UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2021
or
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☐ |
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.
(Exact name of registrant as specified in its charter)
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Delaware |
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83-1098934 |
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(State or other jurisdiction of |
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(IRS Employer |
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incorporation or organization) |
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Identification No.) |
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3043 Townsgate Road, Westlake Village, California |
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91361 |
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(Address of principal executive offices) |
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(Zip Code) |
(818) 224-7442
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Common Stock, $0.0001 par value |
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PFSI |
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New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☒ |
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Accelerated filer ☐ |
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Non-accelerated filer ☐ |
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Smaller reporting company ☐ |
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Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
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Class |
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Outstanding at May 4, 2021 |
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Common Stock, $0.0001 par value |
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66,734,198 |
PENNYMAC FINANCIAL SERVICES, INC.
FORM 10-Q
March 31, 2021
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Report”) contains certain forward-looking statements that are subject to various risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” “continue,” “plan” or other similar words or expressions.
Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Examples of forward-looking statements include the following:
| ● | projections of our revenues, income, earnings per share, capital structure or other financial items; |
| ● | descriptions of our plans or objectives for future operations, products or services; |
| ● | forecasts of our future economic performance, interest rates, profit margins and our share of future markets; and |
| ● | descriptions of assumptions underlying or relating to any of the foregoing expectations regarding the timing of generating any revenues. |
Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. There are a number of factors, many of which are beyond our control that could cause actual results to differ significantly from management’s expectations. Some of these factors are discussed below.
You should not place undue reliance on any forward-looking statement and should consider the following uncertainties and risks, as well as the risks and uncertainties discussed elsewhere in this Report and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on February 25, 2021.
Factors that could cause actual results to differ materially from historical results or those anticipated include, but are not limited to:
| ● | our exposure to risks of loss resulting from adverse weather conditions, man-made or natural disasters, the effect of climate change, and pandemics, such as COVID-19; |
| ● | failure to modify, resell or refinance early buyout loans and or defaults of early buyout loans beyond our expectations; |
| ● | the continually changing federal, state and local laws and regulations applicable to the highly regulated industry in which we operate; |
| ● | lawsuits or governmental actions if we do not comply with the laws and regulations applicable to our businesses; |
| ● | the mortgage lending and servicing-related regulations promulgated by the Consumer Financial Protection Bureau (“CFPB”) and its enforcement of these regulations; |
| ● | our dependence on U.S. government-sponsored entities and changes in their current roles or their guarantees or guidelines; |
| ● | changes to government mortgage modification programs; |
| ● | foreclosure delays and changes in foreclosure practices; |
| ● | the licensing and operational requirements of states and other jurisdictions applicable to our businesses, to which our bank competitors are not subject; |
| ● | our ability to manage third-party service providers and vendors and their compliance with laws, regulations and investor requirements; |
3
| ● | changes in macroeconomic and U.S. real estate market conditions; |
| ● | difficulties inherent in growing loan production volume; |
| ● | difficulties inherent in adjusting the size of our operations to reflect changes in business levels; |
| ● | maintaining sufficient capital and liquidity to support business growth including compliance with financial covenants; |
| ● | changes in prevailing interest rates; |
| ● | our substantial amount of indebtedness; |
| ● | increases in loan delinquencies and defaults; |
| ● | our reliance on PennyMac Mortgage Investment Trust (“PMT”) as a significant source of financing for, and revenue related to, our mortgage banking business; |
| ● | our obligation to indemnify third-party purchasers or repurchase loans if loans that we originate, acquire, service or assist in the fulfillment of, fail to meet certain criteria or characteristics or under other circumstances; |
| ● | our exposure to counterparties that are unwilling or unable to honor contractual obligations, including their obligation to indemnify us or repurchase defective mortgage loans; |
| ● | our ability to realize the anticipated benefit of potential future acquisitions of mortgage servicing rights (“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.
4
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.
5
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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March 31, |
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December 31, |
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2021 |
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2020 |
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(in thousands, except share amounts) |
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ASSETS |
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Cash |
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$ |
441,870 |
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$ |
532,716 |
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Short-term investments at fair value |
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24,850 |
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15,217 |
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Loans held for sale at fair value (includes $13,267,667 and $11,457,678 pledged to creditors) |
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13,385,789 |
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11,616,400 |
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Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors |
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— |
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80,862 |
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Derivative assets |
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530,852 |
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711,238 |
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Servicing advances, net (includes valuation allowance of $156,315 and $181,433; $373,110 and $413,484 pledged to creditors) |
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550,150 |
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579,528 |
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Mortgage servicing rights at fair value (includes $3,265,073 and $2,577,964 pledged to creditors) |
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3,268,910 |
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2,581,174 |
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Operating lease right-of-use assets |
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74,795 |
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74,934 |
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Investment in PennyMac Mortgage Investment Trust at fair value |
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1,470 |
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1,105 |
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Receivable from PennyMac Mortgage Investment Trust |
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68,644 |
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87,005 |
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Loans eligible for repurchase |
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12,312,393 |
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14,625,447 |
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Other (includes $114,342 and $166,418 pledged to creditors) |
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638,257 |
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692,169 |
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Total assets |
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$ |
31,297,980 |
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$ |
31,597,795 |
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LIABILITIES |
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Assets sold under agreements to repurchase |
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$ |
10,848,477 |
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$ |
9,654,797 |
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Mortgage loan participation purchase and sale agreements |
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518,747 |
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521,477 |
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Obligations under capital lease |
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10,468 |
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11,864 |
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Notes payable secured by mortgage servicing assets |
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1,296,285 |
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1,295,840 |
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Unsecured senior notes |
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1,288,198 |
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645,820 |
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Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value |
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— |
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131,750 |
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Derivative liabilities |
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68,557 |
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42,638 |
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Mortgage servicing liabilities at fair value |
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46,026 |
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45,324 |
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Accounts payable and accrued expenses |
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355,429 |
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308,398 |
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Operating lease liabilities |
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96,069 |
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94,193 |
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Payable to PennyMac Mortgage Investment Trust |
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164,469 |
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140,306 |
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Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement |
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35,165 |
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35,165 |
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Income taxes payable |
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751,855 |
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622,700 |
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Liability for loans eligible for repurchase |
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12,312,393 |
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14,625,447 |
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Liability for losses under representations and warranties |
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38,428 |
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32,688 |
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Total liabilities |
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27,830,566 |
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28,208,407 |
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Commitments and contingencies – Note 16 |
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STOCKHOLDERS’ EQUITY |
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Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 66,961,401 and 70,905,532 shares, respectively |
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7 |
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7 |
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Additional paid-in capital |
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762,585 |
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1,047,052 |
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Retained earnings |
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2,704,822 |
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2,342,329 |
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Total stockholders' equity |
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3,467,414 |
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|
3,389,388 |
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Total liabilities and stockholders’ equity |
|
$ |
31,297,980 |
|
$ |
31,597,795 |
The accompanying notes are an integral part of these consolidated financial statements.
6
PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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Quarter ended March 31, |
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2021 |
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2020 |
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(in thousands, except per share amounts) |
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Revenues |
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Net gains on loans held for sale at fair value: |
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From non-affiliates |
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$ |
768,589 |
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$ |
266,366 |
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From PennyMac Mortgage Investment Trust |
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(14,248) |
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77,916 |
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754,341 |
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344,282 |
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Loan origination fees: |
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From non-affiliates |
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95,845 |
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53,591 |
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From PennyMac Mortgage Investment Trust |
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8,192 |
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3,980 |
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104,037 |
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57,571 |
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Fulfillment fees from PennyMac Mortgage Investment Trust |
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60,835 |
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41,940 |
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Net loan servicing fees: |
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Loan servicing fees: |
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From non-affiliates |
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210,753 |
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198,653 |
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From PennyMac Mortgage Investment Trust |
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19,093 |
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14,521 |
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Other |
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29,599 |
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28,755 |
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259,445 |
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241,929 |
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Change in fair value of mortgage servicing rights and mortgage servicing liabilities |
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|
223,463 |
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(1,035,213) |
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Change in fair value of excess servicing spread financing payable to PennyMac Mortgage Investment Trust |
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|
(1,037) |
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|
14,522 |
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Mortgage servicing rights hedging results |
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(442,151) |
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|
1,036,570 |
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(219,725) |
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|
15,879 |
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Net loan servicing fees |
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39,720 |
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|
257,808 |
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Net interest (expense) income: |
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Interest income: |
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From non-affiliates |
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|
81,694 |
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|
71,346 |
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From PennyMac Mortgage Investment Trust |
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|
387 |
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|
1,218 |
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82,081 |
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|
72,564 |
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Interest expense: |
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To non-affiliates |
|
|
106,433 |
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|
59,538 |
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To PennyMac Mortgage Investment Trust |
|
|
1,280 |
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|
1,974 |
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|
107,713 |
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|
61,512 |
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Net interest (expense) income |
|
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(25,632) |
|
|
11,052 |
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Management fees from PennyMac Mortgage Investment Trust |
|
|
8,449 |
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|
9,055 |
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Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust |
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|
401 |
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(857) |
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Results of real estate acquired in settlement of loans |
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|
780 |
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(707) |
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Other |
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|
1,755 |
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|
1,681 |
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Total net revenues |
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944,686 |
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|
721,825 |
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Expenses |
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Compensation |
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258,829 |
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|
168,436 |
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Loan origination |
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87,392 |
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|
46,004 |
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Technology |
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33,672 |
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19,107 |
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Servicing |
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19,183 |
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42,166 |
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Professional services |
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13,286 |
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13,404 |
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Occupancy and equipment |
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9,038 |
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8,038 |
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Other |
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17,278 |
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|
9,940 |
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Total expenses |
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438,678 |
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|
307,095 |
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Income before provision for income taxes |
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506,008 |
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|
414,730 |
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Provision for income taxes |
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|
129,140 |
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|
108,487 |
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Net income |
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$ |
376,868 |
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$ |
306,243 |
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Earnings per share |
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Basic |
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$ |
5.45 |
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$ |
3.89 |
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Diluted |
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$ |
5.15 |
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$ |
3.73 |
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Weighted average shares outstanding |
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Basic |
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69,113 |
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|
78,689 |
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Diluted |
|
|
73,117 |
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|
82,008 |
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Dividend declared per share |
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$ |
0.20 |
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$ |
0.12 |
The accompanying notes are an integral part of these consolidated financial statements.
7
PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
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Quarter ended March 31, 2021 |
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Additional |
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Total |
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Number of |
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Par |
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paid-in |
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Retained |
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stockholders' |
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shares |
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value |
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capital |
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earnings |
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equity |
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(in thousands) |
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Balance, December 31, 2020 |
|
70,906 |
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$ |
7 |
|
$ |
1,047,052 |
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$ |
2,342,329 |
|
$ |
3,389,388 |
|
Net income |
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— |
|
|
— |
|
|
— |
|
|
376,868 |
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|
376,868 |
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Stock-based compensation |
|
707 |
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|
— |
|
|
4,001 |
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— |
|
|
4,001 |
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Issuance of common stock in settlement of directors' fees |
|
1 |
|
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— |
|
|
51 |
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— |
|
|
51 |
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Repurchase of common stock |
|
(4,653) |
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|
— |
|
|
(288,519) |
|
|
— |
|
|
(288,519) |
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Common stock dividend ($0.20 per share) |
|
— |
|
|
— |
|
|
— |
|
|
(14,375) |
|
|
(14,375) |
|
Balance, March 31, 2021 |
|
66,961 |
|
$ |
7 |
|
$ |
762,585 |
|
$ |
2,704,822 |
|
$ |
3,467,414 |
The accompanying notes are an integral part of these consolidated financial statements.
8
PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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|
Quarter ended March 31, |
||||
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|
|
2021 |
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2020 |
||
|
|
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(in thousands) |
||||
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Cash flow from operating activities |
|
|
|
|
|
|
|
Net income |
|
$ |
376,868 |
|
$ |
306,243 |
|
Adjustments to reconcile net income to net cash used in operating activities: |
|
|
|
|
|
|
|
Net gains on loans held for sale at fair value |
|
|
(754,341) |
|
|
(344,282) |
|
Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread |
|
|
(222,426) |
|
|
1,020,691 |
|
Mortgage servicing rights hedging results |
|
|
442,151 |
|
|
(1,036,570) |
|
Capitalization of interest and advance on loans held for sale at fair value |
|
|
(90,177) |
|
|
(18,131) |
|
Accrual of interest on excess servicing spread financing payable to PennyMac Mortgage Investment Trust |
|
|
1,280 |
|
|
1,974 |
|
Amortization of debt issuance costs |
|
|
7,297 |
|
|
2,209 |
|
Change in fair value of investment in common shares of PennyMac Mortgage Investment Trust |
|
|
(365) |
|
|
875 |
|
Results of real estate acquired in settlement in loans |
|
|
(780) |
|
|
707 |
|
Stock-based compensation expense |
|
|
10,877 |
|
|
12,368 |
|
(Reversal of) Provision for servicing advance losses |
|
|
(20,536) |
|
|
3,806 |
|
Impairment of capitalized software |
|
|
728 |
|
|
— |
|
Depreciation and amortization |
|
|
7,632 |
|
|
5,352 |
|
Amortization of right-of-use assets |
|
|
3,382 |
|
|
2,985 |
|
Purchase of loans held for sale from PennyMac Mortgage Investment Trust |
|
|
(18,420,615) |
|
|
(14,509,209) |
|
Origination of loans held for sale |
|
|
(14,314,637) |
|
|
(4,954,316) |
|
Purchase of loans held for sale from non-affiliates |
|
|
(1,443,255) |
|
|
(620,859) |
|
Purchase of loans from Ginnie Mae securities and early buyout investors for modification and subsequent sale |
|
|
(4,355,102) |
|
|
(2,299,262) |
|
Sale to non-affiliates and principal payments of loans held for sale |
|
|
37,268,200 |
|
|
19,337,017 |
|
Sale to PennyMac Mortgage Investment Trust of loans held for sale |
|
|
— |
|
|
2,246,127 |
|
Repurchase of loans subject to representations and warranties |
|
|
(17,986) |
|
|
(16,282) |
|
Sale of real estate acquired in settlement of loans |
|
|
4,946 |
|
|
9,459 |
|
Decrease in servicing advances |
|
|
48,372 |
|
|
18,467 |
|
Decrease (increase) in receivable from PennyMac Mortgage Investment Trust |
|
|
14,878 |
|
|
(10,133) |
|
Decrease in other assets |
|
|
22,912 |
|
|
628 |
|
Increase in accounts payable and accrued expenses |
|
|
46,896 |
|
|
21,866 |
|
Decrease in operating lease liabilities |
|
|
(4,066) |
|
|
(3,469) |
|
Increase (decrease) in payable to PennyMac Mortgage Investment Trust |
|
|
10,696 |
|
|
(17,019) |
|
Increase in income taxes payable |
|
|
129,155 |
|
|
108,474 |
|
Net cash used in operating activities |
|
|
(1,248,016) |
|
|
(730,284) |
|
Cash flow from investing activities |
|
|
|
|
|
|
|
(Increase) decrease in short-term investments |
|
|
(9,633) |
|
|
72,727 |
|
Net change in assets purchased from PMT under agreement to resell |
|
|
80,862 |
|
|
7,746 |
|
Net settlement of derivative financial instruments used for hedging of mortgage servicing rights |
|
|
(527,458) |
|
|
942,005 |
|
Purchase of mortgage servicing rights |
|
|
— |
|
|
(24,104) |
|
Purchase of furniture, fixtures, equipment and leasehold improvements |
|
|
(2,738) |
|
|
(994) |
|
Acquisition of capitalized software |
|
|
(10,056) |
|
|
(14,108) |
|
Decrease in margin deposits |
|
|
245,505 |
|
|
132,953 |
|
Net cash (used in) provided by investing activities |
|
|
(223,518) |
|
|
1,116,225 |
|
Cash flow from financing activities |
|
|
|
|
|
|
|
Sale of assets under agreements to repurchase |
|
|
35,805,822 |
|
|
20,510,531 |
|
Repurchase of assets sold under agreements to repurchase |
|
|
(34,613,141) |
|
|
(20,205,416) |
|
Issuance of mortgage loan participation purchase and sale certificates |
|
|
6,339,539 |
|
|
5,273,329 |
|
Repayment of mortgage loan participation purchase and sale certificates |
|
|
(6,342,269) |
|
|
(5,242,527) |
|
Repayment of obligations under capital lease |
|
|
(1,396) |
|
|
(2,665) |
|
Issuance of unsecured senior notes |
|
|
650,000 |
|
|
— |
|
Repayment of excess servicing spread financing |
|
|
(134,624) |
|
|
(9,308) |
|
Payment of debt issuance costs |
|
|
(13,475) |
|
|
(3,388) |
|
Issuance of common stock pursuant to exercise of stock options |
|
|
1,670 |
|
|
3,082 |
|
Payment of withholding taxes relating to stock-based compensation |
|
|
(8,546) |
|
|
(5,265) |
|
Payment of dividend to holders of common stock |
|
|
(14,375) |
|
|
(9,733) |
|
Repurchase of common stock |
|
|
(288,519) |
|
|
(4,121) |
|
Net cash provided by financing activities |
|
|
1,380,686 |
|
|
304,519 |
|
Net (decrease) increase in cash and restricted cash |
|
|
(90,848) |
|
|
690,460 |
|
Cash and restricted cash at beginning of quarter |
|
|
532,781 |
|
|
188,578 |
|
Cash and restricted cash at end of quarter |
|
$ |
441,933 |
|
$ |
879,038 |
|
Cash and restricted cash at end of quarter are comprised of the following: |
|
|
|
|
|
|
|
Cash |
|
$ |
441,870 |
|
$ |
878,826 |
|
Restricted cash included in Other assets |
|
|
63 |
|
|
212 |
|
|
|
$ |
441,933 |
|
$ |
879,038 |
The accompanying notes are an integral part of these consolidated financial statements.
9
PENNYMAC FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1—Organization
PennyMac Financial Services, Inc. (“PFSI” or the “Company”) is a holding corporation and its primary assets are direct and indirect equity interests in Private National Mortgage Acceptance Company, LLC (“PennyMac”). The Company is the managing member of PennyMac, and it operates and controls all of the businesses and affairs of PennyMac, and consolidates the financial results of PennyMac and its subsidiaries.
PennyMac is a Delaware limited liability company which, through its subsidiaries, engages in mortgage banking and investment management activities. PennyMac’s mortgage banking activities consist of residential mortgage loan production and servicing. PennyMac’s investment management activities and a portion of its loan servicing activities are conducted on behalf of PennyMac Mortgage Investment Trust (“PMT”), a publicly-traded real estate mortgage investment trust that invests primarily in mortgage-related assets. PennyMac’s primary wholly owned subsidiaries are:
| ● | PennyMac Loan Services, LLC (“PLS”) — a Delaware limited liability company that services portfolios of residential mortgage loans on behalf of non-affiliates and PMT, purchases, originates and sells new prime credit quality residential mortgage loans and engages in other mortgage banking activities for its own account and the account of PMT. |
PLS is approved as a seller/servicer of mortgage loans by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and as an issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”). PLS is a licensed Federal Housing Administration (“FHA”) Nonsupervised Title II Lender with the U.S. Department of Housing and Urban Development (“HUD”) and a lender/servicer with the Veterans Administration (“VA”) and U.S. Department of Agriculture (“USDA”) (each of the above an “Agency” and collectively the “Agencies”).
| ● | PNMAC Capital Management, LLC (“PCM”)— a Delaware limited liability company registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended. PCM has an investment management agreement with PMT. |
Note 2—Basis of Presentation and Recently Adopted Accounting Pronouncement
Basis of Presentation
The accompanying consolidated financial statements have been prepared in compliance with accounting principles generally accepted in the United States (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) for interim financial information and with the Securities and Exchange Commission’s instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these financial statements and notes do not include all of the information required by GAAP for complete financial statements. This interim consolidated information should be read together with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
The accompanying unaudited consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, income, and cash flows for the interim periods presented, but are not necessarily indicative of income to be anticipated for the full year ending December 31, 2021. Intercompany accounts and transactions have been eliminated.
Preparation of financial statements in compliance with GAAP requires management to make judgments and estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results will likely differ from those estimates.
10
Note 3—Concentration of Risk
A substantial portion of the Company’s activities relate to PMT. Revenues generated from PMT (generally comprised of gains on loans held for sale, loan origination and fulfillment fees, loan servicing fees, change in fair value of excess servicing spread financing (“ESS”), net interest, management fees, and change in fair value of investment in and dividends received from PMT) totaled 9% and 22% of total net revenue for the quarters ended March 31, 2021 and 2020, respectively.
Note 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 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 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:
| ● | 40% of the fair market value of the MSRs relating to the recaptured loans subject to the first 15% of the “recapture rate”; |
| ● | 35% of the fair market value of the MSRs relating to the recaptured loans subject to the recapture rate in excess of 15% and up to 30%; and |
| ● | 30% of the fair market value of the MSRs relating to the recaptured loans subject to the recapture rate in excess of 30%. |
The “recapture rate” means, during each month, the ratio of (i) the aggregate unpaid principal balance of all recaptured loans, to (ii) the aggregate unpaid principal balance of all mortgage loans for which the Company held the MSRs and that were refinanced or otherwise paid off in such month. The Company has also agreed to allocate sufficient resources to target a recapture rate of 15%.
The Company provides PMT with certain mortgage banking services, including fulfillment and disposition-related services, for which it receives a monthly fulfillment fee.
Through June 30, 2020, pursuant to the terms of a mortgage banking services agreement, the monthly fulfillment fee was an amount equal to:
| a) | no greater than the product of (i) 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 was due or payable to the Company with respect to any mortgage loans underwritten to the Ginnie Mae Mortgage-Backed Securities (“MBS”) Guide. |
11
PMT does not hold the Ginnie Mae approval required to issue Ginnie Mae MBS and act as a servicer. Accordingly, under the agreement, the Company purchases mortgage loans underwritten in accordance with the Ginnie Mae MBS Guide “as is” and without recourse of any kind from PMT at PMT’s cost less an administrative fee plus accrued interest and, through June 30, 2020, a sourcing fee ranging from 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 .99 or .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 $585 for each pull-through adjusted loan commitment up to and including 16,500 per quarter and $355 for each pull-through adjusted loan commitment in excess of 16,500 per quarter, plus |
| (ii) | $315 multiplied by the number of purchased loans that are sold to Fannie Mae and Freddie Mac up to the and including 16,500 per quarter and $195 multiplied by the number of such purchased loans in excess of 16,500 per quarter, plus |
| (iii) | $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 no fulfillment fee shall be due or payable to PLS with respect to any Ginnie Mae loans. |
| ● | Sourcing fees charged to PLS range from one to 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:
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.
12
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 $7.50 per month for fixed-rate loans and $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 $10 to $55 per month based on the delinquency, bankruptcy and foreclosure status of the loan or $75 per month if the underlying mortgaged property becomes REO. The Company is also entitled to customary ancillary income and certain market-based fees and charges, including boarding and deboarding fees, liquidation and disposition fees, assumption, modification and origination fees. |
| ● | 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 $30 per month for current loans up to $95 per month for loans in foreclosure proceedings. The base servicing fee rate for REO is $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 $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 $750 for a streamline modification to $1,750 for a full modification or liquidation and $500 for a deed-in-lieu of foreclosure. The Company is not entitled to earn more than one liquidation fee, reperformance fee or modification fee per loan in any 18-month period. |
| ● | To the extent the Company facilitates rentals of PMT's REO under its REO rental program, the Company collects an REO rental fee of $30 per month per REO, an REO property lease renewal fee of $100 per lease renewal, and a property management fee in an amount equal to the Company’s cost if property management services and/or any related software costs are outsourced to a third-party property management firm or 9% of gross rental income if the Company provides property management services directly. The Company is also entitled to retain any tenant paid application fees and late rent fees and seek reimbursement for certain third-party vendor fees. |
| ● | Except as otherwise provided in the MSR recapture agreement, when the Company effects a refinancing of a loan on behalf of PMT and not through a third-party lender and the resulting 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. |
13
Following is a summary of loan servicing fees earned from PMT:
On June 30, 2020, the Servicing Agreement was amended and restated for a term of 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) 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.
14
The “high watermark” is the quarterly adjustment that reflects the amount by which the “net income” (stated as a percentage of return on “equity”) in that quarter exceeds or falls short of the lesser of 8% and the average Fannie Mae 30-year MBS yield (the “Target Yield”) for the four quarters then ended. If the “net income” is lower than the Target Yield, the high watermark is increased by the difference. If the “net income” is higher than the Target Yield, the high watermark is reduced by the difference. Each time a performance incentive fee is earned, the high watermark returns to zero. As a result, the threshold amounts required for the Company to earn a performance incentive fee are adjusted cumulatively based on the performance of PMT’s “net income” over (or under) the Target Yield, until the “net income” in excess of the Target Yield exceeds the then-current cumulative high watermark amount, and a performance incentive fee is earned.
The base management fee and the performance incentive fee are both receivable quarterly in arrears. The performance incentive fee may be paid in cash or a combination of cash and PMT’s common shares (subject to a limit of no more than 50% paid in common shares), at PMT’s option.
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, |
||||
|
|
|
2021 |
|
2020 |
||
|
|
|
(in thousands) |
||||
|
Base management |
|
$ |
8,449 |
|
$ |
9,055 |
|
Performance incentive |
|
|
— |
|
|
— |
|
|
|
$ |
8,449 |
|
$ |
9,055 |
|
|
|
|
|
|
|
|
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 $120,000 per fiscal quarter through June 30, 2020.
PMT is also required to pay its pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Company and its affiliates required for PMT’s and its subsidiaries’ operations. These expenses are allocated based on the ratio of PMT’s proportion of gross assets compared to all remaining gross assets managed by the Company as calculated at each fiscal quarter end.
On June 30, 2020, the Management Agreement was amended and restated for a term of five years (the “2020 Management Agreement”). The terms of the 2020 Management Agreement are materially consistent with those of the prior management agreement, except that, effective July 1, 2020, PMT’s reimbursement of PCM’s and its affiliates’ compensation expenses was increased from $120,000 to $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.
15
The Company received reimbursements from PMT for expenses as follows:
| (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. |
Investing Activities
Master Repurchase Agreement
On December 19, 2016, the Company, through PLS, entered into a master repurchase agreement with one of PMT’s wholly-owned subsidiaries, PennyMac Holdings, LLC (“PMH”) (the “PMH Repurchase Agreement”), pursuant to which PMH may borrow from the Company for the purpose of financing PMH’s participation certificates representing beneficial ownership in ESS. PLS then re-pledges such participation certificates to PNMAC GMSR ISSUER TRUST (the “Issuer Trust”) under a master repurchase agreement by and among PLS, the Issuer Trust and PennyMac, as guarantor (the “PC Repurchase Agreement”). The Issuer Trust was formed for the purpose of allowing PLS to finance MSRs and ESS relating to such MSRs (the “GNMA MSR Facility). In the first quarter of 2021, PLS repurchased the ESS from PMH at fair market value, effectively terminating the borrowing arrangements allowing PMH to finance its participation certificates representing beneficial ownership in ESS. Such ESS is now included in PLS's participation certificates representing beneficial ownership in ESS.
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 $1,000,000,000.
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:
16
Financing Activities
Spread Acquisition and MSR Servicing Agreements
The Company has a master spread acquisition and MSR servicing agreement with PMT (the “Spread Acquisition Agreement”) which was amended and restated effective December 19, 2016, pursuant to which the Company may sell to PMT, from time to time, the right to receive participation certificates representing beneficial ownership in ESS arising from Ginnie Mae MSRs acquired by the Company, in which case the Company generally would be required to service or subservice the related mortgage loans for Ginnie Mae. The primary purpose of the amendment and restatement was to facilitate the continued financing of the ESS owned by PMT in connection with the parties’ participation in the GNMA MSR Facility.
To the extent the Company refinances any of the mortgage loans relating to the ESS it has issued, the Spread Acquisition Agreement also contains recapture provisions requiring that the Company transfer to PMT, at no cost, the ESS relating to a certain percentage of the unpaid principal balance of the newly originated mortgage loans. However, under the Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie Mae mortgage loans is not equal to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the refinanced mortgage loans, the Company is also required to transfer additional ESS or cash in the amount of such shortfall. Similarly, in any month where the transferred ESS relating to modified Ginnie Mae mortgage loans is not equal to at least 90% of the product of the excess servicing fee rate and the unpaid principal balance of the modified mortgage loans, the Spread Acquisition Agreement contains provisions that require the Company to transfer additional ESS or cash in the amount of such shortfall. To the extent the fair market value of the aggregate ESS to be transferred for the applicable month is less than $200,000, the Company may, at its option, settle its obligation to PMT in cash in an amount equal to such fair market value in lieu of transferring such ESS.
During the quarter ended March 31, 2021, the Company repurchased ESS from PMT and repaid its outstanding ESS financing payable to PMT.
17
Following is a summary of financing activities between the Company and PMT:
Receivable from and Payable to PMT
Amounts receivable from and payable to PMT are summarized below:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
||
|
|
|
2021 |
|
2020 |
||
|
|
|
(in thousands) |
||||
|
Receivable from PMT: |
|
|
|
|
|
|
|
Allocated expenses and expenses incurred on PMT's behalf |
|
$ |
23,325 |
|
$ |
38,142 |
|
Fulfillment fees |
|
|
17,347 |
|
|
20,873 |
|
Correspondent production fees |
|
|
12,937 |
|
|
13,065 |
|
Management fees |
|
|
8,449 |
|
|
8,686 |
|
Servicing fees |
|
|
6,586 |
|
|
6,213 |
|
Interest on assets purchased under agreements to resell |
|
|
— |
|
|
26 |
|
|
|
$ |
68,644 |
|
$ |
87,005 |
|
Payable to PMT: |
|
|
|
|
|
|
|
Amounts advanced by PMT to fund its servicing advances |
|
$ |
156,948 |
|
$ |
132,154 |
|
Mortgage servicing rights recapture payable |
|
|
— |
|
|
296 |
|
Other |
|
|
7,521 |
|
|
7,856 |
|
|
|
$ |
164,469 |
|
$ |
140,306 |
Exchanged Private National Mortgage Acceptance Company, LLC Unitholders
On May 8, 2013, the Company entered into a tax receivable agreement with certain former owners of PennyMac that provides for the payment from time to time by the Company to PennyMac’s exchanged unitholders of an amount equal to 85% of the amount of the net tax benefits, if any, that the Company is deemed to realize as a result of (i) increases in tax basis of PennyMac’s assets resulting from exchanges of ownership interests in PennyMac and (ii) certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.
Although a reorganization in November 2018 eliminated the potential for unitholders to exchange any additional units subject to this tax receivable agreement, the Company continues to be subject to the agreement and will be required to make payments, to the extent any of the tax benefits specified above are deemed to be realized, under the tax receivable agreement to those certain prior owners of PennyMac who effected exchanges of ownership interests in PennyMac for the Company’s common stock prior to the closing of the reorganization.
The Company has recorded $35.2 million Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable agreement as of March 31, 2021 and December 31, 2020. The Company did not make any payments during the quarters ended March 31, 2021 and 2020.
.
18
Note 5—Loan Sales and Servicing Activities
The Company, through PLS, originates or purchases and sells loans in the secondary mortgage market without recourse for credit losses. However, the Company maintains continuing involvement with the loans in the form of servicing arrangements and the liability under representations and warranties it makes to purchasers and insurers of the loans.
The following table summarizes cash flows between the Company and transferees as a result of the sale of loans in transactions where the Company maintains continuing involvement with the loans as servicer:
| (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:
| (1) | Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act. |
19
The following tables summarize the UPB of the Company’s loan servicing portfolio:
| (1) | Includes delinquent loans in COVID-19 related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act. |
| (2) | Custodial funds include cash accounts holding funds on behalf of borrowers and investors relating to loans serviced under servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns placement fees on certain of the custodial funds it manages on behalf of the loans’ borrowers and investors, which are included in Interest income in the Company’s consolidated statements of income. |
20
| (1) | Includes delinquent loans in COVID-19 related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act. |
| (2) | Custodial funds include cash accounts holding funds on behalf of borrowers and investors relating to loans serviced under servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company earns placement fees on certain of the custodial funds it manages on behalf of the loans’ borrowers and investors, which are included in Interest income in the Company’s consolidated statements of income. |
Following is a summary of the geographical distribution of loans included in the Company’s loan servicing portfolio for the top five and all other states as measured by UPB:
21
Note 6—Fair Value
Most of the Company’s assets and certain of its liabilities are measured at or based on their fair values. The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the significant inputs used to determine fair value. These levels are:
| ● | Level 1—Quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2—Prices determined or determinable using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing an asset or liability and are developed based on market data obtained from sources independent of the Company. |
| ● | Level 3— Prices determined using significant unobservable inputs. In situations where observable inputs are unavailable, unobservable inputs may be used. Unobservable inputs reflect the Company’s own judgments about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances. |
As a result of the difficulty in observing certain significant valuation inputs affecting “Level 3” fair value assets and liabilities, the Company is required to make judgments regarding these items’ fair values. Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs to be applied in valuing these assets and liabilities and their fair values. Such differences may result in significantly different fair value measurements. Likewise, due to the general illiquidity of some of these assets and liabilities, subsequent transactions may be at values significantly different from those reported.
Fair Value Accounting Elections
The Company identified its MSRs, its mortgage servicing liabilities (“MSLs”) and all of its non-cash financial assets other than Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell, to be accounted for at fair value so changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance. The Company has also identified its ESS financing to be accounted for at fair value as a means of hedging the related MSRs’ fair value risk.
22
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Following is a summary of assets and liabilities that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021 |
||||||||||
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
||||
|
|
|
(in thousands) |
||||||||||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
$ |
24,850 |
|
$ |
— |
|
$ |
— |
|
$ |
24,850 |
|
Loans held for sale at fair value |
|
|
— |
|
|
8,183,724 |
|
|
5,202,065 |
|
|
13,385,789 |
|
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments |
|
|
— |
|
|
— |
|
|
362,923 |
|
|
362,923 |
|
Forward purchase contracts |
|
|
— |
|
|
14,318 |
|
|
— |
|
|
14,318 |
|
Forward sales contracts |
|
|
— |
|
|
333,198 |
|
|
— |
|
|
333,198 |
|
MBS put options |
|
|
— |
|
|
99,670 |
|
|
— |
|
|
99,670 |
|
Swaption purchase contracts |
|
|
— |
|
|
50,973 |
|
|
— |
|
|
50,973 |
|
Put options on interest rate futures purchase contracts |
|
|
27,133 |
|
|
— |
|
|
— |
|
|
27,133 |
|
Call options on interest rate futures purchase contracts |
|
|
1,539 |
|
|
— |
|
|
— |
|
|
1,539 |
|
Total derivative assets before netting |
|
|
28,672 |
|
|
498,159 |
|
|
362,923 |
|
|
889,754 |
|
Netting |
|
|
— |
|
|
— |
|
|
— |
|
|
(358,902) |
|
Total derivative assets |
|
|
28,672 |
|
|
498,159 |
|
|
362,923 |
|
|
530,852 |
|
Mortgage servicing rights at fair value |
|
|
— |
|
|
— |
|
|
3,268,910 |
|
|
3,268,910 |
|
Investment in PennyMac Mortgage Investment Trust |
|
|
1,470 |
|
|
— |
|
|
— |
|
|
1,470 |
|
|
|
$ |
54,992 |
|
$ |
8,681,883 |
|
$ |
8,833,898 |
|
$ |
17,211,871 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments |
|
$ |
— |
|
$ |
— |
|
$ |
24,983 |
|
$ |
24,983 |
|
Forward purchase contracts |
|
|
— |
|
|
192,793 |
|
|
— |
|
|
192,793 |
|
Forward sales contracts |
|
|
— |
|
|
32,729 |
|
|
— |
|
|
32,729 |
|
MBS put options |
|
|
— |
|
|
34,873 |
|
|
— |
|
|
34,873 |
|
Put options on interest rate futures sale contracts |
|
|
15,881 |
|
|
— |
|
|
— |
|
|
15,881 |
|
Call options on interest rate futures sale contracts |
|
|
1,061 |
|
|
— |
|
|
— |
|
|
1,061 |
|
Total derivative liabilities before netting |
|
|
16,942 |
|
|
260,395 |
|
|
24,983 |
|
|
302,320 |
|
Netting |
|
|
— |
|
|
— |
|
|
— |
|
|
(233,763) |
|
Total derivative liabilities |
|
|
16,942 |
|
|
260,395 |
|
|
24,983 |
|
|
68,557 |
|
Mortgage servicing liabilities at fair value |
|
|
— |
|
|
— |
|
|
46,026 |
|
|
46,026 |
|
|
|
$ |
16,942 |
|
$ |
260,395 |
|
$ |
71,009 |
|
$ |
114,583 |
23
24
As shown above, all or a portion of the Company’s loans held for sale, Interest Rate Lock Commitments (“IRLCs”), MSRs, ESS and MSLs are measured using Level 3 fair value inputs. Following are roll forwards of assets and liabilities measured at fair value using “Level 3” inputs at either the beginning or the end of the period presented:
| (1) | For the purpose of this table, the IRLC asset and liability positions are shown net. |
25
| (1) | For the purpose of this table, the IRLC asset and liability positions are shown net. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
26
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:
Following are the fair value and related principal amounts due upon maturity of loans held for sale:
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate acquired in settlement of loans |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
||||
|
|
|
(in thousands) |
||||||||||
|
March 31, 2021 |
|
$ |
— |
|
$ |
— |
|
$ |
2,568 |
|
$ |
2,568 |
|
December 31, 2020 |
|
$ |
— |
|
$ |
— |
|
$ |
1,450 |
|
$ |
1,450 |
The following table summarizes the (losses) gains recognized on assets when they were remeasured at fair value on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
||||
|
|
|
2021 |
|
2020 |
||
|
|
|
(in thousands) |
||||
|
Real estate acquired in settlement of loans |
|
$ |
(412) |
|
$ |
(3,980) |
27
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 Term Notes and 2018-GT2 Term Notes included in Notes payable secured by mortgage servicing assets and the Unsecured senior notes approximate their carrying values due to their short terms and/or variable interest rates.
The Company estimates the fair value of the Notes payable secured by mortgage servicing assets and the Unsecured senior notes based on non-affiliate broker indications of fair value. The fair value and carrying value of these notes are summarized below:
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.
With respect to the non-IRLC “Level 3” valuations, the FAV group reports to the Company’s senior management valuation committee, which oversees the valuations. The FAV group monitors the models used for valuation of the Company’s “Level 3” fair value assets and liabilities, including the models’ performance versus actual results, and reports those results to the Company’s senior management valuation committee. The Company’s senior management valuation committee includes the Company’s chief financial, investment, operating 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.
28
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. |
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.
29
Following is a quantitative summary of key “Level 3” fair value inputs used in the valuation of loans held for sale:
| (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 default rates. |
Changes in fair value of loans held for sale attributable to changes in the loan’s instrument-specific credit risk are measured with reference to the change in the respective loan’s delinquency status and performance history at period end from the later of the beginning of the period or acquisition date. Changes in fair value of loans held for sale are included in Net gains on loans held for sale at fair value in the Company’s consolidated statements of income.
Derivative Financial Instruments
Interest Rate Lock Commitments
The Company categorizes IRLCs as “Level 3” fair value assets or liabilities. The Company estimates the fair value of IRLCs based on quoted Agency MBS prices, its estimate of the fair value of the MSRs it expects to receive in the sale of the loans and the probability that the loan will be funded or purchased (the “pull-through rate”).
The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the 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.
30
Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:
| (1) | For purpose of this table, IRLC asset and liability positions are shown net. |
| (2) | Weighted average inputs are based on the committed amounts. |
Hedging Derivatives
Fair values of derivative financial instruments actively traded on exchanges are categorized by the Company as “Level 1” fair value assets and liabilities; fair values of derivative financial instruments based on observable interest rates, volatilities and prices in the MBS or other markets are categorized by the Company as “Level 2” fair value assets and liabilities.
Changes in the fair value of hedging derivatives are included in Net gains on loans held for sale at fair value, or Net loan servicing fees – Hedging results, as applicable, in the consolidated statements of income.
Mortgage Servicing Rights
MSRs are categorized as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the estimation of the fair value of MSRs include the applicable pricing spread (discount rate), prepayment rates, 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.
31
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:
| (1) | Weighted average inputs are based on the UPB of the underlying loans. |
| (2) | Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar London Interbank Offered Rate (“LIBOR”)/swap curve for purposes of discounting cash flows relating to MSRs. |
| (3) | Annual total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided for informational purposes. |
32
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:
| (1) | Weighted average inputs are based on the UPB of the underlying loans. |
| (2) | The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to MSRs. |
| (3) | Annual total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided for informational purposes. |
The preceding sensitivity analyses are limited in that they were performed as of a particular date; only contemplate the movements in the indicated inputs; do not incorporate changes to other inputs; are subject to the accuracy of the models and inputs used; and do not incorporate other factors that would affect the Company’s overall financial performance in such events, including operational adjustments made by management to account for changing circumstances. For these reasons, the preceding estimates should not be viewed as earnings forecasts.
33
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. During the quarter ended March 31, 2021, the Company repaid its outstanding ESS financing payable to PMT.
Following are the key inputs used in determining the fair value of ESS financing:
| (1) | Weighted average inputs are based on the UPB of the underlying loans. |
| (2) | The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to ESS. |
| (3) | Annual total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided for informational purposes. |
Mortgage Servicing Liabilities
MSLs are categorized as “Level 3” fair value liabilities. The Company uses a discounted cash flow approach to estimate the fair value of MSLs. The key inputs used in the estimation of the fair value of MSLs include the applicable pricing spread (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.
34
Following are the key inputs used in determining the fair value of MSLs:
| (1) | The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting cash flows relating to MSLs. |
| (2) | Annual total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided for informational purposes. |
Note 7—Loans Held for Sale at Fair Value
Loans held for sale at fair value include the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
||
|
Loan type |
|
2021 |
|
2020 |
||
|
|
|
(in thousands) |
||||
|
Government-insured or guaranteed |
|
$ |
6,722,768 |
|
$ |
5,683,786 |
|
Conventional conforming |
|
|
1,460,956 |
|
|
1,257,445 |
|
Purchased from Ginnie Mae pools serviced by the Company |
|
|
5,182,311 |
|
|
4,661,378 |
|
Repurchased pursuant to representations and warranties |
|
|
19,754 |
|
|
13,791 |
|
|
|
$ |
13,385,789 |
|
$ |
11,616,400 |
|
Fair value of loans pledged to secure: |
|
|
|
|
|
|
|
Assets sold under agreements to repurchase |
|
$ |
12,726,461 |
|
$ |
10,912,178 |
|
Mortgage loan participation purchase and sale agreements |
|
|
541,206 |
|
|
545,500 |
|
|
|
$ |
13,267,667 |
|
$ |
11,457,678 |
Note 8—Derivative Financial Instruments
The Company holds and issues derivative financial instruments in connection with its operating activities. Derivative financial instruments are created as a result of certain of the Company’s operations and when the Company enters into derivative transactions as part of its interest rate risk management activities. Derivative financial instruments created as a result of the Company’s operations are IRLCs that are created when the Company commits to purchase or originate a loan for sale.
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.
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.
35
Derivative Notional Amounts and Fair Value of Derivatives
The Company had the following derivative financial instruments recorded on its consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021 |
|
December 31, 2020 |
||||||||||||
|
|
|
|
|
Fair value |
|
|
|
Fair value |
||||||||
|
|
|
Notional |
|
Derivative |
|
Derivative |
|
Notional |
|
Derivative |
|
Derivative |
||||
|
Instrument |
|
amount (1) |
|
assets |
|
liabilities |
|
amount (1) |
|
assets |
|
liabilities |
||||
|
|
|
(in thousands) |
||||||||||||||
|
Not subject to master netting arrangements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments |
|
17,668,145 |
|
$ |
362,923 |
|
$ |
24,983 |
|
20,624,535 |
|
$ |
679,961 |
|
$ |
2,935 |
|
Used for hedging purposes (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward purchase contracts |
|
34,644,744 |
|
|
14,318 |
|
|
192,793 |
|
31,689,543 |
|
|
133,267 |
|
|
1,276 |
|
Forward sales contracts |
|
52,739,511 |
|
|
333,198 |
|
|
32,729 |
|
50,438,967 |
|
|
1,451 |
|
|
251,149 |
|
MBS put options |
|
11,750,000 |
|
|
99,670 |
|
|
34,873 |
|
12,025,000 |
|
|
14,302 |
|
|
— |
|
Swaption purchase contracts |
|
7,150,000 |
|
|
50,973 |
|
|
— |
|
3,375,000 |
|
|
11,939 |
|
|
— |
|
Put options on interest rate futures purchase contracts |
|
6,950,000 |
|
|
27,133 |
|
|
— |
|
4,750,000 |
|
|
5,520 |
|
|
— |
|
Call options on interest rate futures purchase contracts |
|
2,500,000 |
|
|
1,539 |
|
|
— |
|
850,000 |
|
|
1,391 |
|
|
— |
|
Put options on interest rate futures sale contracts |
|
4,100,000 |
|
|
— |
|
|
15,881 |
|
— |
|
|
— |
|
|
— |
|
Call options on interest rate futures sale contracts |
|
1,575,000 |
|
|
— |
|
|
1,061 |
|
— |
|
|
— |
|
|
— |
|
Treasury futures purchase contracts |
|
830,000 |
|
|
— |
|
|
— |
|
1,065,000 |
|
|
— |
|
|
— |
|
Treasury futures sale contracts |
|
1,705,000 |
|
|
— |
|
|
— |
|
1,555,000 |
|
|
— |
|
|
— |
|
Interest rate swap futures purchase contracts |
|
4,240,000 |
|
|
— |
|
|
— |
|
4,801,700 |
|
|
— |
|
|
— |
|
Interest rate swap futures sale contracts |
|
750,000 |
|
|
— |
|
|
— |
|
711,700 |
|
|
— |
|
|
— |
|
Total derivatives before netting |
|
|
|
|
889,754 |
|
|
302,320 |
|
|
|
|
847,831 |
|
|
255,360 |
|
Netting |
|
|
|
|
(358,902) |
|
|
(233,763) |
|
|
|
|
(136,593) |
|
|
(212,722) |
|
|
|
|
|
$ |
530,852 |
|
$ |
68,557 |
|
|
|
$ |
711,238 |
|
$ |
42,638 |
|
Deposits (received from) placed with derivative counterparties, net |
|
|
|
$ |
(125,139) |
|
|
|
|
|
|
$ |
76,129 |
|
|
|
| (1) | Notional amounts provide an indication of the volume of the Company’s derivative activity. |
| (2) | All of the derivatives used for hedging purposes are interest rate derivatives and are used as economic hedges. |
36
Derivative Balances and Netting of Financial Instruments
The Company has elected to present net derivative asset and liability positions, and cash collateral obtained from (or posted to) its counterparties when subject to a master netting arrangement that is legally enforceable on all counterparties in the event of default. The derivatives that are not subject to a master netting arrangement are IRLCs.
Offsetting of Derivative Assets
Following are summaries of derivative assets and related netting amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021 |
|
December 31, 2020 |
||||||||||||||
|
|
|
Gross |
|
Gross amount |
|
Net amount |
|
Gross |
|
Gross amount |
|
Net amount |
||||||
|
|
|
amount of |
|
offset in the |
|
of assets in the |
|
amount of |
|
offset in the |
|
of assets in the |
||||||
|
|
|
recognized |
|
consolidated |
|
consolidated |
|
recognized |
|
consolidated |
|
consolidated |
||||||
|
|
|
assets |
|
balance sheet |
|
balance sheet |
|
assets |
|
balance sheet |
|
balance sheet |
||||||
|
|
|
(in thousands) |
||||||||||||||||
|
Derivatives not subject to master netting arrangements - IRLCs |
|
$ |
362,923 |
|
$ |
— |
|
$ |
362,923 |
|
$ |
679,961 |
|
$ |
— |
|
$ |
679,961 |
|
Derivatives subject to master netting arrangements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward purchase contracts |
|
|
14,318 |
|
|
— |
|
|
14,318 |
|
|
133,267 |
|
|
— |
|
|
133,267 |
|
Forward sale contracts |
|
|
333,198 |
|
|
— |
|
|
333,198 |
|
|
1,451 |
|
|
— |
|
|
1,451 |
|
MBS put options |
|
|
99,670 |
|
|
— |
|
|
99,670 |
|
|
14,302 |
|
|
— |
|
|
14,302 |
|
Swaption purchase contracts |
|
|
50,973 |
|
|
— |
|
|
50,973 |
|
|
11,939 |
|
|
— |
|
|
11,939 |
|
Put options on interest rate futures purchase contracts |
|
|
27,133 |
|
|
— |
|
|
27,133 |
|
|
5,520 |
|
|
— |
|
|
5,520 |
|
Call options on interest rate futures purchase contracts |
|
|
1,539 |
|
|
— |
|
|
1,539 |
|
|
1,391 |
|
|
— |
|
|
1,391 |
|
Netting |
|
|
— |
|
|
(358,902) |
|
|
(358,902) |
|
|
— |
|
|
(136,593) |
|
|
(136,593) |
|
|
|
|
526,831 |
|
|
(358,902) |
|
|
167,929 |
|
|
167,870 |
|
|
(136,593) |
|
|
31,277 |
|
|
|
$ |
889,754 |
|
$ |
(358,902) |
|
$ |
530,852 |
|
$ |
847,831 |
|
$ |
(136,593) |
|
$ |
711,238 |
Derivative Assets, Financial Instruments, and Cash Collateral Held by Counterparty
The following table summarizes by significant counterparty the amount of derivative asset positions after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance qualifying for netting.
37
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.
38
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.
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:
| (1) | Represents net (decrease) increase in fair value of IRLCs from the beginning to the end of the quarter. Amounts recognized at the date of commitment and fair value changes recognized during the quarter until purchase of the underlying loans are shown in the rollforward of IRLCs for the quarter in Note 6 – Fair Value – Assets and Liabilities Measured at Fair Value on a Recurring Basis. |
39
Note 9—Mortgage Servicing Rights and Mortgage Servicing Liabilities
Mortgage Servicing Rights at Fair Value
The activity in MSRs is as follows:
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
||||
|
|
|
2021 |
|
2020 |
||
|
|
|
(in thousands) |
||||
|
Balance at beginning of quarter |
|
$ |
2,581,174 |
|
$ |
2,926,790 |
|
Additions: |
|
|
|
|
|
|
|
Resulting from loan sales |
|
|
470,533 |
|
|
282,315 |
|
Purchases |
|
|
— |
|
|
25,760 |
|
|
|
|
470,533 |
|
|
308,075 |
|
Change in fair value due to: |
|
|
|
|
|
|
|
Changes in valuation inputs used in valuation model (1) |
|
|
312,890 |
|
|
(915,862) |
|
Other changes in fair value (2) |
|
|
(95,687) |
|
|
(125,306) |
|
Total change in fair value |
|
|
217,203 |
|
|
(1,041,168) |
|
Balance at end of quarter |
|
$ |
3,268,910 |
|
$ |
2,193,697 |
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
||
|
|
|
2021 |
|
2020 |
||
|
|
|
(in thousands) |
||||
|
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets |
|
$ |
3,265,073 |
|
$ |
2,577,964 |
| (1) | Principally reflects changes in discount rate, prepayment speed and servicing cost inputs. |
| (2) | Represents changes due to realization of cash flows. |
Mortgage Servicing Liabilities at Fair Value
The activity in MSLs is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
||||
|
|
|
2021 |
|
2020 |
|
||
|
|
|
(in thousands) |
|
||||
|
Balance at beginning of quarter |
|
$ |
45,324 |
|
$ |
29,140 |
|
|
Mortgage servicing liabilities resulting from loan sales |
|
|
6,962 |
|
|
6,576 |
|
|
Changes in fair value due to: |
|
|
|
|
|
|
|
|
Changes in valuation inputs used in valuation model (1) |
|
|
6,764 |
|
|
4,432 |
|
|
Other changes in fair value (2) |
|
|
(13,024) |
|
|
(10,387) |
|
|
Total change in fair value |
|
|
(6,260) |
|
|
(5,955) |
|
|
Balance at end of quarter |
|
$ |
46,026 |
|
$ |
29,761 |
|
| (1) | Principally reflects changes in expected borrower performance and servicer losses given default. |
| (2) | Represents changes due to realization of cash flows. |
40
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:
Note 10—Leases
The Company has operating lease agreements relating to its facilities. The Company’s operating lease agreements have remaining terms ranging from less than one year to ten years; some of the operating lease agreements include options to extend the term for up to five years. None of the Company’s operating lease agreements require the Company to make variable lease payments.
The Company’s lease agreements are summarized below:
Lease payments of the Company’s operating lease liabilities are summarized below:
41
Note 11—Other Assets
Other assets are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2021 |
|
2020 |
||
|
|
|
(in thousands) |
||||
|
Deposits securing Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets |
|
$ |
102,270 |
|
$ |
153,054 |
|
Margin deposits |
|
|
89,417 |
|
|
116,881 |
|
Capitalized software, net |
|
|
85,371 |
|
|
81,434 |
|
Furniture, fixture, equipment and building improvements, net |
|
|
32,714 |
|
|
32,217 |
|
Real estate acquired in settlement of loans |
|
|
9,616 |
|
|
12,158 |
|
Other |
|
|
318,869 |
|
|
296,425 |
|
|
|
$ |
638,257 |
|
$ |
692,169 |
|
Deposits pledged to secure Assets sold under agreements to repurchase and Notes payable secured by mortgage servicing assets |
|
$ |
102,270 |
|
$ |
153,054 |
|
Assets pledged to secure Obligation under capital lease: |
|
|
|
|
|
|
|
Capitalized software, net |
|
|
6,778 |
|
|
7,675 |
|
Furniture, fixture, equipment and building improvements, net |
|
|
5,294 |
|
|
5,689 |
|
|
|
$ |
114,342 |
|
$ |
166,418 |
Note 12—Short-Term Borrowings
The borrowing facilities described throughout these Notes 12 and 13 contain various covenants, including financial covenants governing the Company’s net worth, debt-to-equity ratio, profitability and liquidity. Management believes that the Company was in compliance with these covenants as of March 31, 2021.
Assets Sold Under Agreements to Repurchase
The Company has multiple borrowing facilities in the form of asset sales under agreements to repurchase. These borrowing facilities are secured by loans held for sale at fair value 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, acting as administrative agent on behalf of Credit Suisse AG, Cayman Islands Branch, as buyer (the “GMSR Servicing Advances Repurchase Agreement”).
The GMSR Servicing Advances Repurchase Agreement provides the Company with financing secured by its servicing advances to pay, in accordance with the Ginnie Mae requirements, in the event borrowers are delinquent: (i) regularly scheduled monthly principal and interest to mortgage-backed securities holders; (ii) taxes, homeowner’s insurance, and other escrowed items; and (iii) other expenses related to servicing delinquent loans as specified by (A) state and federal laws and (B) government agencies, including the FHA, the VA, and the USDA.
The borrowing capacity under the GMSR Servicing Advances Repurchase Agreement, shared with VFN financing capacity, is $600 million, all of which is committed and may be used to finance the servicing advances related to delinquent FHA, VA, and USDA loans, including delinquencies caused by forbearance provided to the borrower in accordance with the CARES Act. The VFN is described in Note 4—Related Party Transactions—Investing Activities.
42
Assets sold under agreements to repurchase are summarized below:
| (1) | Excludes the effect of amortization of net issuance costs of $6.2 million and $1.6 million for the quarters ended March 31, 2021 and 2020, respectively, |
| (2) | The amount the Company is able to borrow under asset repurchase agreements is tied to the fair value of unencumbered assets eligible to secure those agreements and the Company’s ability to fund the agreements’ margin requirements relating to the assets financed. |
| (3) | Beneficial interests in the Ginnie Mae MSRs, servicing advances and deposits are pledged to the Issuer Trust and together serve as the collateral backing the VFN, GMSR Servicing Advance Notes, and the Term Notes described in Notes payable secured by mortgage servicing assets. The VFN financing and the GMSR Servicing Advance Notes are included in Assets sold under agreements to repurchase and the Term Notes are included in Notes payable secured by mortgage servicing assets on the Company's consolidated balance sheets. |
| (4) | Margin deposits are included in Other assets on the Company’s consolidated balance sheets. |
Following is a summary of maturities of outstanding advances under repurchase agreements by maturity date:
43
The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount advanced by the counterparty and interest payable) relating to the Company’s assets sold under agreements to repurchase is summarized by counterparty below as of March 31, 2021:
| (1) | The calculation of the amount at risk includes the VFN and the Term Notes because beneficial interests in the Ginnie Mae MSRs and servicing advances are pledged to the Issuer Trust and together serve as the collateral backing the VFN, and the Term Notes described in Notes payable secured by mortgage servicing assets below. The VFN financing is included in Assets sold under agreements to repurchase and the Term Notes are included in Notes payable secured by mortgage servicing assets on the Company's consolidated balance sheets. |
The Company is subject to margin calls during the period the repurchase agreements are outstanding and therefore may be required to repay a portion of the borrowings before the respective agreements mature if the fair value (as determined by the applicable lender) of the assets securing those agreements decreases.
Mortgage Loan Participation Purchase and Sale Agreements
Certain of the borrowing facilities secured by loans held for sale are in the form of mortgage loan participation purchase and sale agreements. Participation certificates, each of which represents an undivided beneficial ownership interest in mortgage loans that have been pooled with Fannie Mae, Freddie Mac or Ginnie Mae, are sold to a lender pending the securitization of the mortgage loans and sale of the resulting securities. A commitment to sell the securities resulting from the pending securitization between the Company and a non-affiliate is also assigned to the lender at the time a participation certificate is sold.
The purchase price paid by the lender for each participation certificate is based on the trade price of the security, plus an amount of interest expected to accrue on the security to its anticipated delivery date, minus a present value adjustment, any related hedging costs and a holdback amount that is based on a percentage of the purchase price. The holdback amount is not required to be paid to the Company until the settlement of the security and its delivery to the lender.
The mortgage loan participation purchase and sale agreements are summarized below:
| (1) | Excludes the effect of amortization of debt issuance costs totaling $172,000 and $173,000 for the quarters ended March 31, 2021 and 2020, respectively. |
44
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 $150 million. PennyMac did not borrow under the revolving line of credit during the periods presented and terminated the Credit Agreement on September 29, 2020 concurrent with the issuance the Unsecured Senior Notes described below.
Note 13—Long-Term Debt
Obligations Under Capital Lease
The Company has a capital lease transaction secured by certain fixed assets and capitalized software. The capital lease matures on June 13, 2022 and bears interest at a spread over one-month LIBOR.
Obligations under capital lease are summarized below:
45
Notes Payable Secured by Mortgage Servicing Assets
Term Notes
The Company, through the Issuer Trust described in Note 4—Related Party Transactions—Investing Activities, issued term notes (the “Term Notes”) to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”). The Term Notes rank pari passu with each other and with the VFN issued by the Issuer Trust to PLS and are secured by certain participation certificates relating to Ginnie Mae MSRs and ESS that are financed pursuant to the GNMA MSR Facility.
Following is a summary of the issued and outstanding Term Notes:
| (1) | Spread over one-month LIBOR. |
| (2) | The Term Notes’ indentures provide the Company with the option to extend the maturity of the Term Notes by two years after the stated maturity. |
MSR Note Payable
On February 1, 2018, the Company issued a note payable that is secured by Freddie Mac MSRs. Interest is charged at a rate based on LIBOR plus the applicable contract margin. The facility expires on March 31, 2023. The maximum amount that the Company may borrow under the note payable is $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.
46
Notes payable secured by mortgage servicing assets are summarized below:
| (1) | Excludes the effect of amortization of debt issuance costs totaling $544,000 and $445,000 for the quarters ended March 31, 2021 and 2020, respectively. |
| (1) | Beneficial interests in the Ginnie Mae MSRs, servicing advances and deposits are pledged to the Issuer Trust and together serve as the collateral backing the VFN, GMSR Servicing Advance Notes and the Term Notes. The VFN financing and the GMSR Servicing Advance Notes are included in Assets sold under agreements to repurchase and the Term Notes are included in Notes payable secured by mortgage servicing assets on the Company's consolidated balance sheets. |
Unsecured Senior Notes
The Company issued unsecured senior notes (the “Unsecured Notes”) to qualified institutional buyers under Rule 144A of the Securities Act. The Unsecured Notes are senior unsecured obligations of the Company and will rank senior in right of payment to any future subordinated indebtedness of the Company, equally in right of payment with all existing and future senior indebtedness of the Company and effectively subordinated to any future secured indebtedness of the Company to the extent of the fair value of collateral securing such indebtedness.
The Unsecured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by 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 fair value of collateral securing such indebtedness. The Unsecured Notes and the guarantees are structurally subordinated to the indebtedness and liabilities of the Company’s subsidiaries that do not guarantee the Unsecured Notes.
47
Following is a summary of the Unsecured Notes issued:
Before October 15, 2022 or February 15, 2024 for the Unsecured Note issued during 2020 and 2021, respectively, the Company may, at its option redeem earlier in accordance with the terms of the Unsecured Notes:
| ● | some or all of the Unsecured Notes at a price equal to 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 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 105.375% and 104.25% for the Unsecured Notes issued during 2020, and 2021, respectively, 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 101% of the principal amount of the Unsecured Notes, plus accrued and unpaid interest to, but excluding, the repurchase date. |
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
|
|
|
March 31, 2021 |
|
|
|
|
|
(dollars in thousands) |
|
|
|
Average balance |
|
$ |
1,003,889 |
|
|
Weighted average coupon rate (1) |
|
|
4.91 |
% |
|
Total interest expense |
|
$ |
12,670 |
|
| (1) | Excludes the effect of amortization of debt issuance costs totaling $347,000. |
Maturities of Long-Term Debt
Maturities of long-term debt obligations (based on final maturity dates) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended March 31, |
|
|
|
||||||||||||||||
|
|
|
2022 |
|
2023 |
|
2024 |
|
2025 |
|
2026 |
|
Thereafter |
|
Total |
|||||||
|
|
|
(in thousands) |
|||||||||||||||||||
|
Obligations under capital lease |
|
$ |
8,374 |
|
$ |
2,094 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
10,468 |
|
Notes payable secured by mortgage servicing assets |
|
|
— |
|
|
650,000 |
|
|
650,000 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,300,000 |
|
Unsecured Notes |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
650,000 |
|
|
650,000 |
|
|
1,300,000 |
|
Total |
|
$ |
8,374 |
|
$ |
652,094 |
|
$ |
650,000 |
|
$ |
— |
|
$ |
650,000 |
|
$ |
650,000 |
|
$ |
2,610,468 |
48
Note 14—Liability for Losses Under Representations and Warranties
Following is a summary of the Company’s liability for losses under representations and warranties:
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
||||
|
|
|
2021 |
|
2020 |
||
|
|
|
(in thousands) |
||||
|
Balance at beginning of quarter |
|
$ |
32,688 |
|
$ |
21,446 |
|
Provision for losses on loans sold: |
|
|
|
|
|
|
|
Resulting from sales of loans |
|
|
10,053 |
|
|
3,712 |
|
Reduction in liability due to change in estimate |
|
|
(3,685) |
|
|
(1,676) |
|
Losses incurred, net |
|
|
(628) |
|
|
(280) |
|
Balance at end of quarter |
|
$ |
38,428 |
|
$ |
23,202 |
|
Unpaid principal balance of loans subject to representations and warranties at end of quarter |
|
$ |
220,865,034 |
|
$ |
186,517,598 |
Note 15—Income Taxes
The Company’s effective income tax rates were 25.5% and 26.2% for the quarters ended March 31, 2021 and 2020, respectively. The lower effective income tax rate during the quarter ended March 31, 2021 compared to the quarter ended March 31, 2020 was primarily due to a higher net permanent tax deduction for equity compensation in the quarter ended March 31, 2021.
The CARES Act, passed in March 2020, introduced a number of tax law changes which are generally taxpayer favorable and in December 2020, the Taxpayer Certainty and Disaster Tax Relief Act was signed into law. No material changes in our effective income tax rates resulted from either Act.
Note 16—Commitments and Contingencies
Litigation
From time to time, the Company may be a party to legal proceedings, lawsuits and other claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on the financial condition, results of operations, or cash flows of the Company.
On 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 was approved on February 11, 2021. The Company’s share of the settlement amount will be paid entirely by one of the Company’s insurers.
49
On November 5, 2019, Black Knight Servicing Technologies, LLC, a wholly-owned indirect subsidiary of Black Knight, Inc. (“BKI”), filed a Complaint and Demand for Jury Trial in the Circuit Court for the Fourth Judicial Circuit in and for Duval County, Florida (the “Florida State Court”), captioned Black Knight Servicing Technologies, LLC v. PennyMac Loan Services, LLC, Case No. 2019-CA-007908 (the “BKI Complaint”). Allegations contained within the BKI Complaint include breach of contract and misappropriation of MSP® System trade secrets in order to develop an imitation mortgage-processing system intended to replace the MSP® System. The BKI Complaint seeks damages for breach of contract and misappropriation of trade secrets, injunctive relief under the Florida Uniform Trade Secrets Act and declaratory judgment of ownership of all intellectual property and software developed by or on behalf of PLS as a result of its wrongful use of and access to the MSP® System and related trade secret and confidential information. On March 30, 2020, the Florida State Court granted a motion to compel arbitration filed by the Company. Consequently, on April 27, 2020, PennyMac dismissed its federal court action without prejudice to pursue those claims in arbitration as well. While no assurance can be provided at 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.
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.
On January 7, 2021, PLS received a letter from the CFPB notifying PLS that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, the CFPB’s Office of Enforcement was considering recommending that the CFPB take legal action against PLS for alleged violations of the Real Estate Settlement Procedures Act and Truth in Lending Act. The CFPB's examination covered the period from March 2015 through September 2016. Should the CFPB commence an action, it may seek restitution, civil monetary penalties, injunctive relief, or other corrective action, the extent of which remains uncertain at this time. Notably, certain of the alleged violations were originally self-identified by PLS and remediated prior to the CFPB's examination, and all alleged violations were fully remediated as of August 2017. PLS confirmed these remediation actions as well as full restitution to any affected borrowers in its response to the NORA letter submitted on February 8, 2021. While the NORA process remains open and pending at this time, and there can be no assurance as to the nature or extent of any actions taken by the CFPB with regard to these alleged violations, the Company does not believe that the ultimate resolution of this matter will have a material adverse effect on its financial statements or operations.
Commitments to Purchase and Fund Mortgage Loans
The Company’s commitments to purchase and fund loans totaled $17.7 billion as of March 31, 2021.
Note 17—Stockholders’ Equity
In February 2021, the Company’s board of directors approved an increase to the Company’s common stock repurchase program from $500 million to $1 billion.
Following is a summary of activity under the stock repurchase program:
| (1) | Amounts represent the total shares of common stock repurchased under the stock repurchase program from inception through March 31, 2021. |
50
Note 18—Net Gains on Loans Held for Sale
Net gains on loans held for sale at fair value is summarized below:
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
||||
|
|
|
2021 |
|
2020 |
||
|
|
|
(in thousands) |
||||
|
From non-affiliates: |
|
|
|
|
|
|
|
Cash gains (losses): |
|
|
|
|
|
|
|
Loans |
|
$ |
82,712 |
|
$ |
111,757 |
|
Hedging activities |
|
|
736,225 |
|
|
(122,666) |
|
|
|
|
818,937 |
|
|
(10,909) |
|
Non-cash gains: |
|
|
|
|
|
|
|
Mortgage servicing rights and mortgage servicing liabilities resulting from loan sales |
|
|
463,571 |
|
|
275,739 |
|
Provisions for losses relating to representations and warranties: |
|
|
|
|
|
|
|
Pursuant to loan sales |
|
|
(10,053) |
|
|
(3,712) |
|
Reductions in liability due to change in estimate |
|
|
3,685 |
|
|
1,676 |
|
Changes in fair values of loans and derivatives held at quarter end: |
|
|
|
|
|
|
|
Interest rate lock commitments |
|
|
(339,086) |
|
|
178,543 |
|
Loans |
|
|
105,222 |
|
|
(72,080) |
|
Hedging derivatives |
|
|
(273,687) |
|
|
(102,891) |
|
|
|
|
768,589 |
|
|
266,366 |
|
From PennyMac Mortgage Investment Trust (1) |
|
|
(14,248) |
|
|
77,916 |
|
|
|
$ |
754,341 |
|
$ |
344,282 |
| (1) | Gains on sale of loans to PMT are described in Note 4–Related Party Transactions. |
51
Note 19—Net Interest Income
Net interest income is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
||||
|
|
|
2021 |
|
2020 |
|
||
|
|
|
(in thousands) |
|
||||
|
Interest income: |
|
|
|
|
|
|
|
|
From non-affiliates: |
|
|
|
|
|
|
|
|
Cash and short-term investments |
|
$ |
987 |
|
$ |
1,711 |
|
|
Loans held for sale at fair value |
|
|
74,824 |
|
|
46,426 |
|
|
Placement fees relating to custodial funds |
|
|
5,883 |
|
|
23,209 |
|
|
|
|
|
81,694 |
|
|
71,346 |
|
|
From PennyMac Mortgage Investment Trust—Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell |
|
|
387 |
|
|
1,218 |
|
|
|
|
|
82,081 |
|
|
72,564 |
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
To non-affiliates: |
|
|
|
|
|
|
|
|
Assets sold under agreements to repurchase |
|
|
52,179 |
|
|
25,684 |
|
|
Mortgage loan participation purchase and sale agreements |
|
|
1,095 |
|
|
1,810 |
|
|
Obligations under capital lease |
|
|
59 |
|
|
167 |
|
|
Notes payable secured by mortgage servicing assets |
|
|
9,888 |
|
|
14,846 |
|
|
Unsecured senior notes |
|
|
12,670 |
|
|
— |
|
|
Corporate revolving line of credit |
|
|
— |
|
|
503 |
|
|
Interest shortfall on repayments of mortgage loans serviced for Agency securitizations |
|
|
29,436 |
|
|
14,871 |
|
|
Interest on mortgage loan impound deposits |
|
|
1,106 |
|
|
1,657 |
|
|
|
|
|
106,433 |
|
|
59,538 |
|
|
To PennyMac Mortgage Investment Trust—Excess servicing spread financing at fair value |
|
|
1,280 |
|
|
1,974 |
|
|
|
|
|
107,713 |
|
|
61,512 |
|
|
|
|
$ |
(25,632) |
|
$ |
11,052 |
|
52
Note 20—Stock-based Compensation
As of March 31, 2021, the Company had one stock-based compensation plan. Following is a summary of the stock-based compensation activity:
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
||||
|
|
|
2021 |
|
2020 |
||
|
|
|
(in thousands) |
||||
|
Grants: |
|
|
|
|
|
|
|
Units: |
|
|
|
|
|
|
|
Performance-based restricted share units ("RSUs") |
|
|
310 |
|
|
422 |
|
Stock options |
|
|
249 |
|
|
273 |
|
Time-based RSUs |
|
|
171 |
|
|
304 |
|
Grant date fair value: |
|
|
|
|
|
|
|
Performance-based RSUs |
|
$ |
18,234 |
|
$ |
14,768 |
|
Stock options |
|
|
5,116 |
|
|
2,770 |
|
Time-based RSUs |
|
|
10,064 |
|
|
10,662 |
|
Total |
|
$ |
33,414 |
|
$ |
28,200 |
|
Vestings and exercises: |
|
|
|
|
|
|
|
Performance-based RSUs vested |
|
|
640 |
|
|
603 |
|
Stock options exercised |
|
|
88 |
|
|
180 |
|
Time-based RSUs vested |
|
|
305 |
|
|
348 |
|
Compensation expense |
|
$ |
10,877 |
|
$ |
12,368 |
Note 21—Earnings Per Share of Common Stock
Basic earnings per share of common stock is determined by dividing net income by the weighted average number of shares of common stock outstanding during the quarter. Diluted earnings per share of common stock is determined by dividing net income by the weighted average number of shares of common stock outstanding, assuming all dilutive securities were issued.
Potentially dilutive securities include non-vested stock-based compensation awards. The Company applies the treasury stock method to determine the diluted weighted average number of shares of common stock outstanding based on the outstanding stock-based compensation awards.
The following table summarizes the basic and diluted earnings per share calculations:
53
Calculations of diluted earnings per share require certain potentially dilutive shares to be excluded when their inclusion in the diluted earnings per share calculation would be anti-dilutive. The following table summarizes the weighted-average number of anti-dilutive outstanding performance-based RSUs and stock options excluded from the calculation of diluted earnings per share:
| (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. |
Note 22—Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
||||
|
|
|
2021 |
|
2020 |
||
|
|
|
(in thousands) |
||||
|
Cash paid for interest |
|
$ |
112,730 |
|
$ |
64,527 |
|
(Refunds received) cash paid for income taxes, net |
|
$ |
(15) |
|
$ |
13 |
|
Non-cash investing activity: |
|
|
|
|
|
|
|
Mortgage servicing rights resulting from loan sales |
|
$ |
470,533 |
|
$ |
282,315 |
|
Unsettled portion of MSR acquisitions |
|
$ |
— |
|
$ |
1,656 |
|
Operating right-of-use assets recognized |
|
$ |
3,243 |
|
$ |
1,534 |
|
Non-cash financing activity: |
|
|
|
|
|
|
|
Mortgage servicing liabilities resulting from loan sales |
|
$ |
6,962 |
|
$ |
6,576 |
|
Issuance of Excess servicing spread payable to PennyMac Mortgage Investment Trust pursuant to a recapture agreement |
|
$ |
557 |
|
$ |
379 |
|
Issuance of common stock in settlement of directors' fees |
|
$ |
51 |
|
$ |
48 |
Note 23—Regulatory Capital and Liquidity Requirements
The Company, through PLS and PennyMac, is required to maintain specified levels of capital and liquidity to remain a seller/servicer in good standing with the Agencies. Such capital and liquid asset requirements generally are tied to the size of the Company’s loan servicing portfolio, loan origination volume and delinquency rates.
The Company is subject to financial eligibility requirements established by the Federal Housing Finance Agency (“FHFA”) for sellers/servicers eligible to sell or service mortgage loans with Fannie Mae and Freddie Mac. The eligibility requirements include:
| ● | tangible net worth of $2.5 million plus 25 basis points of the UPB of the Company’s total 1-4 unit servicing portfolio, excluding mortgage loans subserviced for others; |
| ● | a liquidity requirement equal to 3.5 basis points of the aggregate UPB serviced for the Agencies plus 200 basis points of total nonperforming Agency servicing UPB less 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. |
54
The Company is also subject to financial eligibility requirements for Ginnie Mae single-family issuers. The eligibility requirements include net worth of $2.5 million plus 35 basis points of PLS' outstanding Ginnie Mae single-family obligations and a liquidity requirement equal to the greater of $1.0 million or 10 basis points of PLS' outstanding Ginnie Mae single-family securities.
The Agencies’ capital and liquidity requirements, the calculations of which are specified by each Agency, are summarized below:
| (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.
Note 24—Segments
The Company operates in three segments: production, servicing and investment management.
Two of the segments are in the mortgage banking business: production and servicing. The production segment performs loan origination, acquisition and sale activities. The servicing segment performs servicing of loans, execution and management of early buyout loan transactions and servicing of loans sourced and managed by the investment management segment for PMT, including executing the loan resolution strategy identified by the investment management segment relating to distressed mortgage loans.
The investment management segment represents the activities of the Company’s investment manager, which include sourcing, performing diligence, bidding and closing investment asset acquisitions and managing the acquired assets and correspondent production activities for PMT.
55
Financial performance and results by segment are as follows:
| (1) | All revenues are from external customers. |
| (1) | All revenues are from external customers. |
56
Note 25—Subsequent Events
Management has evaluated all events and transactions through the date the Company issued these consolidated financial statements. During this period:
| ● | On May 6, 2021, the Company announced that its board of directors declared a cash dividend of $0.20 per common share. The dividend will be paid on May 27, 2021 to common shareholders of record as of May 17, 2021. |
| ● | On April 28, 2021, the Company, through three of its wholly-owned subsidiaries, PLS, PennyMac, and PFSI ISSUER TRUST – FMSR (“PFSI Issuer”), entered into a structured finance transaction, allowing PLS to finance Fannie Mae MSRs and ESS (the “FNMA MSR Facility”). In connection with the FNMA MSR Facility, PLS pledges and/or sells to PFSI Issuer participation certificates representing beneficial interests in MSRs and ESS pursuant to the terms of a master repurchase agreement and the PFSI Issuer issues to PLS the PFSI ISSUER TRUST - FMSR Collateralized Notes, Series 2021-MSRVF. In addition, the PFSI Issuer may issue to institutional investors term notes secured on a pari passu basis by the participation certificates relating to the MSRs and ESS. |
| ● | All agreements to repurchase assets that matured before the date of this Report were extended or renewed. |
57
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
The following discussion and analysis of financial condition and results of operations should be read with the consolidated financial statements including the related notes of PennyMac Financial Services, Inc. (“PFSI”) included within this Quarterly Report on Form 10-Q.
Statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those expressed or implied in such statements. You can identify these forward-looking statements by words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors,” as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and our other filings with the United States Securities and Exchange Commission (“SEC”). The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date hereof and we assume no obligation to update or supplement any forward-looking statements.
Overview
The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our consolidated results of operations and financial condition. Unless the context indicates otherwise, references in this Quarterly Report on Form 10-Q to the words “we,” “us,” “our” and the “Company” refer to PFSI.
Our Company
We are a specialty financial services firm with a comprehensive mortgage platform and integrated business primarily focused on the production and servicing of U.S. residential mortgage loans (activities which we refer to as mortgage banking) and the management of investments related to the U.S. mortgage market. We believe that our operating capabilities, specialized expertise, access to long-term investment capital, and our management’s experience across all aspects of the mortgage business will allow us to profitably grow these activities and capitalize on other related opportunities as they arise in the future.
We operate and control all of the business and affairs and consolidate the financial results of Private National Mortgage Acceptance Company, LLC (“PennyMac”). We conduct our business in three segments: production, servicing (together, production and servicing comprise our mortgage banking activities) and investment management.
| ● | The production segment performs loan origination, acquisition and sale activities. |
| ● | The servicing segment performs loan servicing for both newly originated loans we are holding for sale and loans we service for others, including for PMT. |
| ● | The investment management segment represents our investment management activities, which include the activities associated with investment asset acquisitions and dispositions such as sourcing, due diligence, negotiation and settlement. |
Our principal mortgage banking subsidiary, PennyMac Loan Services, LLC (“PLS”), is a non-bank producer and servicer of mortgage loans in the United States. PLS is a seller/servicer for the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), each of which is a government-sponsored entity. PLS is also an approved issuer of securities guaranteed by the Government National Mortgage Association (“Ginnie Mae”), a lender of the Federal Housing Administration (“FHA”), and a lender/servicer of the Veterans Administration (“VA”) and the U.S. Department of Agriculture (“USDA”). We refer to each of Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA and USDA as an “Agency” and collectively as the “Agencies.” PLS is able to service loans in all 50 states, the District of Columbia, Guam and the U.S. Virgin Islands, and originate loans in 49 states and the District of Columbia, either because PLS is properly licensed in a particular jurisdiction or exempt or otherwise not required to be licensed in that jurisdiction.
58
Our investment management subsidiary is PNMAC Capital Management, LLC (“PCM”), a Delaware limited liability company registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended. PCM has an investment management contract with PennyMac Mortgage Investment Trust (“PMT”), a mortgage real estate investment trust listed on the New York Stock Exchange under the ticker symbol PMT.
Results of Operations
Our results of operations are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
||||
|
|
|
2021 |
|
2020 |
|
||
|
|
|
(dollars in thousands, except per share amounts) |
|
||||
|
Revenues: |
|
|
|
|
|
|
|
|
Net gains on loans held for sale at fair value |
|
$ |
754,341 |
|
$ |
344,282 |
|
|
Loan origination fees |
|
|
104,037 |
|
|
57,571 |
|
|
Fulfillment fees from PennyMac Mortgage Investment Trust |
|
|
60,835 |
|
|
41,940 |
|
|
Net loan servicing fees |
|
|
39,720 |
|
|
257,808 |
|
|
Net interest (expense) income |
|
|
(25,632) |
|
|
11,052 |
|
|
Management fees |
|
|
8,449 |
|
|
9,055 |
|
|
Other |
|
|
2,936 |
|
|
117 |
|
|
Total net revenue |
|
|
944,686 |
|
|
721,825 |
|
|
Expenses: |
|
|
|
|
|
|
|
|
Compensation |
|
|
258,829 |
|
|
168,436 |
|
|
Loan origination |
|
|
87,392 |
|
|
46,004 |
|
|
Technology |
|
|
33,672 |
|
|
19,107 |
|
|
Servicing |
|
|
19,183 |
|
|
42,166 |
|
|
Other |
|
|
39,602 |
|
|
31,382 |
|
|
Total expenses |
|
|
438,678 |
|
|
307,095 |
|
|
Income before provision for income taxes |
|
|
506,008 |
|
|
414,730 |
|
|
Provision for income taxes |
|
|
129,140 |
|
|
108,487 |
|
|
Net income |
|
$ |
376,868 |
|
$ |
306,243 |
|
|
Earnings per share |
|
|
|
|
|
|
|
|
Basic |
|
$ |
5.45 |
|
$ |
3.89 |
|
|
Diluted |
|
$ |
5.15 |
|
$ |
3.73 |
|
|
Return on average common stockholders' equity |
|
|
43.4 |
% |
|
56.0 |
% |
|
Income before provision for income taxes by segment: |
|
|
|
|
|
|
|
|
Mortgage banking: |
|
|
|
|
|
|
|
|
Production |
|
$ |
362,895 |
|
$ |
240,131 |
|
|
Servicing |
|
|
141,744 |
|
|
170,842 |
|
|
Total mortgage banking |
|
|
504,639 |
|
|
410,973 |
|
|
Investment management |
|
|
1,369 |
|
|
3,757 |
|
|
|
|
$ |
506,008 |
|
$ |
414,730 |
|
|
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") (1) |
|
$ |
674,308 |
|
$ |
302,322 |
|
|
During the quarter: |
|
|
|
|
|
|
|
|
Interest rate lock commitments issued |
|
$ |
36,118,713 |
|
$ |
24,804,994 |
|
|
At end of quarter: |
|
|
|
|
|
|
|
|
Interest rate lock commitments outstanding |
|
$ |
17,668,145 |
|
$ |
9,377,614 |
|
|
Unpaid principal balance of loan servicing portfolio: |
|
|
|
|
|
|
|
|
Owned: |
|
|
|
|
|
|
|
|
Mortgage servicing rights |
|
$ |
244,367,930 |
|
$ |
231,484,161 |
|
|
Mortgage servicing liabilities |
|
|
3,173,793 |
|
|
2,635,734 |
|
|
Loans held for sale |
|
|
12,959,016 |
|
|
5,276,688 |
|
|
|
|
|
260,500,739 |
|
|
239,396,583 |
|
|
Subserviced for PMT |
|
|
188,324,162 |
|
|
144,830,043 |
|
|
|
|
$ |
448,824,901 |
|
$ |
384,226,626 |
|
|
|
|
|
|
|
|
|
|
|
Net assets of PennyMac Mortgage Investment Trust |
|
$ |
2,357,143 |
|
$ |
1,823,368 |
|
|
Book value per share |
|
$ |
51.78 |
|
$ |
29.85 |
|
| (1) | To provide investors with information in addition to our results as determined by accounting principles generally accepted in the United States (“GAAP”), we disclose Adjusted EBITDA as a non-GAAP measure. Adjusted EBITDA is a measure that is frequently used in our industry to measure performance and we believe that this measure provides supplemental information that is useful to investors. Adjusted EBITDA is not a financial measure 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. |
59
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.
We believe that the presentation of Adjusted EBITDA provides useful information to investors regarding our results of operations because each measure assists both investors and management in analyzing and benchmarking the performance and value of our business. However, other companies may define Adjusted EBITDA differently, and as a result, our measures of Adjusted EBITDA may not be directly comparable to those of other companies.
Adjusted EBITDA measures have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
| a) | they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments; |
| b) | they do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payment on our debt; |
| 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:
Beginning the year ended December 31, 2020, the United States has been 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 continued economic uncertainty, financial hardships and unemployment for many existing borrowers.
60
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 March 31, 2021, 5.7% of loans in our predominately government-insured or guaranteed MSR portfolio were in forbearance plans and delinquent resulting in an increase in the level of servicing advances we have been required to make in order to fund borrower delinquencies.
The Pandemic has had a mixed effect on the earnings of our servicing segment by reducing the amount of placement fees we earn on custodial deposits related to these loans and increasing our cost to service due to higher delinquency and default rates, offset by gains we recognize when we are able to modify and resell previously delinquent government loans.
In our production segment, gain on sale margins reflect both the strong but moderating demand for loans discussed above as well as growth in loan production from our consumer direct and broker direct channels. The mortgage origination market for 2020 was estimated at $4.0 trillion and current forecasts estimate of the origination market range from $3.3 trillion to $4.0 trillion for 2021. The increase in demand for mortgage loans in 2020, combined with constraints on mortgage industry origination capacity that existed before the Pandemic allowed us to realize higher gain-on sale margins in our production segment in 2020. As industry capacity has adjusted to demand and recent increase in market interest rates have moderated demand, our gain on sale margins have moderated from 2020 levels.
The current environment caused by the Pandemic in the United States is historically unprecedented and the source of much uncertainty surrounding future economic and market prospects and the ongoing effects on our future prospects are difficult to anticipate. For further discussion of the potential impacts of the Pandemic please also see the section entitled “Risk Factors” in Part II. Item 1A. and in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on February 25, 2021.
For the quarter ended March 31, 2021, income before provision for income taxes increased $91.3 million compared to the same period in 2020. 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, partially offset by a decrease in Net loan servicing fees primarily due to decrease in changes in the fair value of our MSRs, MSLs and ESS, net of hedging results and an increase in total expenses. The increase in total expenses was mainly due to increases in compensation and loan origination expenses reflecting the continuing growth of our mortgage banking activities.
Net Gains on Loans Held for Sale at Fair Value
During the quarter ended March 31, 2021, we recognized Net gains on loans held for sale at fair value totaling $754.3 million, an increase of $410.1 million compared to the same period in 2020. The increase was primarily due to an increase in both production volume and gain on sale margins during the quarter ended March 31, 2021 as compared to the quarter ended March 31, 2020.
61
Our net gains on loans held for sale are summarized below:
Our gains on loans held for sale include both cash and non-cash elements. We recognize a significant portion of our gains on loans held for sale when we make a commitment to purchase or fund a mortgage loan. We recognize this gain in the form of an interest rate lock commitment. We adjust our initial gain amount as the loan purchase or origination process progresses until the loan is either funded or cancelled. We also receive non-cash proceeds on sale that include our estimate of the fair value of MSRs and we incur liabilities for mortgage servicing liabilities (which represent the fair value of the costs we expect to incur in excess of the fees we receive for 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 representations and warranties we provide in our loan sale transactions.
Non-cash elements of gain on sale of loans held for sale
The MSRs, MSLs, and liability for representations and warranties we recognize represent our estimate of the fair value of future benefits and costs we will realize for years in the future. These estimates represented approximately 61% of our gain on sale of loans held for sale at fair value for the quarter ended March 31, 2021 as compared to 79% for the same period in 2020. 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.
62
Our agreements with the purchasers and insurers include representations and warranties related to the loans we sell. The representations and warranties require adherence to purchaser and insurer origination and underwriting guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit, income and asset requirements, and compliance with applicable federal, state and local law.
In the event of a breach of our representations and warranties, we may be required to either repurchase the loans with the identified defects or indemnify the purchaser or insurer. In such cases, we bear any subsequent credit losses on the loans. Our credit losses may be reduced by any recourse we have to correspondent originators that sold such loans to us and breached similar or other representations and warranties. In such event, we have the right to seek a recovery of related repurchase losses from that correspondent seller.
Our representations and warranties are generally not subject to stated limits of exposure. However, we believe that the current UPB of loans sold by us and subject to representation and warranty liability to date represents the maximum exposure to repurchases related to representations and warranties.
The level of the liability for losses under representations and warranties is difficult to estimate and requires considerable judgment. The level of loan repurchase losses is dependent on economic factors, purchaser or insurer loss mitigation strategies, and other external conditions that may change over the lives of the underlying loans. Our estimate of the liability for representations and warranties is developed by our credit administration staff and approved by our senior management credit committee which includes our senior executives and senior management in our loan production, loan servicing and credit risk management areas.
The method used to estimate our losses on representations and warranties is a function of our estimate of future defaults, loan repurchase rates, the severity of loss in the event of default, if applicable, and the probability of reimbursement by the correspondent loan seller. We establish a liability at the time loans are sold and review our liability estimate on a periodic basis.
We recorded provisions for losses under representations and warranties relating to current loan sales as a component of Net gains on loans held for sale at fair value totaling $10.1 million for the quarter ended March 31, 2021, compared to $3.7 million for the quarter ended March 31, 2020. 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 $3.7 million during the quarter ended March 31, 2021 compared to $1.7 million during the quarter ended March 31, 2020. The reductions in the liability resulted from previously sold loans meeting performance criteria established by the Agencies which significantly limit the likelihood of certain repurchase or indemnification claims.
63
Following is a summary of loan repurchase activity and the UPB of loans subject to representations and warranties:
During the quarter ended March 31, 2021, we repurchased loans totaling $18.0 million in UPB. We recorded losses of $628,000 net of recoveries during the quarter ended March 31, 2021. 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 $46.5 million during the quarter ended March 31, 2021 compared to the quarter ended March 31, 2020. The increase was 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 $18.9 million during the quarter ended March 31, 2021 compared to the quarter ended March 31, 2020. The increase compared to the quarter ended March 31, 2020 was primarily due to an increase in PMT’s loan production volume, partially offset by the effect of the amendment to the fulfillment fee structure noted above.
64
Net Loan Servicing Fees
Following is a summary of our net loan servicing fees:
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
||||
|
|
|
2021 |
|
2020 |
|
||
|
|
|
(in thousands) |
|
||||
|
Net loan servicing fees: |
|
|
|
|
|
|
|
|
Loan servicing fees: |
|
|
|
|
|
|
|
|
From non-affiliates |
|
$ |
210,753 |
|
$ |
198,653 |
|
|
From PennyMac Mortgage Investment Trust |
|
|
19,093 |
|
|
14,521 |
|
|
Other |
|
|
29,599 |
|
|
28,755 |
|
|
|
|
|
259,445 |
|
|
241,929 |
|
|
Change in fair value of mortgage servicing rights, mortgage servicing liabilities and excess servicing spread financing net of hedging results |
|
|
(219,725) |
|
|
15,879 |
|
|
Net loan servicing fees |
|
$ |
39,720 |
|
$ |
257,808 |
|
|
Average loan servicing portfolio |
|
$ |
437,825,970 |
|
$ |
377,294,965 |
|
Change in fair value of mortgage servicing rights and excess servicing spread are summarized below:
65
Following is a summary of our loan servicing portfolio:
| (1) | Includes delinquent loans in COVID-19 pandemic-related forbearance plans that were requested by borrowers seeking payment relief in accordance with the CARES Act. |
Net loan servicing fees decreased $218.1 million during the quarter ended March 31, 2021 compared to the same period in 2020. The decrease was due to a decrease of $235.6 million in fair value changes relating to MSRs, mortgage servicing liabilities (“MSLs”), and ESS, net of hedging results, partially offset by an increase of $17.5 million in loan servicing fees resulting from an increase in our average servicing portfolio during the quarter ended March 31, 2021 compared to the same period in 2020. The decrease of $235.6 million is primarily due to a decrease of $1.5 billion in hedging activities, partially offset by an increase of $1.2 billion in changes in fair value of MSRs and MSLs, reflecting the effect on prepayment experience and expectations on the fair value of our investments in MSRs of increasing interest rates during the quarter ended March 31, 2021 as compared to decreasing interest rates during the quarter ended March 31, 2020.
66
Net Interest (Expense) Income
Net interest (expense) income decreased $36.7 million during the quarter ended March 31, 2021 compared to the same period in 2020. 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; |
| ● | an increase in interest shortfall on repayments of loans serviced for Agency securitizations, reflecting increased loan payoffs as a result of increased borrower refinancing activity due to the lower interest rate environment; and |
| ● | introduction of interest on Unsecured Notes issued during the period from September 2020 to February 2021. |
Management fees
Management fees are summarized below:
Management fees decreased $0.6 million during the quarter ended March 31, 2021 compared to the same period in 2020. The decrease was due to the decreases in PMT’s average shareholders’ equity, upon which its base management fees are based. The decrease in PMT’s average shareholders’ equity during 2021 as compared to 2020 is the result of the loss PMT incurred during the quarter ended March 31, 2020. PMT’s shareholders’ equity has substantially recovered during the twelve months ended March 31, 2021.
Expenses
Compensation
Compensation expenses are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
||||
|
|
|
2021 |
|
2020 |
|
||
|
|
|
(in thousands) |
|
||||
|
Salaries and wages |
|
$ |
143,700 |
|
$ |
89,315 |
|
|
Incentive compensation |
|
|
72,655 |
|
|
45,981 |
|
|
Taxes and benefits |
|
|
31,597 |
|
|
20,772 |
|
|
Stock and unit-based compensation |
|
|
10,877 |
|
|
12,368 |
|
|
|
|
$ |
258,829 |
|
$ |
168,436 |
|
|
Head count: |
|
|
|
|
|
|
|
|
Average |
|
|
6,882 |
|
|
4,289 |
|
|
Year end |
|
|
7,075 |
|
|
4,458 |
|
Compensation expense increased $90.4 million during the quarter ended March 31, 2021 compared to the same period in 2020. The increase was primarily due to growth in head count made to accommodate the growth in our loan production and servicing activities.
67
Loan origination
Loan origination expense increased $41.4 million during the quarter ended March 31, 2021 compared to the same period in 2020. The increase was primarily resulting from increased consumer and broker direct lending activities during the quarter ended March 31, 2021 compared to the same period during 2020.
Technology
Technology expense increased $14.6 million during the quarter ended March 31, 2021 compared to the same period in 2020. The increases were primarily due to growth in our loan servicing operations and continued investment in our loan production and servicing infrastructure.
Servicing
Servicing expenses decreased $23.0 million during the quarter ended March 31, 2021 compared to the same period in 2020. This decrease in servicing expense was primarily due to reversal of the provision for estimated servicing advances losses recorded in prior periods in amount of $20.5 million during the quarter ended March 31, 2021. The reduction reflects the recent improvements in the performance of our servicing portfolio.
Provision for Income Taxes
Our effective income tax rates were 25.5% during the quarter ended March 31, 2021 compared to 26.2% during the same period in 2020. The lower effective income tax rate during the quarter ended March 31, 2021 compared to the same period in 2020 was primarily resulting from a higher net permanent tax deduction for equity compensation in the quarter ended March 31, 2021.
Balance Sheet Analysis
Following is a summary of key balance sheet items as of the dates presented:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
||
|
|
|
2021 |
|
2020 |
||
|
|
|
(in thousands) |
||||
|
ASSETS |
|
|
|
|
|
|
|
Cash and short-term investments |
|
$ |
466,720 |
|
$ |
547,933 |
|
Loans held for sale at fair value |
|
|
13,385,789 |
|
|
11,616,400 |
|
Derivative assets |
|
|
530,852 |
|
|
711,238 |
|
Servicing advances, net |
|
|
550,150 |
|
|
579,528 |
|
Investments in and advances to affiliates |
|
|
70,114 |
|
|
168,972 |
|
Mortgage servicing rights |
|
|
3,268,910 |
|
|
2,581,174 |
|
Loans eligible for repurchase |
|
|
12,312,393 |
|
|
14,625,447 |
|
Other |
|
|
713,052 |
|
|
767,103 |
|
Total assets |
|
$ |
31,297,980 |
|
$ |
31,597,795 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
Short-term debt |
|
$ |
11,367,224 |
|
$ |
10,176,274 |
|
Long-term debt |
|
|
2,594,951 |
|
|
2,085,274 |
|
Liability for loans eligible for repurchase |
|
|
12,312,393 |
|
|
14,625,447 |
|
Income taxes payable |
|
|
751,855 |
|
|
622,700 |
|
Other |
|
|
804,143 |
|
|
698,712 |
|
Total liabilities |
|
|
27,830,566 |
|
|
28,208,407 |
|
Stockholders' equity |
|
|
3,467,414 |
|
|
3,389,388 |
|
Total liabilities and stockholders' equity |
|
$ |
31,297,980 |
|
$ |
31,597,795 |
68
Total assets decreased $299.8 million from $31.6 billion at December 31, 2020 to $31.3 billion at March 31, 2021. The decrease was primarily due to a decrease of $2.3 billion in loans eligible for repurchase, $180.4 million in derivative assets, $98.9 million investments in and advances to affiliates, partially offset by an increase of $1.8 billion in loans held for sale at fair value and $687.7 million in MSRs.
Total liabilities decreased $377.8 million from $28.2 billion at December 31, 2020 to $27.8 billion at March 31, 2021. The decrease was primarily due to the decrease in liability for loans eligible for repurchase, partially offset by an increase in borrowings to finance the growth in our inventory of loans held for sale.
Cash Flows
Our cash flows for the quarters ended March 31, 2021 and 2020 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, |
|
|
|
|
||||
|
|
|
2021 |
|
2020 |
|
Change |
|
|||
|
|
|
(in thousands) |
|
|||||||
|
Operating |
|
$ |
(1,248,016) |
|
$ |
(730,284) |
|
$ |
(517,732) |
|
|
Investing |
|
|
(223,518) |
|
|
1,116,225 |
|
|
(1,339,743) |
|
|
Financing |
|
|
1,380,686 |
|
|
304,519 |
|
|
1,076,167 |
|
|
Net (decrease) increase in cash and restricted cash |
|
$ |
(90,848) |
|
$ |
690,460 |
|
$ |
(781,308) |
|
Our cash flows resulted in a net decrease in cash and restricted cash of $90.8 million during the quarters ended March 31, 2021 as discussed below.
Operating activities
Net cash used in operating activities totaled $1.2 billion during the quarter ended March 31, 2021 compared with net cash used in operating activities totaled $730.2 million during the same period in 2020. Our cash flows from operating activities are primarily influenced by changes in the levels of our inventory of mortgage loans as shown below:
Investing activities
Net cash used in investing activities during the quarter ended March 31, 2021 totaled $223.5 million primarily due to $527.5 million in net settlement of derivative financial instruments used to hedge our investment in MSRs, partially offset by a $245.5 million decrease in margin deposits. Net cash provided by investing activities during the quarter ended March 31, 2020 totaled $1.1 billion, primarily due to $942.0 million in net settlement of derivative financial instruments used to hedge our investment in MSRs and a decrease in margin deposits of $133.0 million.
Financing activities
Net cash provided by financing activities totaled $1.4 billion during the quarter ended March 31, 2021, primarily due to an increase of $1.8 billion in borrowings to finance the growth in our loans held for sale, partially offset by $288.5 million of repurchase of our common stock and $134.6 million of repayment of ESS financing. Net cash provided by financing activities totaled $304.5 million during the quarter ended March 31, 2020, primarily to finance the growth in our inventory of mortgage loans held for sale.
69
Liquidity and Capital Resources
Our liquidity reflects our ability to meet our current obligations (including our operating expenses and, when applicable, the retirement of, and margin calls relating to, our debt, and margin calls relating to hedges on our commitments to purchase or originate mortgage loans and on our MSR investments), fund new originations and purchases, and make investments as we identify them. We expect our primary sources of liquidity to be through cash flows from business activities, proceeds from bank borrowings, proceeds from and issuance of equity or debt offerings. We believe that our liquidity is sufficient to meet our current liquidity needs.
The effect of the Pandemic on our operations, liquidity and capital resources remain uncertain and difficult to predict, for further discussion of the potential impacts of the Pandemic please also see the section entitled “Risk Factors” in Part II. Item 1A. and in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 25, 2021.
The CARES Act allows borrowers with federally-backed loans to request temporary payment forbearance in response to the increased borrower hardships resulting from the COVID-19 pandemic and may require us as the servicer to advance principal and interest to investors for up to four months on Fannie Mae and Freddie Mac loans and longer on Ginnie Mae and other government agency backed loans, as well as advancing property taxes, insurance premiums and other expenses. In April 2020, the Company entered into a new Ginnie Mae servicing advance financing transaction allowing the Company to borrow $600 million in excess of our currently outstanding MSR term notes against Ginnie Mae MSRs and servicing advances. The Ginnie Mae servicing advances eligible for financing include advances made to support regularly scheduled monthly principal and interest to mortgage-backed securities holders, taxes, homeowners insurance and escrowed items and other costs related to servicing delinquent loans. We are also in ongoing discussions with our lending partners to align our servicing advance assets and financing capacity, and to further diversify our financing alternatives.
The COVID-19 pandemic has significantly increased the number of loans that are delinquent in our Ginnie Mae MSR portfolio. The Ginnie Mae guidelines provides us with the option to purchase loans that are at least three months delinquent out of the underlying Ginnie Mae securities as an alternative to continuing to advance principal and interest payments to the holders of the Ginnie Mae securities. We refer to such loans as “early buyout” or EBO loans.
During the quarter ended March 31, 2021, we repurchased $4.1 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, 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 February 11, 2021, we issued $650 million of long-term Unsecured Notes that mature on February 15, 2029. We used the proceeds from the 2021 Unsecured Notes financing to repay some of our existing short-term borrowings.
70
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:
The differences between the average and maximum daily balances on our repurchase agreements reflect the fluctuations throughout the month of our inventory as we fund and pool mortgage loans for sale in guaranteed mortgage securitizations.
Our secured financing agreements at PLS require us to comply with various financial covenants. The most significant financial covenants currently include the following:
| ● | a minimum in unrestricted cash and cash equivalents of $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
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applicable lender) of the assets subject to the related financing agreement. Upon notice from the applicable lender, we will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter, depending on the timing of the notice.
We are also subject to liquidity and net worth requirements established by the Federal Housing Finance Agency (“FHFA”) for Agency seller/servicers and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established minimum liquidity and net worth requirements for their approved non-depository single-family sellers/servicers in the case of Fannie Mae, Freddie Mac, and Ginnie Mae for its approved single-family issuers, as summarized below:
| ● | Effective June 30, 2020, FHFA liquidity requirement is equal to 0.035% (3.5 basis points) of total Agency servicing UPB plus an incremental 200 basis points of the amount by which total nonperforming Agency servicing UPB (reduced by 70% of the UPB of nonperforming Agency loans that are in COVID-19 payment forbearance and were current when they entered such forbearance) exceeds 6% of the applicable Agency servicing UPB; allowable assets to satisfy liquidity requirement include cash and cash equivalents (unrestricted), certain investment-grade securities that are available for sale or held for trading including Agency mortgage-backed securities, obligations of Fannie Mae or Freddie Mac, and U.S. Treasury obligations, and unused and available portions of committed servicing advance lines; |
| ● | FHFA net worth requirement is a minimum net worth of $2.5 million plus 0.25% (25 basis points) of UPB for total 1-4 unit residential mortgage loans serviced and a tangible net worth/total assets ratio greater than or equal to 6%; |
| ● | Ginnie Mae single-family issuer minimum liquidity requirement is equal to the greater of $1.0 million or 0.10% (10 basis points) of the issuer’s outstanding Ginnie Mae single-family securities, which must be met with cash and cash equivalents; and |
| ● | Ginnie Mae net worth requirement is equal to $2.5 million plus 0.35% (35 basis points) of the issuer’s outstanding Ginnie Mae single-family obligations. |
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.
On February 4, 2021, our Board of Directors increased our common stock repurchase program from $500 million to $1 billion. Share repurchases may be effected through open market purchases or privately negotiated transactions in accordance with applicable rules and regulations. The stock repurchase program does not have an expiration date and the authorization does not obligate us to acquire any particular amount of common stock. From inception through March 31, 2021, we have repurchased $640.9 million of shares under our stock repurchase program.
We continue to explore a variety of means of financing our continued growth, including debt financing through bank warehouse lines of credit, bank loans, repurchase agreements, securitization transactions and corporate debt. However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing will take or whether such efforts will be successful.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Off-Balance Sheet Arrangements and Guarantees
As of March 31, 2021, we have not entered into any off-balance sheet arrangements.
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Debt Obligations
As described further above in “Liquidity and Capital Resources,” we currently finance certain of our assets through borrowings with major financial institution counterparties in the form of sales of assets under agreements to repurchase, mortgage loan participation purchase and sale agreements, notes payable and a capital lease. The borrower under each of these facilities is PLS or the Issuer Trust with the exception of the capital lease where the borrower is PennyMac. All PLS obligations as previously noted are guaranteed by PennyMac.
Under the terms of these agreements, PLS is required to comply with certain financial covenants, as described further above in “Liquidity and Capital Resources,” and various non-financial covenants customary for transactions of this nature. As of March 31, 2021, 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.
Our debt obligations have the following size and maturities:
| (1) | Outstanding indebtedness as of March 31, 2021. |
| (2) | Total facility size, committed facility and maturity date include contractual changes through the date of this Report. |
| (3) | The borrowing of $50 million with Credit Suisse First Boston Mortgage Capital LLC is in the form of a sale of a variable funding note under an agreement to repurchase up to a maximum of $600 million, less any amount utilized |
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| 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 March 31, 2021:
| (1) | The borrowing facility with Credit Suisse First Boston Mortgage Capital LLC is in the form of a sale of a variable funding note under an agreement to repurchase. |
| (2) | The borrowing facility with Credit Suisse First Boston Mortgage Capital LLC is in the form of an asset sale under agreement to repurchase. |
All debt financing arrangements that matured between March 31, 2021 and the date of this Report have been renewed or extended and are described in Note 12—Short-Term Borrowings to the accompanying consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, real estate values and other market-based risks. The primary market risks that we are exposed to are fair value risk, interest rate risk and prepayment risk.
Fair Value Risk
Our IRLCs, mortgage loans held for sale, MSRs and MSLs are reported at their fair values. The fair value of these assets fluctuates primarily due to changes in interest rates. The fair value risk we face is primarily attributable to interest rate risk and prepayment risk.
Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. Changes in interest rates affect both the fair value of, and interest income we earn from, our mortgage-related investments and our derivative financial instruments. This effect is most pronounced with fixed-rate mortgage assets.
In general, rising interest rates negatively affect the fair value of our IRLCs, 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
74
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.
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 March 31, 2021, given several shifts in pricing spreads, prepayment speed and annual per loan cost of servicing:
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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 March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company may be involved in various legal and regulatory proceedings, lawsuits and other claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such matters cannot be determined, but despite the inherent uncertainties of litigation, management believes that the ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material adverse effect on the financial condition, results of operations, or cash flows of the Company. Set forth below are material updates to legal proceedings of the Company.
On 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 was approved on February 11, 2021. 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. Consequently, on April 27, 2020, PennyMac dismissed its federal court action without prejudice to pursue those claims in arbitration as well. While no assurance can be provided at to the ultimate outcome of this claim or the account of any losses to the Company, the Company believes the BKI Complaint is without merit and plans to vigorously defend the matter, which remains pending.
On January 7, 2021, PLS received a letter from the CFPB notifying PLS that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, the CFPB’s Office of Enforcement was considering recommending that the CFPB take legal action against PLS for alleged violations of the Real Estate Settlement Procedures Act and Truth in Lending Act. The CFPB's examination covered the period from March 2015 through September 2016. Should the CFPB commence an action, it may seek restitution, civil monetary penalties, injunctive relief, or other corrective action, the extent of which remains uncertain at this time. Notably, certain of the alleged violations were originally self-identified by PLS and remediated prior to the CFPB's examination, and all alleged violations were fully remediated as of August 2017. PLS confirmed these remediation actions as well as full restitution to any affected borrowers in its response to the NORA letter on February 8, 2021. While the NORA process remains open and pending at this time, and there can be no assurance as to the nature or extent of any actions taken by the CFPB with regard to these alleged violations, we do not believe that the ultimate resolution of this matter will have a material adverse effect on our financial statements or operations.
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Item 1A. Risk Factors
There have been no material changes from the risk factors set forth under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 25, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered equity securities during the quarter ended March 31, 2021.
The following table summarizes information about our stock repurchase during the quarter ended March 31, 2021:
| (1) | In February 2021, the Company’s board of directors approved an increase to the Company’s common stock repurchase program from $500 million to $1 billion. The stock repurchase program does not require the Company to purchase a specific number of shares, and the timing and amount of any shares repurchased are based on market conditions and other factors, including price, regulatory requirements and capital availability. Stock repurchases may be effected through privately negotiated transactions or open market purchases, including pursuant to a trading plan implemented pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The stock repurchase program does not have an expiration date but may be suspended, modified or discontinued at any time without prior notice. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None
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Item 6. Exhibits
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Incorporated by Reference from the Below-Listed Form (Each Filed under SEC File Number 15-68669 or 001-38727) |
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Exhibit No. |
Exhibit Description |
Form |
Filing Date |
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2.1 |
8-K12B |
November 1, 2018 |
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3.1 |
Amended and Restated Certificate of Incorporation of New PennyMac Financial Services, Inc. |
8-K12B |
November 1, 2018 |
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3.1.1 |
8-K12B |
November 1, 2018 |
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3.2 |
Amended and Restated Bylaws of New PennyMac Financial Services, Inc. |
8-K12B |
November 1, 2018 |
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3.2.1 |
10-Q |
November 4, 2019 |
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4.1 |
8-K |
February 11, 2021 |
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4.2 |
Form of Global Note for 4.250% Senior Notes due 2029 (included in Exhibit 4.1). |
8-K |
February 11, 2021 |
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4.3 |
8-K |
May 3, 2021 |
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10.1 |
8-K |
May 3, 2021 |
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10.2 |
8-K |
May 3, 2021 |
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10.3 |
8-K |
May 3, 2021 |
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10.4 |
8-K |
May 3, 2021 |
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10.5 |
* |
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Incorporated by Reference from the Below-Listed Form (Each Filed under SEC File Number 15-68669 or 001-38727) |
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Exhibit No. |
Exhibit Description |
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Filing Date |
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10.6 |
* |
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10.7 |
* |
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10.8† |
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31.1 |
* |
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31.2 |
* |
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32.1 |
** |
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32.2 |
** |
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101 |
Interactive data files pursuant to Rule 405 of Regulation S-T, formatted in Inline XBRL: (i) the Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020 (ii) the Consolidated Statements of Income for the quarters ended March 31, 2021 and March 31, 2020, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended March 31, 2021 and March 31, 2020, (iv) the Consolidated Statements of Cash Flows for the quarters ended March 31, 2021 and March 31, 2020 and (v) the Notes to the Consolidated Financial Statements. |
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101.INS |
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
Cover Page Interactive Data File (embedded within the Inline XBRL document). |
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*Filed herewith
**The certifications attached hereto as Exhibits 32.1 and 32.2 are furnished to the SEC pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.
†Indicates management contract or compensatory plan or arrangement.
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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.
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PENNYMAC FINANCIAL SERVICES, INC. |
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(Registrant) |
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Dated: May 6, 2021 |
By: |
/s/ DAVID A. SPECTOR |
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David A. Spector |
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Chairman and Chief Executive Officer |
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Dated: May 6, 2021 |
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/s/ DANIEL S. PEROTTI |
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Daniel S. Perotti |
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Senior Managing Director and Chief Financial Officer |
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Exhibit 10.5
AMENDMENT NO. 1
TO FOURTH AMENDED AND RESTATED
FLOW SERVICING AGREEMENT
This Amendment No. 1 is entered into as of March 9, 2021 to the Fourth Amended and Restated Flow Servicing Agreement (this “Amendment”) dated June 30, 2020 and effective as of July 1, 2020, by and between PennyMac Loan Services, LLC, a Delaware limited liability company (the “Servicer”), and PennyMac Operating Partnership, L.P., a Delaware limited partnership (the “Owner”).
RECITALS
WHEREAS, the Servicer and the Owner are parties to that certain Fourth Amended and Restated Flow Servicing Agreement, dated as of June 30, 2020 (the “Existing Servicing Agreement” and, as amended by this Amendment, the “Servicing Agreement”). Capitalized terms used but not otherwise defined herein shall have the meanings given to them in the Existing Servicing Agreement.
WHEREAS, the Servicer and the Owner have agreed, subject to the terms and conditions of this Amendment, that the Existing Servicing Agreement be amended to reflect certain agreed upon revisions to the terms of the Existing Servicing Agreement.
NOW, THEREFORE, in consideration of the mutual premises and mutual obligations set forth herein, the Servicer and the Owner hereby agree that the Existing Servicing Agreement is hereby amended as follows:
SECTION 1. Amendments.
1.1Section 3.02 of the Existing Servicing Agreement is hereby amended by deleting it in its entirety and replacing it with the following:
Except as provided in Section 3.11 of this Agreement, in the event of any conflict between the other provisions of this Agreement, in so far as they may relate to any Agency Mortgage Loan, and the terms of the related Guide, the terms of such Guide shall control.
1.2The following new Section 3.11 is added to the Existing Servicing Agreement:
In the event of any conflict between this Agreement or the Guide and the Acknowledgment Agreement dated March 9, 2021, by and among the Federal Home Loan Mortgage Corporation, PennyMac Corp., and Citibank, N.A. (the “Acknowledgment Agreement”), the provisions of the Acknowledgment Agreement shall prevail. To the extent the terms and provisions of this Agreement conflict with the terms and provisions of Modified Guide Exhibit 33, the terms and provisions of Modified Guide Exhibit 33 shall control.
SECTION 2.Conditions Precedent. This Amendment shall become effective as of the date first set forth above (the “Amendment Effective Date”), subject to the satisfaction of the following conditions precedent:
2.1Delivered Documents. On or prior to the Amendment Effective Date,
each party shall have received the following documents, each of which shall be satisfactory to such party in form and substance:
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this Amendment, executed and delivered by duly authorized officers of the Servicer and the Owner; and |
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such other documents as such party or counsel to such party may reasonably request. |
2.2Representations and Warranties. On or prior to the Amendment Effective Date, each party shall be in compliance in all material respects with all the terms and provisions set forth in the Existing Servicing Agreement on its part to be observed or performed.
SECTION 3.Limited Effect. Except as expressly amended and modified by this Amendment, the Existing Servicing Agreement shall continue to be, and shall remain, in full force and effect in accordance with its terms.
SECTION 4. GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
SECTION 5.Counterparts. This Amendment may be executed in one or more counterparts and by different parties hereto on separate counterparts, each of which, when so executed, shall constitute one and the same agreement.
SECTION 6.Conflicts. The parties hereto agree that in the event there is any conflict between the terms of this Amendment, and the terms of the Existing Servicing Agreement, the provisions of this Amendment shall control.
[SIGNATURE PAGE FOLLOWS]
2
IN WITNESS WHEREOF, the parties have caused their names to be signed hereto by their respective officers thereunto duly authorized as of the date first above written.
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PENNYMAC OPERATING PARTNERSHIP, L.P., a Delaware limited partnership |
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(Owner) |
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By: PENNYMAC GP OP, INC., |
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its General Partner |
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By: |
/s/ Daniel S. Perotti |
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Name: |
Daniel S. Perotti |
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Title: |
Senior Managing Director and |
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Chief Financial Officer |
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PENNYMAC LOAN SERVICES, LLC, a Delaware limited liability company |
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(Servicer) |
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By: |
/s/ Steve Bailey |
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Name: |
Steve Bailey |
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Title: |
Senior Managing Director and |
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Chief Mortgage Operations Officer |
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3
Exhibit 10.6
EXECUTION VERSION
===================================================================
PNMAC GMSR ISSUER TRUST,
as Issuer
and
CITIBANK, N.A.,
as Indenture Trustee, Calculation Agent, Paying Agent and Securities Intermediary
and
PENNYMAC LOAN SERVICES, LLC,
as Administrator and as Servicer
and
CREDIT SUISSE FIRST BOSTON MORTGAGE CAPITAL LLC,
as Administrative Agent
and consented to by
CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH,
as Noteholder
__________
AMENDMENT NO. 2
Dated as of April 1, 2021
to the
SERIES 2020-SPIADVF1 INDENTURE SUPPLEMENT
Dated as of April 1, 2020
__________
PNMAC GMSR ISSUER TRUST
MSR COLLATERALIZED NOTES,
SERIES 2020-SPIADVF1
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AMENDMENT NO. 2 TO AMENDED AND RESTATED SERIES 2020-SPIADVF1 INDENTURE SUPPLEMENT
This Amendment No. 2 to the Amended and Restated Series 2020-SPIADVF1 Indenture Supplement (this “Amendment”) is dated as of April 1, 2021, by and among PNMAC GMSR ISSUER TRUST, as issuer (the “Issuer”), CITIBANK, N.A. (“Citibank”), as indenture trustee (the “Indenture Trustee”), PENNYMAC LOAN SERVICES, LLC, as administrator (in such capacity, the “Administrator”) and as servicer (in such capacity, the “Servicer”), and CREDIT SUISSE FIRST BOSTON MORTGAGE CAPITAL LLC, as administrative agent (the “Administrative Agent”), and is consented to by CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH (“CSCIB”), as the sole noteholder of 100% of the Series 2020-SPIADVF1 Note (the “Noteholder”).
RECITALS
WHEREAS, the Issuer, the Indenture Trustee, the Administrator, the Servicer and the Administrative Agent are parties to that certain Third Amended and Restated Indenture, dated as of April 1, 2020 (as may be amended, restated, supplemented or otherwise modified from time to time, the “Base Indenture”), the provisions of which are incorporated, as modified by that certain Series 2020-SPIADVF1 Indenture Supplement, dated as of April 1, 2020 (as amended by Amendment No. 1, dated as of August 25, 2020, and this Amendment, and as may be further amended, restated, supplemented or otherwise modified from time to time, the “Series 2020-SPIADVF1 Indenture Supplement”, and together with the Base Indenture, the “Indenture”), among the Issuer, Citibank, the Servicer, the Administrator and the Administrative Agent. Capitalized terms used but not otherwise defined herein shall have the meanings given to them in the Indenture;
WHEREAS, the Issuer, the Indenture Trustee, the Administrator, the Servicer, the Administrative Agent and the Noteholder have agreed, subject to the terms and conditions of this Amendment, that the Series 2020-SPIADVF1 Indenture Supplement be amended to reflect certain agreed upon revisions to the terms of the Series 2020-SPIADVF1 Indenture Supplement;
WHEREAS, pursuant to Section 12.2 of the Base Indenture, the Issuer, the Indenture Trustee, the Administrator, the Servicer and the Administrative Agent, with prior notice to each Note Rating Agency and the consent of the Majority Noteholders of each Series materially and adversely affected by such amendment, by Act of said Noteholders delivered to the Issuer, the Administrator, the Servicer, the Administrative Agent and the Indenture Trustee, upon delivery of an Issuer Tax Opinion (unless the Noteholders unanimously consent to waive such opinion), for the purpose of adding any provisions to, or changing in any manner or eliminating any of the provisions of, any Indenture Supplement;
WHEREAS, pursuant to Section 12.3 of the Base Indenture, in executing or accepting the additional trusts created by any amendment or Indenture Supplement of the Base Indenture permitted by Article XII or the modifications thereby of the trusts created by the Base Indenture, the Indenture Trustee will be entitled to receive, and (subject to Section 11.1 of the Base Indenture) will be fully protected in relying upon, an Opinion of Counsel stating that the execution of such amendment or Indenture Supplement is authorized and permitted by the Base
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Indenture and that all conditions precedent thereto have been satisfied (the “Authorization Opinion”); provided, that no such Authorization Opinion shall be required in connection with any amendment or Indenture Supplement consented to by all Noteholders if all of the Noteholders have directed the Indenture Trustee in writing to execute such amendment or Indenture Supplement;
WHEREAS, pursuant to Section 1.3 of the Base Indenture, the Issuer shall deliver an Officer’s Certificate stating that all conditions precedent, if any, provided for in the Base Indenture relating to a proposed action have been complied with and that the Issuer reasonably believes that this Amendment will not have a material Adverse Effect, and shall also furnish to the Indenture Trustee an opinion of counsel stating that in the opinion of such counsel all conditions precedent to a proposed action, if any, have been complied with (unless 100% of the Noteholders have consented to the related amendment, modification or action and all of the Noteholders have directed the Indenture Trustee in writing to execute such amendment or supplement, or with respect or with respect to any other modification or action, directed the Indenture Trustee in writing to permit such modification or action without receiving such certificate or opinion);
WHEREAS, pursuant to Section 11.1 of the Trust Agreement, prior to the execution of any amendment to any Transaction Documents to which the Trust is a party, the Owner Trustee shall be entitled to receive and rely upon an Opinion of Counsel stating that the execution of such amendment is authorized or permitted by the Trust Agreement and that all conditions precedent have been met;
WHEREAS, pursuant to Section 4.1(a)(iii) of the Trust Agreement, the consent of each of the Owners (as defined in the Trust Agreement) (unless an Event of Default has occurred and is continuing), the Administrative Agent and the Series Required Noteholders of all Variable Funding Notes is required for the amendment or other change to any Transaction Document in circumstances where the consent of any Noteholder or the Administrative Agent is required (other than an amendment or supplement to the Base Indenture pursuant to Section 12.1 thereof);
WHEREAS, the Series 2020-SPIADVF1 Note (the “Series 2020-SPIADVF1 Note”), was issued to PennyMac Loan Services, LLC (“PLS”) pursuant to the terms of the Series 2020-SPIADVF1 Indenture Supplement, and was purchased by CSCIB under the Master Repurchase Agreement, dated as of April 1, 2020 (as amended by Amendment No. 1, dated as of April 24, 2020, and Amendment No. 2, dated as of August 25, 2020, and as may be further amended, restated, supplemented or otherwise modified from time to time, the “Series 2020-SPIADVF1 Repurchase Agreement”), by and among the Administrative Agent, CSCIB, as buyer, and PLS, as seller, pursuant to which PLS sold all of rights, title and interest in the Series 2020-SPIADVF1 Note to CSCIB;
WHEREAS, (i) pursuant to the Trust Agreement, PLS is the sole Owner and (ii) pursuant to the Series 2020-SPIADVF1 Indenture Supplement, with respect to the Series 2020-SPIADVF1 Note, any Action provided by the Base Indenture or the Series 2020-SPIADVF1 Indenture Supplement to be given or taken by a Noteholder shall be taken by CSCIB, as the buyer of the Series 2020-SPIADVF1 Note under the Series 2020-SPIADVF1 Repurchase Agreement;
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WHEREAS, pursuant to Section 10 of the Series 2020-SPIADVF1 Indenture Supplement, the parties hereto may enter into an amendment to supplement, amend or revise any term or provision of the Series 2020-SPIADVF1 Indenture Supplement pursuant to the terms and provisions of Section 12.2 of the Base Indenture with the consent of the Noteholder of 100% of the Series 2020-SPIADVF1 Note; and
WHEREAS, as of the date hereof, the Series 2020-SPIADVF1 Note is not rated by any Note Rating Agency.
NOW, THEREFORE, the Issuer, Indenture Trustee, the Administrator, the Servicer and the Administrative Agent hereby agree, in consideration of the amendments, agreements and other provisions herein contained and of certain other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged by the parties hereto, that the Series 2020-SPIADVF1 Indenture Supplement is hereby amended as follows:
Section 1.Amendment to the Series 2020-SPIADVF1 Indenture Supplement.
(a)Section 2 of the Series 2020-SPIADVF1 Indenture Supplement is hereby amended by deleting the definition of “Note Interest Rate” in its entirety and replacing it with the following:
“Note Interest Rate” means, with respect to any Interest Accrual Period, the sum of (a) the greater of (i) LIBOR Rate and (ii) 0.25% plus (b) the Margin.
Section 2.No Note Rating Agency. As of the date hereof and prior to the execution of this Amendment, the Series 2020-SPIADVF1 Note is not rated by any Note Rating Agency.
Section 3.Conditions to Effectiveness of this Amendment. This Amendment shall become effective (i) upon the execution and delivery of this Amendment by all parties hereto (the “Amendment Effective Date”) and (ii) upon delivery of the Issuer Tax Opinion pursuant to Section 12.2 of the Base Indenture and Opinion of Counsel pursuant to Section 11.1 of the Trust Agreement.
Section 4.Consent, Acknowledgment and Waiver. By execution of this Amendment, CSCIB, as Noteholder of 100% of the Series 2020-SPIADVF1 Note, hereby consents to this Amendment. The Noteholder certifies that it is the sole Noteholder of the Series 2020-SPIADVF1 Note with the right to instruct the Indenture Trustee. In addition, the Noteholder certifies as to itself that (i) it is authorized to execute and deliver this consent and such power has not been granted or assigned to any other person, (ii) the Person executing this Indenture Supplement on behalf of the Noteholder is duly authorized to do so, (iii) the Indenture Trustee may conclusively rely upon such consent and certifications, (iv) the execution by Noteholder of this Amendment should be considered an “Act” by Noteholders pursuant to Section 1.5 of the Base Indenture, and (v) it acknowledges and agrees that the amendments effected by this Amendment shall become effective on the Amendment Effective Date. The Noteholder further hereby instructs the Indenture Trustee to execute this Amendment, thereby waiving the requirement for the delivery of the Authorization Opinion and the Officer’s Certificate pursuant to Sections 1.3 and 12.3 of the Base Indenture.
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Section 5.Representations and Warranties. The Issuer hereby represents and warrants to the Indenture Trustee, the Administrative Agent and the Noteholder that as of the date hereof it is in compliance with all the terms and provisions set forth in the Indenture on its part to be observed or performed remains bound by the terms thereof, and that no Event of Default has occurred or is continuing, and hereby confirms and reaffirms the representations and warranties contained in Section 9.1 of the Base Indenture.
Section 6.Limited Effect. Except as expressly amended and modified by this Amendment, the Indenture shall continue to be, and shall remain, in full force and effect in accordance with its terms and the execution of this Amendment.
Section 7.No Recourse. It is expressly understood and agreed by the parties hereto that (a) this Amendment is executed and delivered by Wilmington Savings Fund Society, FSB (“WSFS”), not individually or personally but solely as Owner Trustee of the Issuer under the Trust Agreement, in the exercise of the powers and authority conferred and vested in it, (b) each of the representations, warranties, undertakings and agreements herein made on the part of the Issuer is made and intended not as personal representations, warranties, undertakings and agreements by WSFS but is made and intended for the purpose of binding only the Issuer, (c) nothing herein contained shall be construed as creating any liability on WSFS, individually or personally, to perform any covenant either expressed or implied contained herein, all such liability, if any, being expressly waived by the parties hereto and by any Person claiming by, through or under the parties hereto, (d) WSFS has made no investigation as to the accuracy or completeness of any representations or warranties made by the Issuer in this Amendment and (e) under no circumstances shall WSFS be personally liable for the payment of any indebtedness or expenses of the Issuer or be liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaken by the Issuer under this Amendment or any other related documents.
Section 8.Successors and Assigns. This Amendment shall be binding upon the parties hereto and their respective successors and assigns.
Section 9.GOVERNING LAW. THIS AMENDMENT AND ANY CLAIM, CONTROVERSY OR DISPUTE ARISING UNDER OR RELATED TO OR IN CONNECTION WITH THIS AMENDMENT, THE RELATIONSHIP OF THE PARTIES HERETO, AND/OR THE INTERPRETATION AND ENFORCEMENT OF THE RIGHTS AND DUTIES OF THE PARTIES HERETO WILL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO THE CONFLICT OF LAW PRINCIPLES THEREOF OTHER THAN SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW) AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
Section 10.Counterparts. This Amendment may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all of such counterparts shall together constitute but one and the same instrument. The parties agree that this Amendment may be accepted, executed or agreed to through the use of an electronic signature in accordance with the Electronic Signatures in Global and National Commerce Act, 15
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U.S.C. § 7001 et seq, Official Text of the Uniform Electronic Transactions Act as approved by the National Conference of Commissioners on Uniform State Laws at its Annual Conference on July 29, 1999 and any applicable state law. Any document accepted, executed or agreed to in conformity with such laws will be binding on all parties hereto to the same extent as if it were physically executed and each party hereby consents to the use of any secure third party electronic signature capture service with appropriate document access tracking, electronic signature tracking and document retention.
Section 11.Entire Agreement. The Indenture, as amended by this Amendment, constitutes the entire agreement among the parties hereto with respect to the subject matter hereof, and fully supersedes any prior or contemporaneous agreements relating to such subject matter.
Section 12.Recitals. The recitals and statements contained in this Amendment shall be taken as the statements of the Issuer, and the Indenture Trustee does not assume any responsibility for their correctness. The Indenture Trustee does not make any representation as to the validity or sufficiency of this Amendment (except as may be made with respect to the validity of its own obligations hereunder.) In entering into this Amendment, the Indenture Trustee shall be entitled to the benefit of every provision of the Indenture relating to the conduct of, or affecting the liability of or affording protection to it.
[Signature Pages Follow]
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IN WITNESS WHEREOF, the undersigned have caused this Amendment to be duly executed as of the date first above written.
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PNMAC GMSR ISSUER TRUST, as Issuer |
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By: Wilmington Savings Fund Society, FSB,
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By: |
/s/ Mary Emily Pagano |
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Name: |
Mary Emily Pagano |
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Title: |
Assistant Vice President |
[PNMAC GMSR ISSUER TRUST – Amendment No. 2 to Series 2020-SPIADVF1 Indenture Supplement]
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PENNYMAC LOAN SERVICES, LLC, as Servicer, as Administrator and sole Owner |
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By: |
/s/ Pamela Marsh |
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Name: |
Pamela Marsh |
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Title: |
Senior Managing Director and Treasurer |
[PNMAC GMSR ISSUER TRUST – Amendment No. 2 to Series 2020-SPIADVF1 Indenture Supplement]
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CITIBANK, N.A., as Indenture Trustee, and not in its individual capacity |
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By: |
/s/ Valerie Delgado |
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Name: |
Valerie Delgado |
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Title: |
Senior Trust Officer |
[PNMAC GMSR ISSUER TRUST – Amendment No. 2 to Series 2020-SPIADVF1 Indenture Supplement]
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CREDIT SUISSE FIRST BOSTON MORTGAGE CAPITAL LLC, as Administrative Agent |
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By: |
/s/ Dominic Obaditch |
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Name: |
Dominic Obaditch |
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Title: |
Vice President |
[PNMAC GMSR ISSUER TRUST – Amendment No. 2 to Series 2020-SPIADVF1 Indenture Supplement]
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CONSENTED TO BY: |
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CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH, as Noteholder of 100% of the Series 2020-SPIADVF1 Note |
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By: |
/s/ Dominic Obaditch |
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Name: |
Dominic Obaditch |
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Title: |
Authorized Signatory |
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By: |
/s/ Margaret Dellafera |
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Name: |
Margaret Dellafera |
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Title: |
Authorized Signatory |
[PNMAC GMSR ISSUER TRUST – Amendment No. 2 to Series 2020-SPIADVF1 Indenture Supplement]
Exhibit 10.7
EXECUTION VERSION
PNMAC GMSR ISSUER TRUST,
as Issuer
and
CITIBANK, N.A.,
as Indenture Trustee, Calculation Agent, Paying Agent and Securities Intermediary
and
PENNYMAC LOAN SERVICES, LLC,
as Administrator and as Servicer
and
CREDIT SUISSE FIRST BOSTON MORTGAGE CAPITAL LLC,
as Administrative Agent
and consented to by
CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH,
as Noteholder
AMENDMENT NO. 4
Dated as of April 1, 2021
to the
AMENDED AND RESTATED SERIES 2016-MSRVF1 INDENTURE SUPPLEMENT
Dated as of February 28, 2018
PNMAC GMSR ISSUER TRUST
MSR COLLATERALIZED NOTES,
SERIES 2016-MSRVF1
AMENDMENT NO. 4 TO AMENDED AND RESTATED SERIES 2016-MSRVF1 INDENTURE SUPPLEMENT
This Amendment No. 4 to the Amended and Restated Series 2016-MSRVF1 Indenture Supplement (this “Amendment”) is dated as of April 1, 2021, by and among PNMAC GMSR ISSUER TRUST, as issuer (the “Issuer”), CITIBANK, N.A. (“Citibank”), as indenture trustee (the “Indenture Trustee”), PENNYMAC LOAN SERVICES, LLC (“PLS”), as administrator (in such capacity, the “Administrator”) and as servicer (in such capacity, the “Servicer”), and CREDIT SUISSE FIRST BOSTON MORTGAGE CAPITAL LLC, as administrative agent (the “Administrative Agent”), and is consented to by CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH (“CSCIB”), as the sole noteholder of 100% of the Series 2016-MSRVF1 Note (the “Noteholder”).
RECITALS
WHEREAS, the Issuer, the Indenture Trustee, the Administrator, the Servicer and the Administrative Agent are parties to that certain Third Amended and Restated Indenture, dated as of April 1, 2020 (as may be amended, restated, supplemented or otherwise modified from time to time, the “Base Indenture”), the provisions of which are incorporated, as modified by that certain Amended and Restated Series 2016-MSRVF1 Indenture Supplement, dated as of February 28, 2018 (as amended by Amendment No. 1, dated as of August 10, 2018, Amendment No. 2, dated as of April 24, 2020, Amendment No. 3, dated as of August 25, 2020, and this Amendment, and as may be further amended, restated, supplemented or otherwise modified from time to time, the “Series 2016-MSRVF1 Indenture Supplement”, and together with the Base Indenture, the “Indenture”), among the Issuer, Citibank, the Servicer, the Administrator and the Administrative Agent. Capitalized terms used but not otherwise defined herein shall have the meanings given to them in the Indenture;
WHEREAS, the Issuer, the Indenture Trustee, the Administrator, the Servicer, the Administrative Agent and the Noteholder have agreed, subject to the terms and conditions of this Amendment, that the Series 2016-MSRVF1 Indenture Supplement be amended to reflect certain agreed upon revisions to the terms of the Series 2016-MSRVF1 Indenture Supplement;
WHEREAS, pursuant to Section 12.2 of the Base Indenture, the Issuer, the Indenture Trustee, the Administrator, the Servicer and the Administrative Agent, with prior notice to each Note Rating Agency and the consent of the Majority Noteholders of each Series materially and adversely affected by such amendment, by Act of said Noteholders delivered to the Issuer, the Administrator, the Servicer, the Administrative Agent and the Indenture Trustee, upon delivery of an Issuer Tax Opinion (unless the Noteholders unanimously consent to waive such opinion), for the purpose of adding any provisions to, or changing in any manner or eliminating any of the provisions of, any Indenture Supplement;
WHEREAS, pursuant to Section 12.3 of the Base Indenture, in executing or accepting the additional trusts created by any amendment or Indenture Supplement of the Base Indenture permitted by Article XII or the modifications thereby of the trusts created by the Base Indenture, the Indenture Trustee will be entitled to receive, and (subject to Section 11.1 of the Base Indenture) will be fully protected in relying upon, an Opinion of Counsel stating that the
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execution of such amendment or Indenture Supplement is authorized and permitted by the Base Indenture and that all conditions precedent thereto have been satisfied (the “Authorization Opinion”); provided, that no such Authorization Opinion shall be required in connection with any amendment or Indenture Supplement consented to by all Noteholders if all of the Noteholders have directed the Indenture Trustee in writing to execute such amendment or Indenture Supplement;
WHEREAS, pursuant to Section 1.3 of the Base Indenture, the Issuer shall deliver an Officer’s Certificate stating that all conditions precedent, if any, provided for in the Base Indenture relating to a proposed action have been complied with and that the Issuer reasonably believes that this Amendment will not have a material Adverse Effect, and shall also furnish to the Indenture Trustee an opinion of counsel stating that in the opinion of such counsel all conditions precedent to a proposed action, if any, have been complied with (unless 100% of the Noteholders have consented to the related amendment, modification or action and all of the Noteholders have directed the Indenture Trustee in writing to execute such amendment or supplement, or with respect or with respect to any other modification or action, directed the Indenture Trustee in writing to permit such modification or action without receiving such certificate or opinion);
WHEREAS, pursuant to Section 11.1 of the Trust Agreement, prior to the execution of any amendment to any Transaction Documents to which the Trust is a party, the Owner Trustee shall be entitled to receive and rely upon an Opinion of Counsel stating that the execution of such amendment is authorized or permitted by the Trust Agreement and that all conditions precedent have been met;
WHEREAS, pursuant to Section 4.1(a)(iii) of the Trust Agreement, the consent of each of the Owners (as defined in the Trust Agreement) (unless an Event of Default has occurred and is continuing), the Administrative Agent and the Series Required Noteholders of all Variable Funding Notes is required for the amendment or other change to any Transaction Document in circumstances where the consent of any Noteholder or the Administrative Agent is required (other than an amendment or supplement to the Base Indenture pursuant to Section 12.1 thereof);
WHEREAS, the Series 2016-MSRVF1 Note (the “Series 2016-MSRVF1 Note”), was issued to PennyMac Loan Services, LLC (“PLS”) pursuant to the terms of the Series 2016-MSRVF1 Indenture Supplement, and was purchased by CSCIB under the Master Repurchase Agreement, dated as of December 19, 2016 (as amended by Amendment No. 1, dated as of February 28, 2019, Amendment No. 2, dated as of April 1, 2020, Amendment No. 3, dated as of April 24, 2020, and Amendment No. 4, dated as of August 25, 2020, and as may be further amended, restated, supplemented or otherwise modified from time to time, the “Series 2016-MSRVF1 Repurchase Agreement”), by and among the Administrative Agent, CSCIB, as buyer, and PLS, as seller, pursuant to which PLS sold all of rights, title and interest in the Series 2016-MSRVF1 Note to CSCIB;
WHEREAS, (i) pursuant to the Trust Agreement, PLS is the sole Owner and (ii) pursuant to the Series 2016-MSRVF1 Indenture Supplement, with respect to the Series 2016-MSRVF1 Note, any Action provided by the Base Indenture or the Series 2016-MSRVF1 Indenture Supplement to be given or taken by a Noteholder shall be taken by CSCIB, as the
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buyer of the Series 2016-MSRVF1 Note under the Series 2016-MSRVF1 Repurchase Agreement;
WHEREAS, pursuant to Section 10 of the Series 2016-MSRVF1 Indenture Supplement, the parties hereto may enter into an amendment to supplement, amend or revise any term or provision of the Series 2016-MSRVF1 Indenture Supplement pursuant to the terms and provisions of Section 12.2 of the Base Indenture with the consent of the Noteholder of 100% of the Series 2016-MSRVF1 Note; and
WHEREAS, as of the date hereof, the Series 2016-MSRVF1 Note is not rated by any Note Rating Agency.
NOW, THEREFORE, the Issuer, Indenture Trustee, the Administrator, the Servicer and the Administrative Agent hereby agree, in consideration of the amendments, agreements and other provisions herein contained and of certain other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged by the parties hereto, that the Series 2016-MSRVF1 Indenture Supplement is hereby amended as follows:
Section 1.Amendment to the Series 2016-MSRVF1 Indenture Supplement.
(a)Section 2 of the Series 2016-MSRVF1 Indenture Supplement is hereby amended by deleting the definition of “Note Interest Rate” in its entirety and replacing it with the following:
“Note Interest Rate” means, with respect to any Interest Accrual Period, the sum of (a) the greater of (i) LIBOR Rate and (ii) 0.25% plus (b) the Margin.
Section 2.No Note Rating Agency. As of the date hereof and prior to the execution of this Amendment, the Series 2016-MSRVF1 Note is not rated by any Note Rating Agency.
Section 3.Conditions to Effectiveness of this Amendment. This Amendment shall become effective (i) upon the execution and delivery of this Amendment by all parties hereto (the “Amendment Effective Date”) and (ii) upon delivery of the Issuer Tax Opinion pursuant to Section 12.2 of the Base Indenture and Opinion of Counsel pursuant to Section 11.1 of the Trust Agreement.
Section 4.Consent, Acknowledgment and Waiver. By execution of this Amendment, CSCIB, as Noteholder of 100% of the Series 2016-MSRVF1 Note, hereby consents to this Amendment. The Noteholder certifies that it is the sole Noteholder of the Series 2016-MSRVF1 Note with the right to instruct the Indenture Trustee. In addition, the Noteholder certifies as to itself that (i) it is authorized to execute and deliver this consent and such power has not been granted or assigned to any other person, (ii) the Person executing this Indenture Supplement on behalf of the Noteholder is duly authorized to do so, (iii) the Indenture Trustee may conclusively rely upon such consent and certifications, (iv) the execution by Noteholder of this Amendment should be considered an “Act” by Noteholders pursuant to Section 1.5 of the Base Indenture, and (v) it acknowledges and agrees that the amendments effected by this Amendment shall become effective on the Amendment Effective Date. The Noteholder further hereby instructs the Indenture Trustee to execute this Amendment, thereby waiving the
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requirement for the delivery of the Authorization Opinion and the Officer’s Certificate pursuant to Sections 1.3 and 12.3 of the Base Indenture.
Section 5.Representations and Warranties. The Issuer hereby represents and warrants to the Indenture Trustee, the Administrative Agent and the Noteholder that as of the date hereof it is in compliance with all the terms and provisions set forth in the Indenture on its part to be observed or performed remains bound by the terms thereof, and that no Event of Default has occurred or is continuing, and hereby confirms and reaffirms the representations and warranties contained in Section 9.1 of the Base Indenture.
Section 6.Limited Effect. Except as expressly amended and modified by this Amendment, the Indenture shall continue to be, and shall remain, in full force and effect in accordance with its terms and the execution of this Amendment.
Section 7.No Recourse. It is expressly understood and agreed by the parties hereto that (a) this Amendment is executed and delivered by Wilmington Savings Fund Society, FSB (“WSFS”), not individually or personally but solely as Owner Trustee of the Issuer under the Trust Agreement, in the exercise of the powers and authority conferred and vested in it, (b) each of the representations, warranties, undertakings and agreements herein made on the part of the Issuer is made and intended not as personal representations, warranties, undertakings and agreements by WSFS but is made and intended for the purpose of binding only the Issuer, (c) nothing herein contained shall be construed as creating any liability on WSFS, individually or personally, to perform any covenant either expressed or implied contained herein, all such liability, if any, being expressly waived by the parties hereto and by any Person claiming by, through or under the parties hereto, (d) WSFS has made no investigation as to the accuracy or completeness of any representations or warranties made by the Issuer in this Amendment and (e) under no circumstances shall WSFS be personally liable for the payment of any indebtedness or expenses of the Issuer or be liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaken by the Issuer under this Amendment or any other related documents.
Section 8.Successors and Assigns. This Amendment shall be binding upon the parties hereto and their respective successors and assigns.
Section 9.GOVERNING LAW. THIS AMENDMENT AND ANY CLAIM, CONTROVERSY OR DISPUTE ARISING UNDER OR RELATED TO OR IN CONNECTION WITH THIS AMENDMENT, THE RELATIONSHIP OF THE PARTIES HERETO, AND/OR THE INTERPRETATION AND ENFORCEMENT OF THE RIGHTS AND DUTIES OF THE PARTIES HERETO WILL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO THE CONFLICT OF LAW PRINCIPLES THEREOF OTHER THAN SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW) AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
Section 10.Counterparts. This Amendment may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all of such
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counterparts shall together constitute but one and the same instrument. The parties agree that this Amendment may be accepted, executed or agreed to through the use of an electronic signature in accordance with the Electronic Signatures in Global and National Commerce Act, 15 U.S.C. § 7001 et seq, Official Text of the Uniform Electronic Transactions Act as approved by the National Conference of Commissioners on Uniform State Laws at its Annual Conference on July 29, 1999 and any applicable state law. Any document accepted, executed or agreed to in conformity with such laws will be binding on all parties hereto to the same extent as if it were physically executed and each party hereby consents to the use of any secure third party electronic signature capture service with appropriate document access tracking, electronic signature tracking and document retention.
Section 11.Entire Agreement. The Indenture, as amended by this Amendment, constitutes the entire agreement among the parties hereto with respect to the subject matter hereof, and fully supersedes any prior or contemporaneous agreements relating to such subject matter.
Section 12.Recitals. The recitals and statements contained in this Amendment shall be taken as the statements of the Issuer, and the Indenture Trustee does not assume any responsibility for their correctness. The Indenture Trustee does not make any representation as to the validity or sufficiency of this Amendment (except as may be made with respect to the validity of its own obligations hereunder.) In entering into this Amendment, the Indenture Trustee shall be entitled to the benefit of every provision of the Indenture relating to the conduct of, or affecting the liability of or affording protection to it.
[Signature Pages Follow]
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IN WITNESS WHEREOF, the undersigned have caused this Amendment to be duly executed as of the date first above written.
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PNMAC GMSR ISSUER TRUST, as Issuer |
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By: |
Wilmington Savings Fund Society, FSB, |
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not in its individual capacity but solely as |
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Owner Trustee |
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By: |
/s/ Mary Emily Pagano |
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Name: |
Mary Emily Pagano |
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Title: |
Assistant Vice President |
[PNMAC GMSR ISSUER TRUST – Amendment No. 4 to A&R Series 2016-MSRVF1 Indenture Supplement]
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PENNYMAC LOAN SERVICES, LLC, |
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as Servicer, as Administrator and sole Owner |
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By: |
/s/ Pamela Marsh |
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Name: |
Pamela Marsh |
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Title: |
Senior Managing Director and Treasurer |
[PNMAC GMSR ISSUER TRUST – Amendment No. 4 to A&R Series 2016-MSRVF1 Indenture Supplement]
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CITIBANK, N.A., as Indenture Trustee, and |
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not in its individual capacity |
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By: |
/s/ Valerie Delgado |
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Name: |
Valerie Delgado |
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Title: |
Senior Trust Officer |
[PNMAC GMSR ISSUER TRUST – Amendment No. 4 to A&R Series 2016-MSRVF1 Indenture Supplement]
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CREDIT SUISSE FIRST BOSTON |
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MORTGAGE CAPITAL LLC, as |
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Administrative Agent |
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By: |
/s/ Dominic Obaditch |
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Name: |
Dominic Obaditch |
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Title: |
Vice President |
[PNMAC GMSR ISSUER TRUST – Amendment No. 4 to A&R Series 2016-MSRVF1 Indenture Supplement]
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CONSENTED TO BY: |
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CREDIT SUISSE AG, CAYMAN ISLANDS |
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BRANCH, as Noteholder of 100% of the Series |
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2016-MSRVF1 Note |
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By: |
/s/ Dominic Obaditch |
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Name: |
Dominic Obaditch |
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Title: |
Authorized Signatory |
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By: |
/s/ Margaret Dellafera |
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Name: |
Margaret Dellafera |
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Title: |
Authorized Signatory |
[PNMAC GMSR ISSUER TRUST – Amendment No. 4 to A&R Series 2016-MSRVF1 Indenture Supplement]
Exhibit 10.8
PENNYMAC FINANCIAL SERVICES, INC.
2013 EQUITY INCENTIVE PLAN
STOCK OPTION AWARD AGREEMENT
THIS AGREEMENT is dated as of February 25, 2021, between PennyMac Financial Services, Inc., a corporation organized under the laws of the State of Delaware (the “Company”), and the individual identified in Section 1 below (the “Recipient”).
1.Grant of Option. Pursuant and subject to the Company’s 2013 Equity Incentive Plan (as the same may be amended from time to time, the “Plan”), the Company grants to you, the Recipient identified in the table below, an option (this “Option”) to purchase from the Company all or any part of a total of the number of shares identified in the table below (the “Optioned Shares”) of Common Stock, par value $0.0001 per share, in the Company (the “Stock”), at the exercise price per share set out in the table below.
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Recipient |
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Number of Optioned Shares |
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Exercise Price Per Share |
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$58.85 |
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Grant Date |
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February 25, 2021 |
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Vesting Commencement Date |
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February 25, 2021 |
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Expiration Date |
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February 24, 2031 |
2.Character of Option. This Option is not intended to be treated as an “incentive stock option” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended.
3.Expiration of Option. This Option shall expire at 5:00 p.m. PDT on the Expiration Date or, if earlier, the earliest of the dates specified in whichever of the following applies:
(a)If the termination of your employment or other association is on account of your death or Disability (as defined below in Section 4), the first anniversary of the date your employment ends.
(b)If the termination of your employment or other association is due to any reason other than death, Disability, Retirement (as defined below in Section 4) or termination for cause, three (3) months after your employment or other association ends.
(c)If the Company terminates your employment or other association for cause, or at the termination of your employment or other association the Company had grounds to terminate your employment or other association for cause (whether then or thereafter determined), immediately upon the termination of your employment or other association.
4.Vesting of Option; Retirement, Death and Disability.
(a)Until this Option expires, you may exercise it as to the number of Optioned Shares which have vested ( “Vested Shares”), in full or in part, at any time on or after the applicable exercise date or dates identified in the remainder of this Section. However, during any period that this Option remains outstanding after your employment or other association with the Company and its Affiliates ends other than by reason of Retirement, you may exercise it only as to Optioned Shares which are Vested Shares immediately prior to the end of your employment or other association. The procedure for exercising this Option is described in Section 7.1(e) of the Plan.
(b)One-third (1/3) of the Optioned Shares shall become Vested Shares on each of the first, second, and third anniversaries of the Vesting Commencement Date specified above, with any fractions rounded down except on the final installment.
(c)If your employment or other association with the Company is terminated due to Retirement (as defined below) and the Company does not have grounds to terminate your employment or other association for cause, and provided you have executed and continue to comply with the terms of an agreement not to provide services as an employee, director, consultant, agent, or otherwise, to any of the Company’s direct competitors for a period of two (2) years from the date of your Retirement Date (the “Retirement Date”), then the Optioned Shares shall continue to become Vested Shares after the Retirement Date in accordance with the original terms of this Option; provided, however, that (i) if the Retirement Date occurs during the nine-month period immediately following the Grant Date, then this Option shall be forfeited; and (ii) if the Retirement Date occurs during the three-month period prior to the first anniversary of the Grant Date, then one-third of the Optioned Shares shall vest on the first anniversary of the Grant Date (pro-rated based on (A) the number of full months of the Recipient’s employment from the Grant Date through the Retirement Date divided by (B) twelve (12)) and the remaining Optioned Shares shall be forfeited. “Retirement” shall mean voluntary termination of employment after the age of sixty (60) with at least ten (10) years of combined service to the Company and/or any of its subsidiaries; provided, however, that if you elect to terminate your employment in connection with a Retirement, you must provide the Company with a minimum of (x) six (6) months prior written notice of such Retirement if your title is at the senior vice president level and above, or (y) three (3) months prior written notice of such Retirement if your title is at the first vice president level and below.
(d)Notwithstanding anything to the contrary in Section 3 above, if your employment or other association with the Company is terminated due to any other reason, including death or Disability, then this Option shall be forfeited as to any unvested Optioned Shares as of the date of such termination. “Disability” shall mean the inability to engage in any substantial gainful occupation to which the relevant individual is suited by education, training or experience, by reason of any medically determinable physical or mental impairment, which condition can be expected to result in death or otherwise continue for a period of not less than twelve (12) consecutive months.
5.Transfer of Option. You may not transfer this Option except by will or the laws of descent and distribution or pursuant to Section 9, and, during your lifetime, only you may exercise this Option.
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6.Community Property. To the extent the you reside in a jurisdiction in which community property rules apply, without prejudice to the actual rights of the spouses as between each other, for all purposes of this Agreement, you shall be treated as agent and attorney-in-fact for that interest held or claimed by your spouse with respect to this Option and any Optioned Shares and the parties hereto shall act in all matters as if the Recipient was the sole owner of this Option and (following exercise) any such Optioned Shares. This appointment is coupled with an interest and is irrevocable.
7.Incorporation of Plan Terms. This Option is granted subject to all of the applicable terms and provisions of the Plan, including but not limited to the limitations on the Company’s obligation to deliver Optioned Shares upon exercise set forth in Section 10 (Settlement of Awards).
8.Miscellaneous. This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware, without regard to the conflict of laws principles thereof and shall be binding upon and inure to the benefit of any successor or assign of the Company and any executor, administrator, trustee, guardian, or other legal representative of you. Capitalized terms used but not defined herein shall have the meaning assigned under the Plan. The parties agree to execute such further instruments and to take such action as may reasonably be necessary to carry out the intent of this Agreement. This Agreement, including the Plan, constitute the entire agreement of the parties with respect to the subject matter hereof. This Agreement may be executed in any number of counterparts, each of which shall be an original and all of which, taken together, shall constitute one and the same instrument. In making proof of this Agreement it shall not be necessary to produce or account for more than one such counterpart. You acknowledge that you have reviewed and understand the Plan and this Agreement in their entirety, and have had an opportunity to obtain the advice of counsel prior to executing this Agreement. You hereby agree to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Agreement.
9.Designation of Beneficiary. The Recipient may designate one or more beneficiaries with respect to any Options under this Agreement, provided that such designation is made on a form provided by the Company (attached as Exhibit A) and such beneficiaries are family members of the Recipient or a trust established by the Recipentfor estate planning purposes.
10.Tax Consequences. The Company makes no representation or warranty as to the tax treatment to you of your receipt or exercise of this Option or upon your sale or other disposition of the Optioned Shares. You should rely on your own tax advisors for such advice.
IN WITNESS WHEREOF, the parties have executed this Agreement as a sealed instrument as of the date first above written.
PENNYMAC FINANCIAL SERVICES, INC.
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EXHIBIT A
PENNYMAC FINANCIAL SERVICES, INC. 2013 EQUITY INCENTIVE PLAN
BENEFICIARY DESIGNATION
In accordance with the terms and conditions of the PennyMac Financial Services, Inc. 2013 Equity Incentive Plan (the "Plan"), I hereby designate the following as my primary beneficiary(ies) to receive any payments or distributions under the Plan:
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Name and Address
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Social Sec. #
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Relationship |
Date of Birth |
Percentage |
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In the event the above-named primary beneficiary(ies) predecease(s) me, I designate the following as contingent beneficiary(ies):
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Name and Address
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Social Sec. #
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Relationship |
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I expressly revoke all prior designations of beneficiary(ies), reserve the right to change my beneficiary(ies) and agree the rights of beneficiary(ies) shall be subject to the terms of the Plan. In the event there is no beneficiary living at the time of my death, I understand the amounts payable under the Plan will be paid to my estate.
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Date: |
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(Signature) |
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(Print or type name) |
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4
Exhibit 31.1
CERTIFICATION
I, David A. Spector, certify that:
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I have reviewed this Quarterly Report on Form 10-Q of PennyMac Financial Services, Inc.; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) for the registrant and have: |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions): |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: May 6, 2021 |
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By: |
/s/ David A. Spector |
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David A. Spector |
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Chairman and Chief Executive Officer (Principal Executive Officer) |
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Exhibit 31.2
CERTIFICATION
I, Daniel S. Perotti, certify that:
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I have reviewed this Quarterly Report on Form 10-Q of PennyMac Financial Services, Inc.; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) registrant and have: |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions): |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: May 6, 2021 |
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By: |
/s/ Daniel S. Perotti |
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Daniel S. Perotti |
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Senior Managing Director and Chief Financial Officer (Principal Financial Officer) |
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Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of PennyMac Financial Services, Inc. (the “Company”) for the quarter ended March 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David A. Spector, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
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The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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Date: May 6, 2021 |
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By: |
/s/ David A. Spector |
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David A. Spector |
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Chairman and Chief Executive Officer (Principal Executive Officer) |
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A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to PennyMac Financial Services, Inc. and will be retained by PennyMac Financial Services, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of PennyMac Financial Services, Inc. (the “Company”) for the quarter ended March 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Daniel S. Perotti, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
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The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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Date: May 6, 2021 |
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By: |
/s/ Daniel S. Perotti |
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Daniel S. Perotti |
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Senior Managing Director and Chief Financial Officer (Principal Financial Officer) |
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A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to PennyMac Financial Services, Inc. and will be retained by PennyMac Financial Services, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.