 |
Swaptions | | | — | | | i 5,568 | | | — | | | i 5,568 |
Put options on interest rate futures purchase contracts | | | i 5,910 | | | — | | | — | | | i 5,910 |
Call options on interest rate futures purchase contracts | | | i 1,570 | | | — | | | — | | | i 1,570 |
Total derivative assets before netting | | | i 7,480 | | | i 131,451 | | | i 544,151 | | | i 683,082 |
Netting | | | — | | | — | | | — | | | ( i 104,828) |
Total derivative assets | | | i 7,480 | | | i 131,451 | | | i 544,151 | | | i 578,254 |
Mortgage servicing rights at fair value | | | — | | | — | | | i 2,333,821 | | | i 2,333,821 |
Investment in PennyMac Mortgage Investment Trust | | | i 991 | | | — | | | — | | | i 991 |
| | $ | i 110,607 | | $ | i 6,482,626 | | $ | i 5,652,969 | | $ | i 12,141,374 |
Liabilities: | | | | | | | | | | | | |
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value | | $ | — | | $ | — | | $ | i 142,990 | | $ | i 142,990 |
Derivative liabilities: | | | | | | | | | | | | |
Interest rate lock commitments | | | — | | | — | | | i 2,706 | | | i 2,706 |
Forward purchase contracts | | | — | | | i 15,903 | | | — | | | i 15,903 |
Forward sales contracts | | | — | | | i 98,765 | | | — | | | i 98,765 |
Total derivative liabilities before netting | | | — | | | i 114,668 | | | i 2,706 | | | i 117,374 |
Netting | | | — | | | — | | | — | | | ( i 92,837) |
Total derivative liabilities | | | — | | | i 114,668 | | | i 2,706 | | | i 24,537 |
Mortgage servicing liabilities at fair value | | | — | | | — | | | i 31,698 | | | i 31,698 |
| | $ | — | | $ | i 114,668 | | $ | i 177,394 | | $ | i 199,225 |
/22
| | | | | | | | | | | | |
| | |||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
| | (in thousands) | ||||||||||
Assets: | | | | | | | | | | | | |
Short-term investments | | $ | i 74,611 | | $ | — | | $ | — | | $ | i 74,611 |
Loans held for sale at fair value | | | — | | | i 4,529,075 | | | i 383,878 | | | i 4,912,953 |
Derivative assets: | | | | | | | | | | | | |
Interest rate lock commitments | | | — | | | — | | | i 138,511 | | | i 138,511 |
Repurchase agreement derivatives | | | — | | | — | | | i 8,187 | | | i 8,187 |
Forward purchase contracts | | | — | | | i 12,364 | | | — | | | i 12,364 |
Forward sales contracts | | | — | | | i 17,097 | | | — | | | i 17,097 |
MBS put options | | | — | | | i 3,415 | | | — | | | i 3,415 |
Swaptions | | | — | | | i 2,409 | | | — | | | i 2,409 |
Put options on interest rate futures purchase contracts | | | i 3,945 | | | — | | | — | | | i 3,945 |
Call options on interest rate futures purchase contracts | | | i 1,469 | | | — | | | — | | | i 1,469 |
Total derivative assets before netting | | | i 5,414 | | | i 35,285 | | | i 146,698 | | | i 187,397 |
Netting | | | — | | | — | | | — | | | ( i 27,711) |
Total derivative assets | | | i 5,414 | | | i 35,285 | | | i 146,698 | | | i 159,686 |
Mortgage servicing rights at fair value | | | — | | | — | | | i 2,926,790 | | | i 2,926,790 |
Investment in PennyMac Mortgage Investment Trust | | | i 1,672 | | | — | | | — | | | i 1,672 |
| | $ | i 81,697 | | $ | i 4,564,360 | | $ | i 3,457,366 | | $ | i 8,075,712 |
Liabilities: | | | | | | | | | | | | |
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value | | $ | — | | $ | — | | $ | i 178,586 | | $ | i 178,586 |
Derivative liabilities: | | | | | | | | | | | | |
Interest rate lock commitments | | | — | | | — | | | i 1,861 | | | i 1,861 |
Forward purchase contracts | | | — | | | i 19,040 | | | — | | | i 19,040 |
Forward sales contracts | | | — | | | i 18,045 | | | — | | | i 18,045 |
Total derivative liabilities before netting | | | — | | | i 37,085 | | | i 1,861 | | | i 38,946 |
Netting | | | — | | | — | | | — | | | ( i 16,616) |
Total derivative liabilities | | | — | | | i 37,085 | | | i 1,861 | | | i 22,330 |
Mortgage servicing liabilities at fair value | | | — | | | — | | | i 29,140 | | | i 29,140 |
| | $ | — | | $ | i 37,085 | | $ | i 209,587 | | $ | i 230,056 |
23
As shown above, all or a portion of the Company’s loans held for sale, Interest Rate Lock Commitments (“IRLCs”), repurchase agreement derivatives, MSRs, ESS and MSLs are measured using Level 3 fair value inputs. Following are roll forwards of assets and liabilities measured at fair value using “Level 3” inputs at either the beginning or the end of the period presented for the quarter and nine month periods ended September 30, 2020 and 2019:
i
| | | | | | | | | | | | | | | | |
| | Quarter ended September 30, 2020 | | |||||||||||||
| | | | Net interest | | Repurchase | | Mortgage | | | | | ||||
| | Loans held | | rate lock | | agreement | | servicing | | | | | ||||
Assets |
| for sale |
| commitments (1) |
| derivatives |
| rights |
| Total | | |||||
| | (in thousands) | | |||||||||||||
Balance, June 30, 2020 | | $ | i 661,719 | | $ | i 368,064 | | $ | i 8,187 | | $ | i 2,213,539 | | $ | i 3,251,509 | |
Purchases (purchase adjustment) and issuances, net | | | i 2,734,321 | | | i 593,065 | | | — | | | ( i 287) | | | i 3,327,099 | |
Capitalization of interest and advances | | | i 22,262 | | | — | | | — | | | — | | | i 22,262 | |
Sales and repayments | | | ( i 88,955) | | | — | | | ( i 8,270) | | | — | | | ( i 97,225) | |
Mortgage servicing rights resulting from loan sales | | | — | | | — | | | — | | | i 245,946 | | | i 245,946 | |
Changes in fair value included in income arising from: | | | | | | | | | | | | | | | | |
Changes in instrument-specific credit risk | | | i 42,029 | | | — | | | — | | | — | | | i 42,029 | |
Other factors | | | — | | | i 311,790 | | | i 83 | | | ( i 125,377) | | | i 186,496 | |
| | | i 42,029 | | | i 311,790 | | | i 83 | | | ( i 125,377) | | | i 228,525 | |
Transfers from Level 3 to Level 2 | | | ( i 597,134) | | | — | | | — | | | — | | | ( i 597,134) | |
Reinstatement from real estate acquired in settlement of loans | | | i 755 | | | — | | | — | | | — | | | i 755 | |
Transfers of interest rate lock commitments to loans held for sale | | | — | | | ( i 731,474) | | | — | | | — | | | ( i 731,474) | |
Balance, September 30, 2020 | | $ | i 2,774,997 | | $ | i 541,445 | | $ | — | | $ | i 2,333,821 | | $ | i 5,650,263 | |
Changes in fair value recognized during the quarter relating to assets still held at September 30, 2020 | | $ | i 38,217 | | $ | i 541,445 | | $ | — | | $ | ( i 125,377) | | $ | i 454,285 | |
| (1) | For the purpose of this table, the IRLC asset and liability positions are shown net. |
| | | | | | | | | | |
| | Quarter ended September 30, 2020 | | |||||||
| | Excess | | | | | | | ||
| | servicing | | Mortgage | | | | | ||
| | spread | | servicing | | | | | ||
Liabilities |
| financing |
| liabilities |
| Total |
| |||
| | (in thousands) | | |||||||
Balance, June 30, 2020 | | $ | i 151,206 | | $ | i 29,858 | | $ | i 181,064 | |
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust | | | i 531 | | | — | | | i 531 | |
Accrual of interest | | | i 2,070 | | | — | | | i 2,070 | |
Repayments | | | ( i 7,682) | | | — | | | ( i 7,682) | |
Changes in fair value included in income | | | ( i 3,135) | | | i 1,840 | | | ( i 1,295) | |
Balance, September 30, 2020 | | $ | i 142,990 | | $ | i 31,698 | | $ | i 174,688 | |
Changes in fair value recognized during the quarter relating to liabilities still outstanding at September 30, 2020 | | $ | ( i 3,135) | | $ | i 1,840 | | $ | ( i 1,295) | |
| | | | | | | | | | |
24
| | | | | | | | | | | | | | | | | | |
| | Quarter ended September 30, 2019 | | | | |||||||||||||
| | | | Net interest | | Repurchase | | Mortgage | | | | | | | ||||
| | Loans held | | rate lock | | agreement | | servicing | | | | | | | ||||
Assets | | for sale |
| commitments (1) |
| derivatives |
| rights |
| | Total | | | |||||
| | (in thousands) | | | | |||||||||||||
Balance, June 30, 2019 |
| $ | i 217,998 | | $ | i 111,776 | | $ | i 16,015 | | $ | i 2,720,335 | | $ | i 3,066,124 | | | |
Purchases and issuances, net | | | i 1,861,769 | | | i 199,274 | | | i 1,502 | | | i 46 | | | i 2,062,591 | | | |
Sales and repayments | | | ( i 1,582,564) | | | — | | | ( i 9,422) | | | — | | | ( i 1,591,986) | | | |
Mortgage servicing rights resulting from loan sales | | | — | | | — | | | — | | | i 246,757 | | | i 246,757 | | | |
Changes in fair value included in income arising from: | | | | | | | | | | | | | | | | | | |
Changes in instrument-specific credit risk | | | i 4,252 | | | — | | | — | | | — | | | i 4,252 | | | |
Other factors | | | — | | | i 92,138 | | | i 92 | | | ( i 410,885) | | | ( i 318,655) | | | |
| | | i 4,252 | | | i 92,138 | | | i 92 | | | ( i 410,885) | | | ( i 314,403) | | | |
Transfers from Level 3 to Level 2 | | | ( i 416,062) | | | — | | | — | | | — | | | ( i 416,062) | | | |
Transfers to real estate acquired in settlement of loans | | | ( i 376) | | | — | | | — | | | — | | | ( i 376) | | | |
Transfers of interest rate lock commitments to loans held for sale | | | — | | | ( i 258,064) | | | — | | | — | | | ( i 258,064) | | | |
Balance, September 30, 2019 | | $ | i 85,017 | | $ | i 145,124 | | $ | i 8,187 | | $ | i 2,556,253 | | $ | i 2,794,581 | | | |
Changes in fair value recognized during the quarter relating to assets still held at September 30, 2019 | | $ | ( i 2,328) | | $ | i 145,124 | | $ | i 41 | | $ | ( i 410,885) | | $ | ( i 268,048) | | | |
| (1) | For the purpose of this table, the IRLC asset and liability positions are shown net. |
| | | | | | | | | |
| | Quarter ended September 30, 2019 | |||||||
| | Excess | | | | | | ||
| | servicing | | Mortgage | | | | ||
| | spread | | servicing | | | | ||
Liabilities |
| financing |
| liabilities |
| Total | |||
| | (in thousands) | |||||||
Balance, June 30, 2019 | | $ | i 194,156 | | $ | i 12,948 |
| $ | i 207,104 |
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust | | | i 377 | | | — | | | i 377 |
Accrual of interest | | | i 2,291 | | | — | | | i 2,291 |
Repayments | | | ( i 9,819) | | | — | | | ( i 9,819) |
Mortgage servicing liabilities resulting from loan sales | | | — | | | i 19,501 | | | i 19,501 |
Changes in fair value included in income | | | ( i 3,864) | | | i 1,845 | | | ( i 2,019) |
Balance, September 30, 2019 | | $ | i 183,141 | | $ | i 34,294 | | $ | i 217,435 |
Changes in fair value recognized during the quarter relating to liabilities still outstanding at September 30, 2019 | | $ | ( i 3,864) | | $ | i 1,845 | | $ | ( i 2,019) |
25
| | | | | | | | | | | | | | | | |
| | Nine months ended September 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 4,664,408 | | | i 1,431,194 | | | — | | | i 25,473 | | | i 6,121,075 | |
Capitalization of interest and advances | | | i 55,283 | | | — | | | — | | | — | | | i 55,283 | |
Sales and repayments | | | ( i 888,247) | | | — | | | ( i 8,270) | | | — | | | ( i 896,517) | |
Mortgage servicing rights resulting from loan sales | | | — | | | — | | | — | | | i 753,795 | | | i 753,795 | |
Changes in fair value included in income arising from: | | | | | | | | | | | | | | | | |
Changes in instrument-specific credit risk | | | i 35,638 | | | — | | | — | | | — | | | i 35,638 | |
Other factors | | | — | | | i 808,906 | | | i 83 | | | ( i 1,372,237) | | | ( i 563,248) | |
| | | i 35,638 | | | i 808,906 | | | i 83 | | | ( i 1,372,237) | | | ( i 527,610) | |
Transfers from Level 3 to Level 2 | | | ( i 1,476,027) | | | — | | | — | | | — | | | ( i 1,476,027) | |
Transfers to real estate acquired in settlement of loans | | | ( i 691) | | | — | | | — | | | — | | | ( i 691) | |
Reinstatement from real estate acquired in settlement of loans | | | i 755 | | | — | | | — | | | — | | | i 755 | |
Transfers of interest rate lock commitments to loans held for sale | | | — | | | ( i 1,835,305) | | | — | | | — | | | ( i 1,835,305) | |
Balance, September 30, 2020 | | $ | i 2,774,997 | | $ | i 541,445 | | $ | — | | $ | i 2,333,821 | | $ | i 5,650,263 | |
Changes in fair value recognized during the period relating to assets still held at September 30, 2020 | | $ | i 31,389 | | $ | i 541,445 | | $ | — | | $ | ( i 1,372,237) | | $ | ( i 799,403) | |
| (1) | For the purpose of this table, the IRLC asset and liability positions are shown net. |
| | | | | | | | | |
| | Nine months ended September 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 1,393 | | | — | | | i 1,393 |
Accrual of interest | | | i 6,416 | | | — | | | i 6,416 |
Repayments | | | ( i 25,112) | | | — | | | ( i 25,112) |
Mortgage servicing liabilities resulting from loan sales | | | — | | | i 6,576 | | | i 6,576 |
Changes in fair value included in income | | | ( i 18,293) | | | ( i 4,018) | | | ( i 22,311) |
Balance, September 30, 2020 | | $ | i 142,990 | | $ | i 31,698 | | $ | i 174,688 |
Changes in fair value recognized during the period relating to liabilities still outstanding at September 30, 2020 | | $ | ( i 18,293) | | $ | ( i 4,018) | | $ | ( i 22,311) |
26
| | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2019 | |||||||||||||
| | | | Net interest | | Repurchase | | Mortgage | | | | ||||
| | Loans held | | rate lock | | agreement | | servicing | | | | ||||
Assets |
| for sale |
| commitments (1) |
| derivatives |
| rights |
| Total | |||||
| | (in thousands) | |||||||||||||
Balance, December 31, 2018 |
| $ | i 260,008 | | $ | i 49,338 | | $ | i 26,770 | | $ | i 2,820,612 | | $ | i 3,156,728 |
Purchases and issuances, net | | | i 3,537,177 | | | i 376,137 | | | i 15,019 | | | i 227,445 | | | i 4,155,778 |
Sales and repayments | | | ( i 2,414,899) | | | — | | | ( i 31,994) | | | — | | | ( i 2,446,893) |
Mortgage servicing rights resulting from loan sales | | | — | | | — | | | — | | | i 545,839 | | | i 545,839 |
Changes in fair value included in income arising from: | | | | | | | | | | | | | | | |
Changes in instrument-specific credit risk | | | ( i 2,025) | | | — | | | — | | | — | | | ( i 2,025) |
Other factors | | | — | | | i 248,889 | | | ( i 1,608) | | | ( i 1,037,643) | | | ( i 790,362) |
| | | ( i 2,025) | | | i 248,889 | | | ( i 1,608) | | | ( i 1,037,643) | | | ( i 792,387) |
Transfers from Level 3 to Level 2 | | | ( i 1,292,824) | | | — | | | — | | | — | | | ( i 1,292,824) |
Transfers to real estate acquired in settlement of loans | | | ( i 2,420) | | | — | | | — | | | — | | | ( i 2,420) |
Transfers of interest rate lock commitments to loans held for sale | | | — | | | ( i 529,240) | | | — | | | — | | | ( i 529,240) |
Balance, September 30, 2019 | | $ | i 85,017 | | $ | i 145,124 | | $ | i 8,187 | | $ | i 2,556,253 | | $ | i 2,794,581 |
Changes in fair value recognized during the period relating to assets still held at September 30, 2019 | | $ | ( i 2,478) | | $ | i 145,124 | | $ | i 165 | | $ | ( i 1,037,643) | | $ | ( i 894,832) |
| (1) | For the purpose of this table, the IRLC asset and liability positions are shown net. |
| | | | | | | | | |
| | Nine months ended September 30, 2019 | |||||||
| | Excess | | | | | | | |
| | servicing | | Mortgage | | | | ||
| | spread | | servicing | | | | ||
Liabilities |
| financing |
| liabilities |
| Total | |||
| | (in thousands) | |||||||
Balance, December 31, 2018 | | $ | i 216,110 | | $ | i 8,681 |
| $ | i 224,791 |
Issuance of excess servicing spread financing pursuant to a recapture agreement with PennyMac Mortgage Investment Trust | | | i 1,327 | | | — | | | i 1,327 |
Accrual of interest | | | i 8,124 | | | — | | | i 8,124 |
Repayments | | | ( i 30,901) | | | — | | | ( i 30,901) |
Mortgage servicing liabilities resulting from loan sales | | | — | | | i 27,133 | | | i 27,133 |
Changes in fair value included in income | | | ( i 11,519) | | | ( i 1,520) | | | ( i 13,039) |
Balance, September 30, 2019 | | $ | i 183,141 | | $ | i 34,294 | | $ | i 217,435 |
Changes in fair value recognized during the period relating to liabilities still outstanding at September 30, 2019 | | $ | ( i 11,519) | | $ | ( i 1,520) | | $ | ( i 13,039) |
The Company had transfers among the fair value levels arising from transfers of IRLCs to loans held for sale at fair value upon purchase or funding of the respective loans and from the return to salability in the active secondary market of certain loans held for sale.
27
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 September 30, | ||||||||||||||||
| | 2020 | | 2019 | ||||||||||||||
| | 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 | ||||||
| | | ||||||||||||||||
Assets: | | | | | | | | | | | | | | | | | | |
Loans held for sale | | $ | i 773,313 | | $ | — | | $ | i 773,313 | | $ | i 263,339 | | $ | — | | $ | i 263,339 |
Mortgage servicing rights | | | — | | | ( i 125,377) | | | ( i 125,377) | | | — | | | ( i 410,885) | | | ( i 410,885) |
| | $ | i 773,313 | | $ | ( i 125,377) | | $ | i 647,936 | | $ | i 263,339 | | $ | ( i 410,885) | | $ | ( i 147,546) |
Liabilities: | | | | | | | | | | | | | | | | | | |
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust | | $ | — | | $ | i 3,135 | | $ | i 3,135 | | $ | — | | $ | i 3,864 | | $ | i 3,864 |
Mortgage servicing liabilities | | | — | | | ( i 1,840) | | | ( i 1,840) | | | — | | | ( i 1,845) | | | ( i 1,845) |
| | $ | — | | $ | i 1,295 | | $ | i 1,295 | | $ | — | | $ | i 2,019 | | $ | i 2,019 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | ||||||||||||||||
| | 2020 | | 2019 | ||||||||||||||
| | 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 | ||||||
| | | ||||||||||||||||
Assets: | | | | | | | | | | | | | | | | | | |
Loans held for sale | | $ | i 1,911,828 | | $ | — | | $ | i 1,911,828 | | $ | i 538,086 | | $ | — | | $ | i 538,086 |
Mortgage servicing rights | | | — | | | ( i 1,372,237) | | | ( i 1,372,237) | | | — | | | ( i 1,037,643) | | | ( i 1,037,643) |
| | $ | i 1,911,828 | | $ | ( i 1,372,237) | | $ | i 539,591 | | $ | i 538,086 | | $ | ( i 1,037,643) | | $ | ( i 499,557) |
Liabilities: | | | | | | | | | | | | | | | | | | |
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust | | $ | — | | $ | i 18,293 | | $ | i 18,293 | | $ | — | | $ | i 11,519 | | $ | i 11,519 |
Mortgage servicing liabilities | | | — | | | i 4,018 | | | i 4,018 | | | — | | | i 1,520 | | | i 1,520 |
| | $ | — | | $ | i 22,311 | | $ | i 22,311 | | $ | — | | $ | i 13,039 | | $ | i 13,039 |
/Following are the fair value and related principal amounts due upon maturity of loans held for sale accounted for under the fair value option:
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 8,670,895 | | $ | i 8,279,163 | | $ | i 391,732 | | $ | i 4,628,333 | | $ | i 4,431,854 | | $ | i 196,479 |
90 days or more delinquent: | | | | | | | | | | | | | | | | | | |
Not in foreclosure | | | i 392,866 | | | i 404,183 | | | ( i 11,317) | | | i 236,650 | | | i 241,958 | | | ( i 5,308) |
In foreclosure | | | i 62,411 | | | i 66,327 | | | ( i 3,916) | | | i 47,970 | | | i 50,194 | | | ( i 2,224) |
| | $ | i 9,126,172 | | $ | i 8,749,673 | | $ | i 376,499 | | $ | i 4,912,953 | | $ | i 4,724,006 | | $ | i 188,947 |
| | | | | | | | | | | | | | | | | | |
28
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 7,346 | | $ | i 7,346 | |
| $ | — | | $ | — | | $ | i 9,850 | | $ | i 9,850 | |
/The following table summarizes the (losses) gains recognized on assets when they were remeasured at fair value on a nonrecurring basis:
i
| | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
Real estate acquired in settlement of loans | | $ | ( i 825) | | $ | i 139 | | $ | ( i 2,059) | | $ | i 162 |
Fair Value of Financial Instruments Carried at Amortized Cost
The Company’s Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell, Assets sold under agreements to repurchase, Mortgage loan participation purchase and sale agreements, 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 Notes and 2018-GT2 Notes (the “2018 Term Notes”) included in Notes payable secured by mortgage servicing assets and the Unsecured Notes (as hereafter defined) approximate their carrying values due to their short terms and/or variable interest rates.
The Company estimates the fair value of the 2018 Term Notes and the Unsecured 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) | ||||||||||
2018 Term Notes | | $ | i 1,259,619 | | $ | i 1,295,143 | | $ | i 1,303,047 | | $ | i 1,294,070 |
Unsecured Notes | | $ | i 510,000 | | $ | i 492,358 | | $ | — | | $ | — |
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.
29
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. As of September 30, 2020, the Company’s senior management valuation committee includes the Company’s chief 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 repurchase by the Company and provides an alternative to the Company’s obligation to continue advancing principal and interest at the coupon rate of the related Ginnie Mae security. Such repurchased loans may be resold to investors and thereafter may be repurchased to the extent eligible for resale into a new Ginnie Mae guaranteed security. Such eligibility occurs when the repurchased loans become current either through the borrower’s reperformance or through completion of a modification of the loan’s terms or after six months of timely payments following the completion of certain types of payment deferral programs. |
| ● | 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. |
| ● | Home equity lines of credit held for sale to PMT. At present, an active market with observable inputs that are significant to the estimation of fair value of home equity lines of credit does not exist. |
The Company uses a discounted cash flow model to estimate the fair value of its “Level 3” fair value loans held for sale. The significant unobservable inputs used in the fair value measurement of the Company’s “Level 3” fair value loans held for sale are discount rates, home price projections, voluntary prepayment/resale and total prepayment speeds. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment speeds.
30
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 2,774,997 | | $ | i 383,878 |
Key inputs (1): | | | | | | |
Discount rate: | | | | | | |
Range | | | i 3.2% – i 9.2% | | | i 3.0% – i 9.2% |
Weighted average | | | i 3.2% | | | i 3.0% |
Twelve-month projected housing price index change: | | | | | | |
Range | | | i 2.1% – i 2.6% | | | i 2.6% – i 3.2% |
Weighted average | | | i 2.2% | | | i 2.8% |
Voluntary prepayment/resale speed (2): | | | | | | |
Range | | | i 0.5% – i 24.9% | | | i 0.4% – i 21.4% |
Weighted average | | | i 19.6% | | | i 18.2% |
Total prepayment speed (3): | | | | | | |
Range | | | i 0.6% – i 38.7% | | | i 0.5% – i 39.2% |
Weighted average | | | i 29.9% | | | i 36.2% |
| (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 prepayments/resale and defaults. |
Changes in fair value of loans held for sale attributable to changes in the loan’s instrument-specific credit risk are measured with reference to the change in the respective loan’s delinquency status and performance history at period end from the later of the beginning of the period or acquisition date. Changes in fair value of loans held for sale are included in Net gains on loans held for sale at fair value in the Company’s consolidated statements of income.
Derivative Financial Instruments
Interest Rate Lock Commitments
The Company categorizes IRLCs as “Level 3” fair value assets or liabilities. The Company estimates the fair value of IRLCs based on quoted Agency MBS prices, its estimate of the fair value of the MSRs it expects to receive in the sale of the loans and the probability that the loan will be funded or purchased (the “pull-through rate”).
The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the MSR component of the Company’s estimate of the fair value of the 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.
31
Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:
i
| | | | | | |
| | | | | | |
|
|
| ||||
Fair value (in thousands) (1) |
| $ | i 541,445 | | $ | i 136,650 |
Key inputs (2): | | | | | | |
Pull-through rate: | | | | | | |
Range | | | i 11.8% – i 100% | | | i 12.2% – i 100% |
Weighted average | | | i 80.6% | | | i 86.5% |
Mortgage servicing rights value expressed as: | | | | | | |
Servicing fee multiple: | | | | | | |
Range | | | i 1.0 – i 5.1 | | | i 1.4 – i 5.7 |
Weighted average | | | i 3.5 | | | i 4.2 |
Percentage of loan commitment amount | | | | | | |
Range | | | i 0.2% – i 2.5% | | | i 0.3% – i 2.8% |
Weighted average | | | i 1.1% | | | i 1.6% |
| (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.
Repurchase Agreement Derivatives
Through August 21, 2019, the Company had a master repurchase agreement that included incentives for financing loans approved for satisfying designated consumer relief characteristics. These incentives are classified for financial reporting purposes as embedded derivatives and are separated for reporting purposes from the master repurchase agreement. Repurchase agreement derivatives are categorized as “Level 3” fair value assets. The significant unobservable inputs used in the valuation of repurchase agreement derivative assets are the discount rate and the Company’s expected approval rate of the loans financed under the master repurchase agreement. The resulting ratio included in the Company’s fair value estimate was i 99.0% at December 31, 2019.
Mortgage Servicing Rights
MSRs are categorized as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the estimation of the fair value of MSRs include the applicable pricing spread (discount rate), prepayment rates of the underlying loans, and annual per-loan cost to service the underlying loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key inputs are not 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.
32
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 September 30, | | Nine months ended September 30, | ||||||||
| | 2020 | | 2019 |
| 2020 | | 2019 | ||||
| | (Amount recognized and unpaid principal balance of underlying loans in thousands) | ||||||||||
MSR and pool characteristics: | | | |
| | | | | |
| | |
Amount recognized | | $ | i 245,946 | | $ | i 246,757 | | $ | i 753,795 | | $ | i 545,839 |
Unpaid principal balance of underlying loans | | $ | i 25,369,941 | | $ | i 15,709,249 | | $ | i 63,766,627 | | $ | i 35,532,425 |
Weighted average servicing fee rate (in basis points) | | | i 32 | | | i 43 | | | i 36 | | | i 42 |
Key inputs (1): | | | | | | | | | | | | |
Pricing spread (2) | | | | | | | | | | | | |
Range | | | i 8.0% – i 17.6% | | | i 5.5% – i 16.2% | | | i 6.8% – i 18.1% | | | i 5.5% – i 16.2% |
Weighted average | | | i 9.6% | | | i 8.3% | | | i 9.3% | | | i 8.6% |
Annual total prepayment speed (3) | | | | | | | | | | | | |
Range | | | i 7.2% – i 41.0% | | | i 8.8% – i 32.1% | | | i 7.2% – i 49.8% | | | i 7.7% – i 32.8% |
Weighted average | | | i 10.4% | | | i 15.7% | | | i 12.4% | | | i 15.0% |
Equivalent average life (in years) | | | | | | | | | | | | |
Range | | | i 2.3 – i 9.1 | | | i 2.7 – i 7.5 | | | i 1.5 – i 9.1 | | | i 2.6 – i 7.8 |
Weighted average | | | i 7.3 | | | i 5.5 | | | i 6.6 | | | i 5.8 |
Per-loan annual cost of servicing | | | | | | | | | | | | |
Range | | | $ i 80 – $ i 110 | | | $ i 78 – $ i 100 | | | $ i 77 – $ i 110 | | | $ i 78 – $ i 100 |
Weighted average | | | $ i 102 | | | $ i 97 | | | $ i 100 | | | $ i 97 |
| (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 included for informational purposes. |
/33
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 2,333,821 | | $ i 2,926,790 |
Pool characteristics: | | | | |
Unpaid principal balance of underlying loans | | $ i 234,850,997 | | $ i 225,787,103 |
Weighted average note interest rate | | i 3.8% | | i 3.9% |
Weighted average servicing fee rate (in basis points) | | i 35 | | i 35 |
Key inputs (1): | | | | |
Pricing spread (2): | | | | |
Range | | i 8.0% – i 17.6% | | i 6.8% – i 15.8% |
Weighted average | | i 10.1% | | i 8.5% |
Effect on fair value of: | | | | |
5% adverse change | | ($ i 42,266) | | ($ i 44,561) |
10% adverse change | | ($ i 82,935) | | ($ i 87,734) |
20% adverse change | | ($ i 159,813) | | ($ i 170,155) |
Annual total prepayment speed (3): | | | | |
Range | | i 10.4% – i 32.3% | | i 9.3% – i 40.9% |
Weighted average | | i 15.3% | | i 12.7% |
Equivalent average life (in years) | | | | |
Range | | i 1.7 – i 6.8 | | i 1.4 – i 7.4 |
Weighted average | | i 5.4 | | i 6.1 |
Effect on fair value of: | | | | |
5% adverse change | | ($ i 67,933) | | ($ i 63,569) |
10% adverse change | | ($ i 132,698) | | ($ i 124,411) |
20% adverse change | | ($ i 253,474) | | ($ i 238,549) |
Annual per-loan cost of servicing: | | | | |
Range | | $ i 78 – $ i 110 | | $ i 77 – $ i 100 |
Weighted average | | $ i 104 | | $ i 97 |
Effect on fair value of: | | | | |
5% adverse change | | ($ i 25,138) | | ($ i 24,516) |
10% adverse change | | ($ i 50,275) | | ($ i 49,032) |
20% adverse change | | ($ i 100,551) | | ($ i 98,065) |
| (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 included 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.
34
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 (discount rate) and prepayment speed. Significant changes to either of those inputs in isolation could result in a significant change in the fair value of ESS. Changes in these key inputs are not 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.
Following are the key inputs used in determining the fair value of ESS financing:
i
| | | | |
| | September 30, | | |
|
| 2020 |
| 2019 |
Fair value (in thousands) | | $ i 142,990 | | $ i 178,586 |
Pool characteristics: | | | | |
Unpaid principal balance of underlying loans (in thousands) | | $ i 17,070,283 | | $ i 19,904,571 |
Average servicing fee rate (in basis points) | | i 34 | | i 34 |
Average excess servicing spread (in basis points) | | i 19 | | i 19 |
Key inputs (1): | | | | |
Pricing spread (2): | | | | |
Range | | i 4.9% – i 5.3% | | i 3.0% – i 3.3% |
Weighted average | | i 5.1% | | i 3.1% |
Annual total prepayment speed (3): | | | | |
Range | | i 9.6% – i 17.6% | | i 8.7% – i 16.2% |
Weighted average | | i 11.8% | | i 11.0% |
Equivalent average life (in years) | | | | |
Range | | i 2.4 – i 6.7 | | i 2.7 – i 7.2 |
Weighted average | | i 5.8 | | i 6.1 |
| (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 included 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 (discount rate), prepayment rates, and the annual per-loan cost to service the underlying loans. Changes in the fair value of MSLs are included in Net servicing fees—Change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.
35
Following are the key inputs used in determining the fair value of MSLs:
i
| | | | | | |
| | | September 30, | | | |
| | | 2020 | | | 2019 |
Fair value (in thousands) | | $ | i 31,698 | | $ | i 29,140 |
Pool characteristics: | |
| | | | |
Unpaid principal balance of underlying loans (in thousands) | | $ | i 1,799,562 | | $ | i 2,758,454 |
Servicing fee rate (in basis points) | | | i 25 | | | i 25 |
Key inputs: | | | | | | |
Pricing spread (1) | | | i 7.1% | | | i 8.2% |
Annual total prepayment speed (2) | | | i 35.1% | | | i 29.2% |
Equivalent average life (in years) | | | i 2.9 | | | i 3.9 |
Annual per-loan cost of servicing | | $ | i 343 | | $ | i 300 |
| (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 included for informational purposes. |
iNote 7—Loans Held for Sale at Fair Value
Loans held for sale at fair value include the following:
i
| | | | | | |
| | September 30, | | December 31, | ||
Loan type |
| 2020 |
| 2019 | ||
| | (in thousands) | ||||
Government-insured or guaranteed | | $ | i 5,219,448 | | $ | i 4,222,010 |
Conventional conforming | | | i 1,131,727 | | | i 307,065 |
Purchased from Ginnie Mae pools serviced by the Company | | | i 2,759,032 | | | i 374,121 |
Repurchased pursuant to representations and warranties | | | i 15,965 | | | i 9,244 |
Home equity lines of credit | | | — | | | i 513 |
| | $ | i 9,126,172 | | $ | i 4,912,953 |
Fair value of loans pledged to secure: | | | | | | |
Assets sold under agreements to repurchase | | $ | i 8,453,522 | | $ | i 4,322,789 |
Mortgage loan participation purchase and sale agreements | | | i 558,023 | | | i 523,349 |
| | $ | i 9,011,545 | | $ | i 4,846,138 |
/
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 certain of the Company’s operations and when the Company enters into derivative transactions as part of its interest rate risk management activities. Derivative financial instruments created as a result of the Company’s operations include:
| ● | IRLCs that are created when the Company commits to purchase or originate a loan for sale. |
| ● | Derivatives that were embedded in a master repurchase agreement that provided for the Company to receive incentives for financing mortgage loans that satisfied certain consumer relief characteristics under the master repurchase agreement. |
The Company also engages in interest rate risk management activities in an effort to moderate the effect of changes in market interest rates on the fair value of 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 the portion of its MSRs not financed with ESS.
36
The Company does not designate and qualify any of its derivatives for hedge accounting. The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.
Derivative Notional Amounts and Fair Value of Derivatives
The Company had the following derivative financial instruments recorded on its consolidated balance sheets:
i
| | | | | | | | | | | | | | | | |
| | | ||||||||||||||
| | | | Fair value | | | | Fair value | ||||||||
| | Notional | | Derivative | | Derivative | | Notional | | Derivative | | Derivative | ||||
Instrument |
| amount |
| assets |
| liabilities |
| amount |
| assets |
| liabilities | ||||
| | (in thousands) | ||||||||||||||
Not subject to master netting arrangements: | | | | | | | | | | | | | | | | |
Interest rate lock commitments | | i 18,873,579 | | $ | i 544,151 | | $ | i 2,706 | | i 7,122,316 | | $ | i 138,511 | | $ | i 1,861 |
Repurchase agreement derivatives | | | | | — | | | — | | | | | i 8,187 | | | — |
Used for hedging purposes (1): | | | | | | | | | | | | | | | | |
Forward purchase contracts | | i 31,443,783 | | | i 72,640 | | | i 15,903 | | i 13,618,361 | | | i 12,364 | | | i 19,040 |
Forward sales contracts | | i 42,438,243 | | | i 21,652 | | | i 98,765 | | i 16,220,526 | | | i 17,097 | | | i 18,045 |
MBS put options | | i 12,950,000 | | | i 27,336 | | | — | | i 6,100,000 | | | i 3,415 | | | — |
MBS call options | | i 1,850,000 | | | i 4,255 | | | — | | — | | | — | | | — |
Swaption purchase contracts | | i 3,125,000 | | | i 5,568 | | | — | | i 1,750,000 | | | i 2,409 | | | — |
Put options on interest rate futures purchase contracts | | i 2,275,000 | | | i 5,910 | | | — | | i 2,250,000 | | | i 3,945 | | | — |
Call options on interest rate futures purchase contracts | | i 950,000 | | | i 1,570 | | | — | | i 750,000 | | | i 1,469 | | | — |
Treasury futures purchase contracts | | i 1,000,000 | | | — | | | — | | i 1,276,000 | | | — | | | — |
Treasury futures sale contracts | | i 450,000 | | | — | | | — | | i 1,010,000 | | | — | | | — |
Interest rate swap futures purchase contracts | | i 3,585,000 | | | — | | | — | | i 3,210,000 | | | — | | | — |
Total derivatives before netting | | | | | i 683,082 | | | i 117,374 | | | | | i 187,397 | | | i 38,946 |
Netting | | | | | ( i 104,828) | | | ( i 92,837) | | | | | ( i 27,711) | | | ( i 16,616) |
| | | | $ | i 578,254 | | $ | i 24,537 | | | | $ | i 159,686 | | $ | i 22,330 |
Collateral received from derivative counterparties, net | | | | $ | ( i 11,991) | | | | | | | $ | ( i 11,095) | | | |
| (1) | All the hedging derivatives are interest rate derivatives and are used as economic hedges. |
37
The following table summarizes notional amount activity for derivative contracts used in the Company’s hedging activities:
i
| | | | | | | | |
| | Notional amounts, quarter ended September 30, 2020 | ||||||
| | Beginning of | | | | Dispositions/ | | End of |
Instrument |
| quarter |
| Additions |
| expirations |
| quarter |
| | (in thousands) | ||||||
Forward purchase contracts | | i 20,709,914 | | i 143,902,517 | | ( i 133,168,648) | | i 31,443,783 |
Forward sale contracts | | i 25,302,147 | | i 175,642,745 | | ( i 158,506,649) | | i 42,438,243 |
MBS put options | | i 11,200,000 | | i 29,850,000 | | ( i 28,100,000) | | i 12,950,000 |
MBS call options | | — | | i 1,850,000 | | — | | i 1,850,000 |
Swaption purchase contracts | | i 3,375,000 | | i 3,625,000 | | ( i 3,875,000) | | i 3,125,000 |
Swaption sale contracts | | — | | i 3,875,000 | | ( i 3,875,000) | | — |
Put options on interest rate futures purchase contracts | | i 350,000 | | i 3,325,000 | | ( i 1,400,000) | | i 2,275,000 |
Call options on interest rate futures purchase contracts | | i 1,800,000 | | i 1,200,000 | | ( i 2,050,000) | | i 950,000 |
Put options on interest rate futures sale contracts | | — | | i 1,400,000 | | ( i 1,400,000) | | — |
Call options on interest rate futures sale contracts | | — | | i 2,050,000 | | ( i 2,050,000) | | — |
Treasury futures purchase contracts | | i 925,000 | | i 1,561,500 | | ( i 1,486,500) | | i 1,000,000 |
Treasury futures sale contracts | | i 450,000 | | i 1,486,500 | | ( i 1,486,500) | | i 450,000 |
Interest rate swap futures purchase contracts | | i 3,460,000 | | i 1,200,000 | | ( i 1,075,000) | | i 3,585,000 |
Interest rate swap futures sales contracts | | — | | i 1,075,000 | | ( i 1,075,000) | | — |
| | | | | | | | |
| | Notional amounts, quarter ended September 30, 2019 | ||||||
| | Beginning of | | | | Dispositions/ | | End of |
Instrument |
| quarter |
| Additions |
| expirations |
| quarter |
| | (in thousands) | ||||||
Forward purchase contracts | | i 19,497,698 | | i 100,139,970 | | ( i 103,807,843) | | i 15,829,825 |
Forward sale contracts | | i 14,276,156 | | i 122,174,329 | | ( i 121,333,675) | | i 15,116,810 |
MBS put options | | i 12,775,000 | | i 29,575,000 | | ( i 32,300,000) | | i 10,050,000 |
MBS call options | | i 2,250,000 | | — | | ( i 2,250,000) | | — |
Put options on interest rate futures purchase contracts | | i 2,835,000 | | i 9,850,000 | | ( i 8,335,000) | | i 4,350,000 |
Call options on interest rate futures purchase contracts | | i 3,687,500 | | i 1,750,000 | | ( i 4,837,500) | | i 600,000 |
Put options on interest rate futures sale contracts | | — | | i 8,335,000 | | ( i 8,335,000) | | — |
Call options on interest rate futures sale contracts | | — | | i 4,837,500 | | ( i 4,837,500) | | — |
Treasury futures purchase contracts | | i 486,100 | | i 5,132,000 | | ( i 4,209,600) | | i 1,408,500 |
Treasury futures sale contracts | | i 1,550,000 | | i 3,792,100 | | ( i 4,209,600) | | i 1,132,500 |
Interest rate swap futures purchase contracts | | i 2,900,000 | | i 1,800,000 | | ( i 790,000) | | i 3,910,000 |
Interest rate swap futures sale contracts | | — | | i 790,000 | | ( i 790,000) | | — |
| | | | | | | | |
| | Notional amounts, nine months ended September 30, 2020 | ||||||
| | Beginning of | | | | Dispositions/ | | End of |
Instrument |
| period |
| Additions |
| expirations |
| period |
| | (in thousands) | ||||||
Forward purchase contracts | | i 13,618,361 | | i 370,704,328 | | ( i 352,878,906) | | i 31,443,783 |
Forward sale contracts | | i 16,220,526 | | i 444,965,072 | | ( i 418,747,355) | | i 42,438,243 |
MBS put options | | i 6,100,000 | | i 79,600,000 | | ( i 72,750,000) | | i 12,950,000 |
MBS call options | | — | | i 1,850,000 | | — | | i 1,850,000 |
Swaption purchase contracts | | i 1,750,000 | | i 14,700,000 | | ( i 13,325,000) | | i 3,125,000 |
Swaption sale contracts | | — | | i 13,325,000 | | ( i 13,325,000) | | — |
Put options on interest rate futures purchase contracts | | i 2,250,000 | | i 12,025,000 | | ( i 12,000,000) | | i 2,275,000 |
Call options on interest rate futures purchase contracts | | i 750,000 | | i 9,740,000 | | ( i 9,540,000) | | i 950,000 |
Put options on interest rate futures sale contracts | | — | | i 12,000,000 | | ( i 12,000,000) | | — |
Call options on interest rate futures sale contracts | | — | | i 9,540,000 | | ( i 9,540,000) | | — |
Treasury futures purchase contracts | | i 1,276,000 | | i 5,516,700 | | ( i 5,792,700) | | i 1,000,000 |
Treasury futures sale contracts | | i 1,010,000 | | i 5,232,700 | | ( i 5,792,700) | | i 450,000 |
Interest rate swap futures purchase contracts | | i 3,210,000 | | i 4,150,000 | | ( i 3,775,000) | | i 3,585,000 |
Interest rate swap futures sales contracts | | — | | i 3,775,000 | | ( i 3,775,000) | | — |
38
| | | | | | | | |
| | Notional amounts, nine months ended September 30, 2019 | ||||||
| | Beginning of | | | | Dispositions/ | | End of |
Instrument |
| period |
| Additions |
| expirations |
| period |
| | (in thousands) | ||||||
Forward purchase contracts | | i 6,657,026 | | i 237,370,321 | | ( i 228,197,522) | | i 15,829,825 |
Forward sale contracts | | i 6,890,046 | | i 275,749,351 | | ( i 267,522,587) | | i 15,116,810 |
MBS put options | | i 4,635,000 | | i 77,185,000 | | ( i 71,770,000) | | i 10,050,000 |
MBS call options | | i 1,450,000 | | i 6,750,000 | | ( i 8,200,000) | | — |
Put options on interest rate futures purchase contracts | | i 3,085,000 | | i 19,422,500 | | ( i 18,157,500) | | i 4,350,000 |
Call options on interest rate futures purchase contracts | | i 1,512,500 | | i 13,127,800 | | ( i 14,040,300) | | i 600,000 |
Put options on interest rate futures sale contracts | | — | | i 27,297,800 | | ( i 27,297,800) | | — |
Call options on interest rate futures sale contracts | | — | | i 4,837,500 | | ( i 4,837,500) | | — |
Treasury futures purchase contracts | | i 835,000 | | i 11,943,400 | | ( i 11,369,900) | | i 1,408,500 |
Treasury futures sale contracts | | i 1,450,000 | | i 11,052,400 | | ( i 11,369,900) | | i 1,132,500 |
Interest rate swap futures purchase contracts | | i 625,000 | | i 4,075,000 | | ( i 790,000) | | i 3,910,000 |
Interest rate swap futures sale contracts | | — | | i 790,000 | | ( i 790,000) | | — |
| | | | | | | | |
| | | | | | | | |
Derivative Balances and Netting of Financial Instruments
The Company has elected to present net derivative asset and liability positions, and cash collateral obtained from (or posted to) its counterparties when subject to a master netting arrangement that is legally enforceable on all counterparties in the event of default. The derivatives that are not subject to a master netting arrangement are IRLCs and repurchase agreement derivatives.
Offsetting of Derivative Assets
Following are summaries of derivative assets and related netting amounts:
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: | | | | | | | | | | | | | | | | | | |
Interest rate lock commitments | | $ | i 544,151 | | $ | — | | $ | i 544,151 | | $ | i 138,511 | | $ | — | | $ | i 138,511 |
Repurchase agreement derivatives | | | — | | | — | | | — | | | i 8,187 | | | — | | | i 8,187 |
| | | i 544,151 | | | — | | | i 544,151 | | | i 146,698 | | | — | | | i 146,698 |
Derivatives subject to master netting arrangements: | | | | | | | | | | | | | | | | | | |
Forward purchase contracts | | | i 72,640 | | | — | | | i 72,640 | | | i 12,364 | | | — | | | i 12,364 |
Forward sale contracts | | | i 21,652 | | | — | | | i 21,652 | | | i 17,097 | | | — | | | i 17,097 |
MBS put options | | | i 27,336 | | | — | | | i 27,336 | | | i 3,415 | | | — | | | i 3,415 |
MBS call options | | | i 4,255 | | | — | | | i 4,255 | | | — | | | — | | | — |
Swaption purchase contracts | | | i 5,568 | | | — | | | i 5,568 | | | i 2,409 | | | — | | | i 2,409 |
Put options on interest rate futures purchase contracts | | | i 5,910 | | | — | | | i 5,910 | | | i 3,945 | | | — | | | i 3,945 |
Call options on interest rate futures purchase contracts | | | i 1,570 | | | — | | | i 1,570 | | | i 1,469 | | | — | | | i 1,469 |
Netting | | | — | | | ( i 104,828) | | | ( i 104,828) | | | — | | | ( i 27,711) | | | ( i 27,711) |
| | | i 138,931 | | | ( i 104,828) | | | i 34,103 | | | i 40,699 | | | ( i 27,711) | | | i 12,988 |
| | $ | i 683,082 | | $ | ( i 104,828) | | $ | i 578,254 | | $ | i 187,397 | | $ | ( i 27,711) | | $ | i 159,686 |
39
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 544,151 | | $ | — | | $ | — | | $ | i 544,151 | | $ | i 138,511 | | $ | — | | $ | — | | $ | i 138,511 |
JPMorgan Chase Bank, N.A. | | | i 18,772 | | | — | | | — | | | i 18,772 | | | i 2,196 | | | — | | | — | | | i 2,196 |
RJ O'Brien | | | i 7,480 | | | — | | | — | | | i 7,480 | | | i 5,414 | | | — | | | — | | | i 5,414 |
Wells Fargo Bank, N.A. | | | i 5,256 | | | — | | | — | | | i 5,256 | | | — | | | — | | | — | | | — |
Goldman Sachs | | | i 1,148 | | | — | | | — | | | i 1,148 | | | i 2,548 | | | — | | | — | | | i 2,548 |
Deutsche Bank | | | — | | | — | | | — | | | — | | | i 9,138 | | | — | | | — | | | i 9,138 |
Mizuho Securities | | | — | | | — | | | — | | | — | | | i 1,597 | | | — | | | — | | | i 1,597 |
Others | | | i 1,447 | | | — | | | — | | | i 1,447 | | | i 282 | | | — | | | — | | | i 282 |
| | $ | i 578,254 | | $ | — | | $ | — | | $ | i 578,254 | | $ | i 159,686 | | $ | — | | $ | — | | $ | i 159,686 |
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 2,706 | | $ | — | | $ | i 2,706 | | $ | i 1,861 | | $ | — | | $ | i 1,861 |
Derivatives subject to a master netting arrangement: | | | | | | | | | | | | | | | | | | |
Forward purchase contracts | | | i 15,903 | | | — | | | i 15,903 | | | i 19,040 | | | — | | | i 19,040 |
Forward sale contracts | | | i 98,765 | | | — | | | i 98,765 | | | i 18,045 | | | — | | | i 18,045 |
Netting | | | — | | | ( i 92,837) | | | ( i 92,837) | | | — | | | ( i 16,616) | | | ( i 16,616) |
| | | i 114,668 | | | ( i 92,837) | | | i 21,831 | | | i 37,085 | | | ( i 16,616) | | | i 20,469 |
Total derivatives | | | i 117,374 | | | ( i 92,837) | | | i 24,537 | | | i 38,946 | | | ( i 16,616) | | | i 22,330 |
Assets sold under agreements to repurchase: | | | | | | | | | | | | | | | | | | |
Amount outstanding | | | i 7,267,046 | | | — | | | i 7,267,046 | | | i 4,141,680 | | | — | | | i 4,141,680 |
Unamortized debt issuance cost, net | | | ( i 7,858) | | | — | | | ( i 7,858) | | | ( i 627) | | | — | | | ( i 627) |
| | | i 7,259,188 | | | — | | | i 7,259,188 | | | i 4,141,053 | | | — | | | i 4,141,053 |
| | $ | i 7,376,562 | | $ | ( i 92,837) | | $ | i 7,283,725 | | $ | i 4,179,999 | | $ | ( i 16,616) | | $ | i 4,163,383 |
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 2,706 | | $ | — | | $ | — | | $ | i 2,706 | | $ | i 1,861 | | $ | — | | $ | — | | $ | i 1,861 |
Credit Suisse First Boston Mortgage Capital LLC | | | i 3,613,132 | | | ( i 3,607,746) | | | — | | | i 5,386 | | | i 1,235,430 | | | ( i 1,235,430) | | | — | | | — |
Morgan Stanley Bank, N.A. | | | i 784,434 | | | ( i 784,434) | | | — | | | — | | | i 582,941 | | | ( i 582,941) | | | — | | | — |
Bank of America, N.A. | | | i 767,391 | | | ( i 767,391) | | | — | | | — | | | i 379,400 | | | ( i 374,190) | | | — | | | i 5,210 |
JPMorgan Chase Bank, N.A. | | | i 741,341 | | | ( i 741,341) | | | — | | | — | | | i 936,172 | | | ( i 936,172) | | | — | | | — |
Citibank, N.A. | | | i 637,347 | | | ( i 632,928) | | | — | | | i 4,419 | | | i 655,831 | | | ( i 653,170) | | | — | | | i 2,661 |
BNP Paribas | | | i 370,013 | | | ( i 370,013) | | | — | | | — | | | i 183,880 | | | ( i 183,880) | | | — | | | — |
Royal Bank of Canada | | | i 363,193 | | | ( i 363,193) | | | — | | | — | | | i 175,897 | | | ( i 175,897) | | | — | | | — |
Federal Home Loan Mortgage Corporation | | | i 5,755 | | | — | | | — | | | i 5,755 | | | — | | | — | | | — | | | — |
Mizuho Securities | | | i 2,366 | | | — | | | — | | | i 2,366 | | | — | | | — | | | — | | | — |
Barclays Capital | | | i 1,648 | | | — | | | — | | | i 1,648 | | | — | | | — | | | — | | | — |
Wells Fargo Bank, N.A. | | | — | | | — | | | — | | | — | | | i 11,212 | | | — | | | — | | | i 11,212 |
Others | | | i 2,257 | | | — | | | — | | | i 2,257 | | | i 1,386 | | | — | | | — | | | i 1,386 |
| | $ | i 7,291,583 | | $ | ( i 7,267,046) | | $ | — | | $ | i 24,537 | | $ | i 4,164,010 | | $ | ( i 4,141,680) | | $ | — | | $ | i 22,330 |
41
Following are the gains (losses) recognized by the Company on derivative financial instruments and the income statement lines where such gains and losses are included:
i
| | | | | | | | | | | | | | |
| | | | Quarter ended September 30, | | Nine months ended September 30, | ||||||||
Derivative activity |
| Income statement line |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | | | (in thousands) | ||||||||||
Interest rate lock commitments | | Net gains on loans held for sale at fair value (1) | | $ | i 173,381 | | $ | i 33,347 | | $ | i 404,795 | | $ | i 95,785 |
Repurchase agreement derivatives | | Interest expense | | $ | i 83 | | $ | i 92 | | $ | i 83 | | $ | ( i 1,608) |
Hedged item (2): | | | | | | | | | | | | | | |
Interest rate lock commitments and loans held for sale | | Net gains on loans held for sale at fair value | | $ | ( i 77,320) | | $ | ( i 55,540) | | $ | ( i 403,992) | | $ | ( i 157,362) |
Mortgage servicing rights | | Net loan servicing fees–Change in fair value of mortgage servicing rights and mortgage servicing liabilities | | $ | i 6,521 | | $ | i 250,146 | | $ | i 1,027,327 | | $ | i 587,883 |
| (1) | Represents net increase in fair value of IRLCs from the beginning to the end of the reporting 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. |
| (2) | All the hedging derivatives are interest rate derivatives and are used as economic hedges. |
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 September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 | | 2019 | ||||
| | (in thousands) | ||||||||||
Balance at beginning of period | | $ | i 2,213,539 | | $ | i 2,720,335 | | $ | i 2,926,790 |
| $ | i 2,820,612 |
Additions: | | | | | | | | | | | | |
Resulting from loan sales | | | i 245,946 | | | i 246,757 | | | i 753,795 | | | i 545,839 |
Purchases (purchase adjustments), net | | | ( i 287) | | | i 46 | | | i 25,473 | | | i 227,445 |
| | | i 245,659 | | | i 246,803 | | | i 779,268 | | | i 773,284 |
Change in fair value due to: | | | | | | | | | | | | |
Changes in valuation inputs used in valuation model (1) | | | ( i 26,208) | | | ( i 286,880) | | | ( i 1,040,751) | | | ( i 704,967) |
Other changes in fair value (2) | | | ( i 99,169) | | | ( i 124,005) | | | ( i 331,486) | | | ( i 332,676) |
Total change in fair value | | | ( i 125,377) | | | ( i 410,885) | | | ( i 1,372,237) | | | ( i 1,037,643) |
Balance at end of period | | $ | i 2,333,821 | | $ | i 2,556,253 | | $ | i 2,333,821 | | $ | i 2,556,253 |
| | | | | | | | | | | | |
| | | | | | | | September 30, | | |||
| | | | | | | | 2020 | | 2019 | ||
| | | | | | | | (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 2,330,600 | | $ | i 2,920,603 |
| (1) | Principally reflects changes in discount rate, prepayment speed and servicing cost inputs. |
| (2) | Represents changes due to realization of cash flows. |
/
/42
Mortgage Servicing Liabilities at Fair Value
The activity in MSLs is summarized below:
i
| | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
Balance at beginning of period | | $ | i 29,858 | | $ | i 12,948 | | $ | i 29,140 | | $ | i 8,681 |
Mortgage servicing liabilities resulting from loan sales | | | — | | | i 19,501 | | | i 6,576 | | | i 27,133 |
Changes in fair value due to: | | | | | | | | | | | | |
Changes in valuation inputs used in valuation model (1) | | | i 10,822 | | | i 8,630 | | | i 24,927 | | | i 14,687 |
Other changes in fair value (2) | | | ( i 8,982) | | | ( i 6,785) | | | ( i 28,945) | | | ( i 16,207) |
Total change in fair value | | | i 1,840 | | | i 1,845 | | | ( i 4,018) | | | ( i 1,520) |
Balance at end of period | | $ | i 31,698 | | $ | i 34,294 | | $ | i 31,698 | | $ | i 34,294 |
| (1) | Principally reflects changes in expected borrower performance and servicer losses given default. |
| (2) | Represents changes due to realization of cash flows. |
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 September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
Contractual servicing fees | | $ | i 203,696 | | $ | i 185,967 | | $ | i 601,527 | | $ | i 533,510 |
Other fees: | | | | | | | | | | | |
|
Late charges | | | i 7,615 | | | i 12,430 | | | i 28,718 | | | i 31,258 |
Other | | | i 6,960 | | | i 4,846 | | | i 17,781 | | | i 9,119 |
| | $ | i 218,271 | | $ | i 203,243 | | $ | i 648,026 | | $ | i 573,887 |
43
Note 10—Leases
The Company has operating lease agreements relating to its facilities. The Company’s operating lease agreements have remaining terms ranging from less than i one year to i ten years; some of these 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 September 30, |
| Nine months ended September 30, | ||||||||
| 2020 |
| 2019 | | 2020 |
| 2019 | ||||
| (dollars in thousands) | ||||||||||
Lease expense: | | | | | | | | | | | |
Operating leases | $ | i 4,144 | | $ | i 3,356 | | $ | i 12,110 | | $ | i 9,817 |
Short-term leases | | i 457 | | | i 213 | | | i 937 | | | i 644 |
Sublease income | | — | | | ( i 35) | | | — | | | ( i 94) |
Net lease expense included in Occupancy and equipment | $ | i 4,601 | | $ | i 3,534 | | $ | i 13,047 | | $ | i 10,367 |
| | | | | | | | | | | |
Other information: | | | | | | | | | | | |
Cash payments for operating leases | $ | i 4,418 | | $ | i 4,063 | | $ | i 13,212 | | $ | i 11,793 |
Operating lease right-of-use assets recognized: | | | | | | | | | | | |
Upon adoption Accounting Standards Update 2016-02, Leases (Topic 842) | $ | — | | $ | — | | $ | — | | $ | i 58,713 |
New leases | | i 1,721 | | | i 1,929 | | | i 8,219 | | | i 1,929 |
| $ | i 1,721 | | $ | i 1,929 | | $ | i 8,219 | | $ | i 60,642 |
Period end weighted averages: | | | | | | | | | | | |
Remaining lease term (in years) | | i 6.4 | | | i 5.8 | | | | | | |
Discount rate | | i 4.2% | | | i 4.6% | | | | | | |
Lease payments of the Company’s operating lease liabilities are summarized below:
i
| | | |
Twelve months ended September 30, | | Operating leases | |
| | (in thousands) | |
2021 | | $ | i 18,586 |
2022 | | | i 16,405 |
2023 | | | i 16,792 |
2024 | | | i 14,474 |
2025 | | | i 13,296 |
Thereafter | | | i 27,224 |
Total lease payments | | | i 106,777 |
Less imputed interest | | | ( i 14,772) |
Total | | $ | i 92,005 |
44
iNote 11—Other Assets
Other assets are summarized below:
i
| | | | | | |
| | | September 30, | | | |
| | 2020 |
| 2019 | ||
| | (in thousands) | ||||
Deposits securing Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets | | $ | i 192,597 | | $ | — |
Margin deposits | | | i 90,156 | | | i 84,118 |
Capitalized software, net | | | i 91,237 | | | i 63,130 |
Furniture, fixture, equipment and building improvements, net | | | i 29,274 | | | i 30,480 |
Real estate acquired in settlement of loans | | | i 14,395 | | | i 20,326 |
Other | | | i 233,570 | | | i 135,503 |
| | $ | i 651,229 | | $ | i 333,557 |
Deposits pledged to secure Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets | | $ | i 192,597 | | $ | — |
Assets pledged to secure Obligation under capital lease: | | | | | | |
Capitalized software, net | | | i 8,862 | | | i 12,192 |
Furniture, fixture, equipment and building improvements, net | | | i 6,088 | | | i 20,406 |
| | $ | i 207,547 | | $ | i 32,598 |
/
iNote 12—Borrowings
The borrowing facilities described throughout this Note 12 contain various covenants, including financial covenants governing the Company’s net worth, debt-to-equity ratio, profitability and liquidity. Management believes that the Company was in compliance with these covenants as of September 30, 2020.
Assets Sold Under Agreements to Repurchase
The Company has multiple borrowing facilities in the form of asset sales under agreements to repurchase. These borrowing facilities are secured by loans held for sale at fair value or participation certificates backed by MSRs. Eligible loans and participation certificates backed by MSRs are sold at advance rates based on the fair value (as determined by the lender) of the assets sold. Interest is charged at a rate based on LIBOR. Loans and MSRs financed under these agreements may be re-pledged by the lenders.
On April 1, 2020, the Company issued a series of variable funding notes, the Series 2020-SPIADVF1 Notes (“GMSR Servicing Advance Notes”), to be sold under agreement to repurchase pursuant to a Master Repurchase Agreement, dated as of April 1, 2020, with Credit Suisse First Boston Mortgage Capital LLC (“CSFB”), acting as administrative agent on behalf of Credit Suisse AG, Cayman Islands Branch (“CSCIB”), as buyer (the “GMSR Servicing Advances Repurchase Agreement”).
The GMSR Servicing Advance Notes leverage the GNMA MSR Facility to support a separately defined servicing advance facility within the existing structure and provide the Company enhanced ability to finance its servicing advance obligations to Ginnie Mae and its security holders as necessary. Specifically, the GMSR Servicing Advances Repurchase Agreement provides the Company with financing secured by its servicing advances to pay, in accordance with the Ginnie Mae requirements, in the event borrowers are delinquent: (i) regularly scheduled monthly principal and 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 in accordance with the CARES Act.
/45
Assets sold under agreements to repurchase are summarized below:
i
| | | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine months ended September 30, | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (dollars in thousands) | | ||||||||||
Average balance of assets sold under agreements to repurchase | | $ | i 3,363,140 | | $ | i 2,098,208 | | $ | i 2,669,336 | | $ | i 1,861,086 | |
Weighted average interest rate (1) | | | i 2.68 | % | | i 3.66 | % | | i 3.06 | % | | i 4.08 | % |
Total interest expense (2) | | $ | i 27,322 | | $ | i 19,429 | | $ | i 70,493 | | $ | i 47,709 | |
Maximum daily amount outstanding | | $ | i 7,267,046 | | $ | i 3,539,459 | | $ | i 7,267,046 | | $ | i 3,539,459 | |
| | | | | | | | | | | | | |
| | | | | | | | | September 30, | | | | |
|
| | | | | 2020 |
| 2019 |
| ||||
| | | | (dollars in thousands) | | ||||||||
Carrying value: | | | | | | | | | | | | | |
Unpaid principal balance | | | | | | | | $ | i 7,267,046 | | $ | i 4,141,680 | |
Unamortized debt issuance costs | | | | | | | | | ( i 7,858) | | | ( i 627) | |
| | | | | | | | $ | i 7,259,188 | | $ | i 4,141,053 | |
Weighted average interest rate | | | | | | | | | i 1.85 | % | | i 3.29 | % |
Available borrowing capacity (3): | | | | | | | | | | | | | |
Committed | | | | | | | | $ | i 17,072 | | $ | i 125,810 | |
Uncommitted | | | | | | | | | i 2,940,882 | | | i 782,510 | |
| | | | | | | | $ | i 2,957,954 | | $ | i 908,320 | |
Fair value of assets securing repurchase agreements: | | | | | | | | | | | | | |
Loans held for sale | | | | | | | | $ | i 8,453,522 | | $ | i 4,322,789 | |
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell | | | | | | | | $ | i 86,958 | | $ | i 107,512 | |
Servicing advances (4) | | | | | | | | $ | i 232,519 | | $ | i 207,460 | |
Mortgage servicing rights (4) | | | | | | | | $ | i 2,283,876 | | $ | i 2,902,721 | |
Deposits (4) | | | | | | | | $ | i 192,597 | | $ | — | |
Margin deposits placed with counterparties (5) | | | | | | | | $ | i 4,375 | | $ | i 5,000 | |
| (1) | Excludes the effect of amortization of net issuance costs of $ i 4.8 million and $ i 9.2 million for the quarter and nine months ended September 30, 2020, respectively, and net issuance costs and premiums of $ i 0.2 million and $ i 9.2 million for the quarter and nine months ended September 30, 2019, respectively. |
| (2) | In 2017, PFSI entered into a master repurchase agreement that provides the Company with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. The Company included $ i 1.6 million and $ i 14.7 million of such incentives as reductions in Interest expense during the quarter and nine months ended September 30, 2019, respectively. The master repurchase agreement expired on August 21, 2019. |
| (3) | The amount the Company is able to borrow under asset repurchase agreements is tied to the fair value of unencumbered assets eligible to secure those agreements and the Company’s ability to fund the agreements’ margin requirements relating to the assets financed. |
| (4) | Beneficial interests in the Ginnie Mae MSRs, servicing advances and deposits are pledged to the Issuer Trust and together serve as the collateral backing the VFN, GMSR Servicing Advance Notes, the 2018 Term Notes described in 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 2018 Term Notes are included in Notes payable secured by mortgage servicing assets on the Company's consolidated balance sheets. |
| (5) | Margin deposits are included in Other assets on the Company’s consolidated balance sheets. |
46
Following is a summary of maturities of outstanding advances under repurchase agreements by maturity date:
i
| | | |
Remaining maturity at September 30, 2020 |
| Unpaid principal balance | |
| | (dollars in thousands) | |
Within 30 days | | $ | i 1,490,837 |
Over 30 to 90 days | | | i 5,365,208 |
Over 90 to 180 days | | | i 361,001 |
Over 180 days to one year | | | i 50,000 |
Total assets sold under agreements to repurchase | | $ | i 7,267,046 |
Weighted average maturity (in months) | | | i 2.0 |
The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and interest payable) relating to the Company’s assets sold under agreements to repurchase is summarized by counterparty below as of September 30, 2020:
i
| | | | | | | |
| | | | | Weighted average | | |
| | | | | maturity of advances | | |
| | | | | under repurchase | | |
Counterparty |
| Amount at risk |
| agreement |
| Facility maturity | |
| | (in thousands) | | | | | |
Credit Suisse First Boston Mortgage Capital LLC (1) | | $ | i 1,092,694 | | | ||
Credit Suisse First Boston Mortgage Capital LLC | | $ | i 460,264 | | | ||
Bank of America, N.A. | | $ | i 410,222 | | | ||
JP Morgan Chase Bank, N.A. | | $ | i 192,579 | | | ||
Morgan Stanley Bank, N.A. | | $ | i 62,630 | | | ||
Citibank, N.A. | | $ | i 48,231 |
|
| ||
Royal Bank of Canada | | $ | i 33,343 | | | ||
BNP Paribas | | $ | i 27,646 | | | ||
| (1) | The calculation of the amount at risk includes the VFN and the 2018 Term Notes because beneficial interests in the Ginnie Mae MSRs and servicing advances are pledged to the Issuer Trust and together serve as the collateral backing the VFN, 2018 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 2018 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 September 30, | | | Nine months ended September 30, | | ||||||||
|
| 2020 |
| 2019 |
| | 2020 |
| 2019 |
| ||||
| | (dollars in thousands) | ||||||||||||
Average balance | | $ | i 235,713 | | $ | i 258,169 | | | $ | i 227,460 | | $ | i 249,023 | |
Weighted average interest rate (1) | | | i 1.40 | % | | i 3.36 | % | | | i 1.98 | % | | i 3.55 | % |
Total interest expense | | $ | i 999 | | $ | i 2,304 | | | $ | i 3,870 | | $ | i 7,034 | |
Maximum daily amount outstanding | | $ | i 538,074 | | $ | i 524,095 | | | $ | i 540,977 | | $ | i 548,038 | |
| (1) | Excludes the effect of amortization of debt issuance costs totaling $ i 172,000 and $ i 135,000 for the quarters ended September 30, 2020 and 2019, respectively, and $ i 490,000 and $ i 405,000 for the nine months ended September 30, 2020 and 2019, respectively. |
| | | | | | | | | | | | | | |
|
| | | | | | | | September 30, | | | |||
| | | | | | | | | 2020 |
| 2019 |
| ||
| | | | | | | | | (dollars in thousands) | | ||||
Carrying value: | | | | | | | | | | | | | | |
Unpaid principal balance | | | | | | | | | $ | i 535,378 | | $ | i 497,948 | |
Unamortized debt issuance costs | | | | | | | | | | ( i 315) | | | — | |
| | | | | | | | | $ | i 535,063 |
| $ | i 497,948 | |
Weighted average interest rate | | | | | | | | | | i 1.40 | % | | i 3.05 | % |
Fair value of loans pledged to secure mortgage loan participation purchase and sale agreements | | | | | | | | | $ | i 558,023 | | $ | i 523,349 | |
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 September 30, | | Nine months ended September 30, | |||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (dollars in thousands) | |||||||||||
Average balance | | $ | i 15,179 | | $ | i 25,812 | | $ | i 17,253 | | $ | i 13,380 | |
Weighted average interest rate | | | i 2.16 | % | | i 4.47 | % | | i 2.69 | % | | i 4.48 | % |
Total interest expense | | $ | i 83 | | $ | i 274 | | $ | i 354 | | $ | i 476 | |
Maximum daily amount outstanding | | $ | i 16,749 | | $ | i 28,295 | | $ | i 20,810 | | $ | i 28,295 | |
| | | | | | | | | | | | | |
| | | | | | | | September 30, | | | |||
| | | | | | | | 2020 |
| 2019 | | ||
| | | | | | | | (dollars in thousands) | | ||||
Unpaid principal balance | | | | | | | | $ | i 13,957 |
| $ | i 20,810 | |
Weighted average interest rate | | | | | | | | | i 2.15 | % | | i 3.74 | % |
Assets pledged to secure obligations under capital lease: | | | | | | | | | | | | | |
Furniture, fixtures and equipment | | | | | | | | $ | i 6,088 | | $ | i 20,406 | |
Capitalized software | | | | | | | | $ | i 8,862 | | $ | i 12,192 | |
48
Notes Payable Secured by Mortgage Servicing Assets
2018 Term Notes
The Company, through the Issuer Trust, issued the 2018 Term Notes to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”). The 2018 Term Notes rank pari passu with each other and with the VFN issued by the Issuer Trust to PLS and are secured by certain participation certificates relating to Ginnie Mae MSRs and ESS that are financed pursuant to the GNMA MSR Facility.
Following is a summary of the issued and outstanding 2018 Term Notes:
i
| | | | | | | |
Issuance Date | | Principal | | Stated interest rate (1) | | Maturity date (2) | |
| | (in thousands) | | (Annually) | | | |
February 28, 2018 (the "2018-GT1 Notes") | | $ | i 650,000 | | i 2.85% | | 2/25/2023 |
August 10, 2018 (the "2018-GT2 Notes") | | | i 650,000 | | i 2.65% | | 8/25/2023 |
| | $ | i 1,300,000 | | | | |
| (1) | Spread over one-month LIBOR. |
| (2) | The 2018 Term Notes indentures provide the Company with the option to extend the maturity of the 2018 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 October 21, 2020. 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 are summarized below:
i
| | | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine months ended September 30, | | ||||||||
|
| 2020 |
| 2019 | | 2020 |
| 2019 | | ||||
| | (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 2.99 | % | | i 5.11 | % | | i 3.57 | % | | i 5.21 | % |
Total interest expense | | $ | i 10,177 | | $ | i 17,044 | | $ | i 36,131 | | $ | i 52,118 | |
Maximum daily amount outstanding | | $ | i 1,300,000 | | $ | i 1,300,000 | | $ | i 1,300,000 | | $ | i 1,300,000 | |
| (1) | Excludes the effect of amortization of debt issuance costs totaling $ i 459,000 and $ i 445,000 for the quarters ended September 30, 2020 and 2019, respectively, and $ i 1.4 million and $ i 1.3 million for the nine month periods ended September 30, 2020 and 2019, respectively. |
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| | | | | | | | | | | | | |
| | | | | | | | September 30, | | | |||
|
| | | | | | | 2020 |
| 2019 | | ||
| | | | | | | | (dollars in thousands) | | ||||
Carrying value: | | | | | | | | | | | | | |
Unpaid principal balance | | | | | | | | $ | i 1,300,000 |
| $ | i 1,300,000 | |
Unamortized debt issuance costs | | | | | | | | | ( i 4,857) | | | ( i 5,930) | |
| | | | | | | | $ | i 1,295,143 | | $ | i 1,294,070 | |
Weighted average interest rate | | | | | | | | | i 2.93 | % | | i 4.46 | % |
Assets pledged to secure notes payable (1): | | | | | | | | | | | | | |
Servicing advances | | | | | | | | $ | i 232,519 | | $ | i 207,460 | |
Mortgage servicing rights | | | | | | | | $ | i 2,213,344 | | $ | i 2,861,442 | |
Deposits | | | | | | | | $ | i 192,597 | | $ | — | |
| (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 2018 Term Notes. The VFN financing and the GMSR Servicing Advance Notes are included in Assets sold under agreements to repurchase and the 2018 Term Notes are included in Notes payable secured by mortgage servicing assets on the Company's consolidated balance sheet. |
Unsecured Senior Notes
On September 29, 2020, the Company issued $ i 500 million aggregate principal amount of i 5.375% senior notes (the “Unsecured Notes”). Interest on the Unsecured Notes accrues beginning on September 29, 2020 at a rate of i 5.375% per year. Interest on the Unsecured Notes is payable semi-annually on April 15 and October 15 of each year, beginning on April 15, 2021. The Unsecured Notes mature on October 15, 2025.
Before October 15, 2022, the Company may, at its option and on any one or more occasions redeem:
| ● | 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% plus accrued and unpaid interest to, but excluding, the redemption date. |
On or after October 15, 2022, the Company may, at its option and on any one or more occasions, redeem some or all of the Unsecured Notes at the applicable redemption prices set forth in the indenture under which the Unsecured Notes were issued, plus accrued and unpaid interest to, but excluding, the redemption date.
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.
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 value of collateral securing such indebtedness.
50
The Unsecured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by each of PFSI’s existing and future wholly-owned domestic subsidiaries (other than certain excluded subsidiaries). 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 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.
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. Certain cash accounts with balances totaling $ i 52.6 million at December 31, 2019, were pledged to secure this revolving line of credit. 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 Notes. Debt issuance costs and non-utilization fees totaled $ i 561,000 and $ i 481,000 for the quarters ended September 30, 2020 and 2019, respectively, and $ i 1.5 million and $ i 1.4 million for the nine months ended September 30, 2020 and 2019, respectively.
iNote 13—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 September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
Balance at beginning of period | | $ | i 25,909 | | $ | i 18,709 | | $ | i 21,446 | | $ | i 21,155 |
Provision for losses on loans sold: | | | | | | | | | | | | |
Resulting from sales of loans | | | i 5,219 | | | i 2,508 | | | i 13,120 | | | i 5,222 |
Reduction in liability due to change in estimate | | | ( i 2,473) | | | ( i 1,175) | | | ( i 5,419) | | | ( i 6,305) |
Losses incurred, net | | | ( i 151) | | | ( i 74) | | | ( i 643) | | | ( i 104) |
Balance at end of period | | $ | i 28,504 | | $ | i 19,968 | | $ | i 28,504 | | $ | i 19,968 |
Unpaid principal balance of loans subject to representations and warranties at end of period | | $ | i 199,194,983 | | $ | i 166,541,153 | | | | | | |
/
iNote 14—Income Taxes
The Company’s effective income tax rates were i 26.5% and i 26.9% for the quarters ended September 30, 2020 and 2019, respectively and i 26.4% and i 26.3% for the nine months ended September 30, 2020 and 2019, respectively.
The CARES Act, passed in March 2020, introduced a number of tax law changes which are generally taxpayer favorable. The Company does not anticipate any material changes in its effective income tax rates resulting from the CARES Act.
/ i
Note 15—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.
51
On December 20, 2018, a purported shareholder of the Company filed a complaint in a putative class and derivative action in the Court of Chancery of the State of Delaware (the “Delaware Court”), captioned Robert Garfield v. BlackRock Mortgage Ventures, LLC et al., Case No. 2018-0917-KSJM (the “Garfield Action”). The Garfield Action alleges, among other things, that certain current directors and officers of the Company breached their fiduciary duties to the Company and its shareholders by, among other things, agreeing to and entering into a corporate reorganization (the “Reorganization”), without ensuring that the Reorganization was entirely fair to the Company or public shareholders. In connection with the Reorganization, the Company was formed as a Delaware corporation on July 2, 2018, and became the top-level parent holding company for the consolidated PennyMac business on November 1, 2018, The Reorganization was approved by i 99.8% of voting shareholders on October 24, 2018. On December 19, 2019, the Delaware Court denied a motion to dismiss filed by the Company and certain of its directors and officers. While the Company and its co-defendants believe the Garfield Action is without merit and expressly disclaim any wrongdoing, they have collectively agreed to settle the Garfield Action for an amount equal to $ i 6.85 million in order to avoid the ongoing costs of litigation and further distractions to their respective businesses. A settlement agreement was filed with the Delaware Court on October 9, 2020, and is currently pending approval. The Company’s share of the settlement amount will be paid entirely by one of the Company’s insurers.
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. While no assurance can be provided 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. Any potential range of loss cannot be reasonably estimated at this time primarily because the matter involves complex factual and legal issues; there is substantial uncertainty regarding any alleged damages, and the matter is at a preliminary stage of litigation.
Regulatory Matters
The Company and/or its subsidiaries are subject to various state and federal regulations related to its loan production and servicing operations by the various states it operates in as well as federal agencies such as the Consumer Financial Protection Bureau, HUD, and the FHA and is subject to the requirements of the Agencies to which it sells loans and for which it performs loan servicing activities. As a result, the Company may become involved in information-gathering requests, reviews, investigations and proceedings (both formal and informal) by such various federal, state and local regulatory bodies.
Commitments to Purchase and Fund Mortgage Loans
The Company’s commitments to purchase and fund loans totaled $ i 18.9 billion as of September 30, 2020.
52
Note 16—Stockholders’ Equity
In June 2020, the Company’s board of directors approved an increase to the Company’s common stock repurchase program from $ i 50 million to $ i 500 million. The Company entered into a privately negotiated transaction with The BlackRock Foundation under the revised stock repurchase program to repurchase i 6,975,323 shares of the Company’s common stock at a price of $ i 34 per share.
Following is a summary of activity under the stock repurchase program:
i | | | | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine months ended September 30, | Cumulative | |||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | total (1) | |||||
| | (in thousands) | ||||||||||||
Shares of common stock repurchased | | | i 118 | | | — | | | i 7,331 | | | i 51 | | i 8,147 |
Cost of shares of common stock repurchased | | $ | i 6,927 | | $ | — | | $ | i 248,210 | | $ | i 1,056 | $ | i 263,158 |
| (1) | Amounts represent the total shares of common stock repurchased under the stock repurchase program through September 30, 2020. |
iNote 17—Net Gains on Loans Held for Sale
Net gains on loans held for sale at fair value is summarized below:
i
| | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
From non-affiliates: | | | | | | | | | | | | |
Cash gain (loss): | | | | | | | | | | | | |
Loans | | $ | i 605,559 | | $ | ( i 22,838) | | $ | i 1,219,732 |
| $ | ( i 77,659) |
Hedging activities | | | ( i 72,268) | | | ( i 148,128) | | | ( i 421,947) | | | ( i 230,200) |
| | | i 533,291 | | | ( i 170,966) | | | i 797,785 | | | ( i 307,859) |
Non-cash gain: | | | | | | | | | | | | |
Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales | | | i 245,946 | | | i 227,256 | | | i 747,219 | | | i 518,706 |
Provision for losses relating to representations and warranties: | | | | | | | | | | | | |
Pursuant to loan sales | | | ( i 5,219) | | | ( i 2,508) | | | ( i 13,120) | | | ( i 5,222) |
Reduction in liability due to change in estimate | | | i 2,473 | | | i 1,175 | | | i 5,419 | | | i 6,305 |
Change in fair value of loans and derivatives held at period end: | | | | | | | | | | | | |
Interest rate lock commitments | | | i 173,381 | | | i 33,347 | | | i 404,795 | | | i 95,785 |
Loans | | | ( i 79,776) | | | ( i 5,822) | | | ( i 140,878) | | | ( i 35,508) |
Hedging derivatives | | | ( i 5,052) | | | i 92,588 | | | i 17,955 | | | i 72,838 |
| | | i 865,044 | | | i 175,070 | | | i 1,819,175 | | | i 345,045 |
From PennyMac Mortgage Investment Trust (1) | | | ( i 9,775) | | | i 60,662 | | | i 62,549 | | | i 122,996 |
| | $ | i 855,269 | | $ | i 235,732 | | $ | i 1,881,724 | | $ | i 468,041 |
/| (1) | Gain on sale of loans to PMT are detailed in Note 4–Related Party Transactions. |
53
Note 18—Net Interest Income
Net interest income is summarized below:
i
| | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
Interest income: | | | | | | | | | | | | |
From non-affiliates: | | | | | | | | | | | | |
Cash and short-term investments | | $ | i 1,259 | | $ | i 2,894 | | $ | i 4,863 | | $ | i 7,533 |
Loans held for sale at fair value | | | i 41,854 | | | i 35,800 | | | i 120,866 | | | i 101,509 |
Placement fees relating to custodial funds | | | i 9,163 | | | i 43,231 | | | i 44,419 | | | i 98,628 |
| | | i 52,276 | | | i 81,925 | | | i 170,148 | | | i 207,670 |
From PennyMac Mortgage Investment Trust—Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell | | | i 676 | | | i 1,527 | | | i 2,686 | | | i 5,015 |
| | | i 52,952 | | | i 83,452 | | | i 172,834 | | | i 212,685 |
| | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | |
To non-affiliates: | | | | | | | | | | | | |
Assets sold under agreements to repurchase (1) | | | i 27,322 | | | i 19,429 | | | i 70,493 | | | i 47,709 |
Mortgage loan participation purchase and sale agreements | | | i 999 | | | i 2,304 | | | i 3,870 | | | i 7,034 |
Obligations under capital lease | | | i 83 | | | i 274 | | | i 354 | | | i 476 |
Notes payable | | | i 10,738 | | | i 17,525 | | | i 37,668 | | | i 53,559 |
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations | | | i 20,711 | | | i 12,453 | | | i 54,536 | | | i 24,978 |
Interest on mortgage loan impound deposits | | | i 1,256 | | | i 2,104 | | | i 4,561 | | | i 4,967 |
| | | i 61,109 | | | i 54,089 | | | i 171,482 | | | i 138,723 |
To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value | | | i 2,070 | | | i 2,291 | | | i 6,416 | | | i 8,124 |
| | | i 63,179 | | | i 56,380 | | | i 177,898 | | | i 146,847 |
| | $ | ( i 10,227) | | $ | i 27,072 | | $ | ( i 5,064) | | $ | i 65,838 |
| (1) | In 2017, the Company entered into a master repurchase agreement that provided the Company with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. The Company included $ i 1.6 million and $ i 14.7 million of such incentives as reductions of Interest expense during the quarter and nine months ended September 30, 2019, respectively. The master repurchase agreement expired on August 21, 2019. |
54
Note 19—Stock-based Compensation
As of September 30, 2020, the Company had i one stock-based compensation plan. Following is a summary of the stock-based compensation activity:
i
| | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
Grants: | | | | | | | | | | | | |
Units: | | | | | | | | | | | | |
Performance-based RSUs | | | — | | | — | | | i 422 | | | i 665 |
Stock options | | | — | | | — | | | i 273 | | | i 344 |
Time-based RSUs | | | — | | | i 4 | | | i 310 | | | i 334 |
Grant date fair value: | | | | | | | | | | | | |
Performance-based RSUs | | $ | — | | $ | — | | $ | i 14,788 | | $ | i 15,253 |
Stock options | | | — | | | — | | | i 2,770 | | | i 2,965 |
Time-based RSUs | | | — | | | i 102 | | | i 10,823 | | | i 7,647 |
Total | | $ | — | | $ | i 102 | | $ | i 28,381 | | $ | i 25,865 |
Vestings and exercises: | | | | | | | | | | | | |
Performance-based RSUs vested | | | — | | | — | | | i 603 | | | i 648 |
Stock options exercised | | | i 152 | | | i 127 | | | i 476 | | | i 245 |
Time-based RSUs vested | | | i 7 | | | i 3 | | | i 355 | | | i 294 |
Compensation expense | | $ | i 7,095 | | $ | i 8,941 | | $ | i 26,220 | | $ | i 19,124 |
/
iNote 20—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 period. 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 shares of common stock were issued.
Potentially dilutive shares of common stock include non-vested stock-based compensation awards. The Company applies the treasury stock method to determine the diluted weighted average 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 September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands, except per share amounts) | ||||||||||
Net income | | $ | i 535,160 |
| $ | i 121,473 | | $ | i 1,194,080 |
| $ | i 240,304 |
| | | | | | | | | | | | |
Weighted average basic shares of common stock outstanding | | | i 72,439 | | | i 78,361 | | | i 76,292 | | | i 78,119 |
Effect of dilutive shares: | | | | | | | | | | | | |
Common shares issuable under stock-based compensation plan | | | i 3,699 | | | i 2,021 | | | i 3,326 | | | i 1,702 |
Weighted average shares of common stock applicable to diluted earnings per share | | | i 76,138 | | | i 80,382 | | | i 79,618 | | | i 79,821 |
Basic earnings per share of common stock | | $ | i 7.39 | | $ | i 1.55 | | $ | i 15.65 | | $ | i 3.08 |
Diluted earnings per share of common stock | | $ | i 7.03 | | $ | i 1.51 | | $ | i 15.00 | | $ | i 3.01 |
/55
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 restricted share units (“RSUs”) and stock options excluded from the calculation of diluted earnings per share:
i
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands except for weighted-average exercise price) | ||||||||||
Performance-based RSUs (1) | | | — | | | i 1,157 | | | i 335 | | | i 985 |
Stock options (2) | | | — | | | i 566 | | | i 217 | | | i 888 |
Total anti-dilutive shares and units | | | — | | | i 1,723 | | | i 552 | | | i 1,873 |
Weighted average exercise price of anti-dilutive stock options (2) | | $ | — | | $ | i 23.50 | | $ | i 35.03 | | $ | i 23.98 |
| (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 21—Supplemental Cash Flow Information
i
| | | | | | |
| | Nine months ended September 30, | ||||
|
| 2020 |
| 2019 | ||
| | (in thousands) | ||||
Cash paid for interest | | $ | i 184,087 |
| $ | i 125,987 |
Cash paid for income taxes, net | | $ | i 260,723 | | $ | i 5,761 |
Non-cash investing activity: | | | | | | |
Mortgage servicing rights resulting from loan sales | | $ | i 753,795 | | $ | i 545,839 |
Mortgage servicing liabilities resulting from loan sales | | $ | i 6,576 | | $ | i 27,133 |
Operating right-of-use assets recognized | | $ | i 8,219 | | $ | i 60,642 |
Non-cash financing activity: | | | | | | |
Issuance of Excess servicing spread payable to PennyMac Mortgage Investment Trust pursuant to a recapture agreement | | $ | i 1,393 | | $ | i 1,327 |
Issuance of common stock in settlement of directors' fees | | $ | i 144 | | $ | i 184 |
/
iNote 22—Regulatory Capital and Liquidity Requirements
The Company, through PLS and PennyMac, is required to maintain specified levels of capital and liquidity to remain a seller/servicer in good standing with the Agencies. Such capital and liquid asset requirements generally are tied to the size of the Company’s loan servicing portfolio, 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; |
| ● | before June 30, 2020, 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 (including nonperforming Agency loans that are in payment forbearance) in excess of 600 basis points; and |
| ● | effective June 30, 2020, 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. |
/56
On January 31, 2020, FHFA proposed changes to the eligibility requirements, which would increase the tangible net worth requirement to $ i 2.5 million plus i 35 basis points of the UPB of loans serviced for Ginnie Mae and i 25 basis points of the UPB of all other 1-4 unit loans serviced, and increase the liquidity requirement to 4 basis points of the aggregate UPB serviced for Fannie Mae and Freddie Mac and i 10 basis points of the UPB serviced for Ginnie Mae plus i 300 basis points of total nonperforming Agency servicing UPB (including nonperforming Agency loans that are in payment forbearance) in excess of 400 basis points. On June 15, 2020, FHFA announced that it will be re-proposing changes to these requirements.
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 3,841,356 | | $ | i 616,001 | | $ | i 2,247,751 | | $ | i 585,674 | |
Ginnie Mae – PLS | | $ | i 3,139,830 | | $ | i 980,469 | | $ | i 1,907,398 | | $ | i 910,456 | |
HUD – PLS | | $ | i 3,139,830 | | $ | i 2,500 | | $ | i 1,907,398 | | $ | i 2,500 | |
Liquidity | | | | | | | | | | | | | |
Fannie Mae & Freddie Mac – PLS | | $ | i 607,064 | | $ | i 82,828 | | $ | i 257,794 | | $ | i 79,991 | |
Ginnie Mae – PLS | | $ | i 607,064 | | $ | i 217,648 | | $ | i 257,794 | | $ | i 216,119 | |
Adjusted net worth / Total assets ratio | | | | | | | | | | | | | |
Ginnie Mae – PLS | | | i 10 | % | | i 6 | % | | i 19 | % | | i 6 | % |
Tangible net worth / Total assets ratio | | | | | | | | | | | | | |
Fannie Mae & Freddie Mac – PLS | | | i 12 | % | | i 6 | % | | i 22 | % | | 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 23—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.
/57
Financial performance and results by segment are as follows:
i
| | | | | | | | | | | | | | | | |
| | Quarter ended September 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 700,830 | | $ | i 154,439 | | $ | i 855,269 | | $ | — | | $ | i 855,269 | |
Loan origination fees | | | i 75,572 | | | — | | | i 75,572 | | | — | | | i 75,572 | |
Fulfillment fees from PennyMac Mortgage Investment Trust | | | i 54,839 | | | — | | | i 54,839 | | | — | | | i 54,839 | |
Net loan servicing fees | | | — | | | i 132,807 | | | i 132,807 | | | — | | | i 132,807 | |
Net interest income (expense): | | | | | | | | | | | | | | | | |
Interest income | | | i 26,050 | | | i 26,902 | | | i 52,952 | | | — | | | i 52,952 | |
Interest expense | | | i 18,325 | | | i 44,850 | | | i 63,175 | | | i 4 | | | i 63,179 | |
| | | i 7,725 | | | ( i 17,948) | | | ( i 10,223) | | | ( i 4) | | | ( i 10,227) | |
Management fees | | | — | | | — | | | — | | | i 8,508 | | | i 8,508 | |
Other | | | i 132 | | | i 1,802 | | | i 1,934 | | | i 1,290 | | | i 3,224 | |
Total net revenue | | | i 839,098 | | | i 271,100 | | | i 1,110,198 | | | i 9,794 | | | i 1,119,992 | |
Expenses | | | i 225,817 | | | i 159,407 | | | i 385,224 | | | i 6,477 | | | i 391,701 | |
Income before provision for income taxes | | $ | i 613,281 | | $ | i 111,693 | | $ | i 724,974 | | $ | i 3,317 | | $ | i 728,291 | |
Segment assets at quarter end | | $ | i 7,319,838 | | $ | i 23,843,110 | | $ | i 31,162,948 | | $ | i 17,917 | | $ | i 31,180,865 | |
| (1) | All revenues are from external customers. |
| | | | | | | | | | | | | | | | |
| | Quarter ended September 30, 2019 | | |||||||||||||
| | Mortgage Banking | | Investment | | | | | ||||||||
|
| Production |
| Servicing |
| Total |
| Management |
| Total |
| |||||
| | (in thousands) | | |||||||||||||
Revenue: (1) | | | | | | | | | | | | | | | | |
Net gains on loans held for sale at fair value | | $ | i 216,132 | | $ | i 19,600 | | $ | i 235,732 | | $ | — | | $ | i 235,732 | |
Loan origination fees | | | i 49,434 | | | — | | | i 49,434 | | | — | | | i 49,434 | |
Fulfillment fees from PennyMac Mortgage Investment Trust | | | i 45,149 | | | — | | | i 45,149 | | | — | | | i 45,149 | |
Net loan servicing fees | | | — | | | i 66,229 | | | i 66,229 | | | — | | | i 66,229 | |
Net interest income (expense): | | | | | | | | | | | | | | | | |
Interest income | | | i 22,445 | | | i 61,007 | | | i 83,452 | | | — | | | i 83,452 | |
Interest expense | | | i 18,423 | | | i 37,936 | | | i 56,359 | | | i 21 | | | i 56,380 | |
| | | i 4,022 | | | i 23,071 | | | i 27,093 | | | ( i 21) | | | i 27,072 | |
Management fees | | | — | | | — | | | — | | | i 10,098 | | | i 10,098 | |
Other | | | i 324 | | | i 567 | | | i 891 | | | i 1,742 | | | i 2,633 | |
Total net revenue | | | i 315,061 | | | i 109,467 | | | i 424,528 | | | i 11,819 | | | i 436,347 | |
Expenses | | | i 135,777 | | | i 127,581 | | | i 263,358 | | | i 6,792 | | | i 270,150 | |
Income before provision for income taxes | | $ | i 179,284 | | $ | ( i 18,114) | | $ | i 161,170 | | $ | i 5,027 | | $ | i 166,197 | |
Segment assets at quarter end | | $ | i 4,850,741 | | $ | i 4,433,177 | | $ | i 9,283,918 | | $ | i 19,281 | | $ | i 9,303,199 | |
| (1) | All revenues are from external customers. |
/58
| | | | | | | | | | | | | | | | |
| | Nine months ended September 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 1,637,193 | | $ | i 244,531 | | $ | i 1,881,724 | | $ | — | | $ | i 1,881,724 | |
Loan origination fees | | | i 192,091 | | | — | | | i 192,091 | | | — | | | i 192,091 | |
Fulfillment fees from PennyMac Mortgage Investment Trust | | | i 149,594 | | | — | | | i 149,594 | | | — | | | i 149,594 | |
Net loan servicing fees | | | — | | | i 412,952 | | | i 412,952 | | | — | | | i 412,952 | |
Net interest income (expense): | | | | | | | | | | | | | | | | |
Interest income | | | i 71,840 | | | i 100,994 | | | i 172,834 | | | — | | | i 172,834 | |
Interest expense | | | i 51,124 | | | i 126,756 | | | i 177,880 | | | i 18 | | | i 177,898 | |
| | | i 20,716 | | | ( i 25,762) | | | ( i 5,046) | | | ( i 18) | | | ( i 5,064) | |
Management fees | | | — | | | — | | | — | | | i 25,851 | | | i 25,851 | |
Other | | | i 483 | | | i 1,473 | | | i 1,956 | | | i 4,347 | | | i 6,303 | |
Total net revenue | | | i 2,000,077 | | | i 633,194 | | | i 2,633,271 | | | i 30,180 | | | i 2,663,451 | |
Expenses | | | i 608,602 | | | i 413,071 | | | i 1,021,673 | | | i 18,395 | | | i 1,040,068 | |
Income before provision for income taxes | | $ | i 1,391,475 | | $ | i 220,123 | | $ | i 1,611,598 | | $ | i 11,785 | | $ | i 1,623,383 | |
Segment assets at period end | | $ | i 7,319,838 | | $ | i 23,843,110 | | $ | i 31,162,948 | | $ | i 17,917 | | $ | i 31,180,865 | |
| (1) | All revenues are from external customers. |
| | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2019 | | |||||||||||||
| | Mortgage Banking | | Investment | | | | | ||||||||
|
| Production |
| Servicing |
| Total |
| Management |
| Total |
| |||||
| | (in thousands) | | |||||||||||||
Revenue: (1) | | | | | | | | | | | | | | | | |
Net gains on loans held for sale at fair value | | $ | i 407,713 | | $ | i 60,328 | | $ | i 468,041 | | $ | — | | $ | i 468,041 | |
Loan origination fees | | | i 110,288 | | | — | | | i 110,288 | | | — | | | i 110,288 | |
Fulfillment fees from PennyMac Mortgage Investment Trust | | | i 102,313 | | | — | | | i 102,313 | | | — | | | i 102,313 | |
Net loan servicing fees | | | — | | | i 205,934 | | | i 205,934 | | | — | | | i 205,934 | |
Net interest income (expense): | | | | | | | | | | | | | | | | |
Interest income | | | i 55,714 | | | i 156,971 | | | i 212,685 | | | — | | | i 212,685 | |
Interest expense | | | i 36,236 | | | i 110,572 | | | i 146,808 | | | i 39 | | | i 146,847 | |
| | | i 19,478 | | | i 46,399 | | | i 65,877 | | | ( i 39) | | | i 65,838 | |
Management fees | | | — | | | — | | | — | | | i 26,178 | | | i 26,178 | |
Other | | | i 929 | | | i 2,664 | | | i 3,593 | | | i 4,844 | | | i 8,437 | |
Total net revenue | | | i 640,721 | | | i 315,325 | | | i 956,046 | | | i 30,983 | | | i 987,029 | |
Expenses | | | i 316,187 | | | i 324,949 | | | i 641,136 | | | i 19,815 | | | i 660,951 | |
Income before provision for income taxes | | $ | i 324,534 | | $ | ( i 9,624) | | $ | i 314,910 | | $ | i 11,168 | | $ | i 326,078 | |
Segment assets at period end | | $ | i 4,850,741 | | $ | i 4,433,177 | | $ | i 9,283,918 | | $ | i 19,281 | | $ | i 9,303,199 | |
(1) All revenues are from external customers.
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Note 24—Subsequent Events
Management has evaluated all events and transactions through the date the Company issued these consolidated financial statements. During this period:
| ● | On October 19, 2020, The Company issued an additional $ i 150 million in principal amount of unsecured senior notes under a supplemental indenture governing the Unsecured Notes described in Note 12 – Borrowings. The additional unsecured senior notes have the same terms, other than the issuance date and issuance price, as the Unsecured Notes. |
| ● | On November 5, 2020, the Company announced that its board of directors declared a cash dividend of $ i 0.15 per common share. The dividend will be paid on November 25, 2020 to common shareholders of record as of November 16, 2020. |
| ● | All agreements to repurchase assets that matured before the date of this Report were extended or renewed. |
/
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
The following discussion and analysis of financial condition and results of operations should be read with the consolidated financial statements including the related notes of PennyMac Financial Services, Inc. (“PFSI”) included within this Quarterly Report on Form 10-Q.
Statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those expressed or implied in such statements. You can identify these forward-looking statements by words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors,” as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and our other filings with the United States Securities and Exchange Commission (“SEC”). The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date hereof and we assume no obligation to update or supplement any forward-looking statements.
Overview
The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to the words “we,” “us,” “our” and the “Company” refer to PFSI.
We are a specialty financial services firm with a comprehensive mortgage platform and integrated business primarily focused on the production and servicing of U.S. residential mortgage loans (activities which we refer to as mortgage banking) and the management of investments related to the U.S. mortgage market. We believe that our operating capabilities, specialized expertise, access to long-term investment capital, and our management’s experience across all aspects of the mortgage business will allow us to profitably grow these activities and capitalize on other related opportunities as they arise in the future.
We operate and control all of the business and affairs and consolidate the financial results of Private National Mortgage Acceptance Company, LLC (“PennyMac”). PennyMac was founded in 2008 by members of our executive leadership team and two strategic partners, BlackRock Mortgage Ventures, LLC and HC Partners, LLC, formerly known as Highfields Capital Investments, LLC, together with its affiliates.
We were formed as a Delaware corporation on July 2, 2018. We became the top-level parent holding company for the consolidated PennyMac business pursuant to a corporate reorganization (the “Reorganization”) that was consummated on November 1, 2018. Before the Reorganization, PNMAC Holdings, Inc. (formerly known as PennyMac Financial Services, Inc.) (“PNMAC Holdings”) was our top-level parent holding company and our public company registrant.
One result of the consummation of the Reorganization was that our equity structure was changed to create a single class of publicly-held common stock as opposed to the two classes that were in place before the Reorganization. For tax purposes, the Reorganization was treated as an integrated transaction that qualifies as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code and/or a transfer described in Section 351(a) of the Internal Revenue Code. PNMAC Holdings’ financial statements remain our historical financial statements.
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We conduct our business in three segments: production, servicing (together, production and servicing comprise our mortgage banking activities) and investment management.
| ● | The production segment performs loan origination, acquisition and sale activities. |
| ● | The servicing segment performs loan servicing for both newly originated loans we are holding for sale and loans we service for others, including for PMT. |
| ● | The investment management segment represents our investment management activities, which include the activities associated with investment asset acquisitions and dispositions such as sourcing, due diligence, negotiation and settlement. |
Our principal mortgage banking subsidiary, PennyMac Loan Services, LLC (“PLS”), is a non-bank producer and servicer of mortgage and home equity loans in the United States. PLS is a seller/servicer for the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), each of which is a government-sponsored entity (“GSE”). PLS is also an approved issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”), a lender of the Federal Housing Administration (“FHA”), and a lender/servicer of the Veterans Administration (“VA”) and the U.S. Department of Agriculture (“USDA”). We refer to each of Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA and USDA as an “Agency” and collectively as the “Agencies.” PLS is able to service loans in all 50 states, the District of Columbia, Guam and the U.S. Virgin Islands, and originate loans in 49 states and the District of Columbia, either because PLS is properly licensed in a particular jurisdiction or exempt or otherwise not required to be licensed in that jurisdiction.
Our investment management subsidiary is PNMAC Capital Management, LLC (“PCM”), a Delaware limited liability company registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended. PCM manages PennyMac Mortgage Investment Trust (“PMT”), a mortgage real estate investment trust listed on the New York Stock Exchange under the ticker symbol PMT.
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Results of Operations
Our results of operations are summarized below:
| | | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine months ended September 30, | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (dollars in thousands, except per share amounts) | | ||||||||||
Revenues: | | | | | | | | | | | | | |
Net gains on loans held for sale at fair value | | $ | 855,269 | | $ | 235,732 | | $ | 1,881,724 | | $ | 468,041 | |
Loan origination fees | | | 75,572 | | | 49,434 | | | 192,091 | | | 110,288 | |
Fulfillment fees from PennyMac Mortgage Investment Trust | | | 54,839 | | | 45,149 | | | 149,594 | | | 102,313 | |
Net loan servicing fees | | | 132,807 | | | 66,229 | | | 412,952 | | | 205,934 | |
Net interest (expense) income | | | (10,227) | | | 27,072 | | | (5,064) | | | 65,838 | |
Management fees | | | 8,508 | | | 10,098 | | | 25,851 | | | 26,178 | |
Other | | | 3,224 | | | 2,633 | | | 6,303 | | | 8,437 | |
Total net revenue | | | 1,119,992 | | | 436,347 | | | 2,663,451 | | | 987,029 | |
Expenses | | | 391,701 | | | 270,150 | | | 1,040,068 | | | 660,951 | |
Income before provision for income taxes | | | 728,291 | | | 166,197 | | | 1,623,383 | | | 326,078 | |
Provision for income taxes | | | 193,131 | | | 44,724 | | | 429,303 | | | 85,774 | |
Net income | | $ | 535,160 | | $ | 121,473 | | $ | 1,194,080 | | $ | 240,304 | |
Earnings per share | | | | | | | | | | | | | |
Basic | | $ | 7.39 | | $ | 1.55 | | $ | 15.65 | | $ | 3.08 | |
Diluted | | $ | 7.03 | | $ | 1.51 | | $ | 15.00 | | $ | 3.01 | |
Annualized return on average common stockholders' equity | | | 77.6 | % | | 26.2 | % | | 63.8 | % | | 18.2 | % |
Income before provision for income taxes by segment: | | | | | | | | | | | | | |
Mortgage banking: | | | | | | | | | | | | | |
Production | | $ | 613,281 | | $ | 179,284 | | $ | 1,391,475 | | $ | 324,534 | |
Servicing | | | 111,693 | | | (18,114) | | | 220,123 | | | (9,624) | |
Total mortgage banking | | | 724,974 | | | 161,170 | | | 1,611,598 | | | 314,910 | |
Investment management | | | 3,317 | | | 5,027 | | | 11,785 | | | 11,168 | |
| | $ | 728,291 | | $ | 166,197 | | $ | 1,623,383 | | $ | 326,078 | |
Adjusted Earning Before Interest, Taxes, Depreciation and Amortization ("EBITDA") (1) | | $ | 769,805 | | $ | 221,293 | | $ | 1,688,677 | | $ | 478,021 | |
During the period: | | | | | | | | | | | | | |
Interest rate lock commitments issued | | $ | 36,564,786 | | $ | 22,423,177 | | $ | 87,334,326 | | $ | 49,291,237 | |
At end of period: | | | | | | | | | | | | | |
Interest rate lock commitments outstanding | | $ | 18,873,579 | | $ | 8,311,786 | | | | | | | |
Unpaid principal balance of loan servicing portfolio: | | | | | | | | | | | | | |
Owned: | | | | | | | | | | | | | |
Mortgage servicing rights | | $ | 234,850,997 | | $ | 221,215,993 | | | | | | | |
Mortgage servicing liabilities | | | 1,799,562 | | | 2,327,687 | | | | | | | |
Loans held for sale | | | 8,749,673 | | | 4,323,252 | | | | | | | |
| | | 245,400,232 | | | 227,866,932 | | | | | | | |
Subserviced for PMT | | | 156,496,568 | | | 120,608,076 | | | | | | | |
| | $ | 401,896,800 | | $ | 348,475,008 | | | | | | | |
| | | | | | | | | | | | | |
Net assets of PennyMac Mortgage Investment Trust | | $ | 2,281,266 | | $ | 2,219,611 | | | | | | | |
Book value per share | | $ | 41.67 | | $ | 24.37 | | | | | | | |
| (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 which 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 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 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 to the extent such items existed in the periods presented.
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
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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 them in isolation or as a substitute for analysis of our results as reported under U.S. 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;
(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 September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
Net income | | $ | 535,160 | | $ | 121,473 | | $ | 1,194,080 | | $ | 240,304 |
Provision for income taxes | | | 193,131 | | | 44,724 | | | 429,303 | | | 85,774 |
Income befoe provisions for income taxes | | | 728,291 | | | 166,197 | | | 1,623,383 | | | 326,078 |
Depreciation and amortization | | | 6,401 | | | 3,900 | | | 17,126 | | | 10,650 |
Decrease in fair value of MSRs and MSLs due to changes in valuation inputs used in valuation model | | | 37,030 | | | 295,510 | | | 1,065,678 | | | 719,654 |
Decrease in fair value of ESS payable to PennyMac Mortgage Investment Trust | | | (3,135) | | | (3,864) | | | (18,293) | | | (11,519) |
Hedging gains associated with MSRs | | | (6,521) | | | (250,146) | | | (1,027,327) | | | (587,883) |
Stock‑based compensation | | | 7,095 | | | 8,941 | | | 26,220 | | | 19,124 |
Interest expense on corporate debt or corporate revolving credit facilities and capital lease | | | 644 | | | 755 | | | 1,890 | | | 1,917 |
Adjusted EBITDA | | $ | 769,805 | | $ | 221,293 | | $ | 1,688,677 | | $ | 478,021 |
During the nine months ended September 30, 2020, the United States was significantly impacted by the ongoing effects of the COVID-19 Pandemic (the “Pandemic” or “COVID-19”) and the effects of market and government responses to the Pandemic. These developments have resulted in an economic recession in the United States and increased unemployment that have created financial hardships for many existing borrowers.
As part of its response to the Pandemic, the federal government included requirements in the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act that we provide borrowers with loans we service for the Agencies with substantial payment forbearance. As a result of this requirement, we have seen a large increase in delinquencies in our servicing portfolio which has increased our cost to service those loans and may require us to finance substantial amounts of 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 September 30, 2020, 9.2% 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.
This development may have a negative effect on the earnings of our servicing segment before taking into account the effect of future developments on the valuation of our MSRs by, among other things, reducing servicing fee income, reducing the amount of placement fees we earn on custodial deposits related to these loans, increasing our cost to service due to higher delinquency and default rates, as well as increased financing costs due to the need to advance funds on behalf of delinquent borrowers. We expect these losses to be offset by growth in our loan servicing portfolio and gains on early buyout loans as those borrowers reperform.
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Before the onset of the Pandemic, the mortgage origination market was experiencing healthy demand owing to historically low interest rates in the United States. The government’s response to the onset of the Pandemic, including fiscal stimulus and infusions of additional liquidity by the Federal Reserve into financial markets acted to further lower market mortgage interest rates. These developments have acted to sustain heightened demand for new mortgage loans despite the slowdown in overall economic activity. The mortgage origination market for 2019 was estimated at $2.3 trillion; current forecasts estimate the origination market to approximate $3.6 trillion for 2020 and range from $2.5 trillion to $2.7 trillion for 2021. This increase in demand for mortgage loans, combined with constraints on mortgage industry origination capacity that existed before the Pandemic, has allowed us to realize higher gain-on sale margins in our production segment. Fannie Mae and Freddie Mac are expected to add a 50 basis point adverse market refinance fee applicable to most mortgage refinances on December 1, 2020 that could have a negative impact on future refinances.
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 “Risk Factors” in Part II, Item 1A.
For the quarter and nine months ended September 30, 2020, income before provision for income taxes increased $562.1 million and $1.3 billion, respectively, compared to the same periods ended September 30, 2019. The increases were primarily due to an increase in production income (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 and improved margins and an increase in Net loan servicing fees primarily due to growth in our loan servicing portfolio and increase in income from buying loans out of Ginnie Mae securities for potential resecuritization, partially offset by an increase in total expenses. The increase in total expenses were mainly due to increases in compensation, servicing and loan origination expenses reflecting the continuing growth of our mortgage banking activities and the impact of the Pandemic on our servicing portfolio and operations.
Net Gains on Loans Held for Sale at Fair Value
During the quarter and nine months ended September 30, 2020, we recognized Net gains on loans held for sale at fair value totaling $855.3 million and $1.9 billion, respectively, an increase of $619.5 million and $1.4 billion, compared to the same periods in 2019. The increases were primarily due to the combined effects of decreasing interest rates on demand for loans and of temporary disruption of industry capacity at the onset of the Pandemic, both of which increased profit margins during 2020 as compared to 2019.
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Our net gains on loans held for sale are summarized below:
| | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
From non-affiliates: | | | | | | | | | | | | |
Cash gain (loss): | | |
| | |
| | |
| | |
|
Loans | | $ | 605,559 | | $ | (22,838) | | $ | 1,219,732 | | $ | (77,659) |
Hedging activities | | | (72,268) | | | (148,128) | | | (421,947) | | | (230,200) |
Total cash gain (loss) | | | 533,291 | | | (170,966) | | | 797,785 | | | (307,859) |
Non-cash gain: | | | | | | | | | | | | |
Change in fair value of loans and derivative financial instruments outstanding at end of period: | | | | | | | | | | | | |
Interest rate lock commitments | | | 173,381 | | | 33,347 | | | 404,795 | | | 95,785 |
Loans | | | (79,776) | | | (5,822) | | | (140,878) | | | (35,508) |
Hedging derivatives | | | (5,052) | | | 92,588 | | | 17,955 | | | 72,838 |
| | | 88,553 | | | 120,113 | | | 281,872 | | | 133,115 |
Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales | | | 245,946 | | | 227,256 | | | 747,219 | | | 518,706 |
Provision for losses relating to representations and warranties: | | | | | | | | | | | | |
Pursuant to loan sales | | | (5,219) | | | (2,508) | | | (13,120) | | | (5,222) |
Reduction in liability due to change in estimate | | | 2,473 | | | 1,175 | | | 5,419 | | | 6,305 |
Total non-cash gain | | | 331,753 | | | 346,036 | | | 1,021,390 | | | 652,904 |
Total gains on sale from non-affiliates | | | 865,044 | | | 175,070 | | | 1,819,175 | | | 345,045 |
From PennyMac Mortgage Investment Trust | | | (9,775) | | | 60,662 | | | 62,549 | | | 122,996 |
| | $ | 855,269 | | $ | 235,732 | | $ | 1,881,724 | | $ | 468,041 |
During the period: | | | | | | | | | | | | |
Interest rate lock commitments issued: | | | | | | | | | | | | |
Government-insured or guaranteed mortgage loans | | $ | 26,629,871 | | $ | 19,383,044 | | $ | 63,728,308 | | $ | 42,574,349 |
Conventional mortgage loans | | | 9,934,915 | | | 3,031,076 | | | 23,596,038 | | | 6,686,393 |
Jumbo mortgage loans | | | — | | | 6,087 | | | 8,304 | | | 23,452 |
Home equity lines of credit | | | — | | | 2,970 | | | 1,676 | | | 7,043 |
| | $ | 36,564,786 | | $ | 22,423,177 | | $ | 87,334,326 | | $ | 49,291,237 |
At end of period: | | | | | | | | | | | | |
Loans held for sale at fair value | | $ | 9,126,172 | | $ | 4,522,971 | | | | | | |
Commitments to fund and purchase loans | | $ | 18,873,579 | | $ | 8,311,786 | | | | | | |
Our gain on sale of loans held for sale includes both cash and non-cash elements. We recognize a significant portion of our gain on sale of loans 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 early buyout of delinquent loans (“EBO loans”) we have resold) and for the fair value of our estimate of the losses we expect to incur relating to the representation and warranties we provide in our loan sale transactions.
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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 39% and 54% of our gain on sale of loans held for sale at fair value for the quarter and nine months ended September 30, 2020, respectively, as compared to 147% and 140% for the quarter and nine months ended September 30, 2019, 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 loss on the loans. Our credit loss may be reduced by any recourse we have to correspondent originators that sold such loans to us and breached similar or other representations and warranties. In such event, we have the right to seek a recovery of related repurchase losses from that correspondent seller.
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 $5.2 million and $13.1 million for the quarter and nine months ended September 30, 2020, respectively, compared to $2.5 million and $5.2 million for the quarter and nine months ended September 30, 2019, 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 early buyout loans. We also recorded reductions in the liability of $2.5 million and $5.4 million during the quarter and nine months ended September 30, 2020, respectively, compared to $1.2 million and $6.3 million during the quarter and nine months ended September 30, 2019, respectively. The reductions in the liability resulted from previously sold loans meeting performance criteria established by the Agencies which significantly limits the likelihood of certain repurchase or indemnification claims.
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Following is a summary of loan repurchase activity and the UPB of loans subject to representations and warranties:
| | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
During the period: | | |
| | |
| | |
| | |
|
Indemnification activity: | | | | | | | | | | | | |
Loans indemnified by PFSI at beginning of period | | $ | 16,396 | | $ | 12,928 | | $ | 15,366 | | $ | 8,899 |
New indemnifications | | | 1,285 | | | 5,582 | | | 3,731 | | | 9,848 |
Less indemnified loans sold, repaid or refinanced | | | 2,053 | | | 1,587 | | | 3,469 | | | 1,824 |
Loans indemnified by PFSI at end of period | | $ | 15,628 | | $ | 16,923 | | $ | 15,628 | | $ | 16,923 |
Repurchase activity: | | | | | | | | | | | | |
Total loans repurchased by PFSI | | $ | 9,146 | | $ | 4,115 | | $ | 43,699 | | $ | 15,427 |
Less: | | | | | | | | | | | | |
Loans repurchased by correspondent lenders | | | 7,207 | | | 2,677 | | | 23,713 | | | 9,961 |
Loans repaid by borrowers or resold with defects resolved | | | 5,282 | | | 1,663 | | | 12,649 | | | 4,258 |
Net loans (resolved) repurchased with losses chargeable to liability for representations and warranties | | $ | (3,343) | | $ | (225) | | $ | 7,337 | | $ | 1,208 |
Net losses charged to liability for representations and warranties | | $ | 151 | | $ | 74 | | $ | 643 | | $ | 104 |
| | | | | | | | | | | | |
At end of period: | | | | | | | | | | | ||
Unpaid principal balance of loans subject to representations and warranties | | $ | 199,194,983 | | $ | 166,541,153 | | | | | | |
Liability for representations and warranties | | $ | 28,504 | | $ | 19,968 | | | | | | |
During the quarter and nine months ended September 30, 2020, we repurchased loans totaling $9.1 million and $43.7 million in UPB, respectively. We recorded losses of $151,000 and $643,000 net of recoveries during the quarter and nine months ended September 30, 2020, 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 $26.1 million and $81.8 million during the quarter and nine months ended September 30, 2020, respectively, compared to the same periods in 2019. 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 $9.7 million and $47.3 million during the quarter and nine months ended September 30, 2020, respectively, compared to the same periods in 2019. 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 during the quarter and nine month period ended September 30, 2020, compared to the same periods in 2019.
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Net Loan Servicing Fees
Following is a summary of our net loan servicing fees:
| | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
Net loan servicing fees: | | | | | | | | | | | | |
Loan servicing fees: | | | | | | | | | | | | |
From non-affiliates | | $ | 203,696 | | $ | 185,967 | | $ | 601,527 | | $ | 533,510 |
From PennyMac Mortgage Investment Trust | | | 18,752 | | | 12,964 | | | 48,806 | | | 35,102 |
Other | | | 27,920 | | | 26,018 | | | 85,218 | | | 74,043 |
| | | 250,368 | | | 224,949 | | | 735,551 | | | 642,655 |
Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing net of hedging results | | | (117,561) | | | (158,720) | | | (322,599) | | | (436,721) |
Net loan servicing fees | | $ | 132,807 | | $ | 66,229 | | $ | 412,952 | | $ | 205,934 |
Average loan servicing portfolio | | $ | 394,392,315 | | $ | 341,369,904 | | $ | 386,004,037 | | $ | 325,658,620 |
Change in fair value of mortgage servicing rights and excess servicing spread are summarized below:
| | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
Realization of cash flows | | $ | (90,187) | | $ | (117,220) | | $ | (302,541) | | $ | (316,469) |
Other changes in fair value of mortgage servicing rights and mortgage servicing liabilities | | | (37,030) | | | (295,510) | | | (1,065,678) | | | (719,654) |
Change in fair value of excess servicing spread | | | 3,135 | | | 3,864 | | | 18,293 | | | 11,519 |
Hedging results | | | 6,521 | | | 250,146 | | | 1,027,327 | | | 587,883 |
Total change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing net of hedging results | | $ | (117,561) | | $ | (158,720) | | $ | (322,599) | | $ | (436,721) |
Average balances: | | | | | | | | | | | | |
Mortgage servicing rights | | $ | 2,252,504 | | $ | 2,601,069 | | $ | 2,364,573 | | $ | 2,757,948 |
Mortgage servicing liabilities | | $ | 31,070 | | $ | 23,997 | | $ | 29,635 | | $ | 14,649 |
Excess servicing spread financing | | $ | 149,035 | | $ | 187,088 | | $ | 158,636 | | $ | 199,911 |
At period end: | | | | | | | | | | | | |
Mortgage servicing rights | | $ | 2,333,821 | | $ | 2,556,253 | | | | | | |
Mortgage servicing liabilities | | $ | 31,698 | | $ | 34,294 | | | | | | |
Excess servicing spread financing | | $ | 142,990 | | $ | 183,141 | | | | | | |
| | | | | | | | | | | | |
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Following is a summary of our loan servicing portfolio:
| | | | | | |
| | | | | | |
| | September 30, | | |||
|
| 2020 |
| 2019 | ||
| | (in thousands) | ||||
Loans serviced | | | | | | |
Prime servicing: | | | | | | |
Owned: | | | | | | |
Mortgage servicing rights | | | | | | |
Originated | | $ | 187,134,080 | | $ | 166,188,825 |
Acquired | | | 47,716,917 | | | 59,598,279 |
| | | 234,850,997 | | | 225,787,104 |
Mortgage servicing liabilities | | | 1,799,562 | | | 2,758,454 |
Loans held for sale | | | 8,749,673 | | | 4,724,006 |
| | | 245,400,232 | | | 233,269,564 |
Subserviced for PMT | | | 156,425,439 | | | 135,288,944 |
Total prime servicing | | | 401,825,671 | | | 368,558,508 |
Special servicing for PMT | | | 71,129 | | | 125,724 |
Total loans serviced | | $ | 401,896,800 | | $ | 368,684,232 |
Net loan servicing fees increased $66.6 million and $207.0 million, respectively, during the quarter and nine months ended September 30, 2020 compared to the same periods ended September 30, 2019. The increases were due to $41.1 million and $114.1 million, respectively, less in fair value losses relating to MSRs, mortgage servicing liabilities (“MSLs”), and ESS, net of hedging results and an increase of $25.4 million and $92.9 million, respectively, in loan servicing fees resulting from an increase in our average servicing portfolio during the quarter and nine months ended September 30, 2020, compared to the same periods in 2019.
During the nine months ended September 30, 2020, the prepayment expectations resulting from the decreasing interest rate environment, along with expectations of higher costs to service loans in the coming months and increased returns demanded by market participants in response to the uncertainties created by the Pandemic, resulted in a 36% reduction in fair value (as measured by the December 31, 2019 fair value) of our investment in MSRs. This reduction in fair value was offset by our hedging results and change in fair value of ESS.
There can be no assurance that our hedging activities will continue to perform in a like manner in the future. As discussed above, we expect the ongoing effects of the Pandemic and the requirements of the CARES Act to reduce our servicing income and to increase our servicing expenses due to the increased number of delinquent loans, and significant levels of forbearance that we have and continue to grant, as well as the resolution of loans that we expect to ultimately default as the result of the Pandemic.
Net Interest (Expense) Income
Net interest income decreased $37.3 million during the quarter ended September 30, 2020 compared to the same period in 2019. The decrease was primarily due to:
| ● | a decrease in placement fees we receive relating to custodial funds that we manage due to decreased earning rates which reflect the lower interest rate environment; and |
| ● | 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 rates in 2020 as compared to 2019; partially offset by |
| ● | an increase in interest income on loans held for sale due to larger average loan inventory balances during the quarter ended September 30, 2020 as compared to 2019. |
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Net interest income decreased $70.9 million during the nine months ended September 30, 2020 compared to the same period in 2019. The decrease was primarily due to:
| ● | a decrease in placement fees we receive relating to custodial funds that we manage due to low 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 rates in 2020 as compared to 2019; |
| ● | an increase in interest expense on repurchase agreements, reflecting the expiration of a master repurchase agreement in August 2019 that provided us with incentives to finance mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. We recorded $14.7 million of such incentives as reductions in Interest expense during the nine months ended September 30, 2019; partially offset by |
| ● | an increase in interest income on loans held for sale due to larger average loan inventory balances during the nine months ended September 30, 2020 as compared to 2019. |
Management fees
Management fees are summarized below:
| | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine months ended September 30, | ||||||||
| | 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
Management fees: | | | | | | | | | | | | |
PennyMac Mortgage Investment Trust: | | | | | | | | | | | | |
Base management |
| $ | 8,508 |
| $ | 7,914 | | $ | 25,851 |
| $ | 20,862 |
Performance incentive | | | — | | | 2,184 | | | — | | | 5,316 |
| | $ | 8,508 | | $ | 10,098 | | $ | 25,851 | | $ | 26,178 |
Net assets of PMT at end of period | | $ | 2,281,266 | | $ | 2,219,611 | | | | | | |
Management fees decreased $1.6 million and $327,000, respectively, during the quarter and nine months ended September 30, 2020, respectively, compared to the same periods in 2019. The decrease was due to a decrease of $2.2 million and $5.3 million, respectively, in incentive fees during the quarter and nine months ended September 30, 2020 compared to the same period in 2019 reflecting the losses PMT incurred during the nine months ended September 30, 2020, partially offset by an increase of $594,000 and $5.0 million, respectively, in base management fees reflecting the increases in PMT’s average shareholders’ equity, upon which its base management fees are based. The increase in PMT’s average shareholders’ equity during 2020 as compared to 2019 is the result of PMT’s equity offerings throughout 2019. We do not expect to recognize performance incentive fees for the foreseeable future because of the losses PMT incurred during the three months ended March 31, 2020.
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Expenses
Compensation
Compensation expenses are summarized below:
| | | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine months ended September 30, | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (in thousands) | | ||||||||||
Salaries and wages | | $ | 117,230 | | $ | 77,748 | | $ | 308,629 | | $ | 212,135 | |
Incentive compensation | | | 57,257 | | | 39,824 | | | 154,597 | | | 86,587 | |
Taxes and benefits | | | 20,858 | | | 14,619 | | | 61,316 | | | 44,603 | |
Stock and unit-based compensation | | | 7,095 | | | 8,941 | | | 26,220 | | | 19,124 | |
| | $ | 202,440 | | $ | 141,132 | | $ | 550,762 | | $ | 362,449 | |
Head count: | | | | | | | | | | | | | |
Average | | | 5,672 | | | 3,751 | | | 4,978 | | | 3,591 | |
Quarter end | | | 6,019 | | | 3,907 | | | | | | | |
Compensation expense increased $61.3 million and $188.3 million during the quarter and nine months ended September 30, 2020, respectively, compared to the same periods in 2019. The increases were primarily due to growth in head count made to accommodate the growth in our loan production and servicing activities as well as to increases in incentive compensation resulting from performance-based incentives and higher than expected attainment of profitability targets.
Servicing
Servicing expenses increased $23.2 million and $62.6 million during the quarter and nine months ended September 30, 2020, respectively, compared to the same periods in 2019. This increase in servicing expense was primarily the result of the increase in delinquencies we experienced due to the effects on borrower delinquencies of the Pandemic.
Loan origination
Loan origination expense increased $18.9 million and $78.3 million during the quarter and nine months ended September 30, 2020, respectively, compared to the same periods in 2019. The increases were primarily resulting from increased consumer and broker direct lending activities, partially offset by cost reduction initiatives related to lender paid fees during the quarter and nine months ended September 30, 2020 compared to the same periods during 2019.
Provision for Income Taxes
Our effective income tax rates were 26.5% and 26.4% during the quarter and nine months ended September 30, 2020, respectively, compared to 26.9% and 26.3% during the same periods in 2019.
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Balance Sheet Analysis
Following is a summary of key balance sheet items as of the dates presented:
| | | | | | |
| | September 30, | | |||
|
| 2020 |
| 2019 | ||
| | (in thousands) | ||||
ASSETS | | | | | | |
Cash and short-term investments | | $ | 631,302 | | $ | 262,902 |
Loans held for sale at fair value | | | 9,126,172 | | | 4,912,953 |
Servicing advances, net | | | 393,654 | | | 331,169 |
Investments in and advances to affiliates | | | 210,427 | | | 157,343 |
Mortgage servicing rights | | | 2,333,821 | | | 2,926,790 |
Loans eligible for repurchase | | | 17,183,873 | | | 1,046,527 |
Other | | | 1,301,616 | | | 566,333 |
Total assets | | $ | 31,180,865 | | $ | 10,204,017 |
| | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | |
Short-term debt | | $ | 7,794,251 | | $ | 4,639,001 |
Long-term debt | | | 1,944,448 | | | 1,493,466 |
Liability for loans eligible for repurchase | | | 17,183,873 | | | 1,046,527 |
Income taxes payable | | | 673,149 | | | 504,569 |
Other | | | 568,067 | | | 458,947 |
Total liabilities | | | 28,163,788 | | | 8,142,510 |
Stockholders' equity | | | 3,017,077 | | | 2,061,507 |
Total liabilities and stockholders' equity | | $ | 31,180,865 | | $ | 10,204,017 |
Total assets increased $21.0 billion from $10.2 billion at December 31, 2019 to $31.2 billion at September 30, 2020. The increase was primarily due to an increase of $16.1 billion in loans eligible for repurchase, $4.2 billion in loans held for sale at fair value, $368.4 million in cash and short-term investments, $418.6 million in derivative assets and $317.7 million in other assets, partially offset by a decrease of $593.0 million in MSRs. The increase in loans eligible for repurchase reflects an increase in delinquent loans as a result of the Pandemic and the CARES Act forbearance requirements. The decrease in MSRs reflects the $1.0 billion in fair value losses discussed above, partially offset by additions resulting from our loan production activities. We increased our holding of cash and short-term investments during the nine months ended September 30, 2020 as a means of enhancing our liquidity during the Pandemic.
Total liabilities increased $20.1 billion from $8.1 billion at December 31, 2019 to $28.2 billion at September 30, 2020. The increase was primarily attributable to the increase in liability for loans eligible for repurchase.
Cash Flows
Our cash flows for the nine months ended September 30, 2020 and 2019 are summarized below:
| | | | | | | | | | |
|
| Nine months ended September 30, | | | |
| ||||
| | 2020 |
| 2019 |
| Change |
| |||
| | (in thousands) | | |||||||
Operating | | $ | (3,923,531) | | $ | (1,690,141) | | $ | (2,233,390) | |
Investing | | | 924,599 | |
| 169,416 | |
| 755,183 | |
Financing | | | 3,339,596 | |
| 1,566,513 | |
| 1,773,083 | |
Net increase in cash and restricted cash | | $ | 340,664 | | $ | 45,788 | | $ | 294,876 | |
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Our cash flows resulted in a net increase in cash and restricted cash of $340.7 million during the nine months ended September 30, 2020 as discussed below.
Operating activities
Net cash used in operating activities totaled $3.9 billion during the nine months ended September 30, 2020 compared with net cash used in operating activities totaled $1.7 billion during the same period in 2019. Our cash flows from operating activities are primarily influenced by changes in the levels of our inventory of mortgage loans as shown below:
| | | | | | |
| | Nine months ended September 30, | ||||
| | 2020 |
| 2019 | ||
| | (in thousands) | ||||
Cash flows from: | | | | | | |
Loans held for sale | | $ | (3,383,080) | | $ | (2,010,338) |
Other operating (uses) sources | | | (540,451) | | | 320,197 |
| | $ | (3,923,531) | | $ | (1,690,141) |
The decrease in cash flows from other operating activities during the nine months ended September 30, 2020 compared to the same period in 2019 primarily reflects an increase in deposits securing certain of our borrowings and increases in servicing advances caused by COVID-19 induced borrower delinquencies.
Investing activities
Net cash provided by investing activities during the nine months ended September 30, 2020 totaled $924.6 million primarily due to $1.0 billion in net settlement of derivative financial instruments used to hedge our investment in MSRs. Net cash provided by investing activities during the nine months ended September 30, 2019 totaled $169.4 million, primarily due to $542.1 million in net settlement of derivative financial instruments used to hedge our investment in MSRs, partially offset by the purchase of MSRs totaling $227.4 million and increase in margin deposit of $168.1 million.
Financing activities
Net cash provided by financing activities totaled $3.3 billion during the nine months ended September 30, 2020, primarily due to net repurchase of assets sold under agreement to repurchase, reflecting an increase in our financing of mortgage loans held for sale and issuance of unsecured notes to finance the growth in our loans held for sale. Net cash provided by financing activities totaled $1.6 billion during the nine months ended September 30, 2019, primarily to finance the growth in our inventory of mortgage loans held for sale and our investments in MSRs.
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Liquidity and Capital Resources
Our liquidity reflects our ability to meet our current obligations (including our operating expenses and, when applicable, the retirement of, and margin calls relating to, our debt, and margin calls relating to hedges on our commitments to purchase or originate mortgage loans and on our MSR investments), fund new originations and purchases, and make investments as we identify them. We expect our primary sources of liquidity to be through cash flows from business activities, proceeds from bank borrowings, proceeds from and issuance of ESS and/or equity or debt offerings. We believe that our liquidity is sufficient to meet our current liquidity needs.
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 “Risk Factors” in Part II, Item 1A.
The CARES Act allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from the Pandemic and may require the servicer to advance principal and interest, property taxes, insurance premiums and other expenses to the investor for up to four months on Fannie Mae and Freddie Mac loans and longer on Ginnie Mae and other government agency backed loans. In April 2020, the Company entered into a new Ginnie Mae servicing advance financing allowing the Company to borrow $600 million 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 expenses related to servicing delinquent loans. We are also in ongoing discussions with our lending partners to procure additional advance financing.
The Pandemic has significantly increased the number of loans that are delinquent in our Ginnie Mae MSR portfolio. The Ginnie Mae program 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 quarter ended September 30, 2020, we repurchased $2.7 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.
Our current borrowing strategy is to finance our assets where we believe such borrowing is prudent, appropriate and available. Our borrowing activities are in the form of sales of assets under agreements to repurchase, sales of mortgage loan participation purchase and sale certificates, ESS financing, notes payable, a capital lease and unsecured senior notes. A significant amount of our borrowings have short-term maturities and provide for terms of approximately one year. Because a significant portion of our current debt facilities consists of short-term borrowings, we expect to renew these facilities in advance of maturity in order to ensure our ongoing liquidity and access to capital or otherwise allow ourselves sufficient time to replace any necessary financing. On September 29, 2020, we issued $500 million of long term Unsecured Notes that mature on October 15, 2025. We used the proceeds from the Unsecured Notes to repay some of our existing short-term borrowings.
Our repurchase agreements represent the sales of assets together with agreements for us to buy back the respective assets at a later date. The table below presents the average, maximum daily and ending balances:
| | | | | | | | | | | | |
| | Quarter ended September 30, | | Nine months ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| | (in thousands) | ||||||||||
Average balance | | $ | 3,363,140 | | $ | 2,098,208 | | $ | 2,669,336 | | $ | 1,861,086 |
Maximum daily balance | | $ | 7,267,046 | | $ | 3,539,459 | | $ | 7,267,046 | | $ | 3,539,459 |
Balance at period end | | $ | 7,267,046 | | $ | 3,539,459 | | | | | | |
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The differences between the average and maximum daily balances on our repurchase agreements reflect the fluctuations throughout the month of our inventory as we fund and pool mortgage loans for sale in guaranteed mortgage securitizations.
Our secured financing agreements at PLS require us to comply with various financial covenants. The most significant financial covenants currently include the following:
| ● | positive net income during one of the two most recent calendar quarters; |
| ● | a minimum in unrestricted cash and cash equivalents of $40 million; |
| ● | a minimum tangible net worth of $1.25 billion; |
| ● | a maximum ratio of total liabilities to tangible net worth of 10:1; and |
| ● | at least one other warehouse or repurchase facility that finances amounts and assets that are similar to those being financed under certain of our existing secured financing agreements. |
With respect to servicing performed for PMT, PLS is also subject to certain covenants under PMT’s debt agreements. Covenants in PMT’s debt agreements are equally, or sometimes less, restrictive than the covenants described above.
In addition to the covenants noted above, the indenture governing our Unsecured Notes contains covenants that limit our 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; |
| ● | 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 debt financing agreements also contain margin call provisions that, upon notice from the applicable lender at its option, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. A margin deficit will generally result from any decline in the market value (as determined by the applicable lender) of the assets subject to the related financing agreement. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.
We are also subject to liquidity and net worth requirements established by the Federal Housing Finance Agency (“FHFA”) for Agency seller/servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established
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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. |
On January 31, 2020, FHFA proposed changes to the eligibility requirements, which would increase the tangible net worth requirement to $2.5 million plus 35 basis points of the UPB of loans serviced for Ginnie Mae and 25 basis points of the UPB of all other 1-4 unit loans serviced, and increase the liquidity requirement to 4 basis points of the aggregate UPB serviced for Fannie Mae and Freddie Mac and 10 basis points of the UPB serviced for Ginnie Mae plus 300 basis points of total nonperforming Agency servicing UPB (including nonperforming Agency loans that are in payment forbearance) in excess of 4% of total Agency servicing UPB. On June 15, 2020, FHFA announced that it will be re-proposing changes to these requirements.
We believe that we are currently in compliance with the applicable Agency requirements.
We have purchased portfolios of MSRs and have financed them in part through the sale to PMT of the right to receive ESS. The outstanding amount of the ESS is based on the current fair value of such ESS and amounts received on the underlying mortgage loans.
On June 10, 2020, our Board of Directors increased our common stock repurchase program from $50 million to $500 million. 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 September 30, 2020, we have repurchased $263.2 million of shares under our stock repurchase program.
We continue to explore a variety of means of financing our continued growth, including debt financing through bank warehouse lines of credit, bank loans, repurchase agreements, securitization transactions and corporate debt. However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing will take or whether such efforts will be successful.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Off-Balance Sheet Arrangements and Guarantees
As of September 30, 2020, we have not entered into any off-balance sheet arrangements.
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Contractual Obligations
As of September 30, 2020, we had contractual obligations aggregating $29.1 billion, comprised of borrowings, commitments to purchase and originate mortgage loans and a payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under a tax receivable agreement. We also lease our office facilities.
Payment obligations under these agreements are summarized below:
| | | | | | | | | | | | | | | |
| | Payments due by year | |||||||||||||
| | | | Less than | | 1-3 | | 3-5 | | More than | |||||
Contractual obligations |
| Total |
| 1 year |
| years |
| years |
| 5 years | |||||
| | (in thousands) | |||||||||||||
Commitments to purchase and originate loans | | $ | 18,873,579 | | $ | 18,873,579 | | $ | — | | $ | — | | $ | — |
Short-term debt | | | 7,802,424 | | | 7,802,424 | | | — | | | — | | | — |
Long-term debt | | | 1,956,947 | | | 7,677 | | | 656,280 | | | 650,000 | | | 642,990 |
Interest on long-term debt | | | 284,901 | | | 72,850 | | | 126,843 | | | 67,445 | | | 17,763 |
Office leases | | | 106,777 | | | 18,586 | | | 33,197 | | | 27,770 | | | 27,224 |
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement | | | 35,784 | | | 5,940 | | | — | | | — | | | 29,844 |
Total | | $ | 29,060,412 | | $ | 26,781,056 | | $ | 816,320 | | $ | 745,215 | | $ | 717,821 |
Debt Obligations
As described further above in “Liquidity and Capital Resources,” we currently finance certain of our assets through borrowings with major financial institution counterparties in the form of sales of assets under agreements to repurchase, mortgage loan participation purchase and sale agreements, notes payable (including a revolving credit agreement), ESS and a capital lease. The borrower under each of these facilities is PLS or the Issuer Trust with the exception of the capital lease where the borrower is PennyMac. All PLS obligations as previously noted are guaranteed by PennyMac.
Under the terms of these agreements, PLS is required to comply with certain financial covenants, as described further above in “Liquidity and Capital Resources,” and various non-financial covenants customary for transactions of this nature. As of September 30, 2020, we believe we were in compliance in all material respects with these covenants.
The agreements also contain margin call provisions that, upon notice from the applicable lender, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any margin deficit. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.
In addition, the agreements contain events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, guarantor defaults, servicer termination events and defaults, material adverse changes, bankruptcy or insolvency proceedings and other events of default customary for these types of transactions. The remedies for such events of default are also customary for these types of transactions and include the acceleration of the principal amount outstanding under the agreements and the liquidation by our lenders of the mortgage loans or other collateral then subject to the agreements.
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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) | | $ | 3,557,746 | | $ | 3,400,000 | | $ | 100,000 | | |
Credit Suisse First Boston Mortgage Capital LLC (3) | | $ | 50,000 | | $ | 600,000 | | $ | 600,000 | | |
JPMorgan Chase Bank, N.A. | | $ | — | | $ | 2,000,000 | | $ | — | | |
JPMorgan Chase Bank, N.A. | | $ | 741,341 | | $ | 750,000 | | $ | 50,000 | | |
Citibank, N.A. | | $ | 632,928 | | $ | 1,000,000 | | $ | 650,000 | | |
Bank of America, N.A. | | $ | 767,391 | | $ | 800,000 | | $ | 500,000 | | |
Morgan Stanley Bank, N.A. | | $ | 784,434 | | $ | 800,000 | | $ | 100,000 | | |
Royal Bank of Canada | | $ | 363,193 | | $ | 500,000 | | $ | 180,000 | | |
BNP Paribas | | $ | 370,013 | | $ | 375,000 | | $ | 200,000 | | |
Wells Fargo Bank, N.A. | | $ | — | | $ | 175,000 | | $ | 175,000 | | |
Mortgage loan participation purchase and sale agreements | | | | | | | | | | | |
Bank of America, N.A. | | $ | 535,378 | | $ | 550,000 | | $ | — | | |
Notes payable | | | | | | | | | | | |
GMSR 2018-GT1 Term Note | | $ | 650,000 | | $ | 650,000 | | | | | |
GMSR 2018-GT2 Term Note | | $ | 650,000 | | $ | 650,000 | | | | | |
Unsecured senior notes | | $ | 500,000 | | $ | 650,000 | | | | | |
Credit Suisse AG (3) | | $ | — | | $ | — | | $ | — | | |
Obligations under capital lease | | | | | | | | | | | |
Banc of America Leasing and Capital LLC | | $ | 13,957 | | $ | 25,000 | | $ | — | | |
| (1) | Outstanding indebtedness as of September 30, 2020. |
| (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. |
The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and accrued interest) relating to our assets sold under agreements to repurchase is summarized by counterparty below as of September 30, 2020:
| | | | | | | |
| | | | | Weighted average | | |
| | | | | maturity of | | |
| | | | | advances under | | |
Counterparty |
| Amount at risk |
| repurchase agreement |
| Facility maturity | |
| | (in thousands) | | | | | |
Credit Suisse First Boston Mortgage Capital LLC (1) | | $ | 1,092,694 | | | ||
Credit Suisse First Boston Mortgage Capital LLC (2) | | $ | 460,264 | | | ||
Bank of America, N.A. | | $ | 410,222 | | | ||
JP Morgan Chase Bank, N.A. | | $ | 192,579 | | | ||
Morgan Stanley Bank, N.A. | | $ | 62,630 | | | ||
Citibank, N.A. | | $ | 48,231 | | | ||
Royal Bank of Canada | | $ | 33,343 | | | ||
BNP Paribas | | $ | 27,646 | | | ||
| (1) | The borrowing facility with Credit Suisse First Boston Mortgage Capital LLC is in the form of a sale of a variable funding note under an agreement to repurchase. |
| (2) | The borrowing facility with Credit Suisse First Boston Mortgage Capital LLC is in the form of an asset sale under agreement to repurchase. |
All debt financing arrangements that matured between September 30, 2020 and the date of this Report have been renewed or extended and are described in Note 12—Borrowings to the accompanying consolidated financial
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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, MSLs and ESS financing 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, inventory of mortgage loans held for sale and ESS financing 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.
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.
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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 September 30, 2020, given several shifts in pricing spreads, prepayment speed and annual per loan cost of servicing:
| | | | | | | | | | | | | | | | | | | |
Pricing spread shift in % |
| -20% |
| -10% |
| -5% |
| +5% |
| +10% |
| +20% |
| ||||||
| | (dollar amounts in thousands) | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Fair value | | $ | 2,520,756 | | $ | 2,423,512 | | $ | 2,377,775 | | $ | 2,291,555 | | $ | 2,250,885 | | $ | 2,174,008 | |
Change in fair value: | | | | | | | | | | | | | | | | | | | |
$ | | $ | 186,935 | | $ | 89,691 | | $ | 43,954 | | $ | (42,266) | | $ | (82,935) | | $ | (159,813) | |
% | | | 8.0 | % | | 3.8 | % | | 1.9 | % | | (1.8) | % | | (3.6) | % | | (6.8) | % |
| | | | | | | | | | | | | | | | | | | |
Prepayment speed shift in % |
| -20% |
| -10% |
| -5% |
| +5% |
| +10% |
| +20% |
| ||||||
|
| (dollar amounts in thousands) | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Fair value | | $ | 2,641,609 | | $ | 2,480,030 | | $ | 2,405,127 | | $ | 2,265,888 | | $ | 2,201,123 | | $ | 2,080,347 | |
Change in fair value: | | | | | | | | | | | | | | | | | | | |
$ | | $ | 307,788 | | $ | 146,209 | | $ | 71,306 | | $ | (67,933) | | $ | (132,698) | | $ | (253,474) | |
% | | | 13.2 | % | | 6.3 | % | | 3.1 | % | | (2.9) | % | | (5.7) | % | | (10.9) | % |
| | | | | | | | | | | | | | | | | | | |
Per-loan servicing cost shift in % |
| -20% |
| -10% |
| -5% |
| +5% |
| +10% |
| +20% |
| ||||||
| | (dollar amounts in thousands) | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Fair value | | $ | 2,434,372 | | $ | 2,384,096 | | $ | 2,358,959 | | $ | 2,308,683 | | $ | 2,283,546 | | $ | 2,233,270 | |
Change in fair value: | | | | | | | | | | | | | | | | | | | |
$ | | $ | 100,551 | | $ | 50,275 | | $ | 25,138 | | $ | (25,138) | | $ | (50,275) | | $ | (100,551) | |
% | | | 4.3 | % | | 2.2 | % | | 1.1 | % | | (1.1) | % | | (2.2) | % | | (4.3) | % |
Excess Servicing Spread Financing
The following tables summarize the estimated change in fair value of our ESS accounted for using the fair value method as of September 30, 2020, given several shifts in pricing spreads and prepayment speed (decrease in the liabilities’ values increases net income):
| | | | | | | | | | | | | | | | | | | |
Pricing spread shift in % |
| -20% |
| -10% |
| -5% |
| +5% |
| +10% |
| +20% |
| ||||||
| | (dollar amounts in thousands) | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Fair value | | $ | 149,307 | | $ | 146,083 | | $ | 144,520 | | $ | 141,490 | | $ | 140,021 | | $ | 137,170 | |
Change in fair value: | | | | | | | | | | | | | | | | | | | |
$ | | $ | 6,317 | | $ | 3,093 | | $ | 1,531 | | $ | (1,500) | | $ | (2,969) | | $ | (5,820) | |
% | | | 4.4 | % | | 2.2 | % | | 1.1 | % | | (1.0) | % | | (2.1) | % | | (4.1) | % |
| | | | | | | | | | | | | | | | | | | |
Prepayment speed shift in % |
| -20% |
| -10% |
| -5% |
| +5% |
| +10% |
| +20% |
| ||||||
| | (dollar amounts in thousands) | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Fair value | | $ | 158,408 | | $ | 150,372 | | $ | 146,604 | | $ | 139,522 | | $ | 136,193 | | $ | 129,919 | |
Change in fair value: | | | | | | | | | | | | | | | | | | | |
$ | | $ | 15,418 | | $ | 7,382 | | $ | 3,614 | | $ | (3,468) | | $ | (6,797) | | $ | (13,071) | |
% | | | 10.8 | % | | 5.2 | % | | 2.5 | % | | (2.4) | % | | (4.8) | % | | (9.1) | % |
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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 quarter ended September 30, 2020 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 December 20, 2018, a purported shareholder of the Company filed a complaint in a putative class and derivative action in the Court of Chancery of the State of Delaware (the “Delaware Court”), captioned Robert Garfield v. BlackRock Mortgage Ventures, LLC et al., Case No. 2018-0917-KSJM (the “Garfield Action”). The Garfield Action alleges, among other things, that certain current directors and officers of the Company breached their fiduciary duties to the Company and its shareholders by, among other things, agreeing to and entering into the Reorganization without ensuring that the Reorganization was entirely fair to the Company or public shareholders. The Reorganization was approved by 99.8% of voting shareholders on October 24, 2018. On December 19, 2019, the Delaware Court denied a motion to dismiss filed by the Company and certain of its directors and officers. While the Company and its co-defendants believe the Garfield Action is without merit and expressly disclaim any wrongdoing, they have collectively agreed to settle the Garfield Action for an amount equal to $6.85 million in order to avoid the ongoing costs of litigation and further distractions to their respective businesses. A settlement agreement was filed with the Delaware Court on October 9, 2020, and is currently pending approval. The Company’s share of the settlement amount will be paid entirely by one of the Company’s insurers.
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. While no assurance can be provided 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. Any potential range of loss cannot be reasonably estimated at this time primarily because the matter involves complex factual and legal issues; there is substantial uncertainty regarding any alleged damages, and the matter is at a preliminary stage of litigation.
Item 1A. Risk Factors
There have been no material changes from the risk factors set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 28, 2020, except for the following:
Our business, financial condition and results of operations have been, and will likely continue to be, adversely affected by the emergence of the COVID-19 pandemic.
The COVID-19 pandemic has created unprecedented economic, financial and public health disruptions that have adversely affected, and are likely to continue to adversely affect, our business, financial condition and results of operations. The extent to which COVID-19 continues to negatively affect our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to COVID-19.
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The federal government enacted the CARES Act, which allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from COVID-19. As a result of the CARES Act forbearance requirements, we expect to record additional increases in delinquencies in our servicing portfolio that may require us to finance substantial amounts of advances of principal and interest payments to the investors holding those loans, as well as advances of property taxes, insurance premiums and other expenses to protect investors’ interests in the properties securing the loans.. We also expect the effects of the CARES Act forbearance requirements to reduce our servicing income and increase our servicing expenses due to the increased number of delinquent loans, significant levels of forbearance that we have granted and continue to grant, as well as the resolution of loans that we expect to ultimately default as the result of COVID-19. Future servicing advances will be driven by the number of borrower delinquencies, including those resulting from payment forbearance; the amount of time borrowers remain delinquent; and the level of successful resolution of delinquent payments, all of which will be impacted by the pace at which the economy recovers from the Pandemic.
Financial markets have experienced substantial volatility and reduced liquidity, resulting in unprecedented federal government intervention to lower the federal funds rate to near zero and support market liquidity by purchasing assets in many financial markets, including the mortgage-backed securities market. The CARES Act forbearance requirements and the decline in financial markets have negatively impacted the fair value of our servicing assets. In addition, the CARES Act forbearance requirements and the decline in financial markets have caused PMT to report material losses and negatively affected PMT's shareholders' equity and, as a result, our net assets under management. Consequently, we have experienced a reduction in our base management fees from PMT, and we do not expect to earn performance incentive fees from PMT for the foreseeable future. Further market volatility may result in additional declines in the value of our servicing assets, lower base management fees and make it increasingly difficult to optimize our hedging activities. Also, our liquidity and/or regulatory capital could be adversely impacted by volatility and disruptions in the capital and credit markets. In addition, if we fail to meet or satisfy any of the covenants in our repurchase agreements or other financing arrangements as a result of the impact of the COVID-19 pandemic, we would be in default under these agreements, which could result in a cross-default or cross-acceleration under other financing arrangements, and our lenders could elect to declare outstanding amounts due and payable (or such amounts may automatically become due and payable), terminate their commitments, require the posting of additional collateral and enforce their respective interests against existing collateral.
We may also have difficulty accessing debt and equity capital on attractive terms, or at all, as a result of the impact of the COVID-19 pandemic, which may adversely affect our access to capital necessary to fund our operations or address maturing liabilities on a timely basis. This includes renewals of our existing credit facilities with our lenders who are also adversely impacted by the volatility and dislocations in the financial markets and may not be willing to continue to extend us credit on the same terms, or on favorable terms, or at all.
In addition, our business could be disrupted if we are unable to operate due to changing governmental restrictions such as travel bans and quarantines placed on our employees or operations, including, successfully operating our business from remote locations, ensuring the protection of our employees’ health and maintaining our information technology infrastructure.
Governmental authorities have taken additional measures to stabilize the financial markets and support the economy. The success of these measures are unknown and they may not be sufficient to address the current market dislocations or avert severe and prolonged reductions in economic activity. We may also face increased risks of disputes with our business partners, litigation and governmental and regulatory scrutiny as a result of the effects of COVID-19. The scope and duration of COVID-19 and the efficacy of the extraordinary measures put in place to address it are currently unknown. Even after COVID-19 subsides, the economy may not fully recover for some time and we may be materially and adversely affected by a prolonged recession or economic downturn.
Our Unsecured Notes have increased our overall indebtedness and contain restrictive covenants limiting our flexibility in operating our business.
On September 29, 2020 and October 19, 2020, we issued $650 million aggregate principal amount of 5.375% unsecured senior notes due on October 15, 2025 (the “Unsecured Notes”). As our unsecured obligations, the repayment of the Unsecured Notes will depend in part on our restricted subsidiaries’ generation of cash flow and our restricted subsidiaries’ ability to make such cash available to us, by dividend, debt repayment or other means. The Unsecured Notes’ indenture contain restrictive covenants that limit our and our restricted subsidiaries’ ability to engage in specified types of transactions, including our ability and/or the ability of our restricted subsidiaries to:
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• | 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; |
• | 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. |
We may be unable to take advantage of future business opportunities because of the limitations imposed on us by the Unsecured Notes’ restrictive covenants. If we fail to comply with the Unsecured Notes’ restrictive covenants and are unable to obtain a waiver or amendment, an event of default would result under the terms of the Unsecured Notes’ indenture. In addition, the Unsecured Notes’ restrictive covenants and our overall level of indebtedness including our indebtedness under the Unsecured Notes could limit our ability to obtain additional financing on acceptable terms, or at all, for working capital and general corporate purposes.
To the extent the COVID-19 pandemic adversely affects our business, financial condition and results of operations, it may also have the effect of heightening many of the other risks described in our Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “Risk Factors.”
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered equity securities during the quarter ended September 30, 2020.
The following table summarizes information about our stock repurchase during the quarter ended September 30, 2020:
| | | | | | | | | | | | |
|
| Total
number |
| |
| Total number of | | Approximate dollar | ||||
| | — | | $ | — | | | — | | $ | 243,769,499 | |
| | — | | $ | — | | | — | | $ | 243,769,499 | |
| | 118,141 | | $ | 58.64 | | | 118,141 | | $ | 236,842,078 | |
Total | | | 118,141 | | $ | 58.64 | | | 118,141 | | $ | 236,842,078 |
| (1) | In June 2020, the Company’s board of directors approved an increase to the Company’s common stock repurchase program from $50 million to $500 million. In addition, the Company entered into a privately negotiated transaction with The BlackRock Foundation under the revised stock repurchase program to repurchase 6,975,323 shares of the Company’s common stock at a price of $34 per share. 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.
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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 | | ||
| | | | | | |
4.2 | | Form of Global Note for 5.375% Senior Notes due 2025 (Included in Exhibit 4.1). | | 8-K | | |
| | | | | | |
4.3 | | | * | | | |
| | | | | | |
10.1 | | | * | | | |
| | | | | | |
10.2 | | | * | | | |
| | | | | | |
10.3 | | | * | | | |
| | | | | | |
10.4˄ | | | * | | | |
87
| | | | | | |
10.5 | | | * | | | |
| | | | | | |
10.6˄ | | | * | | | |
| | | | | | |
10.7˄ | | | * | | | |
| | | | | | |
10.8 | | | * | | | |
| | | | | | |
10.9˄ | | | * | | | |
| | | | | | |
10.10˄ | | | * | | | |
| | | | | | |
31.1 | | | * | | | |
| | | | | | |
31.2 | | | * | | | |
| | | | | | |
32.1 | | | ** | | | |
| | | | | | |
32.2 | | | ** | | | |
| | | | | | |
88
101 | | The following financial statements from the Company’s Quarterly Report on Form 10-Q were formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 (ii) the Consolidated Statements of Income for the quarters ended September 30, 2020 and September 30, 2019, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended September 30, 2020 and September 30, 2019, (iv) the Consolidated Statements of Cash Flows for the quarters ended September 30, 2020 and September 30, 2019 and (v) the Notes to the Consolidated Financial Statements. | | | | |
| | | | | | |
104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document). | | | | |
| | | | | | |
| | | | | | |
˄Portions of the exhibit have been redacted. | ||||||
**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. | ||||||
89
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PENNYMAC FINANCIAL SERVICES, INC. | |
| (Registrant) | |
| | |
Dated: November 6, 2020 | By: | /s/ DAVID A. SPECTOR |
| | |
| | President and Chief Executive Officer |
| | |
Dated: November 6, 2020 | By: | /s/ ANDREW S. CHANG |
| | |
| | Senior Managing Director and Chief Financial Officer |
90
| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 10/15/25 | ||||
| 8/25/23 | ||||
| 2/25/23 | ||||
| 2/1/23 | ||||
| 11/2/22 | ||||
| 10/15/22 | ||||
| 10/6/22 | ||||
| 9/30/22 | ||||
| 6/13/22 | ||||
| 8/3/21 | ||||
| 7/30/21 | 8-K | |||
| 4/23/21 | ||||
| 4/15/21 | ||||
| 3/11/21 | 4 | |||
| 1/29/21 | ||||
| 1/7/21 | 4 | |||
| 12/31/20 | 10-K, 5 | |||
| 12/16/20 | 4, 8-K | |||
| 12/15/20 | ||||
| 12/2/20 | 4 | |||
| 12/1/20 | 4 | |||
| 11/25/20 | 4 | |||
| 11/16/20 | 4 | |||
| Filed on: | 11/6/20 | 4 | ||
| 11/5/20 | 8-K | |||
| 11/4/20 | 4 | |||
| 11/3/20 | 4 | |||
| 11/2/20 | 4 | |||
| 10/30/20 | ||||
| 10/21/20 | ||||
| 10/19/20 | ||||
| 10/9/20 | 4 | |||
| For Period end: | 9/30/20 | |||
| 9/29/20 | 8-K | |||
| 9/1/20 | 4 | |||
| 8/31/20 | ||||
| 8/1/20 | ||||
| 7/31/20 | 4 | |||
| 7/1/20 | 4 | |||
| 6/30/20 | 10-Q, 8-K | |||
| 6/15/20 | ||||
| 6/10/20 | 4, 8-K, SC 13D/A | |||
| 4/1/20 | 8-K | |||
| 3/31/20 | 10-Q | |||
| 3/30/20 | ||||
| 2/28/20 | 10-K | |||
| 1/31/20 | ||||
| 1/1/20 | ||||
| 12/31/19 | 10-K, 4, 5 | |||
| 12/19/19 | ||||
| 11/5/19 | ||||
| 11/4/19 | 10-Q, 4 | |||
| 9/30/19 | 10-Q | |||
| 8/21/19 | 4 | |||
| 6/30/19 | 10-Q | |||
| 2/1/19 | ||||
| 12/31/18 | 10-K, 5, 8-K | |||
| 12/20/18 | ||||
| 11/1/18 | 4, 8-K, 8-K12B, S-8 POS | |||
| 10/24/18 | ||||
| 8/10/18 | ||||
| 7/2/18 | ||||
| 2/28/18 | ||||
| 2/1/18 | ||||
| 12/19/16 | ||||
| 11/18/16 | ||||
| 5/8/13 | ||||
| 8/4/09 | ||||
| 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 2/25/21 PennyMac Financial Services, Inc. 10-K 12/31/20 149:35M Toppan Merrill Bridge/FA |
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 9/29/20 PennyMac Financial Services, Inc. 8-K:1,2,9 9/29/20 11:1.5M 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 |