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Section 1: 10-Q (10-Q)

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

Form 10-Q

 


 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2019

 

Or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from           to           

 

Commission file number: 001-38727

 


 

PennyMac Financial Services, Inc.

(formerly known as New PennyMac Financial Services, Inc.)

(Exact name of registrant as specified in its charter)

 


 

 

 

 

Delaware

 

83-1098934

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

 

 

 

 

3043 Townsgate Road, Westlake Village, California

 

91361

(Address of principal executive offices)

 

(Zip Code)

 

(818) 224-7442

(Registrant’s telephone number, including area code)

 


 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

           Large accelerated filer ☐

 

Accelerated filer ☒

 

 

 

           Non-accelerated filer ☐ 

 

                Smaller reporting company ☐

 

           Emerging growth company ☐

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock, $0.0001 per value

 

PFSI

 

New York Stock Exchange

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

 

 

 

Class

 

Outstanding at May 3, 2019

Common Stock, $0.0001 par value

 

78,334,037

 

 

 

 

 


 

Table of Contents

 

PENNYMAC FINANCIAL SERVICES, INC.

 

FORM 10-Q

March 31, 2019

 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

Special Note Regarding Forward-Looking Statements 

3

 

 

 

PART I. FINANCIAL INFORMATION 

5

 

 

 

Item 1. 

Financial Statements (Unaudited):

5

 

Consolidated Balance Sheets

5

 

Consolidated Statements of Income

6

 

Consolidated Statements of Changes in Stockholders’ Equity

7

 

Consolidated Statements of Cash Flows

8

 

Notes to Consolidated Financial Statements

9

Item 2. 

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

54

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

70

Item 4. 

Controls and Procedures

71

 

 

 

PART II. OTHER INFORMATION 

72

 

 

 

Item 1. 

Legal Proceedings

72

Item 1A. 

Risk Factors

72

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

72

Item 3. 

Defaults Upon Senior Securities

72

Item 4. 

Mine Safety Disclosures

72

Item 5. 

Other Information

73

Item 6. 

Exhibits

73

 

 

 

2


 

Table of Contents

 

SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS

 

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

 

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

·

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

·

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

·

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

·

descriptions of assumptions underlying or relating to any of the foregoing expectations regarding the timing of generating any revenues.

 

Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward‑looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward‑looking statements. There are a number of factors, many of which are beyond our control that could cause actual results to differ significantly from management’s expectations. Some of these factors are discussed below.

 

You should not place undue reliance on any forward‑looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on March 5, 2019.

 

Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:

 

·

the continually changing federal, state and local laws and regulations applicable to the highly regulated industry in which we operate;

 

·

lawsuits or governmental actions if we do not comply with the laws and regulations applicable to our businesses;

 

·

the mortgage lending and servicing-related regulations promulgated by the Consumer Financial Protection Bureau (“CFPB”) and its enforcement of these regulations;

 

·

our dependence on U.S. government‑sponsored entities and changes in their current roles or their guarantees or guidelines;

 

·

changes to government mortgage modification programs;

 

·

certain banking regulations that may limit our business activities;

 

·

foreclosure delays and changes in foreclosure practices;

 

·

the licensing and operational requirements of states and other jurisdictions applicable to our businesses, to which our bank competitors are not subject;

 

·

our ability to manage third-party service providers and vendors and their compliance with laws, regulations and investor requirements;

 

·

changes in macroeconomic and U.S. real estate market conditions;

 

·

difficulties inherent in growing loan production volume;

3


 

Table of Contents

 

·

difficulties inherent in adjusting the size of our operations to reflect changes in business levels;

 

·

any required additional capital and liquidity to support business growth that may not be available on acceptable terms, if at all;

 

·

changes in prevailing interest rates;

 

·

increases in loan delinquencies and defaults;

 

·

our reliance on PennyMac Mortgage Investment Trust (“PMT”) as a significant source of financing for, and revenue related to, our mortgage banking business;

 

·

our obligation to indemnify third‑party purchasers or repurchase loans if loans that we originate, acquire, service or assist in the fulfillment of, fail to meet certain criteria or characteristics or under other circumstances;

 

·

our exposure to counterparties that are unwilling or unable to honor contractual obligations, including their obligation to indemnify us or repurchase defective mortgage loans;

 

·

our ability to realize the anticipated benefit of potential future acquisitions of mortgage servicing rights (“MSRs”);

 

·

our obligation to indemnify PMT if our services fail to meet certain criteria or characteristics or under other circumstances;

 

·

decreases in the returns on the assets that we select and manage for our clients, and our resulting management and incentive fees;

 

·

the extensive amount of regulation applicable to our investment management segment;

 

·

conflicts of interest in allocating our services and investment opportunities among ourselves and PMT;

 

·

the effect of public opinion on our reputation;

 

·

our recent growth;

 

·

our ability to effectively identify, manage, monitor and mitigate financial risks;

 

·

our initiation of new business activities or expansion of existing business activities;

 

·

our ability to detect misconduct and fraud;

 

·

our ability to effectively deploy new information technology applications and infrastructure;

 

·

our ability to mitigate cybersecurity risks and cyber incidents;

 

·

our exposure to risks of loss resulting from adverse weather conditions and man-made or natural disasters; and

 

·

our organizational structure and certain requirements in our charter documents.

 

Other factors that could also cause results to differ from our expectations may not be described in this Report or any other document.  Each of these factors could by itself, or together with one or more other factors, adversely affect our business, results of operations and/or financial condition.

 

Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.

 

4


 

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

    

2019

    

2018

 

 

(in thousands, except share amounts)

ASSETS

 

 

 

 

 

 

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

 

 $

144,266

 

 $

155,289

Short-term investments at fair value

 

 

149,372

 

 

117,824

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

 

 

2,668,929

 

 

2,521,647

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

 

 

125,929

 

 

131,025

Derivative assets

 

 

121,153

 

 

96,347

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

 

 

284,230

 

 

313,197

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

 

 

2,905,090

 

 

2,820,612

Real estate acquired in settlement of loans

 

 

1,690

 

 

2,250

Operating lease right-of-use assets

 

 

56,239

 

 

 —

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

 

 

33,423

 

 

33,374

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

 

 

45,416

 

 

39,748

Investment in PennyMac Mortgage Investment Trust at fair value

 

 

1,553

 

 

1,397

Receivable from PennyMac Mortgage Investment Trust

 

 

29,951

 

 

33,464

Mortgage loans eligible for repurchase

 

 

1,094,702

 

 

1,102,840

Other 

 

 

157,057

 

 

109,559

Total assets

 

 $

7,819,000

 

 $

7,478,573

LIABILITIES

 

 

 

 

 

 

Assets sold under agreements to repurchase 

 

 $

2,151,938

 

 $

1,933,859

Mortgage loan participation purchase and sale agreements

 

 

547,879

 

 

532,251

Notes payable

 

 

1,292,736

 

 

1,292,291

Obligations under capital lease

 

 

5,091

 

 

6,605

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

 

 

205,081

 

 

216,110

Derivative liabilities

 

 

17,838

 

 

3,064

Operating lease liabilities

 

 

76,373

 

 

 —

Accounts payable and accrued expenses

 

 

162,677

 

 

156,212

Mortgage servicing liabilities at fair value

 

 

7,844

 

 

8,681

Payable to PennyMac Mortgage Investment Trust 

 

 

76,494

 

 

104,631

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

 

 

46,537

 

 

46,537

Income taxes payable

 

 

414,636

 

 

400,546

Liability for mortgage loans eligible for repurchase

 

 

1,094,702

 

 

1,102,840

Liability for losses under representations and warranties  

 

 

17,982

 

 

21,155

Total liabilities

 

 

6,117,808

 

 

5,824,782

 

 

 

 

 

 

 

Commitments and contingencies  –  Note 14

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 78,317,843 and  77,494,332 shares, respectively

 

 

 8

 

 

 8

Additional paid-in capital

 

 

1,311,914

 

 

1,310,648

Retained earnings

 

 

389,270

 

 

343,135

Total stockholders' equity

 

 

1,701,192

 

 

1,653,791

Total liabilities and stockholders’ equity

 

 $

7,819,000

 

 $

7,478,573

 

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

5


 

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

 

2019

 

2018

 

 

(in thousands, except earnings per share)

Revenues

 

 

 

 

 

 

Net mortgage loan servicing fees:

 

 

 

 

 

 

Mortgage loan servicing fees:

 

 

 

 

 

 

From non-affiliates

 

$

166,790

 

$

135,483

From PennyMac Mortgage Investment Trust

 

 

10,570

 

 

11,019

Ancillary and other fees

 

 

22,017

 

 

14,171

 

 

 

199,377

 

 

160,673

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

 

 

(122,857)

 

 

(36,963)

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

 

 

4,051

 

 

(6,921)

 

 

 

(118,806)

 

 

(43,884)

Net mortgage loan servicing fees

 

 

80,571

 

 

116,789

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

 

 

 

 

 

 

From non-affiliates

 

 

58,753

 

 

59,028

From PennyMac Mortgage Investment Trust

 

 

26,023

 

 

12,386

 

 

 

84,776

 

 

71,414

Mortgage loan origination fees:

 

 

 

 

 

 

From non-affiliates

 

 

21,687

 

 

23,355

From PennyMac Mortgage Investment Trust

 

 

2,243

 

 

1,208

 

 

 

23,930

 

 

24,563

Fulfillment fees from PennyMac Mortgage Investment Trust

 

 

27,574

 

 

11,944

Net interest income:

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

From non-affiliates

 

 

56,537

 

 

40,639

From PennyMac Mortgage Investment Trust

 

 

1,796

 

 

1,976

 

 

 

58,333

 

 

42,615

Interest expense:

 

 

 

 

 

 

To non-affiliates

 

 

34,477

 

 

32,811

To PennyMac Mortgage Investment Trust

 

 

3,066

 

 

3,934

 

 

 

37,543

 

 

36,745

Net interest income

 

 

20,790

 

 

5,870

Management fees, net:

 

 

 

 

 

 

From PennyMac Mortgage Investment Trust

 

 

7,248

 

 

5,696

From Investment Funds

 

 

 —

 

 

79

 

 

 

7,248

 

 

5,775

Carried Interest from Investment Funds

 

 

 —

 

 

(180)

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

 

 

192

 

 

182

Results of real estate acquired in settlement of loans

 

 

274

 

 

(28)

Other

 

 

2,350

 

 

1,872

Total net revenues

 

 

247,705

 

 

238,201

Expenses

 

 

 

 

 

 

Compensation

 

 

106,600

 

 

102,013

Servicing

 

 

30,293

 

 

26,299

Technology

 

 

15,966

 

 

14,620

Loan origination

 

 

14,497

 

 

2,115

Occupancy and equipment

 

 

6,776

 

 

6,377

Professional services

 

 

5,881

 

 

5,738

Marketing

 

 

1,325

 

 

2,161

Other

 

 

6,076

 

 

5,882

Total expenses

 

 

187,414

 

 

165,205

Income before provision for income taxes

 

 

60,291

 

 

72,996

Provision for income taxes

 

 

14,156

 

 

6,070

Net income

 

 

46,135

 

 

66,926

Less: Net income attributable to noncontrolling interest

 

 

 —

 

 

50,307

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

 

$

46,135

 

$

16,619

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

Basic

 

$

0.59

 

$

0.70

Diluted

 

$

0.58

 

$

0.67

Weighted average shares outstanding

 

 

 

 

 

 

Basic

 

 

77,653

 

 

23,832

Diluted

 

 

79,286

 

 

79,461

 

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

 

 

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PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 2019

 

 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Total

 

 

Number of

 

Par

 

paid-in

 

Retained

 

stockholders'

 

    

shares

    

value

    

capital

    

earnings

    

equity

 

 

(in thousands)

Balance at December 31, 2018

 

77,494

 

$

 8

 

$

1,310,648

 

$

343,135

 

$

1,653,791

Net income

 

 —

 

 

 —

 

 

 —

 

 

46,135

 

 

46,135

Stock-based compensation

 

820

 

 

 —

 

 

1,180

 

 

 —

 

 

1,180

Issuance of common stock in settlement of directors' fees

 

 4

 

 

 —

 

 

86

 

 

 —

 

 

86

Balance at March 31, 2019

 

78,318

 

$

 8

 

$

1,311,914

 

$

389,270

 

$

1,701,192

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 2018

 

 

Class A common stock

 

 

 

 

Noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

interest in Private

 

 

 

 

 

 

 

 

Additional

 

 

 

National Mortgage

 

Total

 

 

Number of

 

Par

 

paid-in

 

Retained

 

Acceptance

 

stockholders'

 

    

shares

    

value

    

capital

    

earnings

    

Company, LLC

    

equity

 

 

(in thousands)

Balance at December 31, 2017

 

23,530

 

$

 2

 

$

204,103

 

$

265,306

 

$

1,250,263

 

$

1,719,674

Cumulative effect of change in accounting principle – accounting for all existing classes of mortgage servicing rights at fair value

 

 —

 

 

 —

 

 

 —

 

 

189

 

 

587

 

 

776

Balance at January 1, 2018

 

23,530

 

 

 2

 

 

204,103

 

 

265,495

 

 

1,250,850

 

 

1,720,450

Net income

 

 —

 

 

 —

 

 

 —

 

 

16,619

 

 

50,307

 

 

66,926

Stock and unit-based compensation

 

 —

 

 

 —

 

 

5,191

 

 

 —

 

 

4,235

 

 

9,426

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

 

 —

 

 

 —

 

 

24

 

 

 —

 

 

55

 

 

79

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

 

748

 

 

 —

 

 

14,859

 

 

 —

 

 

(14,859)

 

 

 —

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

 

 —

 

 

 —

 

 

(2,682)

 

 

 —

 

 

 —

 

 

(2,682)

Balance at March 31, 2018

 

24,278

 

$

 2

 

$

221,495

 

$

282,114

 

$

1,290,588

 

$

1,794,199

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

7


 

Table of Contents

PENNYMAC FINANCIAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Cash flow from operating activities

 

 

 

 

 

 

Net income

 

$

46,135

 

$

66,926

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

 

 

 

 

 

 

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

 

 

118,806

 

 

43,884

Net gains on mortgage loans held for sale at fair value

 

 

(84,776)

 

 

(71,414)

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

 

 

(16,487)

 

 

(14,467)

Accrual of interest on excess servicing spread financing

 

 

3,066

 

 

3,934

Amortization of net debt issuance (premiums) and costs

 

 

(6,570)

 

 

(3,600)

Carried Interest from Investment Funds

 

 

 —

 

 

180

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

 

 

(156)

 

 

(147)

Results of real estate acquired in settlement in loans

 

 

(274)

 

 

28

Stock-based compensation expense

 

 

4,531

 

 

6,171

Provision for servicing advance losses

 

 

4,820

 

 

6,787

Depreciation and amortization

 

 

3,159

 

 

2,592

Amortization of right-of-use assets

 

 

2,359

 

 

 —

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

 

 

(6,959,389)

 

 

(9,212,188)

Originations of mortgage loans held for sale

 

 

(1,719,734)

 

 

(1,281,302)

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

 

 

(941,154)

 

 

(911,585)

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

 

 

8,536,430

 

 

11,103,785

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

 

 

884,510

 

 

781,326

Repurchase of mortgage loans subject to representations and warranties

 

 

(4,064)

 

 

(6,309)

Settlement of repurchase agreement derivatives

 

 

11,436

 

 

 —

Decrease in servicing advances

 

 

24,087

 

 

27,450

Sale of real estate acquired in settlement of loans

 

 

2,075

 

 

1,230

Decrease (increase) in receivable from PennyMac Mortgage Investment Trust

 

 

2,775

 

 

(955)

(Increase) decrease in other assets

 

 

(38,676)

 

 

6,198

Decrease in operating lease liabilities

 

 

(2,977)

 

 

 —

Increase in accounts payable and accrued expenses

 

 

10,483

 

 

2,344

Decrease in payable to PennyMac Mortgage Investment Trust

 

 

(28,752)

 

 

(19,544)

Increase in income taxes payable

 

 

14,090

 

 

6,068

Net cash (used in) provided by operating activities

 

 

(134,247)

 

 

537,392

Cash flow from investing activities

 

 

 

 

 

 

(Increase) decrease in short-term investments

 

 

(31,548)

 

 

64,190

Net change in assets purchased from PMT under agreement to resell

 

 

5,096

 

 

1,190

Net settlement of derivative financial instruments used for hedging

 

 

125,695

 

 

(128,099)

Purchase of mortgage servicing rights

 

 

(211,481)

 

 

(27,544)

Purchase of furniture, fixtures, equipment and leasehold improvements

 

 

(2,126)

 

 

(2,779)

Acquisition of capitalized software

 

 

(6,750)

 

 

(3,722)

Decrease in margin deposits

 

 

28,343

 

 

15,501

Net cash used in investing activities

 

 

(92,771)

 

 

(81,263)

Cash flow from financing activities

 

 

 

 

 

 

Sale of assets under agreements to repurchase

 

 

8,382,013

 

 

9,771,234

Repurchase of assets sold under agreements to repurchase

 

 

(8,164,625)

 

 

(10,338,629)

Issuance of mortgage loan participation purchase and sale certificates

 

 

5,555,946

 

 

6,155,178

Repayment of mortgage loan participation purchase and sale certificates

 

 

(5,540,374)

 

 

(6,172,301)

Advances on notes payable

 

 

 —

 

 

650,000

Repayment of notes payable

 

 

 —

 

 

(400,000)

Repayment of obligations under capital lease

 

 

(1,514)

 

 

(4,536)

Repayment of excess servicing spread financing

 

 

(10,552)

 

 

(12,291)

Payment of debt issuance costs

 

 

(1,536)

 

 

(7,891)

Issuance of common stock pursuant to exercise of stock options

 

 

1,283

 

 

3,255

Payment of withholding taxes relating to stock-based compensation

 

 

(4,634)

 

 

 —

Net cash provided by (used in) financing activities

 

 

216,007

 

 

(355,981)

Net (decrease) increase in cash and restricted cash

 

 

(11,011)

 

 

100,148

Cash and restricted cash at beginning of quarter

 

 

155,924

 

 

38,173

Cash and restricted cash at end of quarter

 

$

144,913

 

$

138,321

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

 

 

 

 

 

 

Cash

 

$

144,266

 

$

137,863

Restricted cash included in Other assets

 

 

647

 

 

458

 

 

$

144,913

 

$

138,321

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

 

 

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PENNYMAC FINANCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1—Organization

 

PennyMac Financial Services, Inc. (“PFSI” or the “Company”) is a holding corporation and its primary assets are direct and indirect equity interests in Private National Mortgage Acceptance Company, LLC (“PennyMac”). The Company is the managing member of PennyMac, and it operates and controls all of the businesses and affairs of PennyMac, subject to the consent rights of other members under certain circumstances, and consolidates the financial results of PennyMac and its subsidiaries.

 

PennyMac is a Delaware limited liability company which, through its subsidiaries, engages in mortgage banking and investment management activities. PennyMac’s mortgage banking activities consist of residential mortgage loan production and mortgage loan servicing. PennyMac’s investment management activities and a portion of its mortgage loan servicing activities are conducted on behalf of investment vehicles that invest in residential mortgage loans and related assets. PennyMac’s primary wholly owned subsidiaries are:

 

·

PNMAC Capital Management, LLC (“PCM”)—a Delaware limited liability company registered with the Securities and Exchange Commission (“SEC”) as an investment adviser under the Investment Advisers Act of 1940, as amended. PCM enters into investment management agreements with entities that invest in residential mortgage loans and related assets.

 

Presently, PCM has a management agreement with PennyMac Mortgage Investment Trust (“PMT”), a publicly held real estate investment trust. Previously, PCM had management agreements with PNMAC Mortgage Opportunity Fund, LLC and PNMAC Mortgage Opportunity Fund, L.P. an affiliate of these registered funds, and PNMAC Mortgage Opportunity Fund Investors, LLC (the “Private Fund”) (collectively, the “Investment Funds”). The Investment Funds were dissolved during 2018.

 

·

PennyMac Loan Services, LLC (“PLS”)  a Delaware limited liability company that services portfolios of residential mortgage loans on behalf of non-affiliates and PMT, purchases, originates and sells new prime credit quality residential mortgage loans and engages in other mortgage banking activities for its own account and the account of PMT.

 

PLS is approved as a seller/servicer of mortgage loans by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and as an issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”). PLS is a licensed Federal Housing Administration (“FHA”) Nonsupervised Title II Lender with the U.S. Department of Housing and Urban Development (“HUD”) and a lender/servicer with the Veterans Administration (“VA”) and U.S. Department of Agriculture (“USDA”) (each an “Agency” and collectively the “Agencies”).

 

On November 1, 2018, the Company completed a corporate reorganization (the “Reorganization”) by which it changed its equity structure to create a single class of common stock held by all stockholders at a new top-level publicly traded parent holding corporation, as opposed to the two classes of common stock, Class A and Class B, that were in place before the Reorganization. The predecessor holding company became a consolidated subsidiary of the Company and is considered the predecessor of the Company for accounting purposes. Accordingly, the predecessor holding company's historical consolidated financial statements remain the Company’s historical financial statements. As part of the Reorganization, the Company retained its officers and directors in their previously existing roles and assumed the predecessor holding company's stock-based compensation plan. The details of the Reorganization are more fully described in Note 1 – Organization to Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

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Note 2—Basis of Presentation and Recently Issued Accounting Pronouncements

 

Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) for interim financial information and with the SEC’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements and notes do not include all of the information required by GAAP for complete financial statements. This interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, income, and cash flows for the interim periods, but are not necessarily indicative of income to be anticipated for the full year ending December 31, 2019. Intercompany accounts and transactions have been eliminated.

 

Preparation of financial statements in compliance with GAAP requires management to make judgments and estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results will likely differ from those estimates.

 

Accounting Change

 

Effective January 1, 2019, the Company adopted Accounting Standards Update 2016-02, Leases (Topic 842), as amended (“ASU 2016-02”), using the modified retrospective approach. As the result of this adoption, the Company recorded a $58.6 million right-of-use asset, a corresponding lease liability and reclassified $20.7 million of deferred rent from accrued liabilities to the lease liability for a total lease liability of $79.3 million. The Company did not adjust the prior comparative period.

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

·

to retain its current classification of existing leases; and

·

to exclude from its consolidated balance sheet leases with initial terms that are less than or equal to 12 months.

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

The Company determines if an arrangement is a lease at inception. Operating leases are included in Operating lease right-of-use assets and Operating lease liabilities in its consolidated balance sheet. Operating lease right-of-use assets represent the Company’s right to use the underlying assets and operating lease liabilities represent its obligation to make the payments required by the leases.

As most of the Company’s leases do not provide an implicit discount rate, PFSI uses its incremental borrowing rate based on information available at the commencement date to determine the present value of its lease payment obligations. The operating lease right-of-use assets also includes any lease payments made and is reduced by lease incentives. Lease expense is recognized on the straight-line basis over the lease term.

The Company has lease agreements that include both lease and non-lease components (such as common area maintenance), which are generally included in the lease and are accounted for along with the lease component as a single lease component. Detailed lease disclosures are included in Note 10‒Leases.

 

 

Note 3—Concentration of Risk

 

A substantial portion of the Company’s activities relate to PMT. Revenues generated from PMT (generally comprised of mortgage loan servicing fees, gains on mortgage loans held for sale, mortgage loan origination fees, fulfillment fees, change in fair value of excess servicing spread financing (“ESS”), net interest paid to these entities, management fees, and change in fair value of investment and dividend received from PMT) totaled 31% and 15% of total net revenue for the quarters ended March 31, 2019 and 2018, respectively.

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Note 4—Transactions with Affiliates

 

Transactions with PMT

 

Operating Activities

 

Mortgage Loan Production Activities and MSR Recapture

 

The Company sells newly originated loans to PMT under a mortgage loan purchase agreement. Historically, the Company has used the mortgage loan purchase agreement for the purpose of selling to PMT prime jumbo residential mortgage loans. In the third quarter of 2017, the Company began selling conventional conforming balance mortgage loans to PMT under the agreement.

 

Pursuant to the terms of an MSR recapture agreement by and between the Company and PMT, which was amended and restated effective September 12, 2016, if the Company refinances mortgage loans for which PMT previously held the MSRs, the Company is generally required to transfer and convey to PMT cash in an amount equal to 30% of the fair market value of the MSRs related to all such mortgage loans. The MSR recapture agreement expires on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

 

Pursuant to a mortgage banking services agreement, which was amended and restated effective September 12, 2016, the Company provides PMT with certain mortgage banking services, including fulfillment and disposition-related services, for which it receives a fulfillment fee. Pursuant to the terms of the mortgage banking services agreement, the monthly fulfillment fee is an amount that shall equal (a) no greater than the product of (i) 0.35% and (ii) the aggregate initial unpaid principal balance (the “Initial UPB”) of all mortgage loans purchased in such month, plus (b) in the case of all mortgage loans other than mortgage loans sold to or securitized through Fannie Mae or Freddie Mac, no greater than the product of (i) 0.50% and (ii) the aggregate Initial UPB of all such mortgage loans sold and securitized in such month; provided, however, that no fulfillment fee shall be due or payable to the Company with respect to any mortgage loans underwritten to the Ginnie Mae Mortgage‑Backed Securities (“MBS”) Guide. PMT does not hold the Ginnie Mae approval required to issue Ginnie Mae MBS and act as a servicer. Accordingly, under the agreement, the Company currently purchases mortgage loans underwritten in accordance with the Ginnie Mae MBS Guide “as is” and without recourse of any kind from PMT at PMT’s cost less an administrative fee plus accrued interest and a sourcing fee ranging from two to three and one-half basis points, generally based on the average number of calendar days mortgage loans are held by PMT before being purchased by the Company.

 

Following is a summary of loan production activities, including MSR recapture between the Company and PMT:

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

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

 

 

 

 

 

 

Net gains on mortgage loans held for sale to PMT

 

$

27,146

 

$

13,811

Mortgage servicing rights and excess servicing spread recapture incurred

 

 

(1,123)

 

 

(1,425)

 

 

$

26,023

 

$

12,386

Sale of mortgage loans held for sale to PMT

 

$

884,510

 

$

781,326

 

 

 

 

 

 

 

Fulfillment fee revenue

    

$

27,574

    

$

11,944

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

 

$

8,135,552

 

$

4,225,631

 

 

 

 

 

 

 

Sourcing fees paid to PMT

 

$

1,994

 

$

2,641

Unpaid principal balance of mortgage loans purchased from PMT

 

$

6,647,338

 

$

8,847,873

 

 

 

 

 

 

 

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

 

$

2,243

 

$

1,208

 

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Mortgage Loan Servicing

 

The Company and PMT have entered into a loan servicing agreement (the “Servicing Agreement”), which was amended and restated effective September 12, 2016 and pursuant to which the Company provides servicing for PMT’s portfolio of residential mortgage loans and subservicing for its portfolio of MSRs. The Servicing Agreement provides for servicing fees of per‑loan monthly amounts based on the delinquency, bankruptcy and/or foreclosure status of the serviced mortgage loan or the real estate acquired in settlement of loans (“REO”). The Company also remains entitled to customary ancillary income and market-based fees and charges relating to mortgage loans it services for PMT. These include boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and a percentage of late charges.

 

·

The base servicing fee rates for distressed whole mortgage loans range from $30 per month for current loans up to $85 per month for loans where the borrower has declared bankruptcy. The base servicing fee rate for REO is $75 per month.

 

·

To the extent the Company facilitates rentals of PMT's REO under its REO rental program, the Company collects an REO rental fee of $30 per month per REO, an REO property lease renewal fee of $100 per lease renewal, and a property management fee in an amount equal to the Company’s cost if property management services and/or any related software costs are outsourced to a third-party property management firm or 9% of gross rental income if the Company provides property management services directly. The Company is also entitled to retain any tenant paid application fees and late rent fees and seek reimbursement for certain third-party vendor fees.

 

·

Except as otherwise provided in the MSR recapture agreement, when the Company effects a refinancing of a mortgage loan on behalf of PMT and not through a third-party lender and the resulting mortgage loan is readily saleable, or the Company originates a loan to facilitate the disposition of a REO, the Company is entitled to receive from PMT market-based fees and compensation consistent with pricing and terms the Company offers unaffiliated parties on a retail basis.

 

·

Because PMT has a small number of employees and limited infrastructure, the Company is required to provide a range of services and activities significantly greater in scope than the services provided in connection with a customary servicing arrangement. For these services, the Company receives a supplemental servicing fee of $25 per month for each distressed mortgage loan. The Company is entitled to reimbursement for all customary, good faith reasonable and necessary out-of-pocket expenses incurred by the Company in performance of its servicing obligations.

 

·

The Company is entitled to retain any incentive payments made to it and to which it is entitled under the U.S. Department of Treasury’s Home Affordable Modification Plan; provided, however, that with respect to any such incentive payments paid to the Company in connection with a mortgage loan modification for which PMT previously paid the Company a modification fee, the Company is required to reimburse PMT an amount equal to the incentive payments.

 

·

The Company is also entitled to certain activity-based fees for distressed whole mortgage loans that are charged based on the achievement of certain events. These fees range from $750 for a streamline modification to $1,750 for a full modification or liquidation and $500 for a deed-in-lieu of foreclosure. The Company is not entitled to earn more than one liquidation fee, reperformance fee or modification fee per mortgage loan in any 18-month period.

 

·

The base servicing fees for non-distressed mortgage loans are calculated through a monthly per-loan dollar amount, with the actual dollar amount for each loan based on whether the mortgage loan is a fixed-rate or adjustable-rate loan. The base servicing fee rates are $7.50 per month and $8.50 per month for fixed-rate loans and adjustable-rate loans, respectively.

 

The Servicing Agreement expires on September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.

 

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Following is a summary of mortgage loan servicing fees earned from PMT:

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Mortgage loans acquired for sale at fair value

 

$

239

 

$

178

Mortgage loans at fair value

 

 

463

 

 

3,085

Mortgage servicing rights

 

 

9,868

 

 

7,756

 

 

$

10,570

 

$

11,019

Property management fees received from PMT included in Other income

 

$

123

 

$

99

 

Investment Management Activities

 

The Company has a management agreement with PMT (“Management Agreement”), which was amended and restated effective September 12, 2016. Pursuant to the Management Agreement, the Company oversees PMT’s business affairs in conformity with the investment policies that are approved and monitored by its board of trustees, for which it collects a base management fee and may collect a performance incentive fee. The Management Agreement provides that:

 

·

The base management fee is calculated quarterly and is equal to the sum of (i) 1.5% per year of PMT’s average shareholders’ equity up to $2 billion, (ii) 1.375% per year of PMT’s average shareholders’ equity in excess of $2 billion and up to $5 billion, and (iii) 1.25% per year of PMT’s average shareholders’ equity in excess of $5 billion.

 

·

The performance incentive fee is calculated quarterly at a defined annualized percentage of the amount by which PMT’s “net income,” on a rolling four‑quarter basis and before deducting the incentive fee, exceeds certain levels of return on “equity.”

 

The performance incentive fee is equal to the sum of: (a) 10% of the amount by which PMT’s “net income” for the quarter exceeds (i) an 8% return on equity plus the “high watermark,” up to (ii) a 12% return on PMT’s equity; plus (b) 15% of the amount by which PMT’s “net income” for the quarter exceeds (i) a 12% return on PMT’s equity plus the “high watermark,” up to (ii) a 16% return on PMT’s equity; plus (c) 20% of the amount by which PMT’s “net income” for the quarter exceeds a 16% return on equity plus the “high watermark.”

 

For the purpose of determining the amount of the performance incentive fee:

 

“Net income” is defined as net income or loss attributable to PMT’s common shares of beneficial interest computed in accordance with GAAP adjusted for certain other non‑cash charges determined after discussions between the Company and PMT’s independent trustees and approval by a majority of PMT’s independent trustees.

 

“Equity” is the weighted average of the issue price per common share of all of PMT’s public offerings, multiplied by the weighted average number of common shares outstanding (including restricted share units) in the rolling four‑quarter period.

 

The “high watermark” is the quarterly adjustment that reflects the amount by which the “net income” (stated as a percentage of return on equity) in that quarter exceeds or falls short of the lesser of 8% and the average Fannie Mae 30‑year MBS yield (the “Target Yield”) for the four quarters then ended. If the “net income” is lower than the Target Yield, the high watermark is increased by the difference. If the “net income” is higher than the Target Yield, the high watermark is reduced by the difference. Each time a performance incentive fee is earned, the high watermark returns to zero. As a result, the threshold amounts required for the Company to earn a performance incentive fee are adjusted cumulatively based on the performance of PMT’s “net income” over (or under) the Target Yield, until the “net income” in excess of the Target Yield exceeds the then‑current cumulative high watermark amount, and a performance incentive fee is earned.

 

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The base management fee and the performance incentive fee are both receivable quarterly in arrears. The performance incentive fee may be paid in cash or a combination of cash and PMT’s common shares (subject to a limit of no more than 50% paid in common shares), at PMT’s option.

 

The Management Agreement expires on September 12, 2020, subject to automatic renewal for additional
18-month periods, unless terminated earlier in accordance with the terms of the agreement. In the event of termination of the Management Agreement between PMT and the Company, the Company may be entitled to a termination fee in certain circumstances. The termination fee is equal to three times the sum of (a) the average annual base management fee, and (b) the average annual performance incentive fee earned by the Company, in each case during the 24-month period immediately preceding the date of termination.

 

Following is a summary of the base management and performance incentive fees earned from PMT:

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Base management

 

$

6,109

 

$

5,696

Performance incentive

 

 

1,139

 

 

 —

 

 

$

7,248

 

$

5,696

 

 

 

 

 

 

 

Expense Reimbursement

 

Under the Management Agreement, PMT reimburses the Company for its organizational and operating expenses, including third-party expenses, incurred on PMT’s behalf, it being understood that the Company and its affiliates shall allocate a portion of their personnel’s time to provide certain legal, tax and investor relations services for the direct benefit of PMT. With respect to the allocation of the Company’s and its affiliates’ personnel compensation, the Company shall be reimbursed $120,000 per fiscal quarter, such amount to be reviewed annually and not preclude reimbursement for any other services performed by the Company or its affiliates.

 

PMT is also required to pay its pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Company and its affiliates required for PMT’s and its subsidiaries’ operations. These expenses will be allocated based on the ratio of PMT’s proportion of gross assets compared to all remaining gross assets managed by the Company as calculated at each fiscal quarter end.

 

The Company received reimbursements from PMT for expenses as follows:

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Reimbursement of:

    

 

                

    

 

                

Common overhead incurred by the Company included in Other revenue

 

$

1,236

 

$

1,001

Compensation included in Other revenue

 

 

120

 

 

120

Expenses incurred on PMT's behalf, net

 

 

570

 

 

573

 

 

$

1,926

 

$

1,694

Payments and settlements during the quarter (1)

 

$

15,189

 

$

7,658


(1)

Payments and settlements include payments for management fees and correspondent production activities itemized in the preceding tables and netting settlements made pursuant to master netting agreements between the Company and PMT.

 

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Conditional Reimbursement of Underwriting Fees

 

In connection with its initial public offering of common shares of beneficial interest on August 4, 2009 (“IPO”), PMT conditionally agreed to reimburse the Company up to $2.9 million for underwriting fees paid to the IPO underwriters by the Company on PMT’s behalf. In the event a termination fee is payable to the Company under the Management Agreement, and the Company has not received the full amount of the reimbursements and payments under the reimbursement agreement, such amount will be paid in full. On February 1, 2019, the term of the reimbursement agreement was extended to February 1, 2023. The Company received $75,000 in reimbursement of underwriting fees from PMT during the quarter ended March 31, 2019.

 

Investing Activities

 

Master Repurchase Agreement

 

On December 19, 2016, the Company, through PLS, entered into a master repurchase agreement with one of PMT’s wholly-owned subsidiaries, PennyMac Holdings, LLC (“PMH”) (the “PMH Repurchase Agreement”), pursuant to which PMH may borrow from the Company for the purpose of financing PMH’s participation certificates representing beneficial ownership in ESS. PLS then re-pledges such participation certificates to PNMAC GMSR ISSUER TRUST (the “Issuer Trust”) under a master repurchase agreement by and among PLS, the Issuer Trust and PennyMac, as guarantor (the “PC Repurchase Agreement”). The Issuer Trust was formed for the purpose of allowing PLS to finance MSRs and ESS relating to such MSRs (the “GNMA MSR Facility”).

 

In connection with the GNMA MSR Facility, PLS pledges and/or sells to the Issuer Trust participation certificates representing beneficial interests in MSRs and ESS pursuant to the terms of the PC Repurchase Agreement. In return, the Issuer Trust (a) has issued to PLS, pursuant to the terms of an indenture, the Series 2016-MSRVF1 Variable Funding Note, dated December 19, 2016, known as the “PNMAC GMSR ISSUER TRUST MSR Collateralized Notes, Series 2016-MSRVF1” (the “VFN”), and (b) has issued and may, from time to time pursuant to the terms of any supplemental indenture, issue to institutional investors additional term notes (“Term Notes”), in each case secured on a pari passu basis by the participation certificates relating to the MSRs and ESS. The maximum principal balance of the VFN is $1,000,000,000.

 

The principal amount paid by PLS for the participation certificates under the PMH Repurchase Agreement is based upon a percentage of the market value of the underlying ESS. Upon PMH’s repurchase of the participation certificates, PMH is required to repay PLS the principal amount relating thereto plus accrued interest (at a rate reflective of the current market and consistent with the weighted average note rate of the VFN and any outstanding Term Notes) to the date of such repurchase. PLS is then required to repay the Issuer Trust the corresponding amount under the PC Repurchase Agreement.

 

The Company holds an investment in PMT in the form of 75,000 common shares of beneficial interest.

 

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

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

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

 

$

1,796

 

$

1,976

Common shares of beneficial interest of PennyMac Mortgage Investment Trust:

 

 

 

 

 

 

Dividends received

 

$

36

 

$

35

Change in fair value of investment

 

 

156

 

 

147

 

 

$

192

 

$

182

 

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Table of Contents

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2019

    

2018

 

 

(in thousands)

Assets purchased from PennyMac Mortgage Investment Trust under agreements to

 resell

 

$

125,929

 

$

131,025

Common shares of beneficial interest of PennyMac Mortgage Investment Trust:

 

 

 

 

 

 

Fair value

 

$

1,553

 

$

1,397

Number of shares

 

 

75

 

 

75

 

Financing Activities

 

Spread Acquisition and MSR Servicing Agreements

 

On December 19, 2016, the Company amended and restated a master spread acquisition and MSR servicing agreement with PMT (the “Spread Acquisition Agreement”), pursuant to which the Company may sell to PMT, from time to time, the right to receive participation certificates representing beneficial ownership in ESS arising from Ginnie Mae MSRs acquired by the Company, in which case the Company generally would be required to service or subservice the related mortgage loans for Ginnie Mae. The primary purpose of the amendment and restatement was to facilitate the continued financing of the ESS owned by PMT in connection with the parties’ participation in the GNMA MSR Facility.

 

To the extent the Company refinances any of the mortgage loans relating to the ESS it has acquired, the Spread Acquisition Agreement also contains recapture provisions requiring that the Company transfer to PMT, at no cost, the ESS relating to a certain percentage of the unpaid principal balance of the newly originated mortgage loans. However, under the Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the refinanced mortgage loans, the Company is also required to transfer additional ESS or cash in the amount of such shortfall. Similarly, in any month where the transferred ESS relating to modified Ginnie Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the modified mortgage loans, the Spread Acquisition Agreement contains provisions that require the Company to transfer additional ESS or cash in the amount of such shortfall. To the extent the fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, the Company may, at its option, settle its obligation to PMT in cash in an amount equal to such fair market value in lieu of transferring such ESS.

 

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

 

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

 

    

2019

    

2018

 

 

 

(in thousands)

 

Excess servicing spread financing:

 

 

 

 

 

 

 

Issuance pursuant to recapture agreement

 

$

508

 

$

904

 

Repayment

 

$

10,552

 

$

12,291

 

Gain (loss) recognized

 

$

4,051

 

$

(6,921)

 

Interest expense

 

$

3,066

 

$

3,934

 

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

 

$

489

 

$

830

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

 

 

(in thousands)

 

Excess servicing spread financing at fair value

 

$

205,081

 

$

216,110

 

 

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Table of Contents

Receivable from and Payable to PMT

 

Amounts receivable from and payable to PMT are summarized below:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2019

    

2018

 

 

(in thousands)

Receivable from PMT:

 

 

 

 

 

 

Fulfillment fees

 

$

11,744

 

$

10,006

Management fees

 

 

7,238

 

 

6,559

Servicing fees

 

 

4,350

 

 

4,841

Allocated expenses and expenses incurred on PMT's behalf

 

 

3,907

 

 

9,066

Correspondent production fees

 

 

1,852

 

 

2,071

Conditional Reimbursement

 

 

726

 

 

801

Interest on assets purchased under agreements to resell

 

 

134

 

 

120

 

 

$

29,951

 

$

33,464

Payable to PMT:

 

 

 

 

 

 

Deposits made by PMT to fund servicing advances

 

$

73,149

 

$

100,554

Mortgage servicing rights recapture payable

 

 

160

 

 

179

Other

 

 

3,185

 

 

3,898

 

 

$

76,494

 

$

104,631

 

Exchanged Private National Mortgage Acceptance Company, LLC Unitholders

 

On May 8, 2013, the Company entered into a tax receivable agreement with certain former owners of PennyMac that provides for the payment from time to time by the Company to PennyMac’s exchanged unitholders an amount equal to 85% of the amount of the net tax benefits, if any, that the Company is deemed to realize as a result of (i) increases in tax basis of PennyMac’s assets resulting from exchanges of ownership interests in PennyMac and (ii) certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.

 

Although the Company’s reorganization in 2018 eliminated the potential for unitholders to exchange any additional units subject to this tax receivable agreement, the Company continues to be subject to the agreement and will be required to make payments, if any, under the tax receivable agreement to those certain prior owners of PennyMac who effected exchanges of ownership interests in PennyMac for the Company’s common stock prior to the closing of the Reorganization in November 2018.

 

Based on the PennyMac unitholder exchanges to date, the Company has recorded a $46.5 million Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement as of March 31, 2019 and December 31, 2018. The Company did not make any payments under the tax receivable agreement during the quarters ended March 31, 2019 and 2018.

 

 

 .

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Table of Contents

Note 5—Loan Sales and Servicing Activities

 

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

 

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

 

 

 

 

 

 

 

 

 

 

Quarter ended March 31, 

 

    

2019

    

2018

 

 

(in thousands)

Cash flows:

   

 

 

   

 

 

Sales proceeds

 

$

8,536,430

 

$

11,103,785

Servicing fees received (1)

 

$

137,148

 

$

113,091

Net servicing recoveries

 

$

(24,176)

 

$

(10,637)


(1)

Net of guarantee fees paid to the Agencies.

 

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