Financial Services, Inc.
2 0 1 8
A N N U A L R E P O R T
PennyMac Financial Services, Inc. (NYSE: PFSI) is a specialty financial services firm with a
comprehensive mortgage platform and integrated business focused on the production and
servicing of U.S. mortgage loans and the management of investments related to the U.S.
mortgage market.
PennyMac was founded in 2008 by members of our executive leadership team and two
strategic partners, BlackRock Mortgage Ventures, LLC and HC Partners, LLC. Since our founding,
we have pursued opportunities to acquire, originate and manage mortgage loans and
mortgage-related assets and established what we believe to be a best-in-class mortgage
platform.
We manage PennyMac Mortgage Investment Trust (NYSE: PMT), a publicly-traded mortgage
real estate investment trust (REIT). PMT is a tax-efficient vehicle for investing in mortgage-
related assets and has a successful track record of deploying capital in mortgage-related
investments.
Dear Fellow Stockholders,
We marked the tenth anniversary of PennyMac Financial in 2018 with solid performance that
resulted from our resilient and comprehensive mortgage platform and our ability to
successfully address a challenging U.S. mortgage market. The market environment in 2018 was
characterized by higher rates, heightened competition, and lower total mortgage origination
volumes. We produced net revenue of $985 million, up 3 percent from the prior year while
pretax income of $268 million declined from $336 million a year ago. Diluted earnings per
share were $2.59 in 2018, compared to $4.03 per share in the prior year, both of which
included a benefit of $0.20 per share and $1.79 per share, respectively, resulting from the
remeasurement of tax-related items. Key to these strong financial results was the growth of
our servicing portfolio to nearly $300 billion in unpaid principal balance, or UPB, which
generated pretax earnings of $172 million, up from $59 million in 2017 and substantially
offsetting a decline in our production segment pretax earnings which totaled $87 million this
year. Our pretax return on shareholders’ equity was 15 percent in 2018 and notably, our book
value per share increased to $21.34, reflecting a compounded annual growth rate of 22 percent
over the five years since our initial public offering in 2013.
Underpinning our strong performance is our high-quality balance sheet, broad and diverse
sources of liquidity to finance our daily operations and low reliance on debt relative to our
competitors. Last year we told you about a securitization structure we put in place to provide
financing for PennyMac Financial’s largest asset, Ginnie Mae mortgage servicing rights, or
MSRs. This year we successfully refinanced the outstanding secured notes from this vehicle,
significantly lowering our borrowing costs and raising incremental new capital, while extending
the average maturity. Our platform is strengthened by our well-developed and sophisticated
risk management structure that incorporates extensive market expertise and technology to
identify and monitor risks across the enterprise. Moreover, our strong performance is
supported by our more than 3,000 employees who embrace our core culture of being
Accountable, Reliable and Ethical in all that we do.
In November 2018, we successfully completed a corporate reorganization transaction that
converted all equity ownership of the Company into a single class of publicly-traded common
stock, which continues to trade on the New York Stock Exchange under the ticker “PFSI.” This
transaction eliminated the allocation of income and equity between different classes of
stockholders, and now all equity holders are represented by a single class of common stock.
The result greatly simplifies the reporting of our financial results and facilitates better
understanding of the Company’s performance by investors and analysts, with earnings and
book value per share calculations more comparable to our peers. With the completion of this
transaction, PFSI’s market capitalization increased from approximately $500 million to $1.5
billion, providing improved transparency into the strength of our capital foundation. We also
believe that the reorganization may lead to expanded eligibility for inclusion in certain broader
stock market indices over time. Taken as a whole, these factors have the potential to expand
our investor universe and demand for the Company’s stock.
PennyMac Financial produced new residential mortgage loans totaling $68 billion in UPB,
essentially unchanged from the prior year. Our ability to profitably maintain production
volumes while the mortgage market as a whole declined 10 percent from the prior year is a
remarkable achievement. Driving these results was continued focus on our correspondent
seller network, ongoing emphasis on purchase-money loans which represented over 80 percent
of our correspondent production activity for the year and an increase in conventional
conforming mortgage production enabled by our unique execution capabilities and partnership
with PennyMac Mortgage Investment Trust (NYSE: PMT), the residential mortgage REIT that we
manage. We also introduced our broker-direct lending channel, providing us with access to all
significant production channels in the U.S. mortgage origination market. Our servicing portfolio
reached 1.5 million customers and totaled $299 billion in UPB at December 31, 2018, up 22
percent from the same period a year ago, driven by our mortgage production activities in
addition to $18 billion in UPB of bulk MSR acquisitions from third parties. We ended 2018 as
the third largest producer of residential mortgages in the U.S. during the fourth quarter and we
remained the 8th largest servicer of residential mortgages in the U.S. according to Inside
Mortgage Finance.
2018 also marked a successful year for our Investment Management segment, as PMT’s strong
performance placed it among the top performing residential mortgage REIT stocks in 2018.
Through the operational capabilities of PennyMac Financial, PMT invests in attractive credit risk
transfer, or CRT, and MSR investments sourced from its conventional conforming loan
production. PMT’s ability to generate its own investments makes it truly unique among
mortgage REITs, and the synergistic partnership between the two companies provides each
with distinct competitive advantages by uniting the industry-leading operating platform of
PennyMac Financial with PMT’s ability to hold attractive residential mortgage investments as a
tax-efficient, permanent capital vehicle. In light of PMT’s outlook for strong growth of its CRT
and MSR investments during 2019 and beyond, PMT raised approximately $145 million in gross
proceeds from an issuance of 7 million of its common shares in an underwritten equity offering
in February this year.
To further our success and evolve our business activities as consumer demand for mortgage
financing evolves, we are pursuing initiatives across each of our production channels to develop
new products. Earlier this year, we launched a new home equity line of credit, or HELOC,
product in our consumer direct lending channel to offer customers in our servicing portfolio a
flexible way to tap into the equity in their home for a variety of expenditures or debt
consolidation. We also launched a prime non-qualified mortgage, or non-QM, loan product in
the correspondent channel that utilizes a technology-based underwriting solution. The non-
QM market has nearly doubled each of the last two years and is expected to continue its robust
growth trajectory for the foreseeable future. These products expand our loan offerings and
allow us to serve a greater number of consumers in the marketplace, while also providing
opportunities for PMT to invest in the credit risk tranches of future securitizations.
Critical to the long-term success and competitive advantage of PennyMac Financial is our
continued investment in the development and utilization of technology. Throughout the
Company’s history, we have implemented technology to improve and streamline operations
across the enterprise. Our strategy involves a combination of systems developed in-house
alongside third-party technology with an emphasis on deploying innovative mortgage banking
systems that drive cost savings, realize scale efficiencies and facilitate new business
opportunities. Some examples from 2018 include ongoing enhancements to our consumer
direct portal and the launch of our broker direct portal called POWER. We continued to
develop automated “back office” workflow technologies to drive sustainable cost advantages,
and we also continued to deploy servicing system enhancement modules as part of our multi-
year plan to capture greater economies of scale and efficiencies from our servicing system
platform. We expect the servicing system enhancement project to drive meaningful long-term
cost savings. We are also working to strengthen the already robust capabilities of our
enterprise risk management function through the development of a comprehensive risk
intelligence system that will enhance risk monitoring across the organization and strengthen
our ability to identify and mitigate risks as they emerge.
As we enter 2019, we are well-positioned to capitalize on new opportunities in this ever-
changing U.S. mortgage origination market and already this year have completed the
acquisition of new servicing portfolios totaling $17 billion in UPB. We are pleased with our
results in 2018, and we remain optimistic about our future. Our employees and our leadership
team remain committed to profitably managing our growth and maintaining the respected
leadership position we have built over the past 11 years as an organization. We thank you, our
customers and stakeholders, for your continued support and confidence in PennyMac Financial.
Sincerely,
Stanford L. Kurland
Executive Chairman
April 17, 2019
David A. Spector
President and Chief Executive Officer
April 17, 2019
STOCK PERFORMANCE GRAPH
The following graph and table describe certain information comparing the cumulative total
return on our Class A common stock to the cumulative total return of the S&P 500 Index and
the Russell 2000 Index. The comparison period is from May 8, 2013, the day our Class A
common stock commenced trading on the NYSE, to December 31, 2018, and the calculation
assumes reinvestment of any dividends. The graph and table illustrate the value of a
hypothetical investment in our Class A common stock and the two other indices on May 8,
2013.
Source: S&P Global Market Intelligence
The information in the performance graph and table has been obtained from sources believed
to be reliable, but neither its accuracy nor its completeness can be guaranteed. The historical
information set forth above is not necessarily indicative of future performance. Accordingly, we
do not make or endorse any predictions as to future share performance. The share
performance graph and table shall not be deemed, under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, to be (i) “soliciting material” or
“filed” or (ii) incorporated by reference by any general statement into any filing made by us
with the Securities and Exchange Commission, except to the extent that we specifically
incorporate such share performance graph and table by reference.
CORPORATE INFORMATION
Corporate Offices
3043 Townsgate Road
Westlake Village, CA 91361
(818) 264-4907
www.ir.pennymacfinancial.com
2019 Annual Meeting
The 2019 Annual Meeting of Stockholders will
be held at 11:00 a.m. PDT on May 30, 2018, at
3043 Townsgate Road, Westlake Village, CA
91361.
Independent Registered Public Accounting
Firm
Deloitte & Touche LLP
Los Angeles, CA
Market Data of PennyMac Financial Services,
Inc.
Common Stock
Traded: New York Stock Exchange
Symbol: PFSI
Transfer Agent
Computershare Shareowner Services LLC
Jersey City, NJ
Pursuant to Rule 303A.12 of the New York Stock Exchange Listed Companies Manual, each
listed company CEO must certify to the NYSE each year that he or she is not aware of any
violation by the company of NYSE corporate governance listing standards. David A. Spector’s
annual CEO certification regarding the NYSE’s corporate governance listing standards was
submitted to the NYSE on June 29, 2018.
[This page intentionally left blank]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-38727
PennyMac Financial Services, Inc.
(formerly known as New PennyMac Financial Services, Inc.)
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
3043 Townsgate Road, Westlake Village, California
(Address of principal executive offices)
83-1098934
(IRS Employer
Identification No.)
91361
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
(818) 224-7442
(Registrant’s telephone number, including area code)
Title of Each Class
Common Stock, $0.0001 Par Value
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large
accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of June 30, 2018 the aggregate market value of the registrant’s Common Stock, $0.0001 par value (“common stock”), held by non-affiliates was $412,801,482 based on the closing price as reported on the New
York Stock Exchange on that date.
As of February 28, 2019, the number of outstanding shares of common stock of the registrant was 77,534,715.
Documents Incorporated by Reference
Document
Definitive Proxy Statement for
2019 Annual Meeting of Stockholders
Parts Into Which Incorporated
Part III
Page
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70
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90
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PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
Item 16
4
PENNYMAC FINANCIAL SERVICES, INC.
FORM 10-K
December 31, 2018
TABLE OF CONTENTS
Special Note Regarding Forward-Looking Statements
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“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 as set forth in
Item IA. of Part I hereof and any subsequent Quarterly Reports on Form 10-Q.
Factors that could cause actual results to differ materially from historical results or those anticipated include,
but are not limited to:
•
•
•
•
•
•
•
•
the continually changing federal, state and local laws and regulations applicable to the highly regulated
industry in which we operate;
our ability to manage third-party service providers and vendors and their compliance with laws, regulations
and investor requirements;
lawsuits or governmental actions if we do not comply with the laws and regulations applicable to our
businesses;
the mortgage lending and servicing-related regulations promulgated by the Consumer Financial Protection
Bureau (“CFPB”) and its enforcement of these regulations;
our dependence on U.S. government-sponsored entities and changes in their current roles or their
guarantees or guidelines;
changes to government mortgage modification programs;
certain banking regulations that may limit our business activities;
foreclosure delays and changes in foreclosure practices;
3
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the licensing and operational requirements of states and other jurisdictions applicable to our businesses, to
which our bank competitors are not subject;
changes in macroeconomic and U.S. real estate market conditions;
difficulties inherent in growing loan production volume;
difficulties inherent in adjusting the size of our operations to reflect changes in business levels;
any required additional capital and liquidity to support business growth that may not be available on
acceptable terms, if at all;
changes in prevailing interest rates;
increases in loan delinquencies and defaults;
our reliance on PennyMac Mortgage Investment Trust (“PMT”) as a significant source of financing for,
and revenue related to, our mortgage banking business;
our obligation to indemnify third-party purchasers or repurchase loans if loans that we originate, acquire,
service or assist in the fulfillment of, fail to meet certain criteria or characteristics or under other
circumstances;
our exposure to counterparties that are unwilling or unable to honor contractual obligations, including their
obligation to indemnify us or repurchase defective mortgage loans;
our ability to realize the anticipated benefit of potential future acquisitions of mortgage servicing rights
(“MSRs”);
our obligation to indemnify PMT if our services fail to meet certain criteria or characteristics or under other
circumstances;
decreases in the returns on the assets that we select and manage for our clients, and our resulting
management and incentive fees;
the extensive amount of regulation applicable to our investment management segment;
conflicts of interest in allocating our services and investment opportunities among ourselves and our
Advised Entities;
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 mitigate cybersecurity risks and cyber incidents;
our ability to effectively deploy new information technology applications and infrastructure;
our exposure to risks of loss resulting from adverse weather conditions and man-made or natural disasters;
and
4
•
our organizational structure and certain requirements in our charter documents.
Other factors that could also cause results to differ from our expectations may not be described in this Report or
any other document. Each of these factors could by itself, or together with one or more other factors, adversely affect our
business, results of operations and/or financial condition.
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update
any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-looking
statement was made.
5
Item 1. Business
PART I
The following description of our business should be read in conjunction with the information included
elsewhere in this Report. This description contains forward-looking statements that involve risks and uncertainties.
Actual results could differ significantly from the projections and results discussed in the forward-looking statements due
to the factors described under the caption “Risk Factors” and elsewhere in this Report. References in this Report to
“we,” “our,” “us,” and the “Company” refer to PennyMac Financial Services, Inc. (formerly known as New PennyMac
Financial Services, Inc.)(“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”). PennyMac was founded in 2008 by members of our executive
leadership team and two strategic partners, BlackRock Mortgage Ventures, LLC (“BlackRock” or “BlackRock, Inc.”)
and HC Partners, LLC, formerly known as Highfields Capital Investments, LLC, together with its affiliates
(“Highfields”).
We were formed as a Delaware corporation on July 2, 2018. We became the top-level parent holding company
for the consolidated PennyMac business pursuant to a corporate reorganization (the “Reorganization”) that was
consummated on November 1, 2018. Before the Reorganization, PNMAC Holdings, Inc. (formerly known as PennyMac
Financial Services, Inc.) (“PNMAC Holdings”) was our top-level parent holding company and our public company
registrant. One result of the consummation of the Reorganization was that our equity structure was changed to create a
single class of publicly-held common stock as opposed to the two classes that were in place before the Reorganization.
The Reorganization is to be treated as an integrated transaction that qualifies as a reorganization with the meaning of
Section 368(a) of the Internal Revenue Code and/or a transfer described in Section 351(a) of the Internal Revenue Code.
PNMAC Holdings’ financial statements remain our historical financial statements.
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 (“GSE”). PLS is also an approved issuer of securities guaranteed by the Government
National Mortgage Association (“Ginnie Mae”), a lender of the Federal Housing Administration (“FHA”), and a
lender/servicer of the Veterans Administration (“VA”) and the U.S. Department of Agriculture (“USDA”). We refer to
each of Fannie Mae, Freddie Mac, Ginnie Mae, FHA, VA and USDA as an “Agency” and collectively as the
“Agencies.” PLS is able to service loans in all 50 states, the District of Columbia, Guam and the U.S. Virgin Islands, and
originate loans in 49 states and the District of Columbia, either because PLS is properly licensed in a particular
jurisdiction or exempt or otherwise not required to be licensed in that jurisdiction.
Our investment management subsidiary is PNMAC Capital Management, LLC (“PCM”), a Delaware limited
liability company registered with the Securities and Exchange Commission (“SEC”) as an investment adviser under the
Investment Advisers Act of 1940 (the “Advisers Act”), as amended. PCM manages PennyMac Mortgage Investment
Trust (“PMT”), a mortgage real estate investment trust listed on the New York Stock Exchange under the ticker symbol
PMT. PCM previously managed PNMAC Mortgage Opportunity Fund, LLC, PNMAC Mortgage Opportunity Fund, LP,
an affiliate of these funds and PNMAC Mortgage Opportunity Fund Investors, LLC. We refer to these funds collectively
6
as our “Investment Funds” and, together with PMT, as our “Advised Entities.” During 2018, the Investment Funds were
dissolved.
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 mortgage loan origination, acquisition and sale activities.
• The servicing segment performs mortgage 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.
Following is a summary of our segment’s results for the years presented:
2018
2017
Year ended December 31,
2016
(in thousands)
2015
2014
Net revenues:
Production
Servicing
Investment management
Income (loss) before income taxes:
Production
Servicing
Investment management
Non-segment activities (1)
Total assets at year end:
Production
Servicing
Investment management
$ 385,995 $ 513,641 $ 694,405 $ 481,636 $ 260,673
207,239
48,987
$ 983,503 $ 922,523 $ 931,287 $ 714,805 $ 516,899
212,886
23,996
567,921
29,587
202,322
30,847
386,203
22,679
$
87,266 $ 238,508 $ 416,096 $ 271,869 $ 135,619
65,925
(36,099)
20,111
2,486
1,378
600
$ 267,697 $ 335,909 $ 383,083 $ 279,193 $ 223,033
172,302
7,003
1,126
58,672
5,789
32,940
1,297
7,722
(1,695)
$ 2,434,897 $ 2,459,014 $ 2,195,330 $ 1,122,242 $ 1,040,358
1,320,092
2,841,551
92,881
91,517
$ 7,478,498 $ 7,365,488 $ 5,128,398 $ 3,486,075 $ 2,453,331
2,270,940
92,893
4,886,594
19,880
5,031,920
11,681
(1) Primarily represents repricing of Payable to exchanged Private National Mortgage Acceptance Company, LLC
unitholders under tax receivable agreement we entered into as part of our initial public offering during 2013.
Mortgage Banking
Loan Production
In our loan production activities, we earn interest income, gains or losses during the holding period and upon
the sale of these loans, and retain the associated MSRs. Our loan production segment sources new prime credit quality
first-lien residential conventional and government-insured or guaranteed mortgage loans through three channels:
correspondent production, consumer direct and broker direct lending.
In correspondent production we manage, on behalf of PMT and for our own account, the purchase from non-
affiliates of mortgage loans that have been underwritten to investor guidelines. For conventional mortgage loans, we
perform fulfillment activities for PMT and earn a fulfillment fee for each mortgage loan purchased by PMT. In the case
of government insured mortgage loans, we fulfill them for our own account and purchase them from PMT at PMT’s cost
plus a sourcing fee.
7
Through our consumer direct lending channel, we originate mortgage loans on a national basis. Our consumer
direct model relies on the Internet and call center-based staff to acquire and interact with customers across the country,
and we do not have a “brick and mortar” branch network.
In broker direct lending, we obtain loan application packages from third-party mortgage loan brokers for
mortgage loans, underwrite and fund mortgage loans for sale to PMT or investors.
We conduct our own fulfillment for mortgage loans originated through the consumer direct and broker direct
lending channels. Our loan production activity is summarized below:
Unpaid principal balance ("UPB") of mortgage loans purchased and
originated for sale:
Government-insured or guaranteed mortgage loans acquired from
PennyMac Mortgage Investment Trust
Mortgage loans sourced through our consumer direct channel
Mortgage loans sourced through our broker direct channel
Unpaid principal balance of conventional mortgage loans fulfilled for
PennyMac Mortgage Investment Trust
Total loan production
Loan Servicing
2018
Year ended December 31,
2017
(in thousands)
2016
$ 36,415,933
4,650,316
378,544
41,444,793
$ 40,561,241
5,466,669
—
46,027,910
$ 39,908,163
6,491,107
—
46,399,270
26,194,303
23,188,386
$ 67,639,096 $ 68,999,029 $ 69,587,656
22,971,119
Our loan servicing segment performs loan administration, collection, and default management activities,
including the collection and remittance of loan payments; response to customer inquiries; accounting for principal and
interest; holding custodial (impounded) funds for the payment of property taxes and insurance premiums; counseling
delinquent mortgagors; and supervising foreclosures and property dispositions. We service mortgage loans both as the
owner of MSRs and on behalf of other MSR or mortgage owners. We provide servicing for conventional and
government-insured or guaranteed loans (“prime servicing”), as well as servicing for distressed mortgage loans that have
been acquired as investments by PMT (“special servicing”).
8
The UPB of our mortgage loan servicing portfolio is summarized below:
December 31, 2018
Contract
servicing and
subservicing
Servicing
rights owned
Total
mortgage
loans serviced
Servicing
rights owned
(in thousands)
December 31, 2017
Contract
servicing and
subservicing
Total
mortgage
loans serviced
Investor:
Non-affiliated
entities:
Originated
Purchased
Advised entities
Mortgage loans
held for sale
Total
$ 145,224,596 $
56,990,486
202,215,082
—
— $ 145,224,596 $ 120,853,138 $
—
—
94,658,154
47,016,708
202,215,082 167,869,846
—
56,990,486
94,658,154
— $ 120,853,138
47,016,708
—
167,869,846
—
74,980,268
74,980,268
2,420,636
2,998,377
$ 204,635,718 $ 94,658,154 $ 299,293,872 $ 170,868,223 $ 74,980,268 $ 245,848,491
2,420,636
2,998,377
—
—
Investment Management
We are an investment manager through our subsidiary, PCM. PCM currently manages PMT. For these
activities, we earn management fees as a percentage of net assets and may earn incentive compensation based on
investment performance. During 2018, we completed the liquidation of the Investment Funds.
The net assets of the Advised Entities are summarized below:
PennyMac Mortgage Investment Trust
Investment Funds
U.S. Mortgage Market
December 31,
2018
2017
(in thousands)
$ 1,566,132 $ 1,544,585
29,329
$ 1,566,132 $ 1,573,914
—
The U.S. residential mortgage market is one of the largest financial markets in the world, with approximately
$10.8 trillion of outstanding debt as of September 30, 2018. According to Inside Mortgage Finance, first lien mortgage
loan origination volume was approximately $1.6 trillion in 2018. Many of the largest financial institutions, primarily
banks which have traditionally held the majority of the market share in mortgage origination and servicing, have reduced
their participation in the mortgage market and the industry remains in a period of significant transformation, creating
opportunities for non-bank participants.
The residential mortgage industry is characterized by high barriers to entry, including the necessity for
approvals required to sell loans to and service loans for the Agencies, state licensing requirements for non-federally
chartered banks, sophisticated infrastructure, technology, risk management, and processes required for successful
operations, and financial capital requirements.
9
Our Growth Strategies
Our growth strategies include:
Growing our Mortgage Loan Servicing Portfolio
We expect to focus the growth of our servicing portfolio on loan production activities, as our correspondent
government-insured production and consumer and broker direct lending add new prime servicing for owned MSRs, and
correspondent conventional production adds new subservicing. In 2018, our correspondent, consumer direct and broker
direct loan production totaled $67.6 billion in UPB. We plan to supplement our organic growth with MSR acquisitions,
some of which may be concentrated in delinquent or defaulted loans for which we have expertise in servicing. We have
acquired MSRs from large mortgage servicers, which are selling MSRs due to continuing operational and regulatory
pressures, higher regulatory capital requirements for banks, and a re-focus on core customers and business, and from
independent mortgage banks, which are selling MSRs due to reduced origination volumes, operational losses, and a need
for capital. In 2018, we purchased approximately $18.8 billion in UPB of MSRs.
Growing Correspondent Production through Expanding Seller Relationships and Adding Products and
Services
We expect to grow our correspondent production business by expanding the number and types of sellers from
which we purchase loans and increasing the volume of loans that we purchase from our sellers as we continue to add to
the loan products and services we offer. Over the past several years, a number of large banks have exited or reduced the
size of their correspondent production businesses, creating an opportunity for non-bank entities to gain market share. We
believe that we are well positioned to continue to taking advantage of this opportunity based on our management
expertise in the correspondent production business, our relationships with correspondent sellers, and our supporting
systems and processes. In 2016, we launched a non-delegated correspondent service to complement our delegated
correspondent channel. The non-delegated correspondent lending service involves the purchase of loans for which PLS
has provided underwriting eligibility services to the originating correspondent seller. Entry into this market leverages our
existing loan fulfillment infrastructure, gives our existing sellers an additional method through which they can deliver
loans to us and provides us with access to new sellers that were not previously served.
Growing Consumer Direct Lending through Portfolio Recapture and Non-Portfolio Originations
We expect to grow our consumer direct lending business by leveraging our growing servicing portfolio through
recapture of existing customers for refinance and purchase-money loans as well as increasing our non-portfolio
originations. As our servicing portfolio grows, we will have a greater number of leads to pursue, which we believe will
lead to greater origination activity through our consumer direct business. As of December 31, 2018, we serviced 1.5
million loans for existing customers. At the same time, we are making significant investments in technology, personnel
and marketing to increase our non-portfolio originations. We believe that our national call center model and our
technology will enable us to drive origination process efficiencies and best-in-class customer service.
Growing Broker Direct Lending
During 2018, we introduced our broker direct lending channel.The broker lending channel involves the
underwriting and funding of mortgage loans sourced by mortgage loan brokers and other financial intermediaries. We
estimate that the broker lending channel represents approximately 10% of U.S. residential mortgage originations and we
have recently entered that market. Through this mortgage loan origination channel, third-party mortgage loan brokers
submit loan application packages to us and we underwrite and fund the mortgage loans. In 2018, we funded $378.5
million of mortgage loans through our broker direct channel. We plan on growing our mortgage loan volume by adding
broker relationships and offering our mortgage loan brokers access to our technology through a dedicated portal.
10
Expansion into New Markets and Products
We regularly evaluate opportunities to grow our business, including expansion into new markets, such as the
broker lending channel and non-delegated correspondent lending services. We also continue to develop new products to
satisfy demand from customers in each of our production channels and respond to changing circumstances in the market
for mortgage-related financing. For example, the Company recently launched a home equity line of credit (“HELOC”)
product through its consumer direct lending channel that allows customers to use their home equity for home
improvements, debt consolidation or other expenses while maintaining their existing first mortgage. The HELOC
product leverages the Company’s partnership with PMT through its ability to securitize and invest in HELOC assets.
Compliance and Regulatory
Our business is subject to extensive federal, state and local regulation. The CFPB was established on July 21,
2010 under Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFPB is responsible for
ensuring consumers are provided with timely and understandable information to make responsible decisions about
financial transactions, federal consumer financial laws are enforced and consumers are protected from unfair, deceptive,
or abusive acts and practices and from discrimination. Although the CFPB’s actions may improve consumer protection,
such actions also have resulted in a meaningful increase in costs to consumers and financial services companies
including mortgage originators and servicers.
Our loan production and loan servicing operations are regulated at the state level by state licensing authorities
and administrative agencies. We, along with certain PennyMac employees who engage in regulated activities, must
apply for licensing as a mortgage banker or lender, loan servicer and debt collector pursuant to applicable state law.
These state licensing requirements typically require an application process, the payment of fees, background checks and
administrative review. Our servicing operations are licensed (or exempt or otherwise not required to be licensed) to
service mortgage loans in all 50 states, the District of Columbia, Guam and the U.S. Virgin Islands. Our consumer direct
lending business is licensed to originate loans in 49 states and the District of Columbia. From time to time, we receive
requests from states and Agencies and various investors for records, documents and information regarding our policies,
procedures and practices regarding our loan production and loan servicing business activities, and undergo periodic
examinations by federal and state regulatory agencies. We incur significant ongoing costs to comply with these licensing
and examination requirements.
The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the “SAFE Act”) requires all states to
enact laws that require all individuals acting in the United States as mortgage loan originators to be individually licensed
or registered if they intend to offer mortgage loan products. These licensing requirements include enrollment in the
Nationwide Mortgage Licensing System, application to state regulators for individual licenses and the completion of
pre-licensing education, annual education and the successful completion of both national and state exams.
We must comply with a number of federal consumer protection laws, including, among others:
•
•
the Real Estate Settlement Procedures Act (“RESPA”), and Regulation X thereunder, which require certain
disclosures to mortgagors regarding the costs of mortgage loans, the administration of tax and insurance
escrows, the transferring of servicing of mortgage loans, the response to consumer complaints, and
payments between lenders and vendors of certain settlement services;
the Truth in Lending Act (“TILA”), and Regulation Z thereunder, which require certain disclosures to
mortgagors regarding the terms of their mortgage loans, notices of sale, assignments or transfers of
ownership of mortgage loans, new servicing rules involving payment processing, and adjustable rate
mortgage change notices and periodic statements;
•
the Equal Credit Opportunity Act and Regulation B thereunder, which prohibit discrimination on the basis
of age, race and certain other characteristics, in the extension of credit;
11
•
•
•
•
•
•
•
•
the Fair Housing Act, which prohibits discrimination in housing on the basis of race, sex, national origin,
and certain other characteristics;
the Home Mortgage Disclosure Act and Regulation C thereunder, which require financial institutions to
report certain public loan data;
the Homeowners Protection Act, which requires the cancellation of private mortgage insurance once
certain equity levels are reached, sets disclosure and notification requirements, and requires the return of
unearned premiums;
the Servicemembers Civil Relief Act, which provides, among other things, interest and foreclosure
protections for service members on active duty;
the Gramm-Leach-Bliley Act and Regulation P thereunder, which require us to maintain privacy with
respect to certain consumer data in our possession and to periodically communicate with consumers on
privacy matters;
the Fair Debt Collection Practices Act, which regulates the timing and content of debt collection
communications;
the Fair Credit Reporting Act and Regulation V thereunder, which regulate the use and reporting of
information related to the credit history of consumers; and
the National Flood Insurance Reform Act of 1994, which provides for lenders to require from borrowers or
to purchase flood insurance on behalf of borrower/owners of properties in special flood hazard areas.
Many of these laws are further impacted by the SAFE Act and implementation of new rules by the CFPB.
Our senior management team has established a comprehensive compliance management system ("CMS") that is
designed to ensure compliance with applicable mortgage origination and servicing laws and regulations. The
components of our CMS include: (a) oversight by senior management and our Board of Directors to ensure that our
compliance culture, guidance, and resources are appropriate; (b) a compliance program to ensure that our policies,
training and monitoring activities are complete and comprehensive; (c) a complaint management program to ensure that
consumer complaints are appropriately addressed and that any required actions are implemented on a timely basis; and
(d) independent oversight to ensure that our CMS is functioning as designed.
An important component of the CMS is management’s Mortgage Regulatory Compliance Committee
(“MRCC”). This committee oversees the CMS and supports our cultural initiatives that reinforce the importance of
regulatory compliance. The MRCC also monitors changes in the internal and external environment, approves mortgage
compliance policies, monitors compliance with those policies and ensures any required remediation is implemented on a
timely basis. The MRCC has identified individuals throughout the organization to oversee specific areas of compliance.
MRCC membership includes senior management from all areas of the Company impacted by mortgage compliance laws
and regulations. The MRCC meets on a regular basis throughout the year.
Intellectual Property
We hold various registered trademarks, including trademarks with respect to the name PennyMac®, the swirl
design and rooftop design appearing in certain PennyMac drawings and logos and various additional designs and word
marks relating to the PennyMac name. Depending upon the jurisdiction, trademarks generally are valid as long as they
are in use and/or their registrations are properly maintained. We generally intend to renew our trademarks as they come
up for renewal. We do not otherwise rely on any copyright, patent or other form of registration to protect our rights in
our intellectual property. Our other intellectual property includes proprietary know-how and technological innovations,
such as our proprietary loan-level analytics systems and models for distressed loan management, and other trade secrets
that we have developed to maintain our competitive position.
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Competition
Given the diverse and specialized nature of our businesses, we do not believe we have a direct competitor for
the totality of our business. We compete with a number of nationally-focused companies in each of our businesses.
In our mortgage banking segments, we compete with large financial institutions and with other independent
residential mortgage loan producers and servicers, such as Wells Fargo, JP Morgan Chase, Quicken Loans and Mr.
Cooper. In our loan production segment, we compete on the basis of product offerings, technical knowledge,
manufacturing quality, speed of execution, rate and fees. In our servicing segment, we compete on the basis of
experience in the residential loan servicing business, quality and efficiency of execution and servicing performance,
especially in the servicing of delinquent and defaulted loans.
In our investment management segment, we compete for capital with both traditional and alternative investment
managers. We compete on the basis of historical track record of risk-adjusted returns, experience of investment
management team, the return profile of prospective investment opportunities and on the level of fees and expenses.
Employees
As of December 31, 2018, we, through a subsidiary, had 3,460 employees.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy
statements and amendments to those reports filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, are available free of charge through the investor relations section of our
website at www.pennymacfinancial.com as soon as reasonably practicable after electronically filing such material with
the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other
information regarding our filings at www.sec.gov. The above references to our website and the SEC’s website do not
constitute incorporation by reference of the information contained on those websites and should not be considered part of
this document.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the following factors,
which could materially affect our business, financial condition, liquidity and results of operations in future periods. The
risks described below are not the only risks that we face. Additional risks not presently known to us or that we currently
deem immaterial may also materially adversely affect our business, financial condition, liquidity and results of
operations in future periods.
Risks Related to Our Mortgage Banking Segment
Regulatory Risks
We operate in a highly regulated industry and the continually changing federal, state and local laws and regulations
could materially and adversely affect our business, financial condition, liquidity and results of operations.
We are required to comply with a wide array of federal, state and local laws and regulations that regulate,
among other things, the manner in which we conduct our loan production and servicing businesses. These regulations
directly impact our business and require constant compliance, monitoring and internal and external audits and
examinations by federal and state regulators. This can result in increases in our administrative costs, and we or PLS may
be required to pay substantial penalties imposed by these regulators due to compliance errors, or PLS may lose its
13
licenses. Negative publicity or fines and penalties incurred in one jurisdiction may cause investigations or other actions
by regulators in other jurisdictions.
Federal, state and local governments have proposed or enacted numerous laws, regulations and rules related to
mortgage loans. Laws, regulations, rules and judicial and administrative decisions relating to mortgage loans include
those pertaining to real estate settlement procedures, equal credit opportunity, fair lending, fair credit reporting, truth in
lending, fair debt collection practices, service members protections, compliance with net worth and financial statement
delivery requirements, compliance with federal and state disclosure and licensing requirements, the establishment of
maximum interest rates, finance charges and other charges, qualified mortgages, licensing of loan officers and other
personnel, loan officer compensation, secured transactions, property valuations, servicing transfers, payment processing,
escrow, communications with consumers, loss mitigation, collection, foreclosure, bankruptcy, repossession and
claims-handling procedures, and other trade practices and privacy regulations providing for the use and safeguarding of
non-public personal financial information of borrowers. Service providers we use must also comply with some of these
legal requirements, including outside counsel retained to process foreclosures and bankruptcies.
Our failure to operate effectively and in compliance with any of these laws, regulations and rules could subject
us to lawsuits or governmental actions and damage our reputation, which could materially and adversely affect our
business, financial condition, liquidity and results of operations. In addition, our failure to comply with these laws,
regulations and rules may result in increased costs of doing business, reduced payments by borrowers, modification of
the original terms of mortgage loans, permanent forgiveness of debt, delays in the foreclosure process, increased
servicing advances, litigation, reputational damage, enforcement actions, and repurchase and indemnification
obligations.
Our service providers and vendors are also required to operate in compliance with applicable laws, regulations
and rules. Our failure to adequately manage service providers and vendors in order to mitigate risks of noncompliance
with applicable laws may also have these negative results.
The failure of the mortgage lenders from whom loans were acquired through our correspondent production
activities to comply with any applicable laws, regulations and rules may also result in these adverse consequences. We
have in place a due diligence program designed to assess areas of risk with respect to these acquired loans, including,
without limitation, compliance with underwriting guidelines and applicable laws or regulations. However, we may not
detect every violation of law by these mortgage lenders. Further, to the extent any other third party originators or
servicers with whom we do business fail to comply with applicable laws or regulations and any of their mortgage loans
or MSRs become part of our assets, it could subject us, as an assignee or purchaser of the related mortgage loans or
MSRs, to monetary penalties or other losses. In general, if any of our loans are found to have been originated, serviced
or owned by us or a third party in violation of applicable laws or regulations, we could be subject to lawsuits or
governmental actions, or we could be fined or incur losses. While we may have contractual rights to seek indemnity or
repurchase from certain of these lenders and third party originators and servicers, if any of them are unable to fulfill their
indemnity or repurchase obligations to us to a material extent, our business, liquidity, financial condition and results of
operations could be materially and adversely affected.
The CFPB is active in its monitoring of the residential mortgage origination and servicing sectors. New rules and
regulations and more stringent enforcement of existing rules and regulations by the CFPB could result in
enforcement actions, fines, penalties and the inherent reputational risk that results from such actions.
Under the Dodd-Frank Act, the CFPB is empowered with broad supervision, rulemaking and examination
authority to enforce laws involving consumer financial products and services and to ensure, among other things, that
consumers receive clear and accurate disclosures regarding financial products and are protected from hidden fees and
unfair, deceptive or abusive acts or practices. The CFPB has adopted a number of final regulations under the Dodd-
Frank Act regarding truth in lending, “ability to repay,” home mortgage loan disclosure, home loan origination, fair
credit reporting, fair debt collection practices, foreclosure protections, and mortgage servicing rules, including provisions
regarding loss mitigation, early intervention, periodic statement requirements and lender-placed insurance. In January
2018, the Home Mortgage Disclosure Act regulatory amendments became effective that require us to collect, record and
report substantially more data about originations, purchases, and applications for certain covered loans. The expanded
14
data fields include information such as applicant demographics, loan fees and costs, underwriting results, and other key
loan and property characteristics.
The CFPB also has enforcement authority with respect to the conduct of third-party service providers of
financial institutions. The CFPB has made it clear that it expects non-bank entities to maintain an effective process for
managing risks associated with third-party vendor relationships, including compliance-related risks. In connection with
this vendor risk management process, we are expected to perform due diligence reviews of potential vendors, review
vendors’ policies and procedures and internal training materials to confirm compliance-related focus, include
enforceable consequences in contracts with vendors regarding failure to comply with consumer protection requirements,
and take prompt action, including terminating the relationship, in the event that vendors fail to meet our expectations.
In addition to its supervision and examination authority, the CFPB is authorized to conduct investigations to
determine whether any person is engaging in, or has engaged in, conduct that violates federal consumer financial
protection laws, and to initiate enforcement actions for such violations, regardless of its direct supervisory authority.
Investigations may be conducted jointly with other regulators. In furtherance of its supervision and examination powers,
the CFPB has the authority to impose monetary penalties for violations of applicable federal consumer financial laws,
require remediation of practices and pursue administrative proceedings or litigation for violations of applicable federal
consumer financial laws. The CFPB also has the authority to obtain cease and desist orders (which can include orders for
restitution or rescission of contracts, as well as other kinds of affirmative relief) and monetary penalties ranging from
$5,000 per day for ordinary violations of federal consumer financial laws to $25,000 per day for reckless violations and
$1 million per day for knowing violations.
Rules and regulations promulgated under the Dodd-Frank Act or by the CFPB, uncertainty regarding recent
changes in leadership (including interim leadership) or authority levels within the CFPB, and actions taken or not taken
by the CFPB could result in heightened federal and state regulation and oversight of our business activities, materially
and adversely affect the manner in which we conduct our business, and increase costs and potential litigation associated
with our business activities. Our failure to comply with the laws, rules or regulations to which we are subject, whether
actual or alleged, would expose us to fines, penalties or potential litigation liabilities, including costs, settlements and
judgments, any of which could have a material adverse effect on our business, liquidity, financial condition and results
of operations.
We are highly dependent on U.S. government-sponsored entities and government agencies, and any changes in these
entities, their current roles or the leadership at such entities or their regulators could materially and adversely affect
our business, financial condition, liquidity and results of operations.
Our ability to generate revenues through mortgage loan sales depends to a significant degree on programs
administered by GSEs, such as Fannie Mae and Freddie Mac, government agencies, including Ginnie Mae, and others
that facilitate the issuance of mortgage-backed securities (“MBS”), in the secondary market. These Agencies play a
critical role in the mortgage industry and we have significant business relationships with many of them. Presently,
almost all of the newly originated conforming loans that we originate directly with borrowers or assist PMT in acquiring
from mortgage lenders through our correspondent production activities qualify under existing standards for inclusion in
MBS issued by Fannie Mae or Freddie Mac or guaranteed by Ginnie Mae. We also derive other material financial
benefits from our Agency relationships, including the assumption of credit risk by certain of these Agencies on loans
included in such MBS in exchange for our payment of guarantee fees and the ability to avoid certain loan inventory
finance costs through streamlined loan funding and sale procedures.
Any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and their
regulators or the U.S. federal government, and any changes in leadership at these entities, could adversely affect our
business and prospects. Although the U.S. Treasury has committed capital to Fannie Mae and Freddie Mac, these actions
may not be adequate for their needs. Any discontinuation of, or significant reduction in, the operation of Fannie Mae or
Freddie Mac or any significant adverse change in their capital structure, financial condition, activity levels in the primary
or secondary mortgage markets or in underwriting criteria could materially and adversely affect our business, financial
condition, liquidity and results of operations.
15
The roles of Fannie Mae and Freddie Mac could be significantly restructured, reduced or eliminated and the
nature of the guarantees could be considerably limited relative to historical measurements. Elimination of the traditional
roles of Fannie Mae and Freddie Mac, or any changes to the nature or extent of the guarantees provided by Fannie Mae
and Freddie Mac or the fees, terms and guidelines that govern our selling and servicing relationships with them, such as
increases in the guarantee fees we are required to pay, initiatives that increase the number of repurchase requests and/or
the manner in which they are pursued, or possible limits on delivery volumes imposed upon us and other seller/servicers,
could also materially and adversely affect our business, including our ability to sell and securitize loans through our loan
production segment, and the performance, liquidity and market value of our investments. Our ability to generate
revenues from newly originated loans that we assist PMT in acquiring through its correspondent production business
would be similarly affected. Moreover, any changes to the nature of the GSEs or their guarantee obligations could
redefine what constitutes an Agency MBS and could have broad adverse implications for the market and our business,
financial condition, liquidity and results of operations.
Our ability to generate revenues from newly originated loans that we assist PMT in acquiring through its
correspondent production business is also highly dependent on the fact that the Agencies have not historically acquired
such loans directly from mortgage lenders, but have instead relied on banks and non-bank aggregators such as us to
acquire, aggregate and securitize or otherwise sell such loans to investors in the secondary market. Certain of the
Agencies have approved new and smaller lenders that traditionally may not have qualified for such approvals. To the
extent that these lenders choose to sell directly to the Agencies rather than through loan aggregators like us, the number
of loans available for purchase by aggregators is reduced, which could materially and adversely affect our business and
results of operations. Similarly, to the extent the Agencies increase the number of purchases and sales for their own
accounts, our business and results of operations could be materially and adversely affected.
We are required to hold various Agency approvals in order to conduct our business and there is no assurance that we
will be able to obtain or maintain those Agency approvals or that changes in Agency guidelines will not materially
and adversely affect our business, financial condition, liquidity and results of operations.
We are required to hold certain Agency approvals in order to sell mortgage loans to the Agencies and service such
mortgage loans on their behalf. Our failure to satisfy the various requirements necessary to obtain and maintain such
Agency approvals over time would restrict our direct business activities and could materially adversely impact our
business, financial condition, liquidity and results of operations.
We are also required to follow specific guidelines that impact the way that we originate and service Agency
loans, including guidelines with respect to:
•
•
•
•
•
•
credit standards for mortgage loans;
collections, remittances and other payments;
our staffing levels and other servicing practices;
the servicing and ancillary fees that we may charge;
our modification standards and procedures; and
the amount of non-reimbursable advances.
We generally cannot negotiate these terms with the Agencies and they are subject to change at any time. A
significant change in these guidelines that has the effect of decreasing the fees we charge or requires us to expend
additional resources in providing mortgage services could decrease our revenues or increase our costs, which would also
adversely affect our business, financial condition, liquidity and results of operations.
16
In addition, the Federal Housing Finance Agency (“FHFA”) has directed the GSEs to align their guidelines for
servicing delinquent mortgages that they own or that back securities which they guarantee, which can result in monetary
incentives for servicers that perform well and penalties for those that do not. The FHFA has also directed the GSEs to
assess compensatory penalties against servicers in connection with the failure to meet specified timelines relating to
delinquent loans and foreclosure proceedings, and other breaches of servicing obligations. Our failure to operate
efficiently and effectively within the prevailing regulatory framework and in accordance with the applicable origination
and servicing guidelines and/or the loss of our seller/servicer license approval or approved issuer status with the
Agencies could result in our failure to benefit from available monetary incentives and/or expose us to monetary penalties
and curtailments, all of which could materially and adversely affect our business, financial condition, liquidity and
results of operations.
Our inability to meet certain net worth and liquidity requirements imposed by the Agencies could have a material
adverse effect on our business, financial condition, liquidity and results of operation.
We are subject to minimum financial eligibility requirements established by the Agencies. These eligibility
requirements align the minimum financial requirements for entities to do business with the Agencies. These minimum
financial requirements, which are described in Liquidity and Capital Resources, include net worth, capital ratio and/or
liquidity criteria in order to set a minimum level of capital needed to adequately absorb potential losses and a minimum
amount of liquidity needed to service Agency mortgage loans and MBS and cover the associated financial obligations
and risks.
In order to meet these minimum financial requirements, we are required to maintain cash and cash equivalents in
amounts that may adversely affect our business, financial condition, liquidity and results of operations, and this could
significantly impede us from growing our business and place us at a competitive disadvantage in relation to federally
chartered banks and certain other financial institutions. To the extent that such minimum financial requirements are not
met, the Agencies may suspend or terminate our Agency approvals or agreements, which could cause us to cross default
under financing arrangements and/or have a material adverse effect on our business, financial condition liquidity and
results of operations.
We may be subject to certain banking regulations that may limit our business activities.
As of December 31, 2018, PNC Financial Services Group Inc. (“PNC”) owned approximately 22% of the
outstanding voting common shares of BlackRock, Inc. Based on PNC’s interests in and relationships with BlackRock,
Inc., BlackRock, Inc. is deemed to be a non-bank subsidiary of PNC. BlackRock, Inc. is an affiliate of BlackRock
Mortgage Ventures, LLC, which is one of our largest equity holders. Due to these relationships, we are deemed to be a
non-bank subsidiary of PNC, which is regulated as a financial holding company under the Bank Holding Company Act
of 1956, as amended. As a non-bank subsidiary of PNC, we may be subject to certain banking regulations, including the
supervision and regulation of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Such
banking regulations could limit the activities and the types of businesses that we may conduct. The Federal Reserve has
broad enforcement authority over financial holding companies and their subsidiaries. The Federal Reserve could exercise
its power to restrict PNC from having a non-bank subsidiary that is engaged in any activity that, in the Federal Reserve’s
opinion, is unauthorized or constitutes an unsafe or unsound business practice, and could exercise its power to restrict us
from engaging in any such activity. The Federal Reserve may also impose substantial fines and other penalties for
violations that we may commit. To the extent that we, as a non-bank mortgage lender, are subject to banking regulations,
we could be at a competitive disadvantage because many of our non-bank competitors are not subject to these same
regulations.
In addition, provisions of the Dodd-Frank Act referred to as the “Volcker Rule” prohibit or restrict a bank
holding company and its affiliates from conducting certain transactions with certain investment funds, including hedge
funds and private equity funds (collectively “covered funds”), when it has an ownership interest in, sponsors or advises a
covered fund. The Volcker Rule prohibits proprietary trading as defined by such rule, unless the trading is permitted by
an exemption, such as for risk-mitigating hedging purposes. The Volcker Rule applies to us by virtue of our affiliation
with PNC through BlackRock. The Volcker Rule limits our ability to acquire or retain an ownership interest in, sponsor,
advise or manage covered funds, and limits investments in certain covered funds by our employees, among other
restrictions. If a fund, whether newly created or existing, becomes a covered fund, then certain transactions between us
17
and the covered fund could be prohibited or restricted, or the fund may need to be restructured. These prohibitions,
restrictions and limitations could disadvantage us against those competitors that are not subject to the Volcker Rule in
the ability to manage covered funds and to retain employees. Our failure to comply with the requirements of the Volcker
Rule may adversely affect our business, financial condition, liquidity and results of operations.
Unlike competitors that are federally chartered banks, we are subject to the licensing and operational requirements of
states and other jurisdictions that result in substantial compliance costs, and our business would be adversely affected
if we lose our licenses.
Because we are not a federally chartered depository institution, we do not benefit from exemptions to state
mortgage lending, loan servicing or debt collection licensing and regulatory requirements. We must comply with state
licensing requirements and varying compliance requirements in all 50 states, the District of Columbia, Guam and the
U.S. Virgin Islands, and regulatory changes may increase our costs through stricter licensing laws, disclosure laws or
increased fees or may impose conditions to licensing that we or our personnel are unable to meet.
In most states in which we operate, a regulatory agency or agencies regulate and enforce laws relating to
mortgage servicers and mortgage originators. These rules and regulations generally provide for licensing as a mortgage
servicer, mortgage originator, loan modification underwriter, or third-party debt collection specialist (or a combination
thereof), requirements as to the form and content of employee compensation contracts and other documentation,
licensing of our employees and those of independent contractors with whom we contract, and employee hiring
background checks. They also set forth restrictions on advertising and collection practices and disclosure and
record-keeping requirements, and they establish a variety of borrowers’ rights. Future state legislation and changes in
existing regulation may significantly increase our compliance costs or reduce the amount of ancillary income we are
entitled to collect from borrowers or otherwise. This could make our business cost-prohibitive in the affected state or
states and could materially affect our business.
The failure of PennyMac Loan Services, LLC to avail itself of an appropriate exemption from registration as an
investment company under the Investment Company Act of 1940 could have a material and adverse effect on our
business.
We intend to operate so that we and each of our subsidiaries are not required to register as investment
companies under the Investment Company Act of 1940, as amended, or the Investment Company Act. We believe that
our subsidiary, PennyMac Loan Services, LLC (“PLS”), qualifies for the exemption provided in Section 3(c)(6) of the
Investment Company Act because it has been, and is expected to continue to be, primarily engaged, directly or through
majority-owned subsidiaries, in (1) the business of purchasing or otherwise acquiring mortgages or other liens on and
interests in real estate (from which not less than 25 percent of its gross income during its last fiscal year was and will
continue to be derived), together with (2) an additional business or businesses other than investing, reinvesting, owning,
holding, or trading in securities, namely the business of servicing mortgages. Although we expect not less than 25
percent of PLS’ gross income to be derived from originating, purchasing, or acquiring mortgages or liens on and
interests in real estate, there can be no assurances that the composition of PLS’ gross income will remain the same over
time.
To date, the SEC staff has provided limited guidance with respect to the applicability of Section 3(c)(6), and
PLS has not sought a no-action letter from the SEC staff respecting its position. If PLS is ultimately unable to rely on the
Section 3(c)(6) exemption due to a failure to meet the 25 percent of gross income test or to the extent that the SEC staff
provides negative guidance regarding the applicability or scope of the exemption, we may be required to either (a)
register as an investment company, or (b) substantially restructure our business, change our investment strategy and/or
the manner in which we conduct our operations in order to qualify for another Investment Company Act exemption and
avoid being required to register as an investment company, either of which could materially and adversely affect our
business, financial condition, liquidity and results of operations.
In the case of a restructuring, PLS could temporarily rely on Rule 3a-2 for its exemption from registration. Rule
3a-2 provides a safe harbor exemption, not to exceed one year, for companies that have a bona fide intent to be engaged
in an excepted activity but temporarily fail to meet the requirements for an exemption. In such case, PLS would likely be
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required to restructure its business by acquiring and/or disposing of assets in order to meet an exemption under Section
3(c)(5)(C), depending on the composition of its assets at the time. The SEC staff’s position on Section 3(c)(5)(C)
generally requires that an issuer maintain at least 55% of its assets in mortgages and other liens on and interests in real
estate (qualifying assets) and at least 80% of its assets in qualifying assets plus real estate-related assets. PLS would be
more limited in its ability to hold MSRs or would be required to acquire and hold more mortgage loans and real estate to
adjust the composition of its assets to meet the 55% and 80% tests.
If PLS is required to register as an investment company, we would be required to comply with a variety of
substantive requirements under the Investment Company Act that impose, among other things: limitations on capital
structure; restrictions on specified investments; prohibitions on transactions with affiliates; compliance with reporting,
record keeping, voting and proxy disclosure; and, other rules and regulations that would significantly increase our
operating expenses. Further, if PLS was or is required to register as an investment company, PLS would be in breach of
various representations and warranties contained in its credit and other agreements resulting in a default as to certain of
our contracts and obligations. This could also subject us to civil or criminal actions or regulatory proceedings, or result
in a court appointed receiver to take control of us and liquidate our business, any or all of which could have a material
adverse effect on our business, financial condition, liquidity and results of operations.
Liability relating to environmental matters may impact the value of properties that we may acquire or the properties
underlying our investments.
Under various U.S. federal, state and local laws, an owner or operator of real property may become liable for
the costs of removal of certain hazardous substances released on its property. These laws often impose liability without
regard to whether the owner or operator was responsible for, or aware of, the release of such hazardous substances. The
presence of hazardous substances may also adversely affect an owner’s ability to sell real estate, borrow using real estate
as collateral or make debt payments to us. In addition, if we take title to a property, the presence of hazardous substances
may adversely affect our ability to sell the property, and we may become liable to a governmental entity or to third
parties for various fines, damages or remediation costs. Any of these liabilities or events may materially and adversely
affect the fair value of the relevant asset and/or our business, financial condition, liquidity and results of operations.
Market Risks
Our mortgage banking revenues are highly dependent on macroeconomic and United States real estate market,
mortgage market and financial market conditions.
The success of our business strategies and our results of operations are materially affected by current or future
conditions in the real estate market, mortgage markets, financial markets and the economy generally. Factors such as
inflation, deflation, unemployment, personal and business income taxes, healthcare, energy costs, domestic political
issues, government shutdowns, climate change and the availability and cost of credit may contribute to increased
volatility and unclear expectations for the economy in general and the real estate, mortgage market and financial markets
in particular going forward. A destabilization of the real estate market, mortgage market and financial markets or
deterioration in these markets also could reduce our loan production volume, reduce the profitability of servicing
mortgages or adversely affect our ability to sell mortgage loans that we originate or acquire, either at a profit or at all.
Any of the foregoing could materially and adversely affect our business, financial condition, liquidity and results of
operations.
The industry in which we operate is highly competitive, and is likely to become more competitive, and decreased
margins resulting from increased competition or our inability to compete successfully could adversely affect our
business, financial condition, liquidity and results of operations.
We operate in a highly competitive industry that could become even more competitive as a result of economic,
legislative, regulatory and technological changes. With respect to mortgage loan production, we face competition in such
areas as mortgage loan offerings, rates, fees and customer service. With respect to servicing, we face competition in
areas such as fees, cost to service and service levels, including our performance in reducing delinquencies and entering
into successful modifications.
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Large commercial banks and savings institutions and other non-bank mortgage originators and servicers are
becoming increasingly competitive in the origination or acquisition of newly originated mortgage loans and the servicing
of mortgage loans. Many of these institutions have significantly greater resources and access to capital and financing
arrangements than we do, which may give them the benefit of a lower cost of funds. Additionally, our existing and
potential competitors may decide to modify their business models to compete more directly with our loan production and
servicing models. For example, other non-bank loan servicers may try to leverage their servicing relationships and
expertise to develop or expand a loan origination business. Since the withdrawal or decreased participation of a number
of large participants from these markets following the financial crisis in 2008, there has been a steady increase in the
number of non-bank participants. As more non-bank entities enter these markets and as more commercial banks
aggressively compete, our mortgage banking businesses may generate lower volumes and/or margins. We believe that
changes in supply and demand within the marketplace have been driving lower margins in recent periods, which is
reflected in our results of operations and in our gains on mortgage loans held for sale. If we are unable to grow our loan
production volumes or if our margins become compressed, then our business, financial condition, liquidity and results of
operations could be materially and adversely affected.
In addition, technological advances and heightened e-commerce activities have increased consumers’ access to
products and services. This has intensified competition among banks and non-banks in offering and servicing mortgage
loans. We may be unable to compete successfully in our mortgage banking businesses and this could materially and
adversely affect our business, financial condition, liquidity and results of operations.
We may not be able to effectively manage significant increases or decreases in our loan production volume, which
could negatively affect our business, financial condition, liquidity and results of operations.
Our loan production segment consists of our consumer direct lending activities, in which we originate mortgage
loans directly with borrowers through telephone call centers or the Internet, our correspondent production activities, in
which we facilitate the acquisition by PMT from correspondent sellers of newly originated mortgage loans that have
been underwritten to our standards and, in the case of government loans, acquire such loans from PMT, and our broker
direct lending activities, in which we provide brokers with a broad range of mortgage loan products and programs.
Our correspondent production activities are relationship driven. As of December 31, 2018, we worked with 710
approved mortgage lenders, but these lenders are not contractually obligated to do business with us or PMT, and our
competitors also have relationships with these lenders and actively compete against us in our efforts to expand PMT’s
network of approved mortgage lenders. To date, we have grown our loan production volumes with mortgage lenders on
the basis of our product offerings, technical knowledge, manufacturing quality, speed of execution, interest rates and
fees. If we are not able to consistently maintain these qualities of execution, our reputation and existing relationships
with mortgage lenders could be damaged. We may not be able to maintain PMT’s existing relationships or develop new
relationships with mortgage lenders or our new mortgage products may not gain widespread acceptance.
Our current volume of consumer direct lending originations, which is based in large part on the refinancing of
existing mortgage loans that we service, is highly dependent on interest rates and may decline if interest rates increase.
Our non-servicing portfolio consumer direct lending platform may not succeed because of the referral-driven nature of
our industry. For example, the origination of purchase money mortgage loans is greatly influenced by traditional
business clients in the home buying process such as real estate agents and builders. As a result, our ability to secure
relationships with such traditional business clients will influence our ability to grow our purchase money mortgage loan
volume and, thus, our consumer direct lending business. We may not be successful in establishing such relationships. In
addition, to grow our consumer direct lending business, we will need to convert leads regarding prospective borrowers
into funded loans, the success of which depends on the pricing we offer relative to the pricing of our competitors and our
operational ability to process, underwrite and close loans. Institutions that compete with us in this regard may have
significantly greater access to capital or other resources than we do, which may give them the benefit of a lower cost of
operations.
On the other hand, we may experience significant growth in our correspondent production, consumer direct
lending and broker direct lending loan volumes. If we do not effectively manage our growth, the quality of our
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correspondent production and consumer direct lending operations could suffer, which could negatively affect our brand
and operating results. Our correspondent production and consumer direct lending operations are also subject to overall
market factors that can impact our ability to grow our loan production volume. For example, increased competition from
new and existing market participants, reductions in the overall level of refinancing activity or slow growth in the level of
new home purchase activity can impact our ability to continue to grow our loan production volumes, and we may be
forced to accept lower margins in our respective businesses in order to continue to compete and keep our volume of
activity consistent with past or projected levels.
We may be unable to maintain sufficient capital and liquidity to meet the financing requirements of our business.
We will require new and continued debt financing to facilitate our anticipated growth. Accordingly, our ability
to finance our operations and repay maturing obligations rests in large part on our ability to borrow money. We are
generally required to renew our financing arrangements each year, which exposes us to refinancing and interest rate
risks. Our ability to refinance existing debt and borrow additional funds is affected by a variety of factors beyond our
control including:
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limitations imposed on us under our financing agreements that contain restrictive covenants and
borrowing conditions, which may limit our ability to raise additional debt;
restrictions imposed upon us by regulatory agencies that mandate certain minimum capital and
liquidity requirements and additional scrutiny from such regulatory agencies that we face as a non-
bank;
liquidity in the credit markets;
prevailing interest rates;
the strength of the lenders from which we borrow, and the regulatory environment in which they
operate, including proposed capital strengthening requirements;
limitations on borrowings on credit facilities imposed by the amount of eligible collateral pledged,
which may be less than the borrowing capacity of the credit facility; and
•
accounting changes that may impact calculations of covenants in our debt agreements.
No assurance can be given that any refinancing or additional financing will be possible when needed, that we
will be able to negotiate acceptable terms or that market conditions will be favorable at the times that we require such
refinancing or additional financing. If we are unable to obtain sufficient capital to meet the financing requirements of
our business, financial condition, liquidity and results of operations would be materially and adversely affected.
We are also dependent on a limited number of banking institutions that extend us credit on terms that we have
determined to be commercially reasonable. These banking institutions are subject to their own regulatory supervision,
liquidity and capital requirements, risk management frameworks, profitability and risk thresholds and tolerances, any of
which may change materially and negatively impact their business strategies, including their extension of credit to us
specifically or mortgage lenders and servicers generally. Certain banking institutions have already exited, and others
may in the future decide to exit, the mortgage business. Such actions may increase our cost of capital and limit or
otherwise eliminate our access to capital, in which case our business, financial condition, liquidity and results of
operations would be materially and adversely affected.
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We leverage our assets under credit and other financing agreements and utilize various other sources of borrowings,
which exposes us to significant risk and may materially and adversely affect our business, financial condition,
liquidity and results of operations.
We currently leverage and, to the extent available, we intend to continue to leverage the mortgage loans
produced through our consumer direct lending business and the government-insured loans acquired through our
correspondent production operations from PMT with borrowings under repurchase agreements. When we enter into
repurchase agreements, we sell mortgage loans to lenders, which are the repurchase agreement counterparties, and
receive cash from the lenders. The lenders are obligated to resell the same assets back to us at the end of the term of the
transaction. Because the cash that we receive from a lender when we initially sell the assets to that lender is less than the
fair value of those assets (this difference is referred to as the haircut), if the lender defaults on its obligation to resell the
same assets back to us we could incur a loss on the transaction equal to the amount of the haircut (assuming that there
was no change in the fair value of the assets). In addition, repurchase agreements generally allow the counterparties, to
varying degrees, to determine a new fair value of the collateral to reflect current market conditions. If a counterparty
lender determines that the fair value of the collateral has decreased, it may initiate a margin call and require us to either
post additional collateral to cover such decrease or repay a portion of the outstanding borrowing. Should this occur, in
order to obtain cash to satisfy a margin call, we may be required to liquidate assets at a disadvantageous time, which
could cause us to incur further losses. If we are unable to satisfy a margin call, our counterparty may sell the collateral,
which may result in significant losses to us.
In addition, we invest in certain assets, including MSRs, for which financing has historically been difficult to
obtain. We currently leverage certain of our MSRs under secured financing arrangements. Our Fannie Mae and Freddie
Mac MSRs are pledged to secure borrowings under a loan and security agreement, while our Ginnie Mae MSRs and
related excess servicing spread financing (“ESS”) are pledged to a special purpose entity, which issues variable funding
notes and term notes that are secured by such Ginnie Mae assets and repaid through the cash flows received by the
special purpose entity as the lender under a repurchase agreement with PLS. In each case, similar to our repurchase
agreements, the cash that we receive under these secured financing arrangements is less than the fair value of the assets
and a decrease in the fair value of the pledged collateral can result in a margin call. Should a margin call occur, we may
be required to liquidate assets at a disadvantageous time, which could cause us to incur further losses. If we are unable to
satisfy a margin call, the secured parties may sell the collateral, which may result in significant losses to us.
Each of the secured financing arrangements pursuant to which we finance MSRs and ESS is further subject to
the terms of an acknowledgement agreement with Fannie Mae, Freddie Mac or Ginnie Mae, as applicable, pursuant to
which our and the secured parties’ rights are subordinate in all respects to the rights of the applicable Agency.
Accordingly, the exercise by any of Fannie Mae, Freddie Mac or Ginnie Mae of its rights under the applicable
acknowledgment agreement could result in the extinguishment of our and the secured parties’ rights in the related
collateral and result in significant losses to us.
We leverage certain of our other assets under a capital lease and a revolving credit agreement and may in the
future utilize other sources of borrowings, including term loans, bank credit facilities and structured financing
arrangements, among others. The amount of leverage we employ varies depending on the asset class being financed, our
available capital, our ability to obtain and access financing arrangements with lenders and the lenders’ and rating
agencies’ estimate of, among other things, the stability of our cash flows. We can provide no assurance that we will have
access to any debt or equity capital on favorable terms or at the desired times, or at all. Our inability to raise such capital
or obtain financing on favorable terms could materially and adversely impact our business, financial condition, liquidity
and results of operations.
Our credit and financing agreements contain financial and restrictive covenants that could adversely affect our
business, financial condition, liquidity and results of operations.
The lenders under our credit and financing agreements require us and/or our subsidiaries to comply with
various financial covenants, including those relating to tangible net worth, profitability and our ratio of total liabilities to
tangible net worth. Incurring substantial debt subjects us to the risk that our cash flows from operations may be
insufficient to repurchase the assets that we have sold to the lenders under our repurchase agreements or otherwise
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service the debt incurred under our other credit and financing agreements. Our lenders also require us to maintain
minimum amounts of cash or cash equivalents sufficient to maintain a specified liquidity position. If we are unable to
maintain these liquidity levels, we could be forced to sell additional assets at a loss and our financial condition could
deteriorate rapidly.
Our existing credit and financing agreements also impose other financial and non-financial covenants and
restrictions on us that impact our flexibility to determine our operating policies and investment strategies by limiting our
ability to incur certain types of indebtedness; grant liens; engage in consolidations, mergers and asset sales, make
restricted payments and investments; enter into transactions with affiliates; and amend, modify or prepay certain
indebtedness. In our credit and financing agreements, we agree to certain covenants and restrictions and we make
representations about the assets sold or pledged under these agreements. We also agree to certain events of default
(subject to certain materiality thresholds and grace periods), including payment defaults, breaches of financial and other
covenants and/or certain representations and warranties, cross-defaults, servicer termination events, ratings downgrades,
guarantor defaults, bankruptcy or insolvency proceedings and other events of default and remedies customary for these
types of agreements. If we default on our obligations under a credit or financing agreement, fail to comply with certain
covenants and restrictions or breach our representations and are unable to cure, the lender may be able to terminate the
transaction or its commitments, accelerate any amounts outstanding, require us to post additional collateral or repurchase
the assets, and/or cease entering into any other credit transactions with us.
Because our credit and financing agreements typically contain cross-default provisions, a default that occurs
under any one agreement could allow the lenders under our other agreements to also declare a default, thereby exposing
us to a variety of lender remedies, such as those described above, and potential losses arising therefrom. Any losses that
we incur on our credit and financing agreements could materially and adversely affect our business, financial condition,
liquidity and results of operations.
Our earnings may decrease because of changes in prevailing interest rates.
Our profitability is directly affected by changes in prevailing interest rates. The following are the material risks
we face related to increases in prevailing interest rates:
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an increase in prevailing interest rates could adversely affect our loan production volume because
refinancing an existing loan would be less attractive for homeowners and qualifying for a loan may be
more difficult for consumers;
an increase in prevailing interest rates could adversely affect our Ginnie Mae early buyout program because
loan modifications would become less economically feasible;
an increase in prevailing interest rates would increase the cost of servicing our outstanding debt, including
debt related to servicing assets and loan production; and
an increase in prevailing interest rates could increase payments for servicing customers with adjustable rate
mortgages and generate an increase in delinquency, default and foreclosure rates, resulting in an increase in
our loan servicing expenses.
The following are the material risks we face related to decreases in prevailing interest rates:
•
a decrease in prevailing interest rates may cause more borrowers to refinance existing loans that we service
or may cause the expected volume of refinancing to increase, which would require us to record decreases in
fair value and a higher level of amortization, impairment or both on our MSRs; and
•
a decrease in prevailing interest rates could reduce our earnings from our custodial deposit accounts.
An event of default, a negative ratings action by a rating agency, the perception of financial weakness, an
adverse action by a regulatory authority, a lengthening of foreclosure timelines or a general deterioration in the economy
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that constricts the availability of credit may increase our cost of funds and make it difficult for us to refinance existing
debt and borrow additional funds. In addition, we may not be able to adjust our operational capacity in a timely fashion,
or at all, in response to increases or decreases in mortgage production volume resulting from changes in prevailing
interest rates.
Any of the increases or decreases discussed above could have a material adverse effect on our business,
financial condition, liquidity and results of operations.
Hedging against interest rate exposure may materially and adversely affect our results of operations and cash flows.
We pursue hedging strategies to reduce our exposure to adverse changes in interest rates. Our hedging activity
will vary in scope based on the risks hedged, the level of interest rates, the type of investments held, and other changing
market conditions. Hedging instruments involve risk because they often are not traded on regulated exchanges,
guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities, and our
interest rate hedging may fail to protect or could adversely affect us because, among other things:
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interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;
available interest rate hedging may not correspond directly with the interest rate risk for which protection is
sought;
the duration of the hedge may not match the duration of the related liability or asset;
the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an
extent that it impairs our ability to sell or assign our side of the hedging transaction; and
•
the hedging counterparty owing the money in the hedging transaction may default on its obligation to pay.
In addition, we may fail to recalculate, re-adjust and execute hedges in an efficient manner. Any hedging
activity, which is intended to limit losses, may materially and adversely affect our results of operations and cash flows.
Therefore, while we may enter into such transactions seeking to reduce interest rate risk, unanticipated changes in
interest rates may result in worse overall investment performance than if we had not engaged in any such hedging
transactions. A liquid secondary market may not exist for a hedging instrument purchased or sold, and we may be
required to maintain a position until exercise or expiration, which could result in significant losses. In addition, the
degree of correlation between price movements of the instruments used in hedging strategies and price movements in the
portfolio positions or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not
establish an effective correlation between such hedging instruments and the portfolio positions or liabilities being
hedged. Any such ineffective correlation may prevent us from achieving the intended hedge and expose us to risk of
loss. Numerous regulations currently apply to hedging and any new regulations or changes in existing regulations may
significantly increase our administrative or compliance costs. Our derivative agreements generally provide for the daily
mark to market of our hedge exposures. If a hedge counterparty determines that its exposure to us exceeds its exposure
threshold, it may initiate a margin call and require us to post collateral. If we are unable to satisfy a margin call, we
would be in default of our agreement, which could have a material adverse effect on our business, financial condition,
liquidity and results of operations.
We use estimates in determining the fair value of our MSRs, which are highly volatile assets with continually
changing fair values. If our estimates of their value prove to be inaccurate, we may be required to write down the fair
values of the MSRs which could adversely affect our business, financial condition, liquidity and results of operations.
Our estimates of the fair value of our MSRs is based on the cash flows projected to result from the servicing of
the related mortgage loans and continually fluctuates due to a number of factors. These factors include prepayment
speeds, changes in interest rates and other market conditions, which affect the number of loans that are repaid or
refinanced and thus no longer result in cash flows, and the number of loans that become delinquent.
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We use internal financial models that utilize our understanding of inputs and assumptions used by market
participants to value our MSRs for purposes of financial reporting and for purposes of determining the price that we pay
for portfolios of MSRs and to acquire loans for which we will retain MSRs. These models are complex and use
asset-specific collateral data and market inputs for interest and discount rates. In addition, the modeling requirements of
MSRs are complex because of the high number of variables that drive cash flows associated with MSRs. Even if the
general accuracy of our valuation models is validated, valuations are highly dependent upon the reasonableness of our
inputs and the results of the models.
If loan delinquencies or prepayment speeds are different than anticipated or other factors perform differently
than modeled, the recorded value of certain of our MSRs may change. Significant differences in performance could
increase the chance that we do not adequately estimate the impact of these factors on our valuations which could result
in misstatements of our financial results, restatements of our financial statements, or otherwise materially and adversely
affect our business, financial condition, liquidity and results of operations.
The geographic concentration of our servicing portfolio may decrease the fair value of our MSRs and adversely affect
our consumer direct business, which would adversely affect our business, financial condition, liquidity and results of
operations.
As of December 31, 2018, approximately 17% of the aggregate outstanding loan balance in our servicing
portfolio was secured by properties located in California. To the extent that California or other states in which we have
greater concentrations of business in the future experience weaker economic conditions or greater rates of decline in real
estate values than the United States generally, such concentration may disproportionately decrease the fair value of our
MSRs and adversely affect our consumer direct lending business. The impact of property value declines may increase in
magnitude and it may continue for a long period of time. Additionally, if states in which we have greater concentrations
of business were to change their licensing or other regulatory requirements to make our business cost-prohibitive, we
may be required to stop doing business in those states or may be subject to a higher cost of doing business in those
states, which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Increases in delinquencies and defaults may adversely affect our business, financial condition, liquidity and results of
operations.
A decrease in home prices may result in higher loan-to-value ratios (“LTVs”), lower recoveries in foreclosure
and an increase in loss severities above those that would have been realized had property values remained the same or
continued to increase. Some borrowers do not have sufficient equity in their homes to permit them to refinance their
existing loans, which may reduce the volume or growth of our loan production business. This may also provide
borrowers with an incentive to default on their mortgage loans even if they have the ability to make principal and interest
payments. Further, despite recent increases, interest rates have remained near historical lows for an extended period of
time. Borrowers with adjustable rate mortgage loans must make larger monthly payments when the interest rates on
those mortgage loans adjust upward from their initial fixed rates or low introductory rates to the rates computed in
accordance with the applicable index and margin. Increases in monthly payments may increase the delinquencies,
defaults and foreclosures on a significant number of the loans that we service.
Increased mortgage delinquencies, defaults and foreclosures may result in lower revenue for loans that we
service for the Agencies because we only collect servicing fees from the Agencies for performing loans, and our failure
to service delinquent and defaulted loans in accordance with the applicable servicing guidelines could result in our
failure to benefit from available monetary incentives and/or expose us to monetary penalties and curtailments.
Additionally, while increased delinquencies generate higher ancillary fees, including late fees, these fees are not likely to
be recoverable in the event that the related loan is liquidated. In addition, an increase in delinquencies lowers the interest
income that we receive on cash held in collection and other accounts because there is less cash in those accounts. Also,
increased mortgage defaults may ultimately reduce the number of mortgages that we service.
Increased mortgage delinquencies, defaults and foreclosures will also result in a higher cost to service those
loans due to the increased time and effort required to collect payments from delinquent borrowers and to acquire and
liquidate the properties securing the loans or otherwise resolve loan defaults if payment collection is unsuccessful, and
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only a portion of these increased costs are recoverable under our servicing agreements. Increased mortgage
delinquencies, defaults and foreclosures may also result in an increase in servicing advances we are obligated to make to
fulfill our obligations to MBS holders and to protect our investors’ interests in the properties securing the delinquent
mortgage loans. An increase in required advances also may cause an increase in our interest expense and affect our
liquidity as a result of increased borrowings under our credit facilities to fund any such increase in the advances.
A disruption in the MBS market could materially and adversely affect our business, financial condition, liquidity and
results of operations.
Most of the loans that we produce are pooled into MBS issued by Fannie Mae or Freddie Mac or guaranteed by
Ginnie Mae. Disruptions in the general MBS market have occurred in the past. Any significant disruption or period of
illiquidity in the general MBS market would directly affect our own liquidity and the liquidity of PMT because no
existing alternative secondary market would likely be willing and able to accommodate on a timely basis the volume of
loans that we typically sell in any given period. Furthermore, we would remain contractually obligated to fund loans
under our outstanding IRLCs without being able to sell our existing inventory of mortgage loans. Accordingly, if the
MBS market experiences a period of illiquidity, we might be prevented from selling the loans that we produce into the
secondary market in a timely manner or at favorable prices and we would be required to hold a larger inventory of loans
than we have committed facilities to fund or we may be required to repay a portion of the debt secured by these assets,
which could have a material adverse effect on our business, financial condition, liquidity and results of operations.
Related Party Risks
We rely on PMT as a significant source of financing for, and revenue related to, our mortgage banking business, and
the termination of, or material adverse change in, the terms of this relationship, or a material adverse change to PMT
or its operations, would adversely affect our business, financial condition, liquidity and results of operations.
PMT is the counterparty that currently acquires all of the newly originated mortgage loans in connection with
our correspondent production operations. A significant portion of our income is derived from a fulfillment fee earned in
connection with PMT’s acquisition of conventional loans. We are able to conduct our correspondent production
operations without having to incur the significant additional debt financing that would be required for us to purchase
those loans from the originating lender. In the case of government-insured loans, we purchase them from PMT at PMT’s
cost plus a sourcing fee and fulfill them for our own account and sell the loans, typically by pooling the federally insured
or guaranteed loans together into an MBS which Ginnie Mae guarantees. We earn interest income and gains or losses
during the holding period and upon the sale of these securities, and we retain the MSRs with respect to the loans. If this
relationship with PMT is terminated by PMT or PMT reduces the volume of these loans that it acquires for any reason,
we would have to acquire these loans from the correspondent sellers for our own account, something that we may be
unable to do, or enter into another similar counterparty arrangement with a third party, which we may not be able to
enter into on terms that are as favorable to us, or at all.
The management agreement, the mortgage banking services agreement and certain of the other agreements that
we have entered into with PMT contain cross-termination provisions that allow PMT to terminate one or more of those
agreements under certain circumstances where another one of such agreements is terminated. Accordingly, the
termination of this relationship with PMT, or a material change in the terms thereof that is adverse to us, would likely
have a material adverse effect our business, financial condition, liquidity and results of operations. The terms of these
agreements extend until September 12, 2020, subject to automatic renewal for additional 18-month periods, but any of
the agreements may be terminated earlier under certain circumstances or otherwise non-renewed. If any agreement is
terminated or non-renewed and not replaced by a new agreement, it would materially and adversely affect our ability to
continue to execute our business plan.
We expect that PMT will continue to qualify as a REIT for U.S. federal income tax purposes. However, it is
possible that PMT may not meet the requirements for qualification as a REIT. If PMT were to lose its REIT status,
corporate-level income taxes, including alternative minimum taxes, would apply to all of PMT's taxable income at
federal and state tax rates. Either of these scenarios would potentially impair PMT’s financial position and its ability to
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raise capital, which could have a material adverse effect on our business, financial condition, liquidity and results of
operations.
A significant portion of our loan servicing operations are conducted pursuant to subservicing contracts with PMT,
and any termination by PMT of these contracts, or a material change in the terms thereof that is adverse to us, would
adversely affect our business, financial condition, liquidity and results of operations.
PMT, as the owner of a substantial number of all of the MSRs or mortgage loans that we subservice, may,
under certain circumstances, terminate our subservicing contract with or without cause, in some instances with little
notice and little to no compensation. Upon any such termination, it would be difficult to replace such a large volume of
subservicing in a short period of time, or perhaps at all. Accordingly, we may not generate as much revenue from
subservicing for other third parties. If we were to have our subservicing terminated by PMT, or if there was a change in
the terms under which we perform subservicing for PMT that was material and adverse to us, this would have a material
adverse effect on our business, financial condition, liquidity and results of operations.
PMT has an exclusive right to acquire the loans that are produced through our correspondent production operations,
which may limit the revenues that we could otherwise earn in respect of those loans.
Our mortgage banking services agreement with PMT requires PLS to provide fulfillment services for
correspondent production activities exclusively to PMT as long as PMT has the legal and financial capacity to purchase
correspondent loans. As a result, the revenue that we earn with respect to these loans will be limited to the fulfillment
fees that we earn in connection with the production of these loans, which may be less than the revenues that we might
otherwise be able to realize by acquiring these loans ourselves and selling them in the secondary loan market.
Our financings of MSRs using excess servicing spread exposes us to significant risks.
We have previously sold to PMT or its subsidiaries, from time to time, the right to receive certain ESS arising
from MSRs that we owned or acquired. The ESS represents the difference between our contractual servicing fee with the
applicable Agency and the base servicing fee that we retain as compensation for servicing the related mortgage loans
upon our sale of the ESS.
As a condition of our sale of the ESS, PMT was required to subordinate its interests in the ESS to those of the
applicable Agency. With respect to our Ginnie Mae MSRs, we pledged our interest in such MSRs and PMT’s interest in
the related ESS to a special purpose entity, which issues variable funding notes and term notes that are secured by such
Ginnie Mae assets and repaid through the cash flows received by the special purpose entity as the lender under a
repurchase agreement with PLS. Accordingly, our interest in the Ginnie Mae MSRs and PMT’s interest in the related
ESS are also subordinated to the rights of an indenture trustee on behalf of the note holders to which the special purpose
entity issues its variable funding notes and term notes under an indenture, pursuant to which the indenture trustee has a
blanket lien on all of our Ginnie Mae MSRs (including the ESS we sell to PMT and record as a financing).
The indenture trustee, on behalf of the note holders, may liquidate our Ginnie Mae MSRs along with PMT’s
interest in the ESS to the extent there exists an event of default under the indenture, the result of which could have a
material adverse effect on our business, financial condition, liquidity and results of operations. In the event PMT’s ESS
is liquidated as a result of certain of our actions or inactions, we generally would be required to indemnify PMT under
the applicable spread acquisition agreement. A claim by PMT for the loss of its ESS as a result of our actions or
inactions would likely be significant in size and could also have a material adverse effect on our business, financial
condition, liquidity and results of operations.
In connection with PLS’ repurchase agreement with the special purpose entity, we also provide pass through
financing to PMT under a repurchase agreement to facilitate its financing of the ESS it acquires from us. The repurchase
agreement subjects us to the credit risk of PMT. To the extent PMT defaults in its payments of principal and interest
under its repurchase agreement with us, we would still be required to make the allocable and corresponding payments
under our repurchase agreement with the special purpose entity. To the extent PMT fails to make such payments of
principal and interest to us or otherwise defaults under its repurchase agreement and we are unable to make the allocable
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and corresponding payments under our repurchase agreement with the special purpose entity, this could also create an
event of default that could cause a cross default under other financing arrangements and/or have a material adverse effect
on our business, financial condition, liquidity and results of operations.
Other Risks
We may be required to indemnify the purchasers of loans that we originate, acquire or assist in the fulfillment of, or
repurchase those loans, if those loans fail to meet certain criteria or characteristics or under other circumstances.
Our contracts with purchasers of newly originated loans that we fund through our consumer direct lending
business or acquire from PMT through our correspondent production activities contain provisions that require us to
indemnify the purchaser of the related loans or repurchase such loans under certain circumstances. We believe that, as a
result of the current market environment, many purchasers of mortgage loans, including the Agencies, are particularly
aware of the conditions under which loan originators or sellers must indemnify them against losses related to purchased
loans, or repurchase such loans, and would benefit from enforcing any indemnity or repurchase remedies they may have.
Our loan sale agreements with purchasers, including the Agencies, contain provisions that generally require us to
indemnify or repurchase these loans if:
•
•
our representations and warranties concerning loan quality and loan characteristics are inaccurate; or
the loans fail to comply with the respective Agency’s underwriting or regulatory requirements.
Repurchased loans typically can only be financed at a steep discount to their repurchase price, if at all. They
are also typically valued and, therefore, can generally only be sold at a significant discount to the underlying UPBs. In
certain cases involving mortgage lenders from whom loans were acquired through our correspondent production
activities, we may have contractual rights to either recover some or all of our indemnification losses or otherwise
demand repurchase of these loans. Depending on the volume of repurchase and indemnification requests, some of these
mortgage lenders may not be able to financially fulfill their obligation to indemnify us or repurchase the affected loans.
If a material amount of recovery cannot be obtained from these mortgage lenders, our business, financial condition,
liquidity and results of operations could be materially and adversely affected.
Although our indemnification and repurchase exposure cannot be quantified with certainty, to recognize these
potential indemnification and repurchase losses, we have recorded a liability of $21.2 million as of December 31, 2018.
Because of the increase in our loan production over time, we expect that indemnification and repurchase requests are
also likely to increase. Should home values decrease and negatively impact the related loan values, our realized loan
losses from indemnifications and repurchases may increase as well. As such, our indemnification and repurchase costs
may increase well beyond our current expectations. In addition, our mortgage banking services agreement with PMT
requires us to indemnify it with respect to loans for which we provide fulfillment services in certain instances. If we are
required to indemnify PMT or other purchasers against losses, or repurchase loans from PMT or other purchasers, that
result in losses that exceed the recorded liability, this could have a material adverse effect on our business, financial
condition, liquidity and results of operations.
We depend on the accuracy and completeness of information about borrowers and counterparties and any
misrepresented information could adversely affect our business, financial condition, liquidity and results of
operations.
In deciding whether to approve loans or to enter into other transactions across our businesses with borrowers
and counterparties, including brokers, correspondent lenders and non-delegated correspondent lenders, we may rely on
information furnished to us by or on behalf of borrowers and such counterparties, including financial statements and
other financial information. We also may rely on representations of borrowers and such counterparties as to the accuracy
and completeness of that information and, with respect to financial statements, on reports of independent auditors. If any
of this information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to loan
funding, the fair value of the loan may be significantly lower than expected. Whether a misrepresentation is made by the
loan applicant, another third party or one of our employees, we generally bear the risk of loss associated with the
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misrepresentation. Our controls and processes may not have detected or may not detect all misrepresented information in
our loan originations or acquisitions. Any such misrepresented information could have a material adverse effect on our
business, financial condition, liquidity and results of operations.
Our prime servicing portfolio, which consists primarily of recently originated loans, has a limited performance
history, which makes our future results of operations more difficult to predict.
The likelihood of mortgage delinquencies and defaults, and the associated risks to our business, including
higher costs to service such loans and a greater risk that we may incur losses due to repurchase or indemnification
demands, change as loans season. Newly originated loans typically exhibit low delinquency and default rates as the
changes in economic conditions, individual financial circumstances and other factors that drive borrower delinquency
often do not appear for months or years. Highly seasoned loan portfolios, in which borrowers have demonstrated years
of performance on their mortgage payments, also tend to exhibit low delinquency and default rates. Most of the loans in
our prime servicing portfolio were originated in the years 2016 through 2018. As a result, we expect the delinquency rate
and defaults in the prime servicing portfolio to increase in future periods as the portfolio seasons, but we cannot predict
the magnitude of this impact on our results of operations.
Our counterparties may terminate our MSRs, which could adversely affect our business, financial condition, liquidity
and results of operations.
As is standard in the industry, under the terms of our master servicing agreements with the Agencies in respect
of Agency MSRs that we retain in connection with our loan production, the Agencies have the right to terminate us as
servicer of the loans we service on their behalf at any time (and, in certain instances, without the payment of any
termination fee) and also have the right to cause us to sell the MSRs to a third party. In addition, our failure to comply
with applicable servicing guidelines could result in our termination under such master servicing agreements by the
Agencies with little or no notice and without any compensation. The owners of other non-Agency loans that we service
may also terminate certain of our MSRs if we fail to comply with applicable servicing guidelines. If the MSRs are
terminated on a material portion of our servicing portfolio, our business, financial condition, liquidity and results of
operations could be adversely affected.
We are required to make servicing advances that can be subject to delays in recovery or may not be recoverable in
certain circumstances, which could adversely affect our business, financial condition, liquidity and results of
operations.
During any period in which a borrower is not making payments, we are required under most of our servicing
agreements in respect of our MSRs to advance our own funds to pay property taxes and insurance premiums, legal
expenses and other protective advances. We also advance funds under these agreements to maintain, repair and market
real estate properties on behalf of investors. As home values change, we may have to reconsider certain of the
assumptions underlying our decisions to make advances and, in certain situations, our contractual obligations may
require us to make advances for which we may not be reimbursed. In addition, if a mortgage loan serviced by us is in
default or becomes delinquent, the repayment to us of the advance may be delayed until the mortgage loan is repaid or
refinanced or a liquidation occurs. A delay in our ability to collect advances may adversely affect our liquidity, and our
inability to be reimbursed for advances could have a material adverse effect on our business, financial condition,
liquidity and results of operations.
We may not realize all of the anticipated benefits of potential future acquisitions of MSRs, which could adversely
affect our business, financial condition, liquidity and results of operations.
Our ability to realize the anticipated benefits of potential future acquisitions of servicing portfolios will depend,
in part, on our ability to appropriately service any such assets. The process of acquiring these assets may disrupt our
business and may not result in the full benefits expected. The risks associated with these acquisitions include, among
others, unanticipated issues in integrating information regarding the new loans to be serviced into our information
technology systems, and the diversion of management’s attention from other ongoing business concerns. We have also
seen increased scrutiny by the Agencies and regulators with respect to large servicing acquisitions, the effect of which
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could reduce the willingness of selling institutions to pursue MSR sales and/or impede our ability to complete MSR
acquisitions. Moreover, if we inappropriately value the assets that we acquire or the fair value of the assets that we
acquire declines after we acquire them, the resulting charges may negatively affect both the carrying value of the assets
on our balance sheet and our earnings. Furthermore, if we incur additional indebtedness to finance an acquisition, the
acquired servicing portfolio may not be able to generate sufficient cash flows to service that additional indebtedness.
Unsuitable or unsuccessful acquisitions could have a material adverse effect on our business, financial condition,
liquidity and results of operations.
Risks Related to our Investment Management Segment
Market conditions could reduce the fair value of the assets that we manage, which would reduce our management
and incentive fees.
A significant portion of the fees that we earn under our investment management agreements with clients are
based on the fair value of the assets that we manage. The fair values of the securities and other assets held in the
portfolios that we manage and, therefore, our assets under management may decline due to any number of factors
beyond our control, including, among others, a decline in housing, changes to interest rates, stock or bond market
movements a general economic downturn, political uncertainty or acts of terrorism. The economic outlook cannot be
predicted with certainty and we continue to operate in a challenging business environment. If volatile market conditions
cause a decline in the fair value of our assets under management, that decline in fair value could materially reduce our
management fees and incentive fees under our management contract with PMT and adversely affect our revenues. If our
revenues decline without a commensurate reduction in our expenses, our net income will be reduced.
We currently manage assets for a single client, the loss of which could significantly reduce our management and
incentive fees and have a material adverse effect on our results of operations.
Substantially all of our management and incentive fees result from our management of PMT. The term of the
management agreement that we have entered into with PMT, as amended, expires on September 12, 2020, subject to
automatic renewal for additional 18-month periods, unless terminated earlier in accordance with the terms of the
agreement. In the event of a termination of one or more related party agreements by PMT in certain circumstances, we
may be entitled to a termination fee under our management agreement. However, the termination of such management
agreement and the loss of PMT as a client would significantly affect our investment management segment and
negatively impact our management fees and incentive fees.
The historical returns on the assets that we select and manage for PMT, and our resulting management and incentive
fees, may not be indicative of future results.
The historical returns of the assets that we manage should not be considered indicative of the future returns on
those assets or future returns on other assets that we may select for investment by PMT. The investment performance
that is achieved for the assets that we manage varies over time, and the nature and mix of assets we manage has changed
significantly over the past several years. As a result, the change and variance in investment performance can be
significant. Accordingly, the management and incentive fees that we have earned in the past based on those returns
should not be considered indicative of the management or incentive fees that we may earn in the future from managing
those same assets or from managing other assets for PMT. A decline in the investment performance of our managed
assets will also adversely affect our ability to attract and retain clients.
Changes in regulations applicable to our investment management segment could materially and adversely affect our
business, financial condition, liquidity and results of operations.
The legislative and regulatory environment in which we operate has undergone significant changes in the recent
past. We believe that significant regulatory changes in the investment management industry are likely to continue, which
is likely to subject industry participants to additional, more costly and generally more detailed regulation. New laws or
regulations, or changes in the enforcement of existing laws or regulations, applicable to us and our clients may adversely
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affect our business. Our ability to function in this environment will depend on our ability to monitor and promptly react
to legislative and regulatory changes.
Certain provisions of the Dodd-Frank Act will, and other provisions may, increase regulatory burdens and
reporting and related compliance costs on our investment management segment. The scope of many provisions of the
Dodd-Frank Act is being determined by implementing regulations, some of which are subject to additional proposal and
promulgation periods. The SEC requires investment advisers such as us who are registered with the SEC and advise one
or more funds to provide certain information about their funds and assets under management, including the amount of
borrowings, concentration of ownership and other performance information. These filings have required, and will
continue to require, significant investments in people, resources and systems to ensure timely and accurate reporting.
The Dodd-Frank Act will affect a broad range of market participants with whom we interact or may interact, including
banks, non-bank financial institutions, rating agencies, mortgage brokers, credit unions, insurance companies and
broker-dealers, and may cause us or PMT to become subject to further regulation by the Commodity Futures Trading
Commission. Regulatory changes that will affect other market participants are likely to change the way in which we
conduct business with our counterparties. The uncertainty regarding the continued implementation of the Dodd-Frank
Act and its impact on the investment management industry and us cannot be predicted at this time but will continue to be
a risk for our business.
We may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other
U.S. or non-U.S. governmental regulatory authorities or self-regulatory organizations that supervise the financial
markets. We also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules
by these governmental authorities and self-regulatory organizations, as well as by U.S. and non-U.S. courts. It is
impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be imposed on us or
the markets in which we trade, or whether any of the proposals will become law. Compliance with any new laws or
regulations could add to our compliance burden and costs and adversely affect the manner in which we conduct business,
as well as our financial condition, liquidity and results of operations.
Our failure to comply with the extensive amount of regulation applicable to our investment management segment
could materially and adversely affect our business, financial condition, liquidity and results of operations.
Our investment management segment is subject to extensive regulation in the United States, primarily at the
federal level, including regulation of PCM by the SEC under the Advisers Act. The requirements imposed by our
regulators are designed primarily to ensure the integrity of the financial markets and to protect investors in any entity
that we advise and are not designed to protect our stockholders. Consequently, these regulations often serve to limit our
activities.
These requirements relate to, among other things, fiduciary duties to clients, solicitation agreements, conflicts
of interest, recordkeeping and reporting requirements, disclosure requirements, limitations on agency cross and principal
transactions between an adviser and advisory clients and general anti-fraud prohibitions. More generally, we are required
to maintain an effective compliance program, and we have engaged an outside third party compliance advisor to
implement and administer a substantial portion of our compliance program. Registered investment advisers are also
subject to routine periodic examinations by the staff of the SEC.
We also regularly rely on exemptions and exclusions from various requirements of the Securities Act of 1933,
as amended (the “Securities Act”), the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the
Investment Company Act and ERISA. These exemptions are sometimes highly complex and may in certain
circumstances depend on compliance by third parties and service providers who we do not control. If for any reason
these exemptions were to be revoked or challenged or otherwise become unavailable to us, we could be subject to
regulatory action or third-party claims, and our business could be materially and adversely affected.
Our business combines the production and servicing of loans and investment management, the combination of
which presents particular compliance challenges. For example, regulations applicable to our investment management
business that are easily applied to traditional investments, such as stocks and bonds, may be more difficult to apply to a
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portfolio of mortgage loans, and the regulations applicable to our investment management business can require
procedures that are uncommon, impractical or difficult in our loan production and servicing businesses.
The failure by us or our service providers to comply with applicable laws or regulations, or the failure of our
outside third party compliance advisor to design and successfully implement and administer our compliance program,
could result in fines, suspensions of individual employees or other sanctions, any of which could have a material adverse
effect on our business, financial condition, liquidity and results of operations. Even if an investigation or proceeding did
not result in a fine or sanction or the fine or sanction imposed against us or our employees by a regulator were small in
monetary amount, the adverse publicity relating to an investigation, proceeding or imposition of these fines or sanctions
could harm our reputation and cause us to lose existing clients.
We may encounter conflicts of interest in trying to appropriately allocate our time and services between activities for
our own account and for PMT, or in trying to appropriately allocate investment opportunities among ourselves and
for PMT.
Pursuant to our management agreement with PMT, we are obligated to provide PMT with the services of our
senior management team, and the members of that team are required to devote such time as is necessary and appropriate,
commensurate with the level of activity of PMT. The members of our senior management team may have conflicts in
allocating their time and services between our operations and the activities of PMT and any other entities or accounts
that we may manage in the future.
In addition, we and the other entities or accounts that we may manage may participate in some of PMT’s
investments now or in the future, which may not be the result of arm’s length negotiations and may involve or later
result in potential conflicts between our interests in the investments and those of PMT or such other entities. Any such
potential or actual conflicts of interest could damage our reputation and materially and adversely affect our business,
financial condition, liquidity and results of operations.
We are subject to significant financial and reputational risks from potential liability arising from lawsuits, and
regulatory and government action.
We face significant legal risks in our business, and the volume of claims and amount of damages, penalties and
fines claimed in litigation, and regulatory and government proceedings against us and other financial institutions remains
high. Greater than expected investigation costs and litigation, including class action lawsuits associated with compliance
related issues, substantial legal liability or significant regulatory or government action against us could have adverse
effects on our financial condition and results of operations or cause significant reputational harm to us, which in turn
could adversely impact our business results and prospects. We may experience a significant volume of litigation and
other disputes, including claims for contractual indemnification, with counterparties regarding relative rights and
responsibilities. Consumers, clients and other counterparties may also become increasingly litigious.
We also may be exposed to the risk of litigation by investors in clients that we manage from time to time if our
management advice is alleged to constitute gross negligence or willful misconduct. Investors could sue us to recover
amounts lost by those entities due to our alleged misconduct, up to the entire amount of loss. Further, we may be subject
to litigation arising from investor dissatisfaction with the performance of any such entities that we manage or from
allegations that we improperly exercised control or influence over those entities. In addition, we are exposed to risks of
litigation or investigation relating to transactions which presented conflicts of interest that were not properly addressed.
In such actions, we would be obligated to bear legal, settlement and other costs (which may be in excess of available
insurance coverage). In addition, although we are generally indemnified by the entities that we manage, our rights to
indemnification may be challenged. If we are required to incur all or a portion of the costs arising out of litigation or
investigations as a result of inadequate insurance proceeds or failure to obtain indemnification from the entities that we
manage, our business, financial condition, liquidity and results of operations would be materially and adversely affected.
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Risks Related to Our Business in General
The loss of the services of our senior managers could adversely affect our business.
The experience of our senior managers is a valuable asset to us. Our management team has significant
experience in the mortgage loan production and servicing industry and the investment management industry. We do not
maintain key person life insurance policies relating to our senior managers. The loss of the services of our senior
managers for any reason could have a material adverse effect on our business, financial condition, liquidity and results of
operations.
Our business could suffer if we fail to attract and retain a highly skilled workforce.
Our future success will depend on our ability to identify, hire, develop, motivate and retain highly qualified
personnel for all areas of our organization, in particular skilled managers, loan officers, underwriters, loan servicers and
debt default specialists. Trained and experienced personnel are in high demand and may be in short supply in some
areas. Many of the companies with which we compete for experienced employees have greater resources than we have
and may be able to offer more attractive terms of employment. In addition, we invest significant time and expense in
training our employees, which increases their value to competitors who may seek to recruit them. We may not be able to
attract, develop and maintain an adequate skilled workforce necessary to operate our businesses and labor expenses may
increase as a result of a shortage in the supply of qualified personnel. If we are unable to attract and retain such
personnel, we may not be able to take advantage of acquisitions and other growth opportunities that may be presented to
us and this could have a material adverse effect on our business, financial condition, liquidity and results of operations.
We depend on counterparties and vendors to provide services that are critical to our business, which subjects us to a
variety of risks.
We have a number of counterparties and vendors, who provide us with financial, technology and other services
that are critical to support our businesses. If our current counterparties and vendors were to stop providing services to us
on acceptable terms, we may be unable to procure alternative services from other counterparties or vendors in a timely
and efficient manner and on similarly acceptable terms, or at all. Some of these counterparties and vendors have
significant operations outside of the United States. If we or our vendors had to curtail or cease operations in these
countries due to political unrest or natural disasters and then transfer some or all of these operations to another
geographic area, we could experience disruptions in service and incur significant transition costs as well as higher future
overhead costs. With respect to vendors engaged to perform certain servicing activities, we are required to assess their
compliance with various regulations and establish procedures to provide reasonable assurance that the vendor’s activities
comply in all material respects with such regulations. In the event that a vendor’s activities are not in compliance, it
could negatively impact our relationships with our regulators, as well as our business and operations. Further, we may
incur significant costs to resolve any such disruptions in service which could have a material adverse effect on our
business, financial condition, liquidity and results of operations.
Our failure to deal appropriately with various issues that may give rise to reputational risk, including conflicts of
interest, legal and regulatory requirements, could cause harm to our business and adversely affect our earnings.
Maintaining our reputation is critical to attracting and retaining clients, customers, trading counterparties,
investors and employees. If we fail to deal with, or appear to fail to deal with various issues that may give rise to
reputational risk, we could significantly harm our business prospects and earnings. Such issues include, but are not
limited to, conflicts of interest, legal and regulatory requirements, and any of the other risks discussed in this Item 1A.
Certain of our officers also serve as officers of PMT. As we expand the scope of our businesses, we
increasingly confront potential conflicts of interest relating to investment activities that we manage for our clients. In
addition, investors may perceive conflicts of interest regarding investment decisions and wind-down strategies for funds
in which certain of our officers have made and may continue to make personal investments. Similarly, conflicts of
interest may exist regarding decisions about the allocation of specific investment opportunities between funds in which
we receive an allocation of profits as the general partner and funds in which we do not.
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The SEC and certain regulators have increased their scrutiny of potential conflicts of interest, and as we
experience growth in our businesses, we must continue to monitor and mitigate or otherwise address any conflicts
between our interests and those of our clients. We have implemented procedures and controls to be followed when real
or potential conflicts of interest arise, but it is possible that potential or perceived conflicts could give rise to the
dissatisfaction of, or litigation by, our stockholders, investors in any entity that we advise or regulatory enforcement
actions. Appropriately dealing with conflicts of interest is complex and difficult and our reputation could be damaged if
we fail, or appear to fail, to deal appropriately with one or more potential or actual conflicts of interest. Reputational risk
incurred in connection with conflicts of interest could negatively affect our business, strain our working relationships
with regulators and government agencies, expose us to litigation and regulatory action, impact our ability to attract and
retain clients, customers, trading counterparties, investors and employees and adversely affect our results of operations.
Reputational risk, or the risk to our business, earnings and capital from negative public opinion, is inherent in
our business and can result from a number of factors. Negative public opinion can result from our actual or alleged
conduct in any number of activities, including lending and debt collection practices, corporate governance, and actions
taken by government regulators and community organizations in response to those activities. Negative public opinion
can also result from social media and media coverage, whether accurate or not. These factors can tarnish or otherwise
strain our working relationships with regulators and government agencies, expose us to litigation and regulatory action,
negatively affect our ability to attract and retain customers, trading counterparties and employees and adversely affect
our results of operations.
Initiating new business activities, developing new products or significantly expanding existing business activities may
expose us to new risks and will increase our cost of doing business.
Initiating new business activities, developing new products, such as the recently launched home equity line of
credit product, or significantly expanding existing business activities, such as our entry into broker direct and consumer
direct lending and non-delegated correspondent production, are ways to grow our businesses and respond to changing
circumstances in our industry; however, they may expose us to new risks and regulatory compliance requirements. We
cannot be certain that we will be able to manage these risks and compliance requirements effectively. Furthermore, our
efforts may not succeed, and any revenues we earn from any new or expanded business initiative may not be sufficient to
offset the initial and ongoing costs of that initiative, which would result in a loss with respect to that initiative.
Our risk management efforts may not be effective.
We could incur substantial losses and our business operations could be disrupted if we are unable to effectively
identify, manage, monitor, and mitigate financial risks, such as credit risk, interest rate risk, prepayment risk, liquidity
risk, and other market-related risks, as well as operational and legal risks related to our business, assets, and liabilities.
We also are subject to various laws, regulations and rules that are not industry specific, including employment laws
related to employee hiring and termination practices, health and safety laws, environmental laws and other federal, state
and local laws, regulations and rules in the jurisdictions in which we operate. Our risk management policies, procedures,
and techniques may not be sufficient to identify all of the risks to which we are exposed, mitigate the risks we have
identified, or identify additional risks to which we may become subject in the future. Expansion of our business activities
may also result in our being exposed to risks to which we have not previously been exposed or may increase our
exposure to certain types of risks, and we may not effectively identify, manage, monitor, and mitigate these risks as our
business activities change or increase.
We could be harmed by misconduct or fraud that is difficult to detect.
We are exposed to risks relating to misconduct by our employees, contractors we use, or other third parties with
whom we have relationships. For example, our employees could execute unauthorized transactions, use our assets
improperly or without authorization, perform improper activities, use confidential information for improper purposes, or
misrecord or otherwise try to hide improper activities from us. This type of misconduct could also relate to assets we
manage for others through our investment advisory subsidiary, and can be difficult to detect. If not prevented or
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detected, misconduct by employees, contractors, or others could result in losses, claims or enforcement actions against
us, or could seriously harm our reputation. Our controls may not be effective in detecting this type of activity.
If we fail to maintain an effective system of internal controls, we may not be able to accurately determine our
financial results or prevent fraud. As a result, our stockholders could lose confidence in our financial results, which
could harm our business and the market value of our common stock.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent
fraud. We may in the future discover areas of our internal controls that need improvement. Section 404 of the
Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires that we evaluate and report on our internal control
over financial reporting. We cannot be certain that we will be successful in maintaining adequate control over our
financial reporting and financial processes. Furthermore, as we rapidly grow our businesses, our internal controls will
become more complex, and we will require significantly more resources to ensure our internal controls remain effective.
Section 404(b) of the Sarbanes-Oxley Act requires our auditors to formally attest to and report on the effectiveness of
our internal control over financial reporting.
If we cannot maintain effective internal control over financial reporting, or our independent registered public
accounting firm cannot provide an unqualified attestation report on the effectiveness of our internal control over
financial reporting, investor confidence and, in turn, the market price of our common stock could decline. If we or our
independent auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could result in
an event of default under one or more of our lending arrangements and/or reduce the market value of shares of our
common stock. Additionally, the existence of any material weakness or significant deficiency could require management
to devote significant time and incur significant expense to remediate any such material weakness or significant
deficiency, and management may not be able to remediate any such material weakness or significant deficiency in a
timely manner, or at all. Accordingly, our failure to maintain effective internal control over financial reporting could
result in misstatements of our financial results or restatements of our financial statements or otherwise have a material
adverse effect on our business, financial condition, liquidity and results of operations.
Accounting rules for certain of our transactions are highly complex and involve significant judgment and
assumptions. Changes in accounting interpretations or assumptions could impact our financial statements.
Accounting rules for mortgage loan sales and securitizations, valuations of financial instruments and MSRs,
investment consolidations, income taxes and other aspects of our operations are highly complex and involve significant
judgment and assumptions. These complexities could lead to a delay in preparation of financial information and the
delivery of this information to our stockholders and also increase the risk of errors and restatements, as well as the cost
of compliance. Changes in accounting interpretations or assumptions could impact our financial statements and our
ability to timely prepare our financial statements. Our inability to timely prepare our financial statements in the future
would likely adversely affect our share price significantly.
The success and growth of our business depends upon our ability to adapt to and implement technological changes.
Our mortgage loan production businesses are dependent upon our ability to effectively interface with our
borrowers, mortgage lenders and other third parties and to efficiently process loan applications and closings. The direct
lending and correspondent production processes are becoming more dependent upon technological advancement, such as
our continued ability to process applications over the Internet, accept electronic signatures, provide process status
updates instantly and other borrower- or counterparty-expected conveniences.
Similarly, our servicing business is dependent on our ability to effectively interface with our customers and
investors, as well as service mortgage loans in compliance with applicable laws and regulations and the contractual
requirements of such investors. We have developed proprietary servicing technology to automate our workflows in order
to better meet these needs while reducing servicing costs and creating sustainable efficiencies.
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Maintaining and improving these new technologies and becoming proficient with them requires significant
capital expenditures. As these technological advancements and investor and compliance requirements increase in the
future, we will need to fully develop these technological capabilities in order to remain competitive, and we will need to
implement, execute and maintain them in an operating and regulatory environment that exposes us to significant risk.
Any failure by us to develop, implement, execute or maintain these technological capabilities could have a material
adverse effect on our business, financial condition and results of operations.
Cybersecurity risks, cyber incidents and technology failures may adversely affect our business by causing a disruption
to our operations, a compromise or corruption of our confidential information, and/or damage to our business
relationships, all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability
of our information resources. These incidents may be an intentional attack or an unintentional event and could involve
gaining unauthorized access to our information systems for purposes of theft of certain personally identifiable
information of consumers, misappropriating assets, stealing confidential information, corrupting data or causing
operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial
data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and
damage to our investor relationships.
As our reliance on rapidly changing technology has increased, so have the risks posed to our information
systems, both proprietary and those provided to us by third-party service providers such as cloud-based computing
service providers. System disruptions and failures caused by fire, power loss, telecommunications outages, unauthorized
intrusion, computer viruses and disabling devices, natural disasters and other similar events may interrupt or delay our
ability to provide services to our customers.
Despite our efforts to ensure the integrity of our systems our investment in significant physical and
technological security measures, employee training, contractual precautions and business continuity plans, and our
implementation of policies and procedures designed to help mitigate cybersecurity risks and cyber intrusions, there can
be no assurance that any such cyber intrusions will not occur or, if they do occur, that they will be adequately addressed.
We also may not be able to anticipate or implement effective preventive measures against all security breaches,
especially because the methods of attack change frequently or may not be recognized until after such attack has been
launched, and because security attacks can originate from a wide variety of sources, including third parties such as
persons involved with organized crime or associated with external service providers. We are also held accountable for
the actions and inactions of our third-party vendors regarding cybersecurity and other consumer-related matters.
Any of the foregoing events could result in violations of applicable privacy and other laws, financial loss to us
or to our customers, loss of confidence in our security measures, customer dissatisfaction, additional regulatory scrutiny,
significant litigation exposure and harm to our reputation, any of which could have a material adverse effect on our
business, financial condition, liquidity and results of operations, any of which could have a material adverse effect on
our business, financial condition, liquidity and results of operations.
Terrorist attacks and other acts of violence or war may cause disruptions in our operations and in the financial
markets, and could materially and adversely affect the real estate industry generally and our business, financial
condition, liquidity and results of operations.
Terrorist attacks and other acts of violence or war may cause disruptions in the U.S. financial markets,
including the real estate capital markets, and negatively impact the U.S. economy in general. Such attacks could also
cause disruptions in our operations. Any future terrorist attacks, the anticipation of any such attacks, the consequences of
any military or other response by the United States and its allies, and other armed conflicts could cause consumer
confidence and spending to decrease or result in increased volatility in the United States and worldwide financial
markets and economy. The economic impact of these events could also materially and adversely affect the credit quality
of some of our loans and investments and the properties underlying our interests.
We may suffer losses as a result of the adverse impact of any future attacks and these losses may adversely
impact our performance and may cause the market value of our common stock to decline or be more volatile. A
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prolonged economic slowdown, recession or declining real estate values could impair the performance of our
investments and harm our financial condition and results of operations, increase our funding costs, limit our access to the
capital markets or result in a decision by lenders not to extend credit to us. We cannot predict the severity of the effect
that potential future armed conflicts and terrorist attacks would have on us. Losses resulting from these types of events
may not be fully insurable.
We are subject to certain risks associated with investing in real estate and real estate related assets, including risks of
loss from adverse weather conditions and man-made or natural disasters, which may cause disruptions in our
operations and could materially and adversely affect the real estate industry generally and our business, financial
condition, liquidity and results of operations.
Weather conditions and man-made or natural disasters such as hurricanes, tornadoes, earthquakes, floods,
droughts, fires and other environmental conditions can damage properties that we own or that collateralize loans we own
or service. In addition, the properties where we conduct business could be adversely impacted. Future adverse weather
conditions and man-made or natural disasters could also adversely impact the demand for, and value of, our assets, as
well as the cost to service or manage such assets, directly impact the value of our assets through damage, destruction or
loss, and thereafter materially impact the availability or cost of insurance to protect against these events. Although we
believe our owned real estate and the properties collateralizing our loan assets or underlying our MSR assets are
adequately covered by insurance, we cannot predict at this time if we or our borrowers will be able to obtain appropriate
coverage at a reasonable cost in the future, or if we will be able to continue to pass along all of the costs of insurance. In
addition, there is a risk that one or more of the insurers of property in which we hold an interest may not be able to fulfill
their obligations with respect to claims payments due to a deterioration in its financial condition or may even cancel
policies due to increasing costs of providing insurance coverage in certain geographic areas.
Catastrophic events may disrupt our business.
Our corporate headquarters are located in Westlake Village, California and we have additional locations around
the greater Los Angeles metropolitan area and elsewhere in the State of California. In 2018, many areas of California,
including the immediate area around our corporate headquarters, experienced extensive damage and property loss due to
a series of very large wildfires. California and the other jurisdictions in which we operate are also prone to other types
of natural disasters. In the event of a major earthquake, hurricane, or catastrophic event such as fire, flood, power loss,
telecommunications failure, cyber-attack, war, or terrorist attack, we may be unable to continue our operations and may
endure significant business interruptions, reputational harm, delays in servicing our customers and working with our
partners, interruptions in the availability of our technology and systems, breaches of data security, and loss of critical
data, all of which could have an adverse effect on our future operating results.
Risks Related to Our Organizational Structure
BlackRock and Highfields may be able to significantly influence the outcome of votes of our common stock, or
exercise certain other rights pursuant to separate stockholder agreements we have entered into with each of them,
and their interests may differ from those of our public stockholders.
Pursuant to separate stockholder agreements with BlackRock and Highfields, which were amended and restated
in connection with the Reorganization in November 2018, each of BlackRock and Highfields has the right to nominate
one or two individuals for election to our board of directors, depending on the percentage of the voting power of our
outstanding shares common stock that it holds, and we are obligated to use our best efforts to cause the election of those
nominees. In addition, these stockholder agreements require that we obtain the consent of BlackRock and Highfields
with respect to amendments to our certificate of incorporation or bylaws. As a result, each of BlackRock and Highfields
may be able to significantly influence our management and affairs. In addition, as a result of the size of their individual
equity holding they may be able to significantly influence the outcome of all matters requiring stockholder approval,
including mergers and other material transactions, and may be able to cause or prevent a change in the composition of
our board of directors or a change in control of our Company that could deprive our stockholders of an opportunity to
receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price
of our common stock.
37
We will be required to pay certain of the former owners of PennyMac other than us for certain tax benefits that we
may claim, and the amounts we may pay could be significant.
We are a party to a tax receivable agreement with certain former owners of PennyMac other than us that
provides for the payment from time to time by us to those former owners of 85% of the tax benefits, if any, that we are
deemed to realize under certain circumstances as a result of (i) increases in tax basis resulting from exchanges of Class A
units of PennyMac for shares of our common stock and (ii) certain other tax benefits related to our entering into the tax
receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. As a result of
the Reorganization, each Class A unit of PennyMac held by a Class A unit holder was contributed and exchanged on a
one-for-one basis into a share of our common stock. Notwithstanding the foregoing, we have continuing payment
obligations under the tax receivable agreement to any Class A unit holder who exchanged Class A units for shares of our
common stock prior to the completion of the Reorganization.
It is possible that future transactions or events could increase or decrease the actual tax benefits realized and the
corresponding tax receivable agreement payments. There may be a material negative effect on our liquidity if, as a result
of timing discrepancies or otherwise, the payments under the tax receivable agreement precede or exceed the actual
benefits we realize in respect of the tax attributes subject to the tax receivable agreement or distributions to us by
PennyMac are not sufficient to permit us to make payments under the tax receivable agreement after we have paid our
taxes. Furthermore, our obligations to make payments under the tax receivable agreement could make us a less attractive
target for an acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that are
deemed realized under the tax receivable agreement. The payments under the tax receivable agreement are not
conditioned upon the continued ownership of us by former owners of PennyMac.
In certain cases, payments under the tax receivable agreement to former owners of PennyMac other than us may be
accelerated and/or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the tax
receivable agreement.
The tax receivable agreement provides that upon certain mergers, asset sales, other forms of business
combinations or other changes of control, or if, at any time, we elect an early termination of the tax receivable
agreement, our (or our successor’s) obligations with respect to previously exchanged Class A units of PennyMac would
be based on certain assumptions, including that we would have sufficient taxable income to fully utilize the deductions
arising from the increased tax deductions and tax basis and other benefits related to entering into the tax receivable
agreement. As a result, we could be required to make payments under the tax receivable agreement that differ from the
percentage specified in the tax receivable agreement of the actual benefits that we realize in respect of the tax attributes
that are subject to the tax receivable agreement. Also, if we elect to terminate the tax receivable agreement early, we
would be required to make an immediate payment equal to the present value of the anticipated future tax benefits, which
upfront payment may be made years in advance of the actual realization of such future benefits (if any). In these
situations, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity,
as well as our attractiveness as a target for an acquisition. In addition, we may not be able to finance our obligations
under the tax receivable agreement.
Payments under the tax receivable agreement will be based on the tax reporting positions that we determine.
Although we are not aware of any issue that would cause the Internal Revenue Service, or IRS, to challenge a tax basis
increase, we will not be reimbursed for any payments previously made under the tax receivable agreement. As a result,
in certain circumstances, payments could be made under the tax receivable agreement in excess of the tax benefits that
we actually realize in respect of (i) increases in tax basis resulting from exchanges of Class A units of PennyMac for
shares of our common stock and (ii) certain other tax benefits related to our entering into the tax receivable agreement,
including tax benefits attributable to payments under the tax receivable agreement.
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Our only material assets are our equity interests in PNMAC Holdings, Inc., PennyMac and their subsidiaries, and we
are accordingly dependent upon distributions from such entities to pay taxes, make payments under the tax receivable
agreement or pay dividends.
We are a holding company and have no material assets other than our direct ownership of PNMAC Holdings,
Inc. and our direct and indirect ownership of all of the Class A units of PennyMac. We have no independent means of
generating revenue. We are required to pay tax on the taxable income of PennyMac and make payments under the tax
receivable agreement without regard to whether PennyMac distributes to us any cash or other property. To the extent that
we need funds, and PennyMac is restricted from making such distributions under applicable laws or regulations or under
the terms of financing arrangements, or is otherwise unable to provide such funds, it could materially and adversely
affect our liquidity and financial condition.
We may not pay dividends on our common stock in the foreseeable future.
We are entitled to receive the tax distributions made by PennyMac. The cash received from such distributions
will first be used to satisfy any of our tax liabilities and then to make any payments under the tax receivable agreement
with certain former owners of PennyMac other than us. The declaration, amount and payment of any dividends on shares
of our common stock with respect to any remaining excess cash will be at the sole discretion of our board of directors.
For example, in 2018, PNMAC Holdings Inc. (our former top-level parent entity prior to the Reorganization) declared a
special dividend of $0.40 per share to holders of record of its Class A Common Stock with a record date of
August 13, 2018, that was paid on August 30, 2018. Our board of directors may take into account general and economic
conditions, our financial condition and operating results, our available cash and current and anticipated cash needs,
capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by
us to our stockholders or by our subsidiaries to us, and such other factors as our board of directors may deem relevant.
We may also enter into credit agreements or other borrowing arrangements in the future that restrict or limit our ability
to pay cash dividends on our common stock. Accordingly, we may not pay any dividends on our common stock in the
foreseeable future.
Anti-takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts
for us that you might consider favorable.
Our certificate of incorporation and bylaws contain provisions that may make the acquisition of our company
more difficult without the approval of our board of directors. Among other things, these provisions:
•
•
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•
•
authorize the issuance of undesignated preferred stock, the terms of which may be established and the
shares of which may be issued without stockholder approval, and which may include super voting, special
approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;
prohibit stockholder action by written consent unless the matter as to which action is being taken has been
approved by our board of directors, which requires all stockholder actions regarding matters not approved
by our board of directors to be taken at a meeting of our stockholders;
provide that our board of directors is expressly authorized to make, alter, or repeal our bylaws (provided
that, if that action adversely affects BlackRock or Highfields when that entity, together with its affiliates,
holds at least 5% of the voting power of our outstanding shares of capital stock, our stockholder
agreements provide that such action must be approved by that entity);
establish advance notice requirements for nominations for elections to our board or for proposing matters
that can be acted upon by stockholders at stockholder meetings; and
prevent us from selling substantially all of our assets or completing a merger or other business combination
that constitutes a change of control without the approval of a majority of those of our directors who are not
also our officers.
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These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a
transaction involving a change in control of our company, including actions that our stockholders may deem
advantageous, or negatively affect the trading price of our common stock. These provisions could also discourage proxy
contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to
take other corporate actions you desire.
Our certificate of incorporation contains provisions renouncing our interest and expectancy in certain corporate
opportunities identified by or presented to BlackRock and Highfields.
BlackRock, Highfields and their respective affiliates are in the business of providing capital to growing
companies, and may acquire interests in businesses that directly or indirectly compete with certain portions of our
business. Our certificate of incorporation provides that neither BlackRock nor Highfields nor their respective affiliates
has any duty to refrain from (i) engaging, directly or indirectly, in a corporate opportunity in the same or similar lines of
business in which we now engage or propose to engage, or (ii) doing business with any of our clients, customers or
vendors. In the event that either of BlackRock or Highfields or their respective affiliates acquires knowledge of a
potential transaction or other business opportunity which may be a corporate opportunity for itself or its affiliates and for
us or our affiliates other than in the capacity as one of our officers or directors, then neither BlackRock nor Highfields
has any duty to communicate or offer such transaction or business opportunity to us and may take any such opportunity
for themselves or offer it to another person or entity. Neither BlackRock nor Highfields nor any officer, director or
employee thereof, shall be liable to us or to any of our stockholders (or any affiliates thereof) for breach of any fiduciary
or other duty by engaging in any such activity and we waive and renounce any claim based on such activity. This
provision applies even if the business opportunity is one that we might reasonably be deemed to have pursued or had the
ability or desire to pursue if granted the opportunity to do so. Our separate stockholder agreements with BlackRock and
Highfields provide that any amendment or repeal of the provisions related to corporate opportunities described above
requires the consent of each of BlackRock and Highfields as long as it, or any of its affiliates, holds any equity interest in
us. These potential conflicts of interest could have a material and adverse effect on our business, financial condition,
liquidity, results of operations or prospects if attractive corporate opportunities are allocated by BlackRock or Highfields
to themselves or their other affiliates instead of to us.
Our bylaws include an exclusive forum provision that could limit our stockholders’ ability to obtain a judicial forum
viewed by the stockholders as more favorable for disputes with us or our directors, officers or other employees.
Our bylaws provide that the state or federal court located within the State of Delaware is the exclusive forum
for any derivative action or proceeding brought on our behalf; any action asserting a claim of breach of fiduciary duty;
any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of
incorporation or our bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine.
This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds
favorable for disputes with us or our directors, officers or other associates, which may discourage such lawsuits against
us and our directors, officers and other employees. Alternatively, if a court were to find the exclusive forum provision
contained in our bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with
resolving such action in other jurisdictions, which could adversely affect our business, financial condition, liquidity and
results of operations.
Risks Related to Our Common Stock
The market price and trading volume of our common stock may be volatile, which could result in rapid and
substantial losses for our stockholders.
The market price of our common stock has fluctuated significantly in the past and may be highly volatile in the
future and could be subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and
cause significant price variations to occur. Further, if the market price of our common stock declines significantly, you
may be unable to resell your shares at or above your purchase price, if at all. The market price of our common stock may
40
decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations
in the price or trading volume of our common stock include:
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•
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•
•
•
•
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•
variations in our quarterly or annual operating results;
changes in our earnings estimates (if provided) or differences between our actual financial and operating
results and those expected by investors and analysts;
the contents of published research reports about us or our industry or the failure of securities analysts to
cover our common stock;
additions or departures of key management personnel;
any increased indebtedness we may incur in the future;
announcements by us or others and developments affecting us;
actions by institutional stockholders;
litigation and governmental investigations;
changes in market valuations of similar companies;
speculation or reports by the press or investment community with respect to us or our industry in general;
increases in market interest rates that may lead purchasers of our shares to demand a higher yield;
announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic
relationships, joint ventures or capital commitments; and
general market, political and economic conditions, including any such conditions and local conditions in
the markets in which our customers are located.
These broad market and industry factors may decrease the market price of our common stock, regardless of our
actual operating performance. The stock market in general has from time to time experienced extreme price and volume
fluctuations, including in recent months. In addition, in the past, following periods of volatility in the overall market and
the market price of a company’s securities, securities class action litigation has often been instituted against these
companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s
attention and resources.
The market price of our common stock could be negatively affected by sales of substantial amounts of our common
stock into the public trading market.
PennyMac was founded in 2008 by members of our executive leadership team, BlackRock and Highfields. As a
result of the Reorganization, BlackRock, Highfields, and certain other former owners of PennyMac contributed
37,497,607 Class A units of PennyMac to us in exchange for, on a one-for-one basis, shares of our common stock. Some
of these former owners of PennyMac should be eligible for long-term capital gains treatment (rather than ordinary
income tax treatment) on future sales of such common stock if the holding period is more than one year. Accordingly,
we believe that, following the one year anniversary of the Reorganization, such owners may be more likely to sell their
shares of common stock into the public trading market. Sales of substantial numbers of shares of our common stock into
the public trading market, or the perception that such sales could occur, could adversely affect the market price of our
common stock and impede our ability to raise capital through the issuance of additional common stock or other equity
securities.
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The future issuance of additional common stock in connection with our incentive plans, acquisitions or otherwise will
dilute all other stockholdings.
As of December 31, 2018, we have an aggregate of 3,909,942 shares of common stock authorized and
remaining available for future issuance under our 2013 Equity Incentive Plan. We may issue all of these shares of
common stock without any action or approval by our stockholders, subject to certain exceptions. We also intend to
continue to evaluate acquisition opportunities and may issue common stock in connection with these acquisitions. Any
common stock issued in connection with our incentive plans, acquisitions, the exercise of outstanding stock options or
otherwise would dilute the percentage ownership held by investors who purchase our common stock.
Future offerings of debt or equity securities by us may adversely affect the market price of our common stock.
In the future, we may attempt to obtain financing or to further increase our capital resources by issuing
additional shares of our common stock or offering debt or other equity securities, including commercial paper,
medium-term notes, senior or subordinated notes, debt securities convertible into equity or shares of preferred stock. In
particular, we intend to seek opportunities to acquire MSR portfolios. Future acquisitions could require substantial
additional capital in excess of cash from operations. We would expect to obtain the capital required for acquisitions
through a combination of additional issuances of equity, corporate indebtedness, asset-backed acquisition financing
and/or cash from operations.
Issuing additional shares of our common stock or other equity securities or securities convertible into equity
may dilute the economic and voting rights of our existing stockholders or reduce the market price of our common stock
or both. Upon liquidation, holders of such debt securities and preferred shares, if issued, and lenders with respect to other
borrowings would receive a distribution of our available assets prior to the holders of our common stock. Debt securities
convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may
increase the number of equity securities issuable upon conversion. Preferred shares, if issued, could have a preference
with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to
pay dividends to the holders of our common stock. Our decision to issue securities in any future offering will depend on
market conditions and other factors beyond our control, which may adversely affect the amount, timing or nature of our
future offerings. Any such issuance will dilute the ownership of holders of our stock in substantially all of our operating
assets. Thus, holders of our common stock bear the risk that our future offerings, including any future offerings by
PennyMac, may reduce the market price of our common stock and dilute their stockholdings in us.
Exposure to United Kingdom political developments, including the United Kingdom’s vote to leave the European
Union, could have a material adverse effect on us.
On June 23, 2016, a referendum was held on the United Kingdom’s membership in the European Union, the
outcome of which was a vote in favor of leaving the European Union. On March 29, 2017, the United Kingdom provided
its official notice to the European Council that it intends to leave the European Union, triggering the two-year
transitionary period, which is expiring on March 29, 2019. The United Kingdom’s vote to leave the European Union
creates an uncertain political and economic environment in the United Kingdom and potentially across other European
Union member states, which may last for a number of months or years.
The result of the referendum means that the long-term nature of the United Kingdom’s relationship with the
European Union is unclear and that there is considerable uncertainty as to when any such relationship will be agreed and
implemented. In the interim, there is a risk of instability for both the United Kingdom and the European Union, which
could adversely affect our results, financial condition, and prospects.
The political and economic instability created by the United Kingdom’s vote to leave the European Union has
caused and may continue to cause significant volatility in global financial markets and the value of the British Pound
Sterling currency or other currencies, including the Euro. Depending on the terms reached regarding any exit from the
European Union, it is possible that there may be adverse practical or operational implications on our business.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate offices are housed in a 60,000 square foot leased facility located at 3043 Townsgate Road,
Westlake Village, California 91361 where we conduct executive management for all of our businesses and investment
management activities. Our primary loan servicing operation is housed in a 142,000 square foot leased facility located in
Moorpark, CA. Much of our California-based loan production operation is housed in a leased 60,000 square foot facility
in close proximity to our corporate offices. Our information technology division is housed in a 50,000 square foot
facility in Agoura Hills, CA.
We lease several additional locations throughout the country generally housing loan production and servicing
activities. Our consumer direct lending business occupies a 36,000 square foot facility in Pasadena, CA. Loan servicing
and its call center operations occupy a 116,000 square foot facility in Fort Worth, TX, and a 75,000 square foot facility
in Plano, TX. In 2018, we leased a new facility in Summerlin, NV as a future site primarily for loan servicing activities.
We have five loan production centers located in Roseville, CA, Honolulu, HI, Edina, MN, St. Louis, MO, and
Henderson, NV. We also lease a 30,000 square foot facility in Tampa, FL devoted to our correspondent production
activities.
The financial commitments of our leases are immaterial to the scope of our operations.
Item 3. Legal Proceedings
The Company is a party to legal proceedings and potential claims arising in the ordinary course of our 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 such proceedings and exposure will not
have a material adverse impact 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, 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 March 1, 2019, the Company and its directors and officers named in the
Garfield Action filed a motion to dismiss the complaint.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Our shares of common stock are listed on the New York Stock Exchange (Symbol: PFSI). As of
February 28, 2019, our shares of common stock were held by 2,936 holders of record.
We have not established a minimum dividend payment level and our ability to pay dividends may be adversely
affected for the reasons described in Item 1A of this Report in the section entitled Risk Factors. All distributions are
made at the discretion of our board of directors and depend on our earnings, our financial condition and such other
factors as our board of directors may deem relevant from time to time.
Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered equity securities during the year ended December 31, 2018.
Repurchase of our Common Stock
The following table summarized the stock repurchase activity for the quarter ended December 31, 2018:
Total number
of shares
purchased
Average price
paid per share
Total number of
shares purchased
as part of publicly
announced plans
or program (1)
October 1, 2018 – October 31, 2018
November 1, 2018 – November 30, 2018
December 1, 2018 – December 31, 2018
Total
— $
16,110 $
7,517 $
$
23,627
—
19.74
19.84
19.77
— $
16,110 $
7,517 $
23,627 $
Approximate dollar
value of shares that
may yet be
purchased under
the plans
or program (1)
36,575,218
36,257,166
36,108,029
(1) In June 2017, our board of directors approved a stock repurchase program authorizing us to repurchase up to
$50 million of our outstanding common stock. The stock repurchase program does not require us to purchase a
specific number of shares, and the timing and amount of any shares repurchased are based on market conditions and
other factors, including price, regulatory requirements and capital availability. Stock repurchases may be effected
through negotiated transactions or open market purchases, including pursuant to a trading plan implemented
pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The stock repurchase program does
not have an expiration date but may be suspended, modified or discontinued at any time without prior notice.
Equity Compensation Plan Information
We have adopted an equity incentive plan, the 2013 Equity Incentive Plan, which provides for the grant of
incentive stock option and nonstatutory stock options, stock appreciation rights, restricted stock and stock unit awards,
performance units, stock grants and qualified performance-based awards, which we collectively refer to as “awards.”
Directors, officers and other employees of our Company and our subsidiaries, as well as others performing consulting or
advisory services for us, are eligible for grants under the 2013 Equity Incentive Plan. The plan administrator of the
equity incentive plan is the compensation committee of the board of directors. The board of directors itself may also
exercise any of the powers and responsibilities under the 2013 Equity Incentive Plan. Subject to the terms of the 2013
Equity Incentive Plan, the plan administrator will select the recipients of awards and determine, among other things, the:
•
number of shares of common stock covered by the awards and the dates upon which such awards become
exercisable or any restrictions lapse, as applicable;
•
type of award and the exercise or purchase price and method of payment for each such award;
44
•
•
performance measures, if applicable, required to be satisfied prior to vesting;
vesting period for awards, risks of forfeiture and any potential acceleration of vesting or lapses in risks of
forfeiture; and
•
duration of awards.
The following table provides information as of December 31, 2018 concerning our shares of common stock
authorized for issuance under our equity incentive plan.
Plan category
Equity compensation plans approved by
security holders (3)
Equity compensation plans not approved by
security holders (4)
Total
(a)
(b)
Number of securities to
be issued upon exercise of
outstanding options,
warrants and rights
Weighted average
exercise price of
outstanding options,
warrants and rights (1)
(c)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)) (2)
6,211,440 $
—
6,211,440 $
17.81
—
17.81
3,909,942
—
3,909,942
(1) The weighted average exercise price set forth in this column relates only to 3,692,674 shares of stock options
outstanding under our 2013 Equity Incentive Plan. The remaining securities included in column (a) of this table are
performance-based restricted stock units and time-based restricted stock units, for which no exercise price applies.
(2) This number includes a general pool of 3,909,942 shares of common stock authorized for future awards (excluding
securities reflected in column (a)). This general pool initially consisted of 3,906,433 shares of common stock
authorized under the 2013 Equity Incentive Plan for future awards, and has been, and will continue to be, increased
pursuant to the terms of the 2013 Equity Incentive Plan on January 1st of each calendar year by an amount equal to
the lesser of (i) 1.75% of our outstanding common stock on a fully diluted basis as of the end of our immediately
preceding fiscal year, (ii) 1,322,024 shares, and (iii) any lower amount determined by our board of directors. The
annual increase to this general pool on January 1, 2018 pursuant to the foregoing formula was 1,322,024 and in
May 2018, an additional 2,000,000 shares of common stock was authorized for future awards under the 2013 Equity
Incentive Plan and approved by security holders at our 2018 annual meeting of stockholders.
(3) Represents our 2013 Equity Incentive Plan.
(4) We do not have any equity plans that have not been approved by our stockholders.
45
Item 6. Selected Financial Data
The following financial data should be read in conjunction with Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data.”
The table below presents, as of and for the dates indicated, selected historical financial information for us. The
condensed consolidated statements of income data for the years ended December 31, 2018, 2017, and 2016 and the
condensed consolidated balance sheets data at December 31, 2018, and 2017 have been derived from our audited
financial statements included elsewhere in this Report. The condensed consolidated statements of income data for the
years ended December 31, 2015 and 2014 and the condensed consolidated balance sheets data at December 31, 2016,
2015, and 2014 have been derived from our Company’s audited consolidated financial statements that are not included
in this Report.
46
Condensed Consolidated Statements of Income:
Revenues
Net mortgage loan servicing fees
Net gains on mortgage loans held for sale
Loan origination fees
Fulfillment fees from PennyMac Mortgage Investment Trust
Management fees and Carried Interest
Net interest income (expense)
Other
$
Total net revenue
Expenses
Compensation
Servicing
Other
Total expenses
Income before provision for income taxes
Provision for income taxes
Net income
Less: Net income attributable to noncontrolling interest
Net income attributable to PennyMac Financial Services, Inc.
common stockholders
Income before provision for income taxes by segment:
Mortgage banking:
Production
Servicing
Total mortgage banking
Investment management
Non-segment activities
Condensed Consolidated Balance Sheets at Year End:
Assets
Mortgage loans held for sale at fair value
Mortgage servicing rights
Servicing advances
Investments in and advances to affiliates
Mortgage loans eligible for repurchase
Other
Total assets
Liabilities and stockholders' equity
Short-term debt
Long-term debt
Liability for mortgage loans eligible for repurchase
Other
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity
Earnings Per Share:
Basic
Diluted
Year End Per Share:
Book value
Share price
2018
Year ended December 31,
2015
2016
2017
(in thousands, except per share data)
445,393 $
249,022
101,641
81,350
24,104
71,819
11,300
984,629
306,059 $
391,804
119,202
80,359
22,545
(1,341)
36,835
955,463
185,466 $
531,780
125,534
86,465
23,726
(25,079)
3,995
931,887
229,543 $
320,715
91,520
58,607
30,865
(19,382)
1,242
713,110
403,270
137,104
176,558
716,932
267,697
23,254
244,443
156,749
358,721
117,696
143,137
619,554
335,909
24,387
311,522
210,765
342,153
85,857
120,794
548,804
383,083
46,103
336,980
270,901
274,262
68,085
91,570
433,917
279,193
31,635
247,558
200,330
2014
216,919
167,024
41,576
48,719
48,664
(9,486)
4,861
518,277
190,707
48,430
56,107
295,244
223,033
26,722
196,311
159,469
$
87,694 $
100,757 $
66,079 $
47,228 $
36,842
$
$
$
$
$
$
$
$
$
$
87,266 $
172,302
259,568
7,003
1,126
267,697 $
238,508
58,672
297,180
5,789
32,940
335,909
$
$
416,096 $
(36,099)
379,997
2,486
600
383,083 $
271,869 $
1,297
273,166
7,722
(1,695)
279,193 $
135,619
65,925
201,544
20,111
1,378
223,033
2,521,647 $ 3,099,103 $ 2,172,815 $
2,820,612
313,197
165,886
1,102,840
554,391
2,119,588
318,066
181,421
1,208,195
441,720
7,478,573 $ 7,368,093 $ 5,133,902 $
1,627,672
348,306
239,769
382,268
363,072
2,332,143 $ 2,922,542 $ 2,567,658 $
1,648,973
1,102,840
740,826
5,824,782
1,653,791
7,478,573 $ 7,368,093 $ 5,133,902 $
301,917
382,268
482,703
3,734,546
1,399,356
1,135,401
1,208,195
382,281
5,648,419
1,719,674
1,101,204 $ 1,147,884
730,828
1,411,935
228,630
299,354
95,042
241,352
72,539
166,070
231,763
285,379
3,505,294 $ 2,506,686
1,467,535 $ 1,112,675
191,166
421,208
72,539
166,070
323,040
388,131
1,699,420
2,442,944
807,266
1,062,350
3,505,294 $ 2,506,686
2.62 $
2.59 $
4.34 $
4.03 $
2.98 $
2.94 $
2.17 $
2.17 $
1.73
1.73
21.34 $
21.26 $
19.95 $
22.35 $
15.49 $
16.65 $
12.32 $
15.36 $
9.92
17.30
47
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
Preparation of financial statements in compliance with accounting principles generally accepted in the United
States (“GAAP”) requires us to make 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. Certain of these estimates significantly influence the portrayal of our financial condition and
results, and they require us to make difficult, subjective or complex judgments. Our critical accounting policies primarily
relate to our fair value estimates.
Fair Value
We group assets measured at or based on fair value in three levels based on the markets in which the assets are
traded and the observability of the inputs used to determine fair value. These levels are:
Level/Description
December 31, 2018
Percentage of
Carrying value of
assets measured
(in thousands)
Total assets
Total
stockholders'
equity
Level 1: Prices determined using quoted prices in active markets for
identical assets or liabilities.
$
126,052
2%
8%
Level 2: Prices determined 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 us.
Level 3: Prices determined using significant unobservable inputs.
2,273,878
30%
137%
Unobservable inputs reflect our judgements about the factors
that market participants use in pricing an asset or liability, and
are based on the best information available in the
circumstances.
Total assets measured at or based on fair value (1)
Total assets
Total stockholders' equity
3,160,147
5,560,077
7,478,573
1,653,791
$
$
$
42%
74%
191%
336%
(1) Includes assets measured on both a recurring and nonrecurring basis based on the accounting principles applicable
to the specific asset or liability and whether we have elected to carry the asset or liability at its fair value.
As shown above, our consolidated balance sheet is substantially comprised of assets and liabilities that are
measured at or based on their fair values. At December 31, 2018, $5.6 billion or 74% of our total assets were carried at
fair value on a recurring basis and $2.3 million (real estate acquired in settlement of loans (“REO”) properties, were
carried based on its fair value on a non-recurring basis when fair value indicates evidence of impairment of individual
properties. Of these assets carried at or based on fair value, $3.2 billion or 42% of total assets are measured using “Level
3” fair value inputs – significant inputs where there is difficulty in observing the inputs used by market participants in
establishing fair value. Changes in inputs to measurement of these assets can have a significant effect on the amounts
reported for these items including their reported balances and their effects on our income.
48
As a result of the difficulty in observing certain significant valuation inputs affecting our “Level 3” fair value
assets and liabilities, we are 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, subsequent transactions may be at values significantly
different from those reported.
Because the fair value of “Level 3” fair value assets and liabilities are difficult to estimate, our valuation
process includes performance of these items’ fair value estimation by specialized staff and significant senior
management oversight. We have assigned the responsibility for estimating the fair values of non-interest rate lock
commitment (“IRLC”) “Level 3” fair value assets and liabilities to our Financial Analysis and Valuation group (the
“FAV group”), which is responsible for valuing and monitoring these items and maintenance of our valuation policies
and procedures for non-IRLC assets and liabilities. The FAV group submits the results of its valuations to our senior
management valuation committee, which oversees the valuations. During 2018, our senior management valuation
committee included the Company’s executive chairman, chief executive, chief financial, chief risk, and deputy chief
financial officers.
The fair value of our IRLCs is developed by our Capital Markets Risk Management staff and is reviewed by our
Capital Markets Operations group.
Following is a discussion of our approach to measuring the balance sheet items that are most affected by
“Level 3” fair value estimates.
Mortgage Loans
We carry mortgage loans at their fair values. We recognize changes in the fair value of mortgage loans in
current period income as a component of Net gains on mortgage loans held for sale at fair value. How we estimate the
fair value of mortgage loans is based on whether the mortgage loans are saleable into active markets with observable fair
value inputs.
• We categorize mortgage loans that are saleable into active markets as “Level 2” fair value assets. We
estimate the fair value of such mortgage loans using their quoted market price or market price equivalent.
At December 31, 2018, we held $2.3 billion of such mortgage loans.
• We categorize mortgage loans that are not saleable into active markets as “Level 3” fair value assets.
“Level 3” fair value mortgage loans arise primarily from two sources:
We may purchase certain delinquent government guaranteed or insured mortgage loans from Ginnie
Mae guaranteed securitizations included in our mortgage loan servicing portfolio. Our right to purchase
such mortgage loans arises as the result of the borrower’s failure to make payments for three
consecutive months preceding the month that we repurchase the mortgage loan. Our ability to purchase
delinquent mortgage loans provides us with an alternative to our obligation to continue advancing
principal and interest at the coupon rate of the related Ginnie Mae security. To the extent such mortgage
loans (“early buyout loans” or “EBO”) have not become saleable into another Ginnie Mae guaranteed
security by becoming current either through the borrower’s reperformance or through completion of a
modification of the mortgage loan’s terms, we measure such mortgage loans using “Level 3” fair value
inputs.
Certain of our mortgage loans may become non-saleable into active markets due to our identification of
one or more defects. Because such mortgage loans are generally not saleable into active mortgage
markets, we classify them as “Level 3” fair value assets.
49
We use a discounted cash flow model to estimate the fair value of “Level 3” fair value mortgage loans. The
significant unobservable inputs used in the fair value measurement of our “Level 3” fair value mortgage loans held for
sale are discount rates, home price projections and prepayment speeds. Significant changes in any of those inputs in
isolation could result in a significant change to the mortgage loans’ fair value measurement. At December 31, 2018, we
held $260.0 million of “Level 3” fair value mortgage loans.
Interest Rate Lock Commitments
Our net gains on mortgage loans held for sale include our estimates of the gains or losses we expect to realize
upon the sale of mortgage loans we have contractually committed to fund or purchase but have not yet funded,
purchased or sold. We recognize a substantial portion of our net gains on mortgage loans held for sale at fair value
before we fund or purchase the mortgage loans as the result of these commitments. We call these commitments IRLCs.
We recognize the fair value of IRLCs at the time we make the commitment to the correspondent seller or mortgage loan
applicant and adjust the fair value of such IRLCs as the mortgage loan approaches the point of funding or purchase or
the prospective transaction is canceled.
We carry IRLCs as either Derivative assets or Derivative liabilities on our consolidated balance sheet. The fair
value of an IRLC is transferred to Mortgage loans held for sale at fair value when the mortgage loan is funded or
purchased.
An active, observable market for IRLCs does not exist. Therefore, we measure the fair value of IRLCs using
methods we believe that market participants use in pricing IRLCs. We estimate the fair value of an IRLC based on
observable Agency MBS prices, our estimates of the fair value of the MSRs we expect to receive in the sale of the
mortgage loans and the probability that we will fund or purchase the mortgage loan (the “pull-through rate”).
Pull-through rates and MSR fair values are based on our estimates as these inputs are difficult to observe in the
mortgage marketplace. Our estimate of the probability that a mortgage loan will be funded and market interest rates are
updated as the mortgage loans move through the funding or purchase process and as mortgage market interest rates
change and may result in significant changes in our estimates of the fair value of the IRLCs. Such changes are reflected
in the change in fair value of IRLCs which is a component of our Net gains on mortgage loans held for sale at fair value
in the period of the change. The financial effects of changes in these inputs are generally inversely correlated. Increasing
mortgage 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 mortgage loan principal and interest payment cash flow component, which has decreased in fair
value.
A shift in our assessment of an input to the valuation of IRLCs can have a significant effect on the amount of
Net gains on sale of mortgage loans held for sale for the period. We believe that the most significant “Level 3” fair value
input to the measurement of IRLCs is the pull-through rate. At December 31, 2018, we held $49.3 million of net IRLC
assets at fair value. Following is a quantitative summary of the effect of changes in the pull-through rate input on the fair
value of IRLCs at December 31, 2018:
Change in input (1)
Effect on fair value of IRLC of a change in pull-through rate
(in thousands)
5 % $
10 % $
20 % $
(5) % $
(10) % $
(20) % $
2,868
5,469
9,588
(3,184)
(6,369)
(12,739)
(1) The upward shift in input amount on a per-loan basis is limited to the amount of shift required to reach
a 100% pull-through rate.
50
The preceding analysis holds constant all of the other inputs to show an estimate of the effect on fair value of a
change in the pull-through rate. We expect that in a market shock event, multiple inputs would be affected and the
effects of these changes may compound or counteract each other. Therefore the preceding analysis is not a projection of
the effects of a shock event or a change in our estimate of an input and should not be relied upon as an earnings
projection.
Mortgage Servicing Rights
MSRs represent the fair value assigned to contracts that obligate us to service the mortgage loans on behalf of
the owners of the mortgage loans in exchange for servicing fees and the right to collect certain ancillary income from the
borrower. We recognize MSRs at our estimate of the fair value of the contract to service the loans.
We include changes in fair value of MSRs in current period income as a component of Amortization,
impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities. During the year
ended December 31, 2018, we recognized a $129.4 million net reduction in fair value of MSRs: $303.8 million of the
reduction was due to realization of cash flows underlying the fair value of MSR, partially offset by a $174.4 million
increase due to changes in inputs used to estimate fair value.
We classify MSRs as “Level 3” fair value assets and determine their fair value using a discounted cash flow
approach. We believe the most significant “Level 3” fair value inputs to the valuation of MSRs are the pricing spread
(used to develop periodic discount rates), prepayment speed and annual per-loan cost of servicing.
A shift in the market for MSRs or a change in our assessment of an input to the valuation of MSRs can have a
significant effect on their fair value and in our income for the period. The fair value of MSRs that we held at
December 31, 2018 was $2.8 billion.
Following is a summary of the effect on fair value of MSRs of various changes to these key inputs at
December 31, 2018:
Change in input
Pricing spread
Prepayment speed
Servicing cost
Effect on fair value of MSRs of a change in input value
5 %
10 %
20 %
(5) %
(10) %
(20) %
$
$
$
$
$
$
(45,268)
(89,073)
(172,556)
46,801
95,208
197,162
$
$
$
$
$
$
(in thousands)
(47,687)
(93,626)
(180,623)
49,532
101,017
210,306
$
$
$
$
$
$
(22,944)
(45,888)
(91,775)
22,944
45,888
91,775
The preceding analyses hold constant all of the inputs other than the input that is being changed to show an
estimate of the effect on fair value of a change in a specific input. We expect that in a market shock event, multiple
inputs would be affected and the effects of these changes may compound or counteract each other. Therefore the
preceding analyses are not projections of the effects of a shock event or a change in our estimate of an input and should
not be relied upon as earnings projections.
Excess Servicing Spread Financing
We finance a portion of the cost of Agency MSRs that we purchase from non-affiliate sellers through the sale to
PMT of the servicing spread in excess of a specified level. We carry our ESS at fair value.
Because the ESS is a claim to a portion of the cash flows from MSRs, the valuation of the ESS is similar to that
of MSRs. We use the same discounted cash flow approach to measure the ESS and the related MSRs except that certain
51
inputs relating to the cost to service the mortgage loans underlying the MSRs and certain ancillary income are not
included in the ESS valuation as these cash flows do not accrue to the holder of the ESS.
A shift in the market for, or a change in our assessment of an input to, the valuation of ESS can have a
significant effect on the fair value of ESS and in our income for the period. However, we believe that this change will be
offset to a great extent by a change in the fair value of the MSRs that the ESS is financing. We record changes in the fair
value of ESS in Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing
liabilities. During the year ended December 31, 2018, we recorded $8.5 million of net increase in fair value of ESS.
We believe that the most significant “Level 3” fair value inputs to the valuation of ESS are the pricing spread
(used to develop periodic discount rates) and prepayment speed. At December 31, 2018, we carried $216.1 million of
ESS at fair value. Following is a summary of the effect on fair value of various changes to these inputs at
December 31, 2018:
Change in input
Pricing spread
Prepayment speed
Effect on excess servicing spread of a change in input value
5 %
10 %
20 %
(5) %
(10) %
(20) %
$
$
$
$
$
$
(in thousands)
(1,461) $
(2,904) $
(5,735) $
1,481 $
2,980 $
6,040 $
(4,607)
(9,040)
(17,418)
4,792
9,779
20,385
The preceding analyses hold constant all of the inputs other than the input that is being changed to show an
estimate of the effect on fair value of a change in that specific input. We expect that in a market shock event, multiple
inputs would be affected and the effects of these changes may compound or counteract each other. Therefore the
preceding analyses are not projections of the effects of a shock event or a change in our estimate of an input and should
not be relied upon as earnings projections.
Critical Accounting Policy Not Based on Fair Value- Liability for Losses Under Representations and
Warranties
We record a provision for losses relating to our representations and warranties as part of our mortgage loan sale
transactions and periodically update our estimates of our liability. The method we use to estimate the liability for
representations and warranties is a function of the representations and warranties given and considers a combination of
factors, including, but not limited to, estimated future default and mortgage loan repurchase rates, the potential severity
of loss in the event of default and, if applicable, the probability of reimbursement by the correspondent mortgage loan
seller.
The level of the liability for losses under representations and warranties is difficult to estimate and requires
considerable judgment. The level of mortgage 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
mortgage loans. Our estimate of the liability for representations and warranties is developed by our credit administration
staff. The liability estimate is reviewed and approved by our senior management credit committee which includes the
senior executives of the Company and of the loan production, loan servicing and credit risk management areas.
During the year ended December 31, 2018, we recorded $5.8 million in provision for losses relating to current
year mortgage loan sales in Net gain on mortgage loans held for sale at fair value and incurred net losses totaling
$50,000.
52
As economic fundamentals change, as purchaser and insurer evaluations of their loss mitigation strategies
(including claims under representations and warranties) change and as the mortgage market and general economic
conditions affect our correspondent sellers, the level of repurchase activity and ensuing losses will change. As a result of
these changes, we may be required to adjust the estimate of our liability for representations and warranties. Such an
adjustment may be material to our financial condition and income. During the year ended December 31, 2018, we
recorded reductions to our previously recorded representations and warranties liability amounts totaling $4.7 million in
Net gain on mortgage loans held for sale at fair value. At December 31, 2018, the balance of our liability for losses
under representations and warranties totaled $21.2 million.
Accounting Developments
Refer to Note 3 – Significant Accounting Policies ‒ Recently Issued Accounting Pronouncement to our
consolidated financial statements for a discussion of recent accounting developments and the expected effect on the
Company.
53
Results of Operations
Our results of operations are summarized below:
Revenues:
Net mortgage loan servicing fees
Net gains on mortgage loans held for sale at fair value
Mortgage loan origination fees
Fulfillment fees from PennyMac Mortgage Investment Trust
Net interest income (expense)
Management fees & Carried Interest
Other
Total net revenue
Expenses
Provision for income taxes
Net income
Earnings per share
Basic
Diluted
Return on average common stockholders' equity
Income before provision for income taxes by segment:
Mortgage banking:
Production
Servicing
Total mortgage banking
Investment management
Non-segment activities (1)
During the year:
Year ended December 31,
2017
(dollars in thousands except per-share amounts)
2018
2016
$
$
$
$
$
$
445,393 $
249,022
101,641
81,350
71,819
24,104
11,300
984,629
716,932
23,254
244,443 $
306,059 $
391,804
119,202
80,359
(1,341)
22,545
36,835
955,463
619,554
24,387
311,522 $
185,466
531,780
125,534
86,465
(25,079)
23,726
3,995
931,887
548,804
46,103
336,980
2.62 $
2.59 $
12.7 %
4.34 $
4.03 $
26.0 %
2.98
2.94
21.9 %
87,266 $
172,302
259,568
7,003
1,126
267,697 $
238,508 $
58,672
297,180
5,789
32,940
335,909 $
416,096
(36,099)
379,997
2,486
600
383,083
Interest rate lock commitments issued
Unpaid principal balance of mortgage loans fulfilled for PMT subject to fulfillment fees
$
$
44,786,584
$
26,194,303 $
49,606,767 $
22,971,119 $
52,648,017
23,188,386
Common stock closing prices
High
Low
At year-end
At year end:
Unpaid principal balance of mortgage loan servicing portfolio:
Owned:
Mortgage servicing rights
Mortgage servicing liabilities
Mortgage loans held for sale
Subserviced for Advised Entities
Net assets of Advised Entities:
PennyMac Mortgage Investment Trust
Investment Funds
Book value per share
$
$
$
25.20 $
18.77 $
21.26 $
22.45 $
15.65 $
22.35 $
19.35
10.48
16.65
$ 201,054,144
1,160,938
2,420,636
204,635,718
94,658,154
$ 299,293,872
$ 166,249,237
1,620,609
2,998,377
170,868,223
74,980,268
$ 245,848,491
$ 129,177,106
2,074,896
2,101,283
133,353,285
60,886,717
$ 194,240,002
$
$
$
$
1,566,132
—
1,566,132
$
21.34 $
$
1,544,585
29,329
1,573,914
$
19.95 $
1,351,114
197,550
1,548,664
15.49
(1) Primarily represents repricing of Payable to exchanged Private National Mortgage Acceptance Company, LLC
unitholders under tax receivable agreement, of which, for 2017, $32.0 million was the result of the change in the
federal tax rate under Tax Cuts and Jobs Act of 2017 (the “Tax Act”).
54
Comparison of the years ended December 31, 2018, 2017 and 2016
During the year ended December 31, 2018, we recorded net income of $244.4 million, a decrease of
$67.1 million or 22% from 2017. The decrease was primarily due to an increase of $97.4 million in total expense, which
was partially offset by an increase of $29.2 million in total net revenue. The increase in total expense was primarily due
to expansion of our loan servicing and production businesses. The increase in total net revenue is primarily due to an
increase of $139.3 million in Net mortgage loan servicing fees and an increase of $73.2 million in Net interest income,
partially offset by decreases of $142.8 million in Net gains on mortgage loans held for sale at fair value, $17.6 million
in Mortgage loan origination fees and $25.5 million in Other income. The decrease in our Net gains on mortgage loans
held for sale at fair value reflects continued competitive pressures in the mortgage market place arising from the effect
of increasing interest rates on borrower demand for mortgage loans. Increasing interest rates also contributed $70.8
million to Net mortgage loan servicing fees in the form of fair value gains net of hedging results during 2018 as
compared to 2017.
As discussed in Net interest income below, financing incentives contributed $48.1 million and $9.2 million to
our pre-tax income during the years ended December 31, 2018, and 2017, respectively. The master repurchase
agreement underlying the incentives is subject to a rolling six-month term through August 21, 2019, unless terminated
earlier at the option of the lender. We expect that we will cease to accrue the incentives under the repurchase agreement
in the second quarter of 2019. While there can be no assurance, we expect that the loss of such incentive income will be
partially offset by an improvement in pricing margins.
During the year ended December 31, 2017, we recorded net income of $311.5 million, a decrease of
$25.5 million or 8% from 2016. The decrease was primarily due to a decrease in Net gains on mortgage loans held for
sale at fair value due to decreases in our loan production volume and production profit margins. The decrease in
production volume and production profit margins during the year ended December 31, 2017, reflects generally rising
interest rates in the mortgage market, which have a negative influence on demand for mortgage lending and causes
increased competition for mortgage loans among market participants. The decrease in Net gains on mortgage loans held
for sale at fair value was partially offset by an increase in Net mortgage loan servicing fees which reflects both growth
in our servicing portfolio and improved fair value adjustments resulting from the more stable interest rates and decreased
risk premium for government servicing assets.
Net mortgage loan servicing fees
Following is a summary of our net mortgage loan servicing fees:
2018
Year ended December 31,
2017
(in thousands)
2016
$
585,101 $
42,045
3
64,133
691,282
475,848 $
43,064
1,461
58,924
579,297
385,633
50,615
2,583
46,910
485,741
(245,889)
445,393 $
(300,275)
$
185,466
$ 269,402,670 $ 221,505,951 $ 177,676,686
(273,238)
306,059 $
Net mortgage loan servicing fees:
Mortgage loan servicing fees:
From non-affiliates
From PennyMac Mortgage Investment Trust
From Investment Funds
Ancillary and other fees
Amortization, impairment and change in fair value of mortgage
servicing rights, mortgage servicing liabilities and excess servicing
spread financing net of hedging results
Net mortgage loan servicing fees
Average mortgage loan servicing portfolio
55
Amortization, impairment and change in fair value of mortgage servicing rights and excess servicing spread are
summarized below:
Amortization and realization of cash flows
Other changes in fair value of, and provision for impairment of, mortgage
servicing rights and mortgage servicing liabilities
Change in fair value of excess servicing spread
Hedging results
Total fair value adjustments, net of hedging results
2018
Year ended December 31,
2017
(in thousands)
$ (280,015) $ (236,584) $ (204,608)
2016
163,671
(8,500)
(121,045)
34,126
(18,149)
19,350
(37,855)
(36,654)
(145,995)
23,923
26,405
(95,667)
Total amortization, impairment and change in fair value of mortgage servicing
rights, mortgage servicing liabilities and excess servicing spread
$ (245,889) $ (273,238) $ (300,275)
Average mortgage servicing rights balances
Average mortgage servicing liabilities
Mortgage servicing rights at year end
Mortgage servicing liabilities at year end
Following is a summary of our mortgage loan servicing portfolio:
Mortgage loans serviced
Prime servicing:
Owned:
Mortgage servicing rights
Originated
Acquired
Mortgage servicing liabilities
Mortgage loans held for sale
Subserviced for PMT
Total prime servicing
Special servicing – Subserviced for Advised Entities
Total mortgage loans serviced
$ 2,433,758 $ 1,873,001 $ 1,396,884
8,327
$
15,587 $
10,506 $
$ 2,820,612 $ 2,119,588 $ 1,627,672
15,192
$
14,120 $
8,681 $
December 31,
2018
2017
(in thousands)
$ 144,296,544
56,757,600
201,054,144
1,160,938
2,420,636
204,635,718
94,276,938
298,912,656
381,216
$ 299,293,872
$ 119,673,403
46,575,834
166,249,237
1,620,609
2,998,377
170,868,223
73,651,608
244,519,831
1,328,660
$ 245,848,491
Net mortgage loan servicing fees increased $139.3 million and $120.6 million during the years ended
December 31, 2018 and 2017, compared to the years ended December 31, 2017 and 2016, respectively. The increase was
due to a combination of increased mortgage loan servicing fees resulting from growth in our mortgage loan servicing
portfolio and decreased losses in fair value and impairment of MSRs and mortgage servicing liabilities (“MSLs”), net of
hedging results, resulting from the effect of generally rising interest rates from 2016.
Mortgage loan servicing fees increased $112.0 million and $93.6 million during the years ended
December 31, 2018 and 2017, compared to the years ended December 31, 2017 and 2016, respectively, reflecting an
increase in our average servicing portfolio of 22% and 25% during the years ended December 31, 2018 and 2017,
compared to the years ended December 31, 2017 and 2016, respectively. These increases were moderated by decreasing
mortgage loan servicing fees from the Advised Entities due to a reduction in fees related to the servicing of distressed
mortgage loans as those loan portfolios liquidated in the case of two of the Investment Funds, and continued to liquidate
56
in the case of PMT. Special servicing activities generate higher revenues on a per-loan basis than prime servicing due to
the higher costs we incur to service such loans.
Net gains on mortgage loans held for sale at fair value
Most of our mortgage loan production consists of government-insured or guaranteed mortgage loans that we
source primarily through PMT. PMT is not approved by Ginnie Mae as an issuer of Ginnie Mae-guaranteed securities
which are backed by government-insured or guaranteed mortgage loans. We purchase such mortgage loans that PMT
acquires through its correspondent production activities and pay PMT a sourcing fee ranging from two to three and one-
half basis points on the UPB of such mortgage loans.
During the year ended December 31, 2018, we recognized Net gains on mortgage loans held for sale at fair
value totaling $249.0 million, compared to $391.8 million and $531.8 million during the years ended December 31, 2017
and 2016, respectively. The decreases in 2018 and 2017 compared to 2017 and 2016 were primarily due to decreases in
both loan production volume for our own account and profit margins reflecting the generally rising interest rates in the
mortgage market, which has a negative influence on demand for mortgage lending. Reduced demand negatively
influences profit margins by causing increased price competition in the acquisition and origination of mortgage loans.
Our net gains on mortgage loans held for sale include both cash and non-cash elements. We receive proceeds on
sale that include both cash and MSRs. The net gain for the years ended December 31, 2018, 2017 and 2016 included
$584.2 million, $563.9 million, and $562.5 million, respectively, in fair value of MSRs received as part of proceeds on
sales, net of mortgage servicing liabilities incurred. We also recognize a liability for our estimate of the losses we expect
to incur in the future as a result of claims against us in connection with the representations and warranties that we made
in the loan sales transactions. The net gain for the years ended December 31, 2018, 2017 and 2016, included net
provisions for (reversals of) losses relating to representations and warranties of $1.2 million, $1.6 million, and
($582,000), respectively.
57
Our net gains on mortgage loans held for sale are summarized below:
From non-affiliates:
Cash loss:
Mortgage loans
Hedging activities
Non-cash gain:
2018
Year ended December 31,
2017
(in thousands)
2016
$
(469,647) $
93,288
(376,359)
(174,669) $
(16,866)
(191,535)
(62,283)
10,275
(52,008)
Mortgage servicing rights and mortgage servicing liabilities
resulting from mortgage loan sales
Provision for losses relating to representations and warranties:
Pursuant to mortgage loan sales
Reduction in liability due to change in estimate
Change in fair value of mortgage loans and derivative
financial instruments outstanding at year end:
Interest rate lock commitments
Mortgage loans
Hedging derivatives
From PennyMac Mortgage Investment Trust
During the year:
Interest rate lock commitments issued:
Government-insured or guaranteed mortgage loans
Conventional mortgage loans
At year end:
Mortgage loans held for sale at fair value
Commitments to fund and purchase mortgage loans
$
$
$
$
$
Provision for Losses Under Representations and Warranties
584,156
563,872
562,540
(5,824)
4,672
(5,890)
4,301
(7,090)
7,672
(8,934)
(1,506)
(11,766)
184,439
64,583
249,022 $
(1,120)
4,576
(4,389)
369,815
21,989
391,804 $
15,618
2,796
10,344
539,872
(8,092)
531,780
40,193,531 $
4,593,053
44,786,584 $
46,341,356 $
3,265,411
49,606,767 $
49,501,109
3,146,908
52,648,017
2,521,647 $
2,805,400 $
3,099,103 $
3,654,955 $
2,172,815
4,279,611
We record our estimate of the losses that we expect to incur in the future as a result of claims against us made in
connection with the representations and warranties provided to the purchasers and insurers of the mortgage loans we sold
in our Net gains on sale of mortgage loans held for sale at fair value. Our agreements with the purchasers and insurers
include representations and warranties related to the mortgage loans we sell to purchasers. 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 mortgage 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
mortgage loans with the identified defects or indemnify the purchaser or insurer. In such cases, we bear any subsequent
credit loss on the mortgage loans. Our credit loss may be reduced by any recourse we have to correspondent originators
that sold such mortgage loans to us and breached similar or other representations and warranties. In such event, we have
the right to seek a recovery of related repurchase losses from that correspondent seller.
The method used to estimate our losses on representations and warranties is a function of our estimate of future
defaults, mortgage loan repurchase rates, the severity of loss in the event of default, if applicable, and the probability of
reimbursement by the correspondent mortgage loan seller. We establish a liability at the time mortgage loans are sold
and review our liability estimate on a periodic basis.
58
During the years ended December 31, 2018, 2017, and 2016 we recorded provisions for losses under
representations and warranties relating to current mortgage loan sales as a component of Net gains on mortgage loans
held for sale at fair value totaling $5.8 million, $5.9 million, and $7.1 million, respectively. We also recorded reductions
in the liability of $4.7 million, $4.3 million, and $7.7 million, for the years ended December 31, 2018, 2017 and 2016,
respectively. The reductions in the liability resulted from previously sold mortgage loans meeting criteria established by
the Agencies which exempt them from certain repurchase or indemnification claims.
Following is a summary of mortgage loan repurchase activity and the unpaid balance of mortgage loans subject
to representations and warranties:
During the year:
Indemnification activity
Mortgage loans indemnified by PFSI at beginning of year
New indemnifications
$
Less:
Indemnified mortgage loans repurchased
Indemnified mortgage loans sold, repaid or refinanced
Mortgage loans indemnified by PFSI at end of year
Repurchase activity
Total mortgage loans repurchased by PFSI
Less:
Mortgage loans repurchased by correspondent lenders
Mortgage loans repaid by borrowers or resold with
defects resolved
Net mortgage loans repurchased (resold or repaid) with
losses chargeable to liability for representations and
warranties
Net losses charged to liability for representations and
warranties
$
$
$
$
2018
Year ended December 31,
2017
(in thousands)
2016
7,579 $
4,511
209
2,982
8,899 $
5,599 $
3,255
303
972
7,579 $
3,470
3,063
—
934
5,599
26,025 $
20,152 $
19,248
18,127
14,298
12,625
2,138
8,792
4,793
5,760 $
(2,938) $
1,830
50 $
603 $
962
At year end:
Unpaid principal balance of mortgage loans subject to
representations and warranties
Liability for representations and warranties
$
$
137,849,704 $
21,155 $
120,855,101 $
20,053 $
90,650,605
19,067
During the year ended December 31, 2018, we repurchased mortgage loans with unpaid principal balances
totaling $26.0 million and charged $50,000 in net incurred losses relating to repurchases against our liability for
representations and warranties. As the outstanding balance of mortgage loans we purchase and sell subject to
representations and warranties increases and the loans sold continue to season, we expect that the level of repurchase
activity may increase.
59
Mortgage loan origination fees
Following is a summary of our mortgage loan origination fees:
Mortgage loan origination fee revenue
Unpaid principal balance of mortgage loans purchased and
originated for sale
2018
Year ended December 31,
2017
(in thousands)
2016
$
101,641
$
119,202
$
125,534
$
41,444,793
$
46,027,911
$
46,399,270
Mortgage loan origination fees decreased $17.6 million and $6.3 million during the years ended
December 31, 2018, and 2017, compared to the years ended December 31, 2017 and 2016, respectively. The decreases
were primarily due to decreases in the volume of mortgage loans we produced.
Fulfillment fees fron PennyMac Mortgage Investment Trust
Following is a summary of our fulfillment fees:
Fulfillment fee revenue
Unpaid principal balance of mortgage loans fulfilled subject to
fulfillment fees
Average fulfillment fee rate (in basis points)
2018
Year ended December 31,
2017
(dollars in thousands)
2016
$
81,350 $
80,359 $
86,465
$ 26,194,303 $ 22,971,119 $ 23,188,386
37
35
31
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 mortgage loans. The fulfillment fees are calculated as a percentage of the
UPB of the mortgage loans we fulfill for PMT.
Fulfillment fees increased $1.0 million during the year ended December 31, 2018, compared to the year ended
December 31, 2017. The increase was primarily due to increased volume of mortgage loans we fulfilled for PMT,
partially offset by discretionary reductions in the fulfillment fee rate made to facilitate certain loan acquisition
transactions by PMT in a competitive market environment. Fulfillment fees decreased $6.1 million during the year ended
December 31, 2017, compared to the year ended December 31, 2016, primarily due to realization of a lower fulfillment
fee rate during 2017 compared to 2016 resulting from amendments to the mortgage banking services agreement with
PMT.
Net Interest Income
Net interest income increased $73.2 million during the year ended December 31, 2018 compared to the year
ended December 31, 2017. The increase is primarily due to a $38.9 million increase of incentives relating to financing of
mortgage loans under a master repurchase agreement and an increase of $37.4 million in the placement fees we receive
relating to the custodial funds, reflecting the growth of our servicing portfolio and higher interest rates, as well as an
increase in interest income on mortgage loans held for sale.
Net interest expense decreased $23.7 million during the year ended December 31, 2017 compared to the year
ended December 31, 2016. The decrease was primarily due to an increase in interest income on mortgage loans held for
sale as a result of an increase in average mortgage loan inventory and an increase in the placement fees we receive
relating to the custodial funds we held, partially offset by an increase in interest expense incurred to fund the growth in
our average inventory of mortgage loans held for sale and to finance our MSRs.
60
We entered into a master repurchase agreement in 2017 that provides us with incentives to finance mortgage
loans approved for satisfying certain consumer relief characteristics as provided in the agreement. We recorded
$48.1 million and $9.2 million of such incentives as reductions of Interest expense during the year ended
December 31, 2018 and 2017, respectively. The master repurchase agreement is subject to a rolling six-month term
through August 21, 2019, unless terminated earlier at the option of the lender. We expect that we will cease to accrue the
incentives under the repurchase agreement in the second quarter of 2019. While there can be no assurance, we expect
that the loss of such incentives will be partially offset by an improvement in pricing margins in our Net gains on
mortgage loans held for sale at fair value.
Management fees and Carried Interest
Management fees and Carried Interest are summarized below:
Management Fees:
PennyMac Mortgage Investment Trust:
Base management
Performance incentive
Investment Funds
Total management fees
Carried Interest
Total management fees and Carried Interest
Net assets of Advised Entities at year end:
PennyMac Mortgage Investment Trust
Investment Funds
Year ended December 31,
2017
2018
2016
(in thousands)
$
$
23,033 $
1,432
24,465
4
24,469
(365)
24,104 $
22,280 $
304
22,584
1,001
23,585
(1,040)
22,545
$
20,657
—
20,657
2,089
22,746
980
23,726
$ 1,566,132 $ 1,544,585 $ 1,351,114
197,550
$ 1,566,132 $ 1,573,914 $ 1,548,664
29,329
—
Management fees from PMT increased by $1.9 million during the year ended December 31, 2018, compared to
the year ended December 31, 2017, primarily reflecting the increase in PMT’s average shareholders’ equity upon which
its management fees are based and an increase in performance incentive fees. The performance incentive fees increased
$1.1 million during the year ended December 31, 2018, compared to the year ended December 31, 2017, resulting from
an increase in PMT’s net income on which incentive fees are based.
Management fees from PMT increased $1.9 million during the year ended December 31, 2017, compared to the
year ended December 31, 2016, primarily reflecting the increase in PMT’s average shareholders’ equity upon which its
base management fee is based. The increase of PMT’s average shareholders’ equity during the year ended
December 31, 2017, compared to the year ended December 31, 2016, was primarily due to the issuance of additional
equity by PMT in the form of preferred shares. The performance incentive fees increased $304,000 during the year
ended December 31, 2017 compared to the year ended December 31, 2016 resulting from an increase in PMT’s net
income on which incentive fees are based.
Management fees from the Investment Funds decreased $1.0 million and $1.1 million for the years ended
December 31, 2018 and December 31, 2017, compared to the years ended December 31, 2017 and December 31, 2016,
respectively. The reduction of management fees was anticipated as the Investment Funds completed their liquidation
during the year ended December 31, 2018.
61
Change in Fair Value of Investment in and Dividends Received from PMT
The results of our holdings of common shares of PMT, which is included in Changes in fair value of investment
in, and dividends received from PMT are summarized below:
2018
Year ended December 31,
2017
(in thousands)
2016
Dividends from PennyMac Mortgage Investment Trust
Change in fair value of investment in PennyMac Mortgage Investment Trust
Dividends received and change in fair value
Fair value of PennyMac Mortgage Investment Trust shares at year end
$
$
$
140 $
192
332 $
1,397 $
141 $
(23)
118 $
1,205 $
141
83
224
1,228
Change in fair value of investment in and dividends received from PMT increased $214,000 during the year
ended December 31, 2018 compared to the year ended December 31, 2017 and decreased $106,000 during the year
ended December 31, 2017 compared to the year ended December 31, 2016, primarily due to changes in the fair value of
our investment in PMT. We held 75,000 common shares of PMT during each of the three years ended
December 31, 2018.
Other revenues
Other revenue decreased $25.5 million for the year ended December 31, 2018, compared to the year ended
December 31, 2017. The decrease is primarily due to a decrease of $31.8 million in Revaluation of Payable to
exchanged Private National Mortgage Acceptance Company, LLC unitholders under the tax receivable agreement as a
result of the reduction in the federal tax rate which was recorded in 2017, partially offset by an increase of $5.1 million
in reimbursements from PMT due to our adoption of the Financial Accounting Standard Board’s Accounting Standards
Update 2014-09, Revenue from Contracts with Customers (Subtopic 606) using the modified retrospective method
effective January 1, 2018. Those reimbursements were included as a reduction of expense in previous years.
Other revenue increased $32.8 million during the year ended December 31, 2017 compared to the year ended
December 31, 2016. The increase was primarily due to our recording of a $32.0 million Revaluation of Payable to
exchanged Private National Mortgage Acceptance Company, LLC unitholders under the tax receivable agreement as a
result of the reduction in the federal tax rate.
Expenses
Compensation
Our compensation expense is summarized below:
Salaries and wages
Incentive compensation
Taxes and benefits
Stock and unit-based compensation
Head count:
Average
Year end
2018
2016
Year ended December 31,
2017
(dollars in thousands)
$ 256,750 $ 229,710 $ 211,238
78,241
36,169
16,505
$ 403,270 $ 358,721 $ 342,153
65,922
42,392
20,697
70,574
50,695
25,251
3,335
3,460
3,024
3,189
2,745
3,038
Compensation expense increased $44.5 million during the year ended December 31, 2018, compared to the year
ended December 31, 2017. The increase in compensation was primarily due to increased base salaries, taxes and benefits
due to increased average head count resulting from the growth in our mortgage banking activities during 2018.
62
Compensation expense increased $16.6 million during the year ended December 31, 2017, compared to the year
ended December 31, 2016. The increase was primarily due to an increase in base salaries due to increased average head
count during 2017 compared to 2016 resulting from the development of and growth in our mortgage banking segments,
partially offset by a decrease in incentive compensation due to lower attainment of profitability targets during 2017
compared to 2016.
Servicing
Servicing expense increased $19.4 million and $31.8 million in the years ended December 31, 2018 and 2017
compared to the years ended December 31, 2017 and 2016, respectively. The increases were due to growth in our
government-insured or guaranteed mortgage servicing portfolio, which includes mortgage loans that are subject to
nonreimbursable servicing advance losses, and to our EBO program to purchase defaulted mortgage loans out of Ginnie
Mae pools.
The EBO program reduces the ongoing cost of servicing defaulted mortgage loans subject to Ginnie Mae MBS
when we purchase and either sell the defaulted loans or finance them with debt at interest rates below the Ginnie Mae
MBS pass-through rates. While the EBO program reduces the ultimate cost of servicing such mortgage loan pools, it
accelerates loss recognition when the mortgage loans are purchased. We recognize expense because purchasing the
mortgage loans from their Ginnie Mae pools causes us to write off accumulated non-reimbursable interest advances, net
of interest receivable from the mortgage loans’ insurer or guarantor at the debenture rate of interest applicable to the
respective mortgage loans.
During the year ended December 31, 2018, we purchased $3.0 billion in UPB of EBOs as compared to
$2.9 billion for the year ended December 31, 2017 and $1.6 billion for the year ended December 31, 2016.
Technology
Technology expense increased $8.1 million and $16.7 million in the years ended December 31, 2018 and 2017
compared to the years ended December 31, 2017 and 2016, respectively. The increases were primarily due to growth in
loan servicing operations and continued investment in loan production and servicing infrastructure.
Occupancy and equipment
Occupancy and equipment expenses increased $4.5 million and $5.5 million during the years ended
December 31, 2018 and 2017, compared to the years ended December 31, 2017 and 2016, respectively. The increases
are primarily attributable to expansion of our facilities to accommodate our growth.
Provision for Income Taxes
For the years ended December 31, 2018, 2017 and 2016, our effective tax rates were 8.7%, 7.3%, and 12.0%,
respectively. The difference between our effective tax rate and the statutory rates was primarily due to the allocation of
earnings to the noncontrolling interest unitholders. Pursuant to the Reorganization, the noncontrolling interest
unitholders converted their ownership units into our shares and as a result, we were allocated starting on that date and
will in the future be allocated 100% of PNMAC earnings that will be subject to corporate federal and state statutory tax
rates, which will in turn increase our effective income tax rate. The lower effective tax rate for 2017 also reflects the
effect of the repricing of the net deferred tax liability resulting from the change in the federal statutory rate from 35% to
21% under the Tax Act.
63
Balance Sheet Analysis
Following is a summary of key balance sheet items as of the dates presented:
December 31,
2018
2017
(in thousands)
ASSETS
Cash and short-term investments
Mortgage loans held for sale at fair value
Servicing advances, net
Investments in and advances to affiliates
Mortgage servicing rights
Mortgage loans eligible for repurchase
Other
Total assets
$
273,113 $
207,805
3,099,103
318,066
181,421
2,119,588
1,208,195
233,915
$ 7,478,573 $ 7,368,093
2,521,647
313,197
165,886
2,820,612
1,102,840
281,278
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt
Long-term debt
Liability for mortgage loans eligible for repurchase
Other
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity
$ 2,332,143 $ 2,922,542
1,135,401
1,208,195
382,281
5,648,419
1,719,674
$ 7,478,573 $ 7,368,093
1,648,973
1,102,840
740,826
5,824,782
1,653,791
Total assets increased $110.5 million from $7.4 billion at December 31, 2017 to $7.5 billion at
December 31, 2018. The increase was primarily due to an increase of $701.2 million in MSRs reflecting continued
additions from our mortgage loan production activities and servicing portfolio acquisitions, partially offset by a decrease
of $577.5 million in mortgage loans held for sale at fair value resulting from a reduction in mortgage loan production
inventory.
Total liabilities increased by $176.4 million from $5.6 billion as of December 31, 2017 to $5.8 billion as of
December 31, 2018. The increase was primarily attributable to an increase of $513.6 million in long-term debt primarily
due to issuance of notes payable and an increase of $358.5 million in other liabilities primarily due to an increase in
income tax payable relating to conversion of the noncontrolling interest in PennyMac to common stockholders’ equity
pursuant to the Reorganization, partially offset by a decrease of $513.6 million of short-term debt due to lower
production inventory.
Cash Flows
Our cash flows for the three years ended December 31, 2018 are summarized below:
2016
2018
Year ended December 31,
2017
(in thousands)
$ 572,396 $ (883,412) $ (938,325)
(339,231)
(34,739)
967,156
1,161,174
(5,908)
(322,611)
(132,034)
$ 117,751 $
(61,469) $
Operating
Investing
Financing
Net increase (decrease) in cash and restricted cash
64
Operating activities
Net cash provided by (used in) operating activities totaled $572.4 million, ($883.4) million, and
($938.3) million during the years ended December 31, 2018, 2017, and 2016 respectively. Our cash flows from
operating activities are primarily influenced by changes in the levels of our inventory of mortgage loans as shown below:
Cash flows from:
Mortgage loans held for sale at fair value
Other operating sources
Year ended December 31,
2018
2017
2016
(in thousands)
$ 338,838 $ (1,019,898) $ (1,075,095)
136,486
136,770
(883,412) $ (938,325)
233,558
$ 572,396 $
The increase in cash flow from other operating sources during the year ended December 31, 2018, compared to
the year ended December 31, 2017, was primarily attributable to our collection of $31.9 million in repurchase agreement
derivatives and an increase in net changes in other assets and accounts payable and accrued expenses in the amount of
$68.2 million. We expect that we will cease to accrue the incentives under the repurchase agreement in the second
quarter of 2019. While there can be no assurance, we expect that the loss of such incentive income will be partially offset
by an improvement in pricing margins in our Net gains on mortgage loans held for sale at fair value.
Investing activities
Net cash used in investing activities was $322.6 million during the year ended December 31, 2018, a decrease
of $16.6 million compared to the year ended December 31, 2017. The decrease was primarily due to an $85.6 million
increase in cash used in net settlement of derivative financial instruments used to hedge our investment in MSRs and an
increase of $49.1 million in purchase of MSRs, partially offset by an increase of $136.4 million in short-term investment
cash flows. Net cash used in investing activities was $339.2 million during 2017, an increase of $304.5 million from
2016 due to increased purchases of MSRs during 2017 as compared to 2016.
Financing activities
Net cash used in financing activities totaled $132.0 million during the year ended December 31, 2018 primarily
due to net repurchases of assets sold under agreements to repurchase and mortgage loan participation purchase and sale
agreements of $440.9 million, reflecting a reduction in our financing of mortgage loans held for sale, and repayments of
excess servicing spread financing of $46.8 million, partially offset by net proceeds from issuance of notes payable of
$400 million.
Net cash provided by financing activities was $1.2 billion during the year ended December 31, 2017, primarily
due to an increase in loans sold under agreements to repurchase and notes payable used to finance the growth in our
inventory of mortgage loans held for sale and MSRs.
Net cash provided by financing activities was $967.2 million during the year ended December 31, 2016,
primarily from net proceeds from sales of assets under agreements to repurchase of $569.5 million, net proceeds from
issuances of mortgage loan participation certificates of $436.7 million and net proceeds from advances on notes payable
of $89.3 million to finance growth in our inventory of mortgage loans held for sale and investments in MSRs. The
increases were partially offset by repayments of ESS totaling $129.0 million.
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
65
purchases, and make investments as we identify them. We expect our primary sources of liquidity to be through cash
flows from business activities, proceeds from bank borrowings, proceeds from and issuance of ESS and/or equity or debt
offerings. We believe that our liquidity is sufficient to meet our current liquidity needs.
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 certificates, ESS financing, notes payable (including a revolving credit agreement) and a
capital lease. Most of our borrowings have short-term maturities and provide for terms of approximately one year.
Because a significant portion of our current debt facilities consists of short-term borrowings, we expect to renew these
facilities in advance of maturity in order to ensure our ongoing liquidity and access to capital or otherwise allow
ourselves sufficient time to replace any necessary financing.
Our repurchase agreements represent the sales of assets together with agreements for us to buy back the assets
at a later date. The table below presents the average outstanding, maximum and ending balances for each of the three
years ended December 31, 2018, 2017 and 2016:
Average balance
Maximum daily balance
Balance at year end
2018
Year ended December 31,
2017
(in thousands)
$ 1,626,729 $ 1,829,257 $ 1,438,181
$ 2,380,121 $ 3,022,656 $ 2,661,746
$ 1,935,200 $ 2,380,866 $ 1,736,922
2016
The differences between the average and maximum daily balances on our repurchase agreements reflect the
fluctuations throughout the month of our inventory as we fund and pool mortgage loans for sale in guaranteed mortgage
securitizations.
Our secured financing agreements at PLS require us to comply with various financial covenants. The most
significant financial covenants currently include the following:
•
•
•
•
•
positive net income during each calendar quarter;
a minimum in unrestricted cash and cash equivalents of $40 million;
a minimum tangible net worth of $500 million;
a maximum ratio of total liabilities to tangible net worth of 10:1; and
at least one other warehouse or repurchase facility that finances amounts and assets that are similar to those
being financed under certain of our existing secured financing agreements.
With respect to servicing performed for PMT, PLS is also subject to certain covenants under PMT’s debt
agreements. Covenants in PMT’s debt agreements are equally, or sometimes less, restrictive than the covenants
described above.
In addition to the covenants noted above, PennyMac’s revolving credit agreement and capital lease contain
additional financial covenants including, but not limited to,
•
•
•
a minimum of cash equal to the amount borrowed under the revolving credit agreement;
a minimum of unrestricted cash and cash equivalents equal to $25 million;
a minimum of tangible net worth of $500 million;
66
•
•
a minimum asset coverage ratio (the ratio of the total asset amount to the total commitment) of 2.5; and
a maximum ratio of total indebtedness to tangible net worth ratio of 5:1.
Although these financial covenants limit the amount of indebtedness that we may incur and affect our liquidity
through minimum cash reserve requirements, we believe that these covenants currently provide us with sufficient
flexibility to successfully operate our business and obtain the financing necessary to achieve that purpose.
Our debt financing agreements also contain margin call provisions that, upon notice from the applicable lender
at its option, require us to transfer cash or, in some instances, additional assets in an amount sufficient to eliminate any
margin deficit. A margin deficit will generally result from any decline in the market value (as determined by the
applicable lender) of the assets subject to the related financing agreement. Upon notice from the applicable lender, we
will generally be required to satisfy the margin call on the day of such notice or within one business day thereafter,
depending on the timing of the notice.
We are also subject to liquidity and net worth requirements established by FHFA for Agency seller/servicers
and Ginnie Mae for single-family issuers. FHFA and Ginnie Mae have established minimum liquidity requirements and
revised their net worth requirements for their approved non-depository single-family sellers/servicers in the case of
Fannie Mae, Freddie Mac, and Ginnie Mae for its approved single-family issuers, as summarized below:
• FHFA liquidity requirement is equal to 0.035% (3.5 basis points) of total Agency servicing UPB plus an
incremental 200 basis points of the amount by which total nonperforming Agency servicing UPB exceeds
6% of the applicable Agency servicing UPB; allowable assets to satisfy liquidity requirement include cash
and cash equivalents (unrestricted), certain investment-grade securities that are available for sale or held for
trading including Agency mortgage-backed securities, obligations of Fannie Mae or Freddie Mac, and U.S.
Treasury obligations, and unused and available portions of committed servicing advance lines;
• FHFA net worth requirement is a minimum net worth of $2.5 million plus 0.25% (25 basis points) of UPB
for total 1-4 unit residential mortgage loans serviced and a tangible net worth/total assets ratio greater than
or equal to 6%;
• Ginnie Mae single-family issuer minimum liquidity requirement is equal to the greater of $1.0 million or
0.10% (10 basis points) of the issuer’s outstanding Ginnie Mae single-family securities, which must be met
with cash and cash equivalents; and
• Ginnie Mae net worth requirement is equal to $2.5 million plus 0.35% (35 basis points) of the issuer’s
outstanding Ginnie Mae single-family obligations.
We believe that we are currently in compliance with the applicable Agency requirements.
We have purchased portfolios of MSRs and have financed them in part through the sale to PMT of the right to
receive ESS. The outstanding amount of the ESS is based on the current fair value of such ESS and amounts received on
the underlying mortgage loans.
In June 2017, our Board of Directors approved a stock repurchase program that allows us to repurchase up to
$50 million of our common stock using open market stock purchases or privately negotiated transactions in accordance
with applicable rules and regulations. The stock repurchase program does not have an expiration date and the
authorization does not obligate us to acquire any particular amount of common stock. We intend to finance the stock
repurchase program through cash on hand. From inception through December 31, 2018, we have repurchased
$13.9 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.
67
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
As of December 31, 2018, we have not entered into any off-balance sheet arrangements or guarantees.
Contractual Obligations
As of December 31, 2018 we had contractual obligations aggregating $7.3 billion, comprised of commitments
to purchase and originate mortgage loans, borrowings, and a payable to exchanged Private National Mortgage
Acceptance Company, LLC unitholders under a tax receivable agreement. We also lease our office facilities and license
certain software to support our loan servicing operations.
Payment obligations under these agreements are summarized below:
Contractual obligations
Total
Less than
1 year
Payments due by year
1-3
years
(in thousands)
3-5
years
More than
5 years
Commitments to purchase and originate mortgage
loans
Short-term debt
Long-term debt
Interest on long-term debt
Payable to exchanged Private National Mortgage
Acceptance Company, LLC unitholders under tax
receivable agreement
Software licenses (1)
Office leases
Total
$ 2,805,400 $ 2,805,400 $
2,327,666
1,662,715
366,146
2,327,666
6,033
77,929
— $
—
140,572
218,974
— $
—
1,300,000
40,096
—
—
216,110
29,147
46,537
18,509
93,700
46,537
—
24,495
$ 7,320,673 $ 5,251,123 $ 389,903 $ 1,363,358 $ 316,289
—
—
23,262
—
18,509
15,586
—
—
30,357
(1) Software licenses include both volume and activity based fees that are dependent on the number of loans serviced
during each period and include a base fee of approximately $1.8 million per month. Estimated payments for
software licenses above are based on the number of loans currently serviced by us, which totaled approximately
1.5 million at December 31, 2018. Future amounts due may significantly fluctuate based on changes in the number
of loans serviced by us. For the year ended December 31, 2018, software license fees totaled $25.4 million.
68
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 December 31, 2018:
Counterparty
Credit Suisse First Boston Mortgage Capital LLC (1)
Credit Suisse First Boston Mortgage Capital LLC (2)
Deutsche Bank AG
Bank of America, N.A.
BNP Paribas
Morgan Stanley Bank, N.A.
JP Morgan Chase Bank, N.A.
Royal Bank of Canada
Citibank, N.A.
Weighted average
maturity of
advances under
Amount at risk repurchase agreement Facility maturity
(in thousands)
$ 1,416,794
$
$
$
$
$
$
$
$
April 26, 2020
33,906 February 2, 2019
53,901 March 16, 2019
15,863
April 26, 2020
April 26, 2019
June 30, 2019
January 30, 2019 October 28, 2019
9,222 March 18, 2019 August 2, 2019
March 7, 2019 August 23, 2019
5,825
March 3, 2019 October 11, 2019
5,286
January 25, 2019 March 29, 2019
2,129
June 7, 2019
586 February 28, 2019
(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. Beneficial interests in the Ginnie Mae MSRs and servicing
advances are pledged to the Issuer Trust and together serve as the collateral backing the VFN, 2018-GT1 Notes and
2018-GT2 Notes described in Note 13—Borrowings. 2018-GT1 Notes and 2018-GT2 Notes are included in Notes
payable on the Company's consolidated balance sheet.
(2) The borrowing facility with Credit Suisse First Boston Mortgage Capital LLC is in the form of an asset sale under
an agreement to repurchase.
Debt Obligations
As described further above in “Liquidity and Capital Resources,” we currently finance certain of our assets
through borrowings with major financial institution counterparties in the form of sales of assets under agreements to
repurchase, mortgage loan participation purchase and sale agreements, notes payable (including a revolving credit
agreement), ESS and a capital lease. The borrower under each of these facilities is PLS or subsidiary Issuer Trust with
the exception of the revolving credit agreement, which is classified as a note payable, and the capital lease, in each case
where the borrower is PennyMac. All PLS obligations as previously noted are guaranteed by PennyMac.
Under the terms of these agreements, PLS is required to comply with certain financial covenants, as described
further above in “Liquidity and Capital Resources,” and various non-financial covenants customary for transactions of
this nature. As of December 31, 2018, 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.
69
The borrowings have maturities as follows:
Lender
Assets sold under agreements to repurchase
Outstanding
indebtedness (1) facility size (2) facility (2) Maturity date (2)
Committed
Total
(dollar amounts in thousands)
Credit Suisse First Boston Mortgage Capital LLC
Credit Suisse First Boston Mortgage Capital LLC (3)
Deutsche Bank AG
Bank of America, N.A.
BNP Paribas
Morgan Stanley Bank, N.A.
JPMorgan Chase Bank, N.A.
Royal Bank of Canada
Citibank, N.A.
$
$
$
$
$
$
$
$
$
April 26, 2019
550,766 $ 1,100,000 $ 300,000
April 26, 2020
140,000 $ 400,000 $ 400,000
741,978 $ 950,000 $
— August 21, 2019
170,820 $ 500,000 $ 500,000 October 28, 2019
August 2, 2019
149,482 $ 200,000 $ 100,000
77,687 $ 500,000 $ 100,000 August 23, 2019
54,326 $ 500,000 $ 50,000 October 11, 2019
35,181 $ 135,000 $ 20,000 March 29, 2019
June 7, 2019
14,960 $ 700,000 $ 350,000
Mortgage loan participation purchase and sale agreements
Bank of America, N.A.
Notes payable
GMSR 2018-GT1 Term Note
GMSR 2018-GT2 Term Note
Credit Suisse AG
Credit Suisse AG (3)
Obligations under capital lease
Banc of America Leasing and Capital LLC
$
532,466 $ 550,000 $
— October 28, 2019
$
$
$
$
$
650,000 $ 650,000
650,000 $ 650,000
— $ 150,000 $
— $
— $
February 25, 2023
August 25, 2023
— October 31, 2019
— February 1, 2020
6,605 $
35,000 $
— March 23, 2020
(1) Outstanding indebtedness as of December 31, 2018.
(2) Total facility size, committed facility and maturity date include contractual changes through the date of this Report.
(3) The borrowing of $140 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 $400 million, less any amount utilized
under the Credit Suisse AG note payable facility.
All debt financing arrangements that matured between December 31, 2018 and the date of this Report have
been renewed or extended and are described in Note 13—Borrowings to the accompanying consolidated financial
statements.
Item 7A. 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 interest rate risk, prepayment risk, credit risk and fair value 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.
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.
70
We engage in interest rate risk management activities in an effort to mitigate the effect of changes in interest
rates on the fair value of our assets. To manage this price risk resulting from interest rate 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 IRLCs, inventory of mortgage loans held for sale and MSRs. We do not use
derivative financial instruments other than IRLCs for purposes other than in support of our risk management activities.
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 the MSRs, MSLs, and ESS financing and when we measured fair value as of the
end of each reporting period, the carrying value of our investment in MSRs 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.
Credit Risk
We are subject to credit risk in connection with our mortgage loan sales activities. Our mortgage loan sales are
generally made with contractual representations and warranties, which, if breached, can require us to repurchase the
mortgage loan or reimburse the investor for any losses incurred due to such breach. These breaches are generally
evidenced when the borrower defaults on a mortgage loan.
The amount of our liability for losses due to representations and warranties to the mortgage loans’ investors is
not limited. However, we believe that the current UPB of mortgage loans sold by us to date represents the maximum
exposure to repurchases related to representations and warranties. We include a provision for potential losses due to the
representations and warranties we make as part of our recognition of mortgage loan sales, based initially on our estimate
of the fair value of such obligation. We review our loss experience relating to representations and warranties and adjust
our liability estimate when necessary.
In the event of developments affecting the credit performance of mortgage loans we have sold subject to
representations and warranties, such as a significant increase in unemployment or a significant deterioration in real estate
values in markets where properties securing mortgage loans we produce are located, defaults could increase and result in
credit losses arising from claims under our representations and warranties, which could materially and adversely affect
our business, financial condition and results of operations.
Fair Value Risk
Our IRLCs, mortgage loans held for sale, our MSRs, MSLs and ESS financing are reported at their estimated
fair values. The fair value of these assets fluctuates primarily due to changes in interest rates.
The following sensitivity analyses are limited in that they were performed at a particular point in time; only
contemplate the movements in the indicated variables; do not incorporate changes to other variables; are subject to the
accuracy of various models and assumptions used; and do not incorporate other factors that would affect our overall
financial performance in such scenarios, including operational adjustments made by management to account for
changing circumstances. For these reasons, the following estimates should not be viewed as earnings forecasts.
71
Mortgage Servicing Rights
The following tables summarize the estimated change in fair value of MSRs as of December 31, 2018, given
several shifts in pricing spreads, prepayment speed and annual per loan cost of servicing:
Pricing spread shift in %
-20%
-10%
-5%
+5%
+10%
+20%
(dollar amounts in thousands)
Fair value
Change in fair value:
$
%
$ 3,017,774
$ 2,915,820
$ 2,867,413
$ 2,775,344
$ 2,731,539
$ 2,648,056
$ 197,162
$
95,208
$
46,801
$
(45,268)
$
(89,073)
$
(172,556)
7.0 %
3.4 %
1.7 %
(1.6) %
(3.2) %
(6.1) %
Prepayment speed shift in %
-20%
-10%
-5%
+5%
+10%
+20%
(dollar amounts in thousands)
Fair value
Change in fair value:
$
%
$ 3,030,919
$ 2,921,629
$ 2,870,145
$ 2,772,925
$ 2,726,986
$ 2,639,990
$ 210,306
$
101,017
$
49,532
$
(47,687)
$
(93,626)
$
(180,623)
7.5 %
3.6 %
1.8 %
(1.7) %
(3.3) %
(6.4) %
Per-loan servicing cost shift in %
-20%
-10%
-5%
+5%
+10%
+20%
(dollar amounts in thousands)
Fair value
Change in fair value:
$
%
$ 2,912,387
$ 2,866,500
$ 2,843,556
$ 2,797,668
$ 2,774,724
$ 2,728,837
$
91,775
$
45,888
$
22,944
$
(22,944)
$
(45,888)
$
(91,775)
3.3 %
1.6 %
0.8 %
(0.8) %
(1.6) %
(3.3) %
Excess Servicing Spread Financing
The following tables summarize the estimated change in fair value of our ESS accounted for using the fair value
method as of December 31, 2018, given several shifts in pricing spreads and prepayment speed (decrease in the
liabilities’ fair values increases net income):
Pricing spread shift in %
-20%
-10%
-5%
+5%
+10%
+20%
(dollar amounts in thousands)
Fair value
Change in fair value:
$
%
$ 222,150
$ 219,091
$ 217,591
$ 214,649
$ 213,206
$ 210,375
$
6,040
$
2,980
$
1,481
$ (1,461)
$ (2,904)
$ (5,735)
2.8 %
1.4 %
0.7 %
(0.7) %
(1.3) %
(2.7) %
Prepayment speed shift in %
-20%
-10%
-5%
+5%
+10%
+20%
(dollar amounts in thousands)
Fair value
Change in fair value:
$
%
$ 236,495
$ 225,889
$ 220,902
$ 211,503
$ 207,070
$ 198,693
$ 20,385
$
9,779
$
4,792
$ (4,607)
$ (9,040)
$ (17,418)
9.4 %
4.5 %
2.2 %
(2.1) %
(4.2) %
(8.1) %
Item 8. Financial Statements and Supplementary Data
The information called for by this Item 8 is hereby incorporated by reference from our Financial Statements and
Auditors’ Report in Part IV of this Report.
72
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. 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 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.
Internal Control over Financial Reporting
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of its internal
control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on those criteria,
management concluded that our internal control over financial reporting was effective as of December 31, 2018.
The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by
Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein.
73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
PennyMac Financial Services, Inc.
3043 Townsgate Rd
Westlake Village, CA 91361
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of PennyMac Financial Services, Inc. and subsidiaries (“the
Company”) as of December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control—Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018, of the Company and our report
dated March 5, 2019, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding
the Company’s election in 2018 to prospectively change its method of accounting for the classes of mortgage servicing rights it had
accounted for using the amortization method.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
March 5, 2019
74
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the year ended December 31,
2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None.
75
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item 10 is hereby incorporated by reference from our definitive proxy
statement, or will be contained in an amendment to this Report, in either case to be filed by April 30, 2019, which is
within 120 days after the end of fiscal year 2018.
Item 11. Executive Compensation
The information required by this Item 11 is hereby incorporated by reference from our definitive proxy
statement, or will be contained in an amendment to this Report, in either case to be filed by April 30, 2019, which is
within 120 days after the end of fiscal year 2018.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 is hereby incorporated by reference from our definitive proxy
statement, or will be contained in an amendment to this Report, in either case to be filed by April 30, 2019, which is
within 120 days after the end of fiscal year 2018.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 is hereby incorporated by reference from our definitive proxy
statement, or will be contained in an amendment to this Report, in either case to be filed by April 30, 2019, which is
within 120 days after the end of fiscal year 2018.
Item 14. Principal Accounting Fees and Services
The information required by this Item 14 is hereby incorporated by reference from our definitive proxy
statement, or will be contained in an amendment to this Report, in either case to be filed April 30, 2019, which is within
120 days after the end of fiscal year 2018.
76
Item 15. Exhibits and Financial Statement Schedules
PART IV
Exhibit No. Exhibit Description
Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)
Form
Filing Date
2.1
Contribution Agreement and Plan of Merger, dated as of August 2, 2018, by
and among PennyMac Financial Services, Inc., New PennyMac Financial
Services, Inc., New PennyMac Merger Sub, LLC, Private National
Mortgage Acceptance Company, LLC, and the Contributors.
8-K12B
3.1
Amended and Restated Certificate of Incorporation of New PennyMac
8-K12B
Financial Services, Inc.
3.1.1
Certificate of Amendment to Amended and Restated Certificate of
8-K12B
Incorporation of New PennyMac Financial Services, Inc.
3.2
Amended and Restated Bylaws of New PennyMac Financial Services, Inc.
8-K12B
November 1,
2018
November 1,
2018
November 1,
2018
November 1,
2018
November 1,
2018
10.1
10.2
10.3
Fifth Amended and Restated Limited Liability Company Agreement of
Private National Mortgage Acceptance Company, LLC, dated as of
November 1, 2018.
8-K12B
Tax Receivable Agreement, dated as of May 8, 2013, between PennyMac
Financial Services, Inc., Private National Mortgage Acceptance Company,
LLC and each of the Members.
8-K
May 14, 2013
Amended and Restated Registration Rights Agreement, dated as of
November 1, 2018, among PennyMac Financial Services, Inc., New
PennyMac Financial Services, Inc. and the Holders.
8-K12B
November 1,
2018
10.4
Amended and Restated Stockholder Agreement, dated as of November 1,
8-K12B
2018, among PennyMac Financial Services, Inc., New PennyMac Financial
Services, Inc. and BlackRock Mortgage Ventures, LLC.
10.5
Amended and Restated Stockholder Agreement, dated as of November 1,
8-K12B
2018, among PennyMac Financial Services, Inc., New PennyMac Financial
Services, Inc. and HC Partners LLC.
November 1,
2018
November 1,
2018
10.6†
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan.
8-K
May 14, 2013
10.7†
First Amendment to the PennyMac Financial Services, Inc. 2013 Equity
10-K
March 9, 2018
Incentive Plan.
10.8†
Second Amendment to the PennyMac Financial Services, Inc. 2013 Equity
DEF14A April 17, 2018
Incentive Plan.
10.9†
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of
Restricted Stock Unit Award Agreement for Non-Employee Directors.
8-K
May 16, 2013
77
Exhibit No. Exhibit Description
Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)
Form
Filing Date
10.10†
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of
10-Q
Restricted Stock Unit Award Agreement for Executive Officers.
10.11†
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of
Restricted Stock Unit Award Agreement for Other Eligible Participants.
10-Q
November 6,
2015
November 6,
2015
10.12†
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of
8-K
June 17, 2013
Stock Option Award Agreement.
10.13†
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of
10-Q
August 2, 2018
Restricted Stock Unit Subject to Performance Components Award
Agreement (2018).
10.14†
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of
Restricted Stock Unit Subject to Continued Service Award Agreement
(2018).
10-Q
August 2, 2018
10.15†
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of
10-Q
August 2, 2018
Stock Option Award Agreement (2018).
10.16†
Omnibus Amendment to PennyMac Financial Services, Inc. 2013 Equity
*
Incentive Plan Restricted Stock Unit Award Agreements (2019).
10.17†
Form of PennyMac Financial Services, Inc. Indemnification Agreement.
S-1/A
April 5, 2013
10.18†
Employment Agreement, dated December 28, 2018, among Stanford L.
Kurland, Private National Mortgage Acceptance Company, LLC and
PennyMac Financial Services, Inc.
10.19†
Employment Agreement, dated December 28, 2018, among David A.
Spector, Private National Mortgage Acceptance Company, LLC and
PennyMac Financial Services, Inc.
10.20†
Employment Agreement, dated December 28, 2018, among Doug Jones,
Private National Mortgage Acceptance Company, LLC and PennyMac
Financial Services, Inc.
8-K
8-K
8-K
10.21
Second Amended and Restated Management Agreement, dated as of
8-K
September 12, 2016, by and among PennyMac Mortgage Investment Trust,
PennyMac Operating Partnership, L.P. and PNMAC Capital Management,
LLC.
10.22
Amendment No. 1 to Second Amended and Restated Management
10-Q
Agreement, dated as of September 27, 2017, by and among PennyMac
Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and
PNMAC Capital Management, LLC.
December 31,
2018
December 31,
2018
December 31,
2018
September 12,
2016
November 7,
2017
78
Exhibit No. Exhibit Description
Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)
Form
Filing Date
10.23
Third Amended and Restated Flow Servicing Agreement, dated as of
8-K
September 12, 2016, by and between PennyMac Operating Partnership, L.P.
and PennyMac Loan Services, LLC.
September 12,
2016
10.24
10.25
10.26
10.27
10.28
10.29
10.30
Amendment No. 1 to Third Amended and Restated Flow Servicing
Agreement, dated as of March 1, 2018, by and between PennyMac
Operating Partnership, L.P. and PennyMac Loan Services LLC.
10-Q
May 4, 2018
Amended and Restated Mortgage Banking Services Agreement, dated as of
September 12, 2016, by and between PennyMac Loan Services, LLC and
PennyMac Corp.
8-K
September 12,
2016
Amendment No. 1 to Amended and Restated Mortgage Banking Services
Agreement, dated as of May 25, 2017, by and between PennyMac Loan
Services, LLC and PennyMac Corp.
10-Q
August 8, 2017
Amendment No. 2 to Amended and Restated Mortgage Banking Services
Agreement, dated as of October 31, 2017, by and among PennyMac Loan
Services, LLC and PennyMac Corp.
10-Q
November 7,
2017
Amendment No. 3 to Amended and Restated Mortgage Banking Services
Agreement, dated as of December 1, 2017, by and among PennyMac Loan
Services, LLC and PennyMac Corp.
10-K
March 9, 2018
Amended and Restated MSR Recapture Agreement, dated as of September
12, 2016, by and between PennyMac Loan Services, LLC and PennyMac
Corp.
8-K
September 12,
2016
Amendment No. 1 to Amended and Restated MSR Recapture Agreement,
dated as of December 1, 2017, by and between PennyMac Loan Services,
LLC and PennyMac Corp.
10-K
March 9, 2018
10.31
Second Amended and Restated Underwriting Fee Reimbursement
*
Agreement, dated as of February 1, 2019, by and among PennyMac
Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and
PNMAC Capital Management, LLC.
10.32
Master Spread Acquisition and MSR Servicing Agreement, dated as of
December 19, 2014, among PennyMac Loan Services, LLC, PennyMac
Operating Partnership, L.P., and PennyMac Holdings, LLC.
8-K
December 24,
2014
10.33
Amendment No. 1 to Master Spread Acquisition and MSR Servicing
10-Q
May 8, 2015
Agreement, dated as of March 3, 2015, among PennyMac Loan Services,
LLC, PennyMac Operating Partnership, L.P., and PennyMac Holdings,
LLC.
10.34
Second Amended and Restated Master Spread Acquisition and MSR
8-K
Servicing Agreement, dated as of December 19, 2016, by and between
PennyMac Loan Services, LLC, and PennyMac Holdings, LLC.
December 21,
2016
79
Exhibit No. Exhibit Description
Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)
Form
Filing Date
10.35
Amended and Restated Master Repurchase Agreement, dated as of October
8-K
October 31, 2018
29, 2018, among PennyMac Loan Services, LLC, Private National
Mortgage Acceptance Company, LLC and Bank of America, N.A.
10.36
Guaranty dated as of October 29, 2018, made by Private National Mortgage
8-K
October 31, 2018
Acceptance Company, LLC for the benefit of Bank of America, N.A.
10.37
Amended and Restated Master Repurchase Agreement, dated as of March 3,
8-K
March 8, 2017
2017, among Citibank, N.A. and PennyMac Loan Services, LLC.
10.38
Amendment Number One to Amended and Restated Master Repurchase
8-K
June 21, 2017
Agreement, dated as of June 19, 2017, between Citibank, N.A. and
PennyMac Loan Services, LLC.
10.39
Amendment Number Two to Amended and Restated Master Repurchase
10-Q
May 4, 2018
Agreement, dated as of March 2, 2018, by and between Citibank, N.A. and
PennyMac Loan Services, LLC.
10.40
10.41
10.42
10.43
Amendment Number Three to Amended and Restated Master Repurchase
Agreement, dated as of May 1, 2018, by and between Citibank, N.A. and
PennyMac Loan Services, LLC.
10-Q
August 2, 2018
Amendment Number Four to Amended and Restated Master Repurchase
Agreement, dated as of May 9, 2018, by and between Citibank, N.A. and
PennyMac Loan Services, LLC.
10-Q
August 2, 2018
Amendment Number Five to the Amended and Restated Master Repurchase
Agreement, dated as of May 14, 2018, by and between Citibank, N.A. and
PennyMac Loan Services, LLC.
8-K
May 18, 2018
Amendment Number Six to the Amended and Restated Master Repurchase
Agreement, dated as of June 8, 2018, by and between Citibank, N.A. and
PennyMac Loan Services, LLC.
10-Q
August 2, 2018
10.44
Guaranty Agreement, dated as of June 26, 2012, by Private National
Mortgage Acceptance Company, LLC in favor of Citibank, N.A.
10-K
March 13, 2015
10.45
Third Amended and Restated Master Repurchase Agreement, dated as of
8-K
May 3, 2017
April 28, 2017, by and among Credit Suisse First Boston Mortgage Capital
LLC, Credit Suisse AG, Cayman Islands Branch, Alpine Securitization
LTD, PennyMac Loan Services, LLC and Private National Mortgage
Acceptance Company, LLC.
10.46
Amendment No. 1 to Third Amended and Restated Master Repurchase
Agreement, dated as of June 1, 2017, by and among Credit Suisse First
Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch,
Alpine Securitization LTD, PennyMac Loan Services, LLC and Private
National Mortgage Acceptance Company, LLC.
10-Q
August 8, 2017
80
Exhibit No. Exhibit Description
Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)
Form
Filing Date
10.47
Amendment No. 2 to Third Amended and Restated Master Repurchase
10-K
March 9, 2018
Agreement, dated as of December 20, 2017, by and among Credit Suisse
First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands
Branch, Alpine Securitization LTD, PennyMac Loan Services, LLC and
Private National Mortgage Acceptance Company, LLC.
10.48
Amendment No. 3 to Third Amended and Restated Master Repurchase
8-K
February 7, 2018
Agreement, dated as of February 1, 2018, by and among Credit Suisse First
Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch
Alpine Securitization LTD, PennyMac Loan Services, LLC and Private
National Mortgage Acceptance Company, LLC.
10.49
Amendment No. 4 to Third Amended and Restated Master Repurchase
10-Q
August 2, 2018
Agreement, dated as of April 27, 2018, by and among Credit Suisse First
Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands Branch,
Alpine Securitization LTD, PennyMac Loan Services, LLC and Private
National Mortgage Acceptance Company, LLC.
10.50
Amendment No. 5 to Third Amended and Restated Master Repurchase
Agreement, dated as of February 11, 2019, by and among Credit Suisse
First Boston Mortgage Capital LLC, Credit Suisse AG, Cayman Islands
Branch, Alpine Securitization LTD, PennyMac Loan Services, LLC and
Private National Mortgage Acceptance Company, LLC.
*
10.51
Amended and Restated Guaranty, dated as of April 28, 2017, by Private
8-K
May 3, 2017
National Mortgage Acceptance LLC in favor of Credit Suisse First Boston
Mortgage Capital LLC.
10.52
Master Repurchase Agreement, dated as of July 2, 2013, by and between
8-K
July 8, 2013
PennyMac Loan Services, LLC and Morgan Stanley Bank, N.A.
10.53
Amendment Number One to the Master Repurchase Agreement, dated as of
S-1
October 1, 2013
August 26, 2013, by and between PennyMac Loan Services, LLC and
Morgan Stanley Bank, N.A.
10.54
Amendment Number Two to the Master Repurchase Agreement, dated as of
10-Q
May 15, 2014
January 28, 2014, by and between PennyMac Loan Services, LLC and
Morgan Stanley Bank, N.A.
10.55
10.56
Amendment Number Three to the Master Repurchase Agreement, dated as
of June 30, 2014, by and between PennyMac Loan Services, LLC and
Morgan Stanley Bank, N.A.
10-Q
August 14, 2014
Amendment Number Four to the Master Repurchase Agreement, dated as of
June 29, 2015, by and between PennyMac Loan Services, LLC and Morgan
Stanley Bank, N.A.
10-Q
August 7, 2015
81
Exhibit No. Exhibit Description
Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)
Form
Filing Date
10.57
10.58
Amendment Number Five to the Master Repurchase Agreement, dated as of
July 27, 2015, by and between PennyMac Loan Services, LLC and Morgan
Stanley Bank, N.A.
8-K
July 27, 2015
Amendment Number Six to the Master Repurchase Agreement, dated as of
November 9, 2015, by and between PennyMac Loan Services, LLC and
Morgan Stanley Bank, N.A.
10-K
March 10, 2016
10.59
Amendment Number Seven to the Master Repurchase Agreement, dated
10-Q
August 9, 2016
July 26, 2016, by and between PennyMac Loan Services, LLC and Morgan
Stanley Bank, N.A.
10.60
Amendment Number Eight to the Master Repurchase Agreement, dated
10-Q
August 26, 2016, by and between PennyMac Loan Services, LLC, Morgan
Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.
November 8,
2016
10.61
Amendment Number Nine to the Master Repurchase Agreement, dated June
20, 2017, by and between PennyMac Loan Services, LLC, Morgan Stanley
Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.
8-K
June 21, 2017
10.62
Amendment Number Ten to the Master Repurchase Agreement, dated
10-Q
August 25, 2017, by and between PennyMac Loan Services, LLC, Morgan
Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.
November 7,
2017
10.63
10.64
Amendment Number Eleven to the Master Repurchase Agreement, dated
March 20, 2018, by and between PennyMac Loan Services, LLC, Morgan
Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.
10-Q
May 4, 2018
Amendment Number Twelve to the Master Repurchase Agreement, dated
August 24, 2018, by and between PennyMac Loan Services, LLC, Morgan
Stanley Bank, N.A. and Morgan Stanley Mortgage Capital Holdings LLC.
8-K
August 29, 2018
10.65
Guaranty Agreement, dated as of July 2, 2013, by Private National
8-K
July 8, 2013
Mortgage Acceptance Company, LLC in favor of Morgan Stanley Bank,
N.A.
10.66
Mortgage Loan Participation Purchase and Sale Agreement, dated as of
August 13, 2014, by and among PennyMac Loan Services, LLC, Private
National Mortgage Acceptance Company, LLC and Bank of America, N.A.
10-Q
August 14, 2014
10.67
Amendment No. 1 to Mortgage Loan Participation Purchase and Sale
10-K
March 13, 2015
Agreement, dated as of January 30, 2015, by and among Bank of America,
N.A., PennyMac Loan Services, LLC and Private National Mortgage
Acceptance Company, LLC.
10.68
Amendment No. 2 to Mortgage Loan Participation Purchase and Sale
Agreement, dated as of December 22, 2015, by and among Bank of
America, N.A., PennyMac Loan Services, LLC and Private National
Mortgage Acceptance Company, LLC.
10-K
March 10, 2016
82
Exhibit No. Exhibit Description
Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)
Form
Filing Date
10.69
Amendment No. 3 to Mortgage Loan Participation Purchase and Sale
10-Q
August 9, 2016
Agreement, dated as of March 29, 2016, by and among Bank of America,
N.A., PennyMac Loan Services, LLC and Private National Mortgage
Acceptance Company, LLC.
10.70
Amendment No. 4 to Mortgage Loan Participation Purchase and Sale
10-Q
August 8, 2017
Agreement, dated as of March 28, 2017, by and among Bank of America,
N.A., PennyMac Loan Services, LLC and Private National Mortgage
Acceptance Company, LLC.
10.71
Amendment No. 5 to Mortgage Loan Participation Purchase and Sale
10-Q
August 8, 2017
Agreement, dated as of May 23, 2017, by and among Bank of America,
N.A., PennyMac Loan Services, LLC and Private National Mortgage
Acceptance Company, LLC.
10.72
Amendment No. 6 to Mortgage Loan Participation Purchase and Sale
8-K
Agreement, dated as of September 1, 2017, by and among Bank of America,
N.A., PennyMac Loan Services, LLC and Private National Mortgage
Acceptance Company, LLC.
September 8,
2017
10.73
Amendment No. 7 to Mortgage Loan Participation Purchase and Sale
10-Q
May 4, 2018
Agreement, dated as of April 20, 2018, by and among Bank of America,
N.A., PennyMac Loan Services, LLC and Private National Mortgage
Acceptance Company, LLC.
10.74
Amendment No. 8 to Mortgage Loan Participation Purchase and Sale
Agreement, dated June 29, 2018, by and among Bank of America, N.A.,
PennyMac Loan Services, LLC and Private National Mortgage Acceptance
Company, LLC.
10.75
Amendment No. 9 to Mortgage Loan Participation Purchase and Sale
Agreement, dated October 29, 2018, by and among Bank of America, N.A.,
PennyMac Loan Services, LLC and Private National Mortgage Acceptance
Company, LLC.
*
*
10.76
Amended and Restated Guaranty, dated as of August 13, 2014, by Private
10-Q
August 14, 2014
National Mortgage Acceptance Company, LLC in favor of Bank of
America, N.A.
10.77
Amendment No. 1 to Amended and Restated Guaranty, dated as of October
29, 2018, between Private National Mortgage Acceptance Company, LLC
and Bank of America, N.A.
*
10.78
Mortgage Loan Purchase Agreement, dated as of September 25, 2012, by
10-K
March 10, 2016
and between PennyMac Loan Services, LLC and PennyMac Corp.
10.79
Flow Sale Agreement, dated as of June 16, 2015, by and between
10-Q
August 7, 2015
PennyMac Corp. and PennyMac Loan Services, LLC.
83
Exhibit No. Exhibit Description
Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)
Form
Filing Date
10.80
Amended and Restated Flow Commercial Mortgage Loan Purchase
10-Q
August 9, 2016
Agreement, dated as of June 1, 2016, by and between PennyMac Loan
Services, LLC and PennyMac Corp.
10.81
10.82
10.83
10.84
Amendment No. 1 to Amended and Restated Flow Commercial Mortgage
Loan Purchase Agreement, dated as of September 27, 2017, by and among
PennyMac Corp. and PennyMac Loan Services, LLC.
10-Q
November 7,
2017
Servicing Agreement, dated as of July 13, 2015, between PennyMac Corp.,
PennyMac Holdings, LLC, any other parties signing this Agreement as
owner of Mortgage Loans listed in Schedule I and any New Owners,
PennyMac Loan Services, LLC, and Midland Loan Services, a division of
PNC Bank, National Association.
Addendum to Master Lease Agreement No. 30350-90000, dated as of
December 9, 2015, among Private National Mortgage Acceptance
Company, LLC and Banc of America Leasing & Capital, LLC.
Schedule Number 001 to Master Lease Agreement, dated as of December 9,
2015, among Private National Mortgage Acceptance Company, LLC and
Banc of America Leasing & Capital, LLC.
10-K
March 10, 2016
8-K
8-K
December 14,
2015
December 14,
2015
10.85
Schedule Number 002 to Master Lease Agreement, dated as of May 4,
10-Q
March 31, 2016
2016, among Private National Mortgage Acceptance Company, LLC and
Banc of America Leasing & Capital, LLC.
10.86
10.87
Schedule Number 003 to Master Lease Agreement, dated as of November 3,
2016, among Private National Mortgage Acceptance Company, LLC and
Banc of America Leasing & Capital, LLC.
8-K
November 4,
2016
Schedule Number 004 to Master Lease Agreement, dated as of March 23,
2017, among Private National Mortgage Acceptance Company, LLC and
Banc of America Leasing & Capital, LLC.
8-K
March 27, 2017
10.88
Guaranty, dated as of December 9, 2015, by PennyMac Loan Services, LLC
8-K
in favor of Banc of America Leasing & Capital, LLC.
December 14,
2015
10.89
Amended and Restated Credit Agreement, dated November 18, 2016, by
and among Private National Mortgage Acceptance Company, LLC, the
lenders that are parties thereto, Credit Suisse AG and Credit Suisse
Securities (USA) LLC.
8-K
November 22,
2016
10.90
Amendment No. 1 to Amended and Restated Credit Agreement, dated
10-K
March 9, 2018
November 17, 2017, by and among Private National Mortgage Acceptance
Company, LLC and Credit Suisse AG.
84
Exhibit No. Exhibit Description
Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)
Form
Filing Date
10.91
Amendment No. 2 to Amended and Restated Credit Agreement and
*
Amendment No. 1 to Amended and Restated Collateral and Guaranty
Agreement, dated November 1, 2018, by and among Private National
Mortgage Acceptance Company, LLC, each of the Guarantors party thereto,
the Lenders party hereto, Credit Suisse AG, Cayman Islands Branch and
Credit Suisse AG.
10.92
Amended and Restated Collateral and Guaranty Agreement, dated
8-K
November 22,
November 18, 2016, by and among Private National Mortgage Acceptance
Company, LLC, Credit Suisse AG, Cayman Islands Branch, PennyMac
Financial Services, Inc., PNMAC Capital Management, LLC, PennyMac
Loan Services, LLC and PNMAC Opportunity Fund Associates, LLC.
2016
10.93
Collateral and Guaranty Agreement Supplement, dated November 1, 2018,
by and between Credit Suisse AG as the Collateral Agent and PennyMac
Financial Services, Inc.
*
10.94
Master Repurchase Agreement, dated as of August 19, 2016, between
PennyMac Loan Services, LLC and JPMorgan Chase Bank, N.A.
8-K
August 23, 2016
10.95
First Amendment to Master Repurchase Agreement, dated as of May 23,
8-K
May 30, 2017
2017, between PennyMac Loan Services, LLC and JPMorgan Chase Bank,
N.A.
10.96
Second Amendment to Master Repurchase Agreement, dated as of
10-Q
September 27, 2017, between JPMorgan Chase Bank, N.A. and PennyMac
Loan Services, LLC.
November 7,
2017
10.97
10.98
10.99
Third Amendment to Master Repurchase Agreement, dated as of October
13, 2017, between JPMorgan Chase Bank, N.A. and PennyMac Loan
Services, LLC.
10-Q
November 7,
2017
Fourth Amendment to Master Repurchase Agreement, dated as of July 26,
2018, between JPMorgan Chase Bank, N.A. and PennyMac Loan Services,
LLC.
10-Q
November 2,
2018
Fifth Amendment to Master Repurchase Agreement, dated as of October 12,
2018, between JPMorgan Chase Bank, N.A. and PennyMac Loan Services,
LLC.
10-Q
November 2,
2018
10.100
Guaranty, dated as of August 19, 2016, by Private National Mortgage
Acceptance Company, LLC in favor of JPMorgan Chase Bank. N.A.
8-K
August 23, 2016
10.101
Master Repurchase Agreement, dated as of September 19, 2016, between
8-K
Royal Bank of Canada and PennyMac Loan Services, LLC.
September 22,
2016
10.102
Amendment No. 1 to Master Repurchase Agreement, dated as of May 3,
10-Q
August 8, 2017
2017, between Royal Bank of Canada and PennyMac Loan Services, LLC.
85
Exhibit No. Exhibit Description
Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)
Form
Filing Date
10.103
Amendment No. 2 to Master Repurchase Agreement, dated as of September
22, 2017, between Royal Bank of Canada and PennyMac Loan Services,
LLC.
10-Q
November 7,
2017
10.104
Base Indenture, dated as of December 19, 2016, by and among PNMAC
8-K
GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC,
Credit Suisse First Boston Mortgage Capital LLC, and Pentalpha
Surveillance LLC.
December 21,
2016
10.105
Amended and Restated Base Indenture, dated as of February 16, 2017, by
and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac
Loan Services, LLC, Credit Suisse First Boston Mortgage Capital LLC, and
Pentalpha Surveillance LLC.
8-K
February 23,
2017
10.106
Second Amended and Restated Base Indenture, dated as of August 10,
8-K
August 16, 2017
10.107
10.108
10.109
2017, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A.,
PennyMac Loan Services, LLC, Credit Suisse First Boston Mortgage
Capital LLC, and Pentalpha Surveillance LLC.
Amendment No. 1 to Second Amended and Restated Base Indenture, dated
as of February 28, 2018, by and among PNMAC GMSR ISSUER TRUST,
Citibank, N.A., PennyMac Loan Services, LLC, Credit Suisse First Boston
Mortgage Capital LLC, and Pentalpha Surveillance LLC.
Amendment No. 2 to Second Amended and Restated Base Indenture, dated
as of August 10, 2018, by and among PNMAC GMSR ISSUER TRUST,
Citibank, N.A., PennyMac Loan Services, LLC, Credit Suisse First Boston
Mortgage Capital LLC, and Pentalpha Surveillance LLC.
8-K
March 6, 2018
8-K
August 15, 2018
Series 2016-MSRVF1 Indenture Supplement to Indenture, dated as of
December 19, 2016, by and among PNMAC GMSR ISSUER TRUST,
Citibank, N.A., PennyMac Loan Services, LLC, and Credit Suisse First
Boston Mortgage Capital LLC.
8-K
December 21,
2016
10.110
Amended and Restated Series 2016-MSRVF1 Indenture Supplement to
8-K
March 6, 2018
Indenture, dated as of February 28, 2018, by and among PNMAC GMSR
ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC and
Credit Suisse First Boston Mortgage Capital LLC.
10.111
Amendment No. 1 to Amended and Restated Series 2016-MSRVF1
10-Q
Indenture Supplement, dated as of August 10, 2018, by and among PNMAC
GMSR ISSUER TRUST, Citibank, N.A., PennyMac Loan Services, LLC
and Credit Suisse First Boston Mortgage Capital LLC.
November 2,
2018
10.112
Series 2016-MBSADV1 Indenture Supplement to Indenture, dated as of
December 19, 2016, by and among PNMAC GMSR ISSUER TRUST,
Citibank, N.A., PennyMac Loan Services, LLC, and Credit Suisse First
Boston Mortgage Capital LLC.
10-K
March 9, 2017
86
Exhibit No. Exhibit Description
Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)
Form
Filing Date
10.113
Omnibus Amendment No. 1 to the Series 2016-MSRVF1 Indenture
8-K
Supplement and Series 2016-MBSADV1 Indenture Supplement, dated as of
February 16, 2017, by and among PNMAC GMSR ISSUER TRUST,
Citibank, N.A., PennyMac Loan Services, LLC, and Credit Suisse First
Boston Mortgage Capital LLC.
February 23,
2017
10.114
10.115
10.116
10.117
Series 2017-GT1 Indenture Supplement, dated as of February 16, 2017, to
Amended and Restated Base Indenture, dated as of February 16, 2017, by
and among PNMAC GMSR ISSUER TRUST, Citibank, N.A., PennyMac
Loan Services, LLC, Credit Suisse First Boston Mortgage Capital LLC.
8-K
February 23,
2017
Series 2017-GT2 Indenture Supplement, dated as of August 10, 2017, to
Second Amended and Restated Base Indenture, dated as of August 10,
2017, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A.,
PennyMac Loan Services, LLC and Credit Suisse First Boston Mortgage
Capital.
Series 2018-GT1 Indenture Supplement, dated as of February 28, 2018, to
Second Amended and Restated Base Indenture, dated as of August 10,
2017, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A.,
PennyMac Loan Services, LLC and Credit Suisse First Boston Mortgage
Capital LLC.
Series 2018-GT2 Indenture Supplement, dated as of August 10, 2018, to
Second Amended and Restated Base Indenture, dated as of August 10,
2017, by and among PNMAC GMSR ISSUER TRUST, Citibank, N.A.,
PennyMac Loan Services, LLC and Credit Suisse First Boston Mortgage
Capital LLC.
8-K
August 16, 2017
8-K
March 6, 2018
8-K
August 15, 2018
10.118
Master Repurchase Agreement, dated as of December 19, 2016, by and
8-K
among PNMAC GMSR ISSUER TRUST, PennyMac Loan Services, LLC,
and Private National Mortgage Acceptance Company, LLC.
December 21,
2016
10.119
10.120
Amendment No. 1 to Master Repurchase Agreement, dated as of February
16, 2017, by and among PNMAC GMSR ISSUER TRUST, PennyMac
Loan Services, LLC, and Private National Mortgage Acceptance Company,
LLC and consented to by Citibank, N.A., Credit Suisse AG, Cayman
Islands Branch, and Credit Suisse First Boston Mortgage Capital LLC.
Amendment No. 2 to Master Repurchase Agreement, dated as of August 10,
2017, by and among PNMAC GMSR ISSUER TRUST, PennyMac Loan
Services, LLC, and Private National Mortgage Acceptance Company, LLC
and consented to by Citibank, N.A., Credit Suisse AG, Cayman Islands
Branch, and Credit Suisse First Boston Mortgage Capital LLC.
8-K
February 23,
2017
8-K
August 16, 2017
10.121
Guaranty, dated as of December 19, 2016, made by Private National
8-K
Mortgage Acceptance Company, LLC, in favor of PNMAC GMSR ISSUER
TRUST.
December 21,
2016
87
Exhibit No. Exhibit Description
Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)
Form
Filing Date
10.122
Amendment No. 1 to Guaranty, dated as of February 16, 2017, by and
8-K
between PNMAC GMSR ISSUER TRUST and Private National Mortgage
Acceptance Company, LLC.
10.123
Master Repurchase Agreement, dated as of December 19, 2016, by and
among PennyMac Holdings, LLC, PennyMac Loan Services, LLC, and
PennyMac Mortgage Investment Trust.
10.124
Guaranty, dated as of December 19, 2016, by PennyMac Mortgage
Investment Trust, in favor of PennyMac Loan Services, LLC.
10.125
Subordination, Acknowledgment and Pledge Agreement, dated as of
December 19, 2016, between PNMAC GMSR ISSUER TRUST and
PennyMac Holdings, LLC.
10.126
Master Repurchase Agreement, dated as of December 19, 2016, by and
among, Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse
AG, Cayman Islands Branch, and PennyMac Loan Services, LLC.
8-K
8-K
8-K
8-K
February 23,
2017
December 21,
2016
December 21,
2016
December 21,
2016
December 21,
2016
10.127
Amendment No. 1 to Master Repurchase Agreement, dated as of February
28, 2018, by and among Credit Suisse First Boston Mortgage Capital LLC,
Credit Suisse AG, Cayman Islands Branch, and PennyMac Loan Services,
LLC.
8-K
March 6, 2018
10.128
Guaranty, dated as of December 19, 2016, by Private National Mortgage
10-Q
Acceptance Company, LLC in favor of Credit Suisse First Boston Mortgage
Capital LLC.
November 7,
2017
10.129
Master Repurchase Agreement, dated as of August 21, 2017, by and among
PennyMac Loan Services, LLC and Deutsche Bank, AG, Cayman Islands
Branch.
8-K
August 24, 2017
10.130
Amendment No. 1 to Master Repurchase Agreement, dated as of April 17,
2018, by and between Deutsche Bank AG, Cayman Islands Branch and
PennyMac Loan Services LLC.
10-Q
May 4, 2018
10.131
Amendment No. 2 to Master Repurchase Agreement, dated as of September
27, 2018, by and between Deutsche Bank AG, Cayman Islands Branch and
PennyMac Loan Services, LLC.
10-Q
November 2,
2018
10.132
Amendment No. 3 to Master Repurchase Agreement, dated as of December
31, 2018, by and between Deutsche Bank AG, Cayman Islands Branch and
PennyMac Loan Services, LLC.
8-K
January 4, 2019
10.133
Amendment No. 4 to Master Repurchase Agreement, dated as of January
*
29, 2019, by and between Deutsche Bank AG, Cayman Islands Branch and
PennyMac Loan Services, LLC.
88
Exhibit No. Exhibit Description
Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)
Form
Filing Date
10.134
Guaranty, dated as of August 21, 2017, by Private National Mortgage
8-K
August 24, 2017
Acceptance Company, LLC in favor of Deutsche Bank AG, Cayman Islands
Branch.
10.135
Master Repurchase Agreement, dated as of November 17, 2017, by and
8-K
November 22,
among BNP Paribas, PennyMac Loan Services, LLC and Private National
Mortgage Acceptance Company, LLC.
10.136
Amendment No. 1 to Master Repurchase Agreement, dated as of August 20,
10-Q
2018, among BNP Paribas, PennyMac Loan Services, LLC and Private
National Mortgage Acceptance Company, LLC.
10.137
Amendment No. 2 to Master Repurchase Agreement, dated as of November
6, 2018, among BNP Paribas, PennyMac Loan Services, LLC and Private
National Mortgage Acceptance Company, LLC.
*
2017
November 2,
2018
10.138
Guaranty, dated as of November 17, 2017, by Private National Mortgage
8-K
November 22,
Acceptance Company, LLC in favor of BNP Paribas.
2017
10.139
Loan and Security Agreement, dated as of February 1, 2018, by and among
Credit Suisse AG, Cayman Islands Branch, PennyMac Loan Services, LLC
and Private National Mortgage Acceptance Company, LLC.
8-K
February 7, 2018
10.140† Omnibus Amendment to PennyMac Financial Services, Inc. 2013 Equity
Incentive Plan Stock Option Award Agreements (2019).
21.1
Subsidiaries of PennyMac Financial Services, Inc.
23.1
Consent of Deloitte & Touche LLP.
31.1
Certification of David A. Spector pursuant to Rule 13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Andrew S. Chang pursuant to Rule 13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
32.2
Certification of David A. Spector pursuant to Rule 13a-14(b) and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
Certification of Andrew S. Chang pursuant to Rule 13a-14(b) and 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
*
*
*
*
*
**
**
89
Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)
Form
Filing Date
Exhibit No. Exhibit Description
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the
Consolidated Balance Sheets as of December 31, 2018 and December 31,
2017 (ii) the Consolidated Statements of Income for the years ended
December 31, 2018 and December 31, 2017, (iii) the Consolidated
Statements of Changes in Stockholders’ Equity for the years ended
December 31, 2018 and December 31, 2017, (iv) the Consolidated
Statements of Cash Flows for the years ended December 31, 2018 and
December 31, 2017 and (v) the Notes to the Consolidated Financial
Statements.
* 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.
Item 16. Form 10-K Summary
None.
90
PENNYMAC FINANCIAL SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Report of Independent Registered Public Accounting Firm
Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
PennyMac Financial Services, Inc.
3043 Townsgate Road
Westlake Village, CA 91361
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of PennyMac Financial Services, Inc. and subsidiaries
(the ‘‘Company’’) as of December 31, 2018 and 2017, the related consolidated statements of income, changes in
stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2018, and the related
notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with
accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated March 5, 2019, expressed an unqualified opinion on the Company's
internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 3 to the financial statements, during 2018 the Company elected to prospectively change its method
of accounting for the classes of mortgage servicing rights it had accounted for using the amortization method.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
March 5, 2019
We have served as the Company’s auditor since 2008.
F-2
PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Cash (includes $108,174 and $20,765 pledged to creditors)
Short-term investments at fair value
Mortgage loans held for sale at fair value (includes $2,478,858 and $3,081,987 pledged to creditors)
Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors
Derivative assets
Servicing advances, net (includes valuation allowance of $70,582 and $59,958; $162,895 and $114,643 pledged
to creditors)
Mortgage servicing rights (includes $2,820,612 and $638,010 at fair value; $2,807,333 and $2,098,067 pledged
to creditors)
Real estate acquired in settlement of loans
Furniture, fixtures, equipment and building improvements, net (includes $16,281 and $23,915 pledged to
creditors)
Capitalized software, net (includes $1,017 and $1,568 pledged to creditors)
Investment in PennyMac Mortgage Investment Trust at fair value
Receivable from PennyMac Mortgage Investment Trust
Mortgage loans eligible for repurchase
Other
Total assets
LIABILITIES
Assets sold under agreements to repurchase
Mortgage loan participation purchase and sale agreements
Notes payable
Obligations under capital lease
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value
Derivative liabilities
Accounts payable and accrued expenses
Mortgage servicing liabilities at fair value
Payable to PennyMac Mortgage Investment Trust
Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax receivable
agreement
Income taxes payable
Liability for mortgage loans eligible for repurchase
Liability for losses under representations and warranties
Total liabilities
Commitments and contingencies – Note 16
December 31,
2018
2017
(in thousands, except share data)
$
155,289 $
117,824
2,521,647
131,025
96,347
37,725
170,080
3,099,103
144,128
78,179
313,197
318,066
$
$
2,820,612
2,250
33,374
39,748
1,397
33,464
1,102,840
109,559
7,478,573
1,933,859
532,251
1,292,291
6,605
216,110
3,064
156,212
8,681
104,631
46,537
400,546
1,102,840
21,155
5,824,782
$
$
2,119,588
2,447
29,453
25,729
1,205
27,119
1,208,195
107,076
7,368,093
2,381,538
527,395
891,505
20,971
236,534
5,796
109,143
14,120
136,998
44,011
52,160
1,208,195
20,053
5,648,419
STOCKHOLDERS’ EQUITY
Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 77,494,332 and
23,529,970 shares, respectively
Class B common stock—authorized 1,000 shares of $0.0001 par value; issued and outstanding, 0 and 46 shares,
respectively
Additional paid-in capital
Retained earnings
Total stockholders' equity attributable to PennyMac Financial Services, Inc. common stockholders
Noncontrolling interest in Private National Mortgage Acceptance Company, LLC
Total stockholders' equity
Total liabilities and stockholders’ equity
8
2
—
1,310,648
343,135
1,653,791
—
1,653,791
7,478,573
—
204,103
265,306
469,411
1,250,263
1,719,674
7,368,093
$
$
The accompanying notes are an integral part of these financial statements.
F-3
PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
2017
(in thousands, except earnings per share)
2018
2016
Revenues
Net mortgage loan servicing fees:
Mortgage loan servicing fees:
From non-affiliates
From PennyMac Mortgage Investment Trust
From Investment Funds
Ancillary and other fees
Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities
Change in fair value of excess servicing spread payable to PennyMac Mortgage Investment Trust
Net mortgage loan servicing fees
Net gains on mortgage loans held for sale at fair value:
From non-affiliates
From PennyMac Mortgage Investment Trust
Mortgage loan origination fees:
From non-affiliates
From PennyMac Mortgage Investment Trust
Fulfillment fees from PennyMac Mortgage Investment Trust
Net interest income (expense):
Interest income:
From non-affiliates
From PennyMac Mortgage Investment Trust
Interest expense:
To non-affiliates
To PennyMac Mortgage Investment Trust
Net interest income (expense)
Management fees, net:
From PennyMac Mortgage Investment Trust
From Investment Funds
Carried Interest from Investment Funds
Change in fair value of investment in and dividends received from PennyMac Mortgage Investment Trust
Results of real estate acquired in settlement of loans
Revaluation of payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax
receivable agreement
Other
Total net revenues
Expenses
Compensation
Servicing
Technology
Professional services
Loan origination
Occupancy and equipment
Marketing
Other
Total expenses
Income before provision for income taxes
Provision for income taxes
Net income
Less: Net income attributable to noncontrolling interest
Net income attributable to PennyMac Financial Services, Inc. common stockholders
Earnings per share
Basic
Diluted
Weighted average shares outstanding
Basic
Diluted
$
$
$
585,101
42,045
3
64,133
691,282
(237,389)
(8,500)
(245,889)
445,393
475,848
43,064
1,461
58,924
579,297
(292,588)
19,350
(273,238)
306,059
184,439
64,583
249,022
369,815
21,989
391,804
94,208
7,433
101,641
81,350
208,954
7,462
216,416
129,459
15,138
144,597
71,819
24,465
4
24,469
(365)
332
589
1,126
9,253
984,629
403,270
137,104
60,103
27,615
27,398
27,152
8,207
26,083
716,932
267,697
23,254
244,443
156,749
87,694
2.62
2.59
33,524
35,322
$
$
$
112,124
7,078
119,202
80,359
135,141
8,038
143,179
127,569
16,951
144,520
(1,341)
22,584
1,001
23,585
(1,040)
118
94
32,940
3,683
955,463
358,721
117,696
52,013
17,845
20,429
22,615
9,118
21,117
619,554
335,909
24,387
311,522
210,765
100,757
4.34
4.03
23,199
24,999
$
$
$
$
$
$
385,633
50,615
2,583
46,910
485,741
(324,198)
23,923
(300,275)
185,466
539,872
(8,092)
531,780
118,844
6,690
125,534
86,465
73,297
7,830
81,127
83,605
22,601
106,206
(25,079)
20,657
2,089
22,746
980
224
(82)
551
3,302
931,887
342,153
85,857
35,322
18,078
22,528
17,140
5,264
22,462
548,804
383,083
46,103
336,980
270,901
66,079
2.98
2.94
22,161
76,629
The accompanying notes are an integral part of these financial statements.
F-4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
PENNYMAC FINANCIAL SERVICES, INC.
Common Stock
Class A Common Stock
Additional
Number of
shares
Par
value
Number of
shares
Par
value
Noncontrolling
interest in Private
National Mortgage
Acceptance
Company, LLC
Retained
earnings
Balance at December 31, 2015
Net income
Stock and unit-based compensation
Distributions
Issuance of Class A common stock in settlement of directors' fees
Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to
Class A common stock of PennyMac Financial Services, Inc.
Tax effect of exchange of Class A units of Private National Mortgage Acceptance Company,
LLC to Class A common stock of PennyMac Financial Services, Inc.
Balance at December 31, 2016
Net income
Stock and unit-based compensation
Issuance of Class A common stock in settlement of directors' fees
Repurchase of Class A common stock
Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to
Class A common stock of PennyMac Financial Services, Inc.
Tax effect of exchange of Class A units of Private National Mortgage Acceptance Company,
LLC to Class A common stock of PennyMac Financial Services, Inc.
Balance at December 31, 2017
Cumulative effect of change in accounting principle - Adoption of fair value accounting for
all existing classes of mortgage servicing rights at fair value
Balance at January 1, 2018
Net income
Stock and unit-based compensation
Class A common stock dividends ($0.40 per share)
Issuance of Class A common stock in settlement of directors' fees
Repurchase of Class A common stock
Exchange of Class A units of Private National Mortgage Acceptance Company, LLC to
Class A common stock of PennyMac Financial Services, Inc.
Exchange of Class A common stock of subsidiary for common stock of PennyMac Financial
Services, Inc. pursuant to a reorganization
Exchange of Class A unit of Private National Mortgage Acceptance Company, LLC for
common stock of PennyMac Financial Services, Inc. pursuant to a reorganization, net of
income tax effect
Issuance of common stock in settlement of directors' fees
Repurchase of common stock
Balance at December 31, 2018
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
23
—
—
—
—
25,228
52,263
4
(24)
77,494 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3
5
—
—
8
21,991 $
—
111
—
24
301
—
22,427
—
—
—
(505)
1,608
—
23,530
—
23,530
—
299
—
—
(236)
1,635
(25,228)
paid-in
capital
(in thousands)
2 $
—
—
—
—
172,354 $
—
4,646
—
313
98,470 $
66,079
—
—
—
791,524 $
270,901
11,701
(15,216)
—
Total
1,062,350
336,980
16,347
(15,216)
313
—
—
2
—
—
—
—
—
—
2
—
2
—
—
—
—
—
1
(3)
6,877
—
(6,877)
—
(1,418)
182,772
—
7,545
160
(8,599)
27,119
(4,894)
204,103
—
204,103
—
10,932
—
79
(1,554)
33,155
—
—
164,549
100,757
—
—
—
—
—
265,306
189
265,495
87,694
—
(10,054)
—
—
—
—
—
1,052,033
210,765
14,406
178
—
(1,418)
1,399,356
311,522
21,951
338
(8,599)
(27,119)
—
—
1,250,263
587
1,250,850
156,749
19,636
—
166
(3,272)
(33,156)
—
(4,894)
1,719,674
776
1,720,450
244,443
30,568
(10,054)
245
(4,826)
—
—
—
—
—
— $
—
—
—
— $
1,064,315
85
(467)
1,310,648 $
—
—
—
343,135 $
(1,390,973)
—
—
— $
(326,653)
85
(467)
1,653,791
The accompanying notes are an integral part of these financial statements.
F-5
PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flow from operating activities
Net income
2018
Year ended December 31,
2017
(in thousands)
2016
$
244,443 $
311,522 $
336,980
Adjustments to reconcile net income to net cash used in operating activities:
Accrual of servicing rebate payable to Investment Funds
Amortization, impairment and change in fair value of mortgage servicing
rights, mortgage servicing liabilities and excess servicing spread
Net gains on mortgage loans held for sale at fair value
Capitalization of interest on mortgage loans held for sale at fair value
Accrual of interest on excess servicing spread financing
Amortization of net debt issuance (premiums) and costs
Carried Interest from Investment Funds
Change in fair value of investment in common shares of PennyMac
Mortgage Investment Trust
Results of real estate acquired in settlement in loans
Repricing of payable to exchanged Private National Mortgage Acceptance
Company, LLC unitholders under tax
receivable agreement
Stock-based compensation expense
Provision for servicing advance losses
Depreciation and amortization
Loss from disposition of fixed assets and impairment of capitalized
software
Purchase of mortgage loans held for sale from PennyMac Mortgage Investment
Trust
Originations of mortgage loans held for sale
Purchase of mortgage loans from Ginnie Mae securities and early buyout
investors for modification and subsequent sale
Sale to non-affiliates and principal payments of mortgage loans held for sale
Sale of mortgage loans held for sale to PennyMac Mortgage Investment Trust
Repurchase of mortgage loans subject to representations and warranties
Collection of repurchase agreement derivatives
Increase in servicing advances
Sale of real estate acquired in settlement of loans
(Increase) decrease in receivable from PennyMac Mortgage Investment Trust
Decrease in deferred tax assets
(Increase) decrease in other assets
Increase (decrease) in accounts payable and accrued expenses
(Decrease) increase in payable to PennyMac Mortgage Investment Trust
Payments to exchanged Private National Mortgage Acceptance Company, LLC
unitholders under tax receivable agreement
Increase in income taxes payable
Net cash provided by (used in) operating activities
—
129
306
245,889
(249,022)
(79,317)
15,138
(29,170)
365
(192)
(589)
(1,126)
25,251
40,306
12,925
—
273,238
(391,804)
(44,922)
16,951
6,348
1,040
23
(94)
(32,940)
20,697
43,249
8,395
1,336
300,275
(531,780)
(29,234)
22,601
11,052
(980)
(83)
82
(551)
16,198
35,503
5,849
—
(37,967,724)
(5,531,858)
(42,624,288)
(5,557,244)
(42,051,505)
(6,491,107)
(4,036,147)
44,557,560
3,343,028
(26,021)
31,907
(33,415)
4,037
(9,672)
—
(7,791)
32,750
(34,472)
—
25,313
572,396
(3,957,384)
50,235,245
904,097
(20,324)
—
(15,675)
4,655
(11,475)
—
16,092
(59,378)
(34,076)
(6,726)
29,901
(883,412)
(2,168,685)
49,633,909
21,541
(19,248)
—
(85,955)
—
2,969
18,668
(19,294)
23,005
5,589
—
25,570
(938,325)
F-6
Cash flow from investing activities
Decrease (increase) in short-term investments
Net change in assets purchased from PMT under agreement to resell
Net settlement of derivative financial instruments used for hedging
Purchase of mortgage servicing rights
Purchase of furniture, fixtures, equipment and leasehold improvements
Acquisition of capitalized software
(Increase) decrease in margin deposits
Net cash used in investing activities
Cash flow from financing activities
Sale of assets under agreements to repurchase
Repurchase of assets sold under agreements to repurchase
Issuance of mortgage loan participation certificates
Repayment of mortgage loan participation certificates
Advances on notes payable
Repayment of notes payable
Advances of obligations under capital lease
Repayment of obligations under capital lease
Repayment of excess servicing spread financing
Settlement of excess servicing spread financing
Payment of debt issuance costs
Acceptance of mortgage servicing liability
Payment of dividend to Class A common stockholders
Distribution to Private National Mortgage Acceptance Company, LLC
members
Issuance of common stock pursuant to exercise of stock options
Repurchase of common stock
Net cash (used in) provided by financing activities
Net increase (decrease) in cash and restricted cash
Cash and restricted cash at beginning of year
Cash and restricted cash at end of year
Cash and restricted cash at year end are comprised of the following:
Cash
Restricted cash included in Other assets
2018
Year ended December 31,
2017
(in thousands)
2016
52,256
13,103
(122,227)
(227,664)
(13,421)
(17,444)
(7,214)
(322,611)
41,375,177
(41,820,843)
25,284,270
(25,279,510)
1,300,000
(900,000)
—
(14,366)
(46,750)
—
(19,982)
—
(10,054)
(84,116)
5,872
(36,618)
(178,531)
(6,791)
(16,992)
(22,055)
(339,231)
35,698,381
(35,054,437)
23,011,607
(23,155,463)
935,000
(186,935)
10,298
(12,751)
(54,980)
—
(22,201)
—
—
—
5,317
(5,293)
(132,034)
117,751
38,173
155,924 $
155,289 $
635
155,924 $
—
1,254
(8,599)
1,161,174
(61,469)
99,642
38,173 $
37,725 $
448
38,173 $
$
$
$
(39,645)
—
(27,315)
(146)
(21,852)
(8,537)
62,756
(34,739)
45,925,047
(45,355,531)
32,336,793
(31,900,130)
122,920
(33,661)
16,952
(7,107)
(69,992)
(59,045)
(11,747)
10,139
—
(7,631)
149
—
967,156
(5,908)
105,550
99,642
99,367
275
99,642
The accompanying notes are an integral part of these financial statements.
F-7
PENNYMAC FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Organization
PennyMac Financial Services, Inc. (formerly known as New PennyMac Financial Services, Inc.) (“PFSI” or the
“Company”) is a holding corporation and its primary assets are direct and indirect equity interests in Private National
Mortgage Acceptance Company, LLC (“PennyMac”). The Company is the managing member of PennyMac, and it
operates and controls all of the businesses and affairs of PennyMac, subject to the consent rights of other members under
certain circumstances, and consolidates the financial results of PennyMac and its subsidiaries.
PennyMac is a Delaware limited liability company which, through its subsidiaries, engages in mortgage
banking and investment management activities. PennyMac’s mortgage banking activities consist of residential mortgage
loan production and mortgage loan servicing. PennyMac’s investment management activities and a portion of its
mortgage loan servicing activities are conducted on behalf of investment vehicles that invest in residential mortgage
loans and related assets. PennyMac’s primary wholly owned subsidiaries are:
• PNMAC Capital Management, LLC (“PCM”)—a Delaware limited liability company registered with the
Securities and Exchange Commission (“SEC”) as an investment adviser under the Investment Advisers Act
of 1940, as amended. PCM enters into investment management agreements with entities that invest in
residential mortgage loans and related assets.
Presently, PCM has a management agreement with PennyMac Mortgage Investment Trust (“PMT”), a
publicly held real estate investment trust (“REIT”). Previously, PCM had management agreements with
PNMAC Mortgage Opportunity Fund, LLC and PNMAC Mortgage Opportunity Fund, L.P. an affiliate of
these registered funds, and PNMAC Mortgage Opportunity Fund Investors, LLC (the “Private Fund”)
(collectively, the “Investment Funds”). All of the Investment Funds were dissolved during 2018.
• PennyMac Loan Services, LLC (“PLS”)—a Delaware limited liability company that services portfolios of
residential mortgage loans on behalf of non-affiliates and the Advised Entities, 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 Nonsupervised Title II Lender with the U.S. Department of Housing and
Urban Development (“HUD”) and a lender/servicer with the Veterans Administration (“VA”) and U.S.
Department of Agriculture (“USDA”) (each an “Agency” and collectively the “Agencies”).
On November 1, 2018, PNMAC Holdings, Inc. (formerly known as PennyMac Financial Services, Inc.)
(“PNMAC Holdings” or “Old PFSI”) completed a corporate reorganization (the “Reorganization”) by which it changed
its equity structure to create a single class of common stock held by all stockholders at a new top-level publicly traded
parent holding corporation, as opposed to the two classes of common stock, Class A and Class B, that were in place at
Old PFSI before the Reorganization. As part of the Reorganization, the Company replaced Old PFSI as the top-level
parent holding corporation of the consolidated PennyMac business and changed its name from New PennyMac Financial
Services, Inc. (“New PFSI”).
As the result of the reorganization:
• Each outstanding share of Class A common stock of Old PFSI was converted on a one-for-one basis into
shares of New PFSI common stock.
• Each outstanding share of Class B common stock of Old PFSI was cancelled for no consideration.
F-8
• Each Class A unit of PennyMac not held by Old PFSI was contributed to New PFSI and exchanged on a
one-for-one basis for shares of New PFSI common stock.
• New PFSI replaced Old PFSI as the publicly-held entity and, through its subsidiaries, conducts all of the
operations previously conducted by Old PFSI.
• Old PFSI changed its name to PNMAC Holdings, Inc. and New PFSI changed its name to PennyMac
Financial Services, Inc.
• New PFSI assumed Old PFSI’s existing equity incentive plan—including all performance share awards,
restricted share awards, common stock options and other incentive awards covering shares of Old PFSI’s
Class A common stock, whether vested or not vested, that were outstanding at the effective time of the
Reorganization.
New PFSI reserved the same number of shares of its common stock as was reserved by Old PFSI before the
effective time of the Reorganization, and the terms and conditions that were in effect immediately before
the Reorganization under each outstanding incentive award assumed by New PFSI continue in full force
and effect after the Reorganization, except that the shares of Class A common stock reserved under Old
PFSI’s plans and issuable under each such award will be replaced by shares of common stock of New
PFSI.
• Old PFSI’s existing directors and executive officers hold the same positions with New PFSI.
• After the completion of the Reorganization, PNMAC Holdings became a consolidated subsidiary of the
Company and is considered the predecessor of the Company for accounting purposes. Accordingly,
PNMAC Holdings’ historical consolidated financial statements will be the Company’s historical financial
statements.
• The Reorganization is to be treated as an integrated transaction that qualifies as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code and/or a transfer described in Section 351(a) of
the Internal Revenue Code.
Note 2—Concentration of Risk
A substantial portion of the Company’s activities relate to the Advised Entities. Revenues generated from these
entities (generally comprised of gains on mortgage loans held for sale, mortgage loan origination fees, fulfillment fees,
mortgage loan servicing fees, management fees, carried interest, less net interest paid to these entities) totaled 21%,
20%, and 18% of total net revenues for the years ended December 31, 2018, 2017 and 2016, respectively.
Note 3—Significant Accounting Policies and Recently Issued Accounting Pronouncement
A description of the Company’s significant accounting policies applied in the preparation of the accompanying
consolidated financial statements follows.
Basis of Presentation
The Company’s 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 (the “ASC” or the “Codification”).
F-9
Principles of Consolidation
The consolidated financial statements include the accounts of PFSI and its wholly-owned subsidiaries,
including PennyMac. Intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make judgments and
estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual
results will likely differ from those estimates.
Fair Value
Most of the Company’s assets and certain of its liabilities are measured at or based on their fair values. The
Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and
liabilities are traded and the observability of the inputs used to determine fair value. These levels are:
• Level 1—Quoted prices in active markets for identical assets or liabilities.
• Level 2—Prices determined or determinable using other significant observable inputs. Observable inputs
are inputs that other market participants would use in pricing an asset or liability and are developed based
on market data obtained from sources independent of the Company.
• Level 3— Prices determined using significant unobservable inputs. In situations where observable inputs
are unavailable, unobservable inputs may be used. Unobservable inputs reflect the Company’s own
judgments about the factors that market participants use in pricing an asset or liability, and are based on the
best information available in the circumstances.
As a result of the difficulty in observing certain significant valuation inputs affecting “Level 3” fair value
assets and liabilities, the Company is required to make judgments regarding these items’ fair values.
Different persons in possession of the same facts may reasonably arrive at different conclusions as to the
inputs to be applied in valuing these assets and liabilities and their fair values. Such differences may result
in significantly different fair value measurements. Likewise, due to the general illiquidity of some of these
assets and liabilities, subsequent transactions may be at values significantly different from those reported.
Cash Flows
During the year ended December 31, 2018, the Company adopted Accounting Standards Update 2016-18,
Statement of Cash Flows (Topic 230) – Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires that a statement of
cash flows explain the change during the reporting period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and
restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period
and end-of-period total amounts shown on the consolidated statement of cash flows. Accordingly, the Company
retrospectively changed the presentation of its consolidated statements of cash flows to conform to the requirements of
ASU 2016-18.
For the purpose of presentation in the statement of cash flows, the Company has identified tenant security
deposits relating to rental properties owned by PMT and managed by the Company as restricted cash. The tenant security
deposits are included in Other assets on the Company’s consolidated balance sheets.
F-10
As the result of adoption of ASU 2016-18, the Company’s consolidated statements of cash flows for the years
ended December 31, 2017 and 2016 changed as follows:
Year ended December 31,
2017
2016
Cash flow
from operating
activities
Cash and
restricted cash
at year end
Cash flow
from operating
activities
Cash and
restricted cash
at year end
As previously reported
Effect of adoption of ASU 2016-18
As reported
$
$
(883,585) $
173
(883,412) $
(in thousands)
37,725 $
448
38,173 $
(938,522) $
197
(938,325) $
99,367
275
99,642
Short-Term Investments
Short-term investments, which represent investments in accounts with a depository institution such as money
market funds, are carried at fair value. Changes in fair value are recognized in current period income. The Company
classifies its short-term investments as “Level 1” fair value assets.
Mortgage Loans Held for Sale at Fair Value
Management has elected to account for mortgage loans held for sale at fair value, with changes in fair value
recognized in current period income, to more timely reflect the Company’s performance. All changes in fair value are
recognized as a component of Net gains on mortgage loans held for sale at fair value. The Company classifies most of
the mortgage loans held for sale at fair value as “Level 2” fair value assets. Certain of the Company’s mortgage loans
held for sale may not be saleable into active markets due to identified defects or delinquency. Such mortgage loans are
classified as “Level 3” fair value assets.
Sale Recognition
The Company recognizes transfers of mortgage loans as sales when it surrenders control over the mortgage
loans. Control over transferred mortgage loans is deemed to be surrendered when (i) the mortgage loans have been
isolated from the Company, (ii) the transferee has the right (free of conditions that constrain it from taking advantage of
that right) to pledge or exchange the transferred mortgage loans, and (iii) the Company does not maintain effective
control over the transferred mortgage loans through either (a) an agreement that entitles and obligates the Company to
repurchase or redeem them before their maturity or (b) the ability to unilaterally cause the holder to return the specific
mortgage loans.
Interest Income Recognition
Interest income on mortgage loans held for sale at fair value is recognized over the life of the mortgage loans
using their contractual interest rates. Income recognition is suspended and the unpaid interest receivable is reversed
against interest income when mortgage loans become 90 days delinquent, or when, in management’s opinion, a full
recovery of interest and principal becomes doubtful. Income recognition is resumed when the mortgage loan becomes
contractually current.
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 the Company also
enters into derivative transactions as part of its interest rate risk management activities.
F-11
Derivative financial instruments created as a result of the Company’s operations include:
•
Interest rate lock commitments (“IRLCs”) that are created when the Company commits to purchase or
originate a mortgage loan acquired for sale at specified interest rates.
• Derivatives that are embedded in a master repurchase agreement with a non-affiliate that provides for the
Company to receive incentives for financing mortgage loans that satisfy certain consumer relief
characteristics as provided in the master repurchase agreement.
The Company is exposed to price risk relative to its mortgage loans held for sale as well as to IRLCs. The
Company bears price risk from the time a commitment to fund a mortgage loan is made to a borrower or to purchase a
mortgage loan from PMT, to the time either the prospective transaction is cancelled or the mortgage loan is sold. During
this period, the Company is exposed to losses if mortgage market interest rates increase, because the fair value of the
purchase commitment or prospective mortgage loan decreases.
The Company also is exposed to risk relative to the fair value of its mortgage servicing rights (“MSRs”) when
interest rates decrease. MSRs and mortgage servicing liabilities (“MSLs”) are generally subject to reduction in fair value
when mortgage interest rates decrease. Decreasing mortgage interest rates normally encourage increased mortgage
refinancing activity. Increased refinancing activity reduces the expected life of the mortgage loans underlying the MSRs
and MSLs, thereby reducing their fair value. Reductions in the fair value of MSRs and MSLs affect earnings primarily
through change in fair value and impairment charges.
The Company engages in interest rate risk management activities in an effort to mitigate the effect of changes in
market interest rates on the fair value of the Company’s assets. To manage this fair value risk resulting from interest rate
risk, the Company uses derivative financial instruments acquired with the intention of reducing the risk that changes in
market interest rates will result in unfavorable changes in the fair value of the Company’s IRLCs, inventory of mortgage
loans held for sale and MSRs.
IRLCs are accounted for as derivative financial instruments. The Company manages the risk created by IRLCs
relating to mortgage loans held for sale by entering into forward sale agreements to sell the mortgage loans and by the
purchase and sale of options and futures on mortgage-backed securities (“MBS”). Such agreements are also accounted
for as derivative financial instruments. These and other interest-rate derivatives are also used to manage the fair value
risk created by changes in prepayment speeds on certain of the MSRs the Company holds.
The Company classifies its IRLCs as “Level 3” fair value assets and liabilities. Fair value of exchange-traded
hedging derivative financial instruments are categorized by the Company as “Level 1” fair value assets and liabilities.
Fair value of hedging derivative financial instruments based on observable MBS prices or interest rate volatilities in the
MBS market are categorized as “Level 2” fair value assets and liabilities.
The Company does not designate its derivative financial instruments for hedge accounting. Therefore, the
Company accounts for its derivative financial instruments as free-standing derivatives. All derivative financial
instruments are recognized on the consolidated balance sheet at fair value with changes in the fair values being reported
in current period income. Changes in fair value of derivative financial instruments hedging IRLCs, mortgage loans held
for sale at fair value and MSRs are included in Net gains on mortgage loans held for sale at fair value or in
Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities, as
applicable, in the Company’s consolidated statements of income. Changes in fair value of derivative assets relating to a
master repurchase agreement are included in Interest expense.
When the Company has multiple derivative financial instruments with the same counterparty subject to a master
netting arrangement, it offsets the amounts recorded as assets and liabilities and amounts recognized for the right to
reclaim cash collateral it has deposited with the counterparty or the obligation to return cash collateral it has collected
from the counterparty arising from that master netting arrangement. Such offset amounts are presented as either a net
asset or liability by counterparty on the Company’s consolidated balance sheets.
F-12
Servicing Advances
Servicing advances represent advances made on behalf of borrowers and the mortgage loans’ investors to fund
property taxes, insurance premiums and out-of-pocket collection costs (e.g., preservation and restoration of mortgaged or
real estate acquired in the settlement of loans (“REO”), legal fees, and appraisals). Servicing advances are made in
accordance with the Company’s servicing agreements and, when made, are deemed recoverable. The Company
periodically reviews servicing advances for collectability and provides a valuation allowance for amounts estimated to
be uncollectable. Servicing advances are written off when they are deemed uncollectable.
Mortgage Servicing Rights and Mortgage Servicing Liabilities
MSRs and MSLs arise from contractual agreements between the Company and investors (or their agents) in
mortgage securities and mortgage loans. Under these contracts, the Company performs mortgage loan servicing
functions in exchange for fees and other remuneration. The servicing functions typically performed include, among other
responsibilities, collecting and remitting loan payments; responding to borrower inquiries; accounting for principal and
interest; holding custodial (impound) funds for payment of property taxes and insurance premiums; counseling
delinquent mortgagors; and supervising the acquisition and disposition of REO.
The fair value of MSRs and MSLs is derived from the net positive or negative, respectively, cash flows
associated with the servicing contracts. The Company receives a servicing fee, net of related guarantee fees based on the
remaining outstanding principal balances of the mortgage loans subject to the servicing contracts. The servicing fees are
collected from the monthly payments made by the mortgagors.
The Company is contractually entitled to receive other remuneration including various mortgagor-contracted
fees such as late charges and collateral reconveyance charges, and the Company is generally entitled to retain the interest
earned on funds held pending remittance related to its collection of mortgagor payments. The Company also generally
has the right to solicit the mortgagors for other products and services as well as for new mortgages for those considering
refinancing or purchasing a new home.
The Company recognizes MSRs and MSLs initially at fair value, either as proceeds from or liabilities incurred
in, sales of mortgage loans where the Company assumes the obligation to service the mortgage loan in the sale
transaction, or from the purchase of MSRs or receipt of cash for acceptance of MSLs.
Through December 31, 2017, the Company’s subsequent accounting for MSRs and MSLs was based on the
class of MSR or MSL. The Company identified three classes of MSRs: originated MSRs backed by mortgage loans with
initial interest rates of less than or equal to 4.5%, MSRs backed by mortgage loans with initial interest rates of more than
4.5%, and purchased MSRs financed in part through the transfer of the right to receive excess servicing spread (“ESS”)
cash flows.
• Originated MSRs backed by mortgage loans with initial interest rates of less than or equal to 4.5% were
accounted for using the amortization method (discussed below).
• Originated MSRs backed by loans with initial interest rates of more than 4.5% and purchased MSRs
financed in part by ESS were accounted for at fair value with changes in fair value recorded in current
period income. MSLs were and continue to be carried at fair value with changes in fair value recorded in
current period income.
Effective January 1, 2018, the Company elected to change the accounting for MSRs it had accounted for using
the amortization method through December 31, 2017, to the fair value method as allowed in the Transfers and Servicing
topic of the FASB’s ASC. The Company determined that a single accounting treatment across all currently existing
classes of MSRs is consistent with lender valuation under its financing arrangements and simplifies that Company’s
hedging activities. As a result of this change, the Company recorded an adjustment to increase its investment in MSRs
by $848,000, increase its liability for income taxes payable by $72,000 and increase its stockholders’ equity by
$776,000.
F-13
The fair value of MSRs and MSLs is difficult to determine because MSRs and MSLs are not actively traded in
observable stand-alone markets. Considerable judgment is required to estimate the fair values of MSRs and MSLs and
the exercise of such judgment can significantly affect the Company’s income. Therefore, the Company classifies its
MSRs and MSLs as “Level 3” fair value assets and liabilities.
MSRs and MSLs Accounted for at Fair Value
Changes in fair value of MSLs and MSRs accounted for at fair value are recognized in current period income in
Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities in the
consolidated statements of income.
MSRs Accounted for Using the Amortization Method
Through December 2017, the Company amortized MSRs that were accounted for using the amortization
method. MSR amortization was determined by applying the ratio of the net MSR cash flows projected for the current
period to the estimated total remaining projected net MSR cash flows. The estimated total net MSR cash flows were
determined at the beginning of each month using prepayment inputs applicable at that time.
MSRs accounted for using the amortization method were periodically evaluated for impairment. Impairment
occurs when the current fair value of the MSRs decreases below the asset’s amortized cost. If MSRs were impaired, the
impairment was recognized in current-period income and the carrying value (carrying value is the MSR’s amortized cost
reduced by any related valuation allowance) of the MSRs was adjusted through a valuation allowance. If the fair value of
impaired MSRs subsequently increased, the increase in fair value was recognized in current-period income. When an
increase in fair value of MSR was recognized, the valuation allowance was adjusted to increase the carrying value of the
MSRs only to the extent of the valuation allowance.
For impairment evaluation purposes, the Company stratified its MSRs by predominant risk characteristic when
evaluating for impairment. For purposes of performing its MSR impairment evaluation, the Company stratified its
servicing portfolio on the basis of certain risk characteristics including mortgage loan type (fixed-rate or adjustable-rate)
and note interest rate. Fixed-rate mortgage loans were stratified into note rate pools of 50 basis points for note rates
between 3.0% and 4.5% and a single pool for note rates of less than or equal to 3.0%. If the fair value of MSRs in any of
the note interest rate pools was below the carrying value of the MSRs for that pool, impairment was recognized to the
extent of the difference between the fair value and the carrying value of that pool.
Management periodically reviewed the various impairment strata to determine whether the fair value of the
impaired MSRs in a given stratum was likely to recover. When management deemed recovery of the fair value to be
unlikely in the foreseeable future, a write-down of the cost of the MSRs for that stratum to its estimated recoverable
value was charged to the valuation allowance.
Both amortization and changes in the amount of the MSR valuation allowance were recorded in current period
income in Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing
liabilities in the consolidated statements of income.
Furniture, Fixtures, Equipment and Building Improvements
Furniture, fixtures, equipment and building improvements are stated at historical cost less accumulated
depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the
estimated useful lives of the various classes of assets, which range from five to seven years for furniture and equipment
and the lesser of the asset’s estimated useful life or the remaining lease term for fixtures and building improvements.
F-14
Capitalized Software
The Company capitalizes certain consulting, payroll, and payroll-related costs related to computer software
developed for internal use. Once development is complete and the software is placed in service, the Company amortizes
the capitalized costs over three to seven years using the straight-line method.
The Company also periodically assesses capitalized software for recoverability when events or changes in
circumstances indicate that its carrying amount may not be recoverable. If management identifies an indicator of
impairment, it assesses recoverability by comparing the carrying amount of the asset to the sum of the undiscounted cash
flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized when the
carrying amount is not recoverable and is measured as the excess of carrying value over fair value.
Investment in PennyMac Mortgage Investment Trust at Fair Value
Common shares of beneficial interest in PMT are carried at their fair value with changes in fair value
recognized in current period income. Fair value for purposes of the Company’s holdings in PMT is based on the
published closing price of the shares as of period end. The Company classifies its investment in common shares of PMT
as a “Level 1” fair value asset.
Mortgage Loans Eligible for Repurchase
The terms of the Ginnie Mae MBS program allow, but do not require, the Company to repurchase mortgage
loans when the borrower has made no payments for the three consecutive months preceding the month of repurchase. As
a result of this right, the Company recognizes the mortgage loans in Mortgage loans eligible for repurchase at their
unpaid principal balances and records a corresponding liability in Liability for mortgage loans eligible for repurchase on
its consolidated balance sheets.
Carried Interest Due from Investment Funds
Carried Interest, in general terms, is the share of any profits in excess of specified levels that the general
partners receive as compensation. The Company had a general partnership interest or other Carried Interest arrangement
with the Investment Funds, and earned Carried Interest thereunder. The amount of Carried Interest to be recorded each
period was based on the cash flows that would be realized by all partners assuming liquidation of the Investment Funds’
remaining investments as of the measurement date. The Company received Carried Interest in the priority of distribution
as provided in the charter documents relating to the respective Investment Funds. The Company included its Carried
Interest in Other assets.
Borrowings
The carrying values of borrowings other than ESS are based on the accrued cost of the agreements. The costs of
creating the facilities underlying the agreements are included in the carrying value of the agreements and are amortized
to Interest expense over the terms of the respective borrowing facilities:
• Debt issuance costs relating to revolving facilities, such as repurchase agreement and mortgage loan
participation purchase and sale facilities are amortized on the straight line basis over the term of the
facility;
• Debt issuance cost relating to non-revolving debts, such as certain of the Company’s Notes payable,
are amortized over the contractual term of the non-revolving debt using the interest method;
• Debt issuance premiums recorded as the results of recognition of repurchase agreement derivatives
are amortized to Interest expense over the contractual term of the repurchase agreement. Unamortized
premiums relating to repurchase agreements repaid before the transaction’s contractual maturity are
credited to Interest expense.
F-15
Excess Servicing Spread Financing at Fair Value
The Company finances certain of its purchases of Agency MSRs through the sale to PMT of the right to receive
the excess of the servicing fee rate over a specified rate of the underlying MSRs. This excess is referred to as the ESS.
ESS is carried at its fair value. Changes in fair value are recognized in current period income in Change in fair value of
excess servicing spread payable to PennyMac Mortgage Investment Trust.
Interest expense for ESS is accrued using the interest method based upon the expected cash flows from the ESS
through the expected life of the underlying mortgage loans.
Liability for Losses Under Representations and Warranties
The Company’s agreements with the Agencies and other investors include representations and warranties
related to the mortgage loans the Company sells to the Agencies and other investors. The representations and warranties
require adherence to Agency and other investor origination and underwriting guidelines, including but not limited to the
validity of the lien securing the mortgage 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 its representations and warranties, the Company may be required to either repurchase
the mortgage loans with the identified defects or indemnify the investor or insurer. In such cases, the Company bears any
subsequent credit loss on the mortgage loans. The Company’s credit loss may be reduced by any recourse it may have to
correspondent mortgage loan sellers that, in turn, had sold such mortgage loans to PMT and breached similar or other
representations and warranties. In such event, the Company has the right to seek a recovery of related repurchase losses
from that correspondent mortgage loan seller, through PMT.
As a result of providing representations and warranties to investors and insurers, the Company records a
provision for losses relating to representations and warranties as part of its mortgage loan sale transactions. The method
used to estimate the liability for representations and warranties is a function of the representations and warranties given
and considers a combination of factors, including, but not limited to, estimated future defaults and mortgage loan
repurchase rates, the estimated severity of loss in the event of default and the probability of reimbursement by the
correspondent mortgage loan seller. The Company establishes a liability at the time mortgage loans are sold and
periodically updates its liability estimate. The level of the liability for representations and warranties is reviewed and
approved by the Company’s management credit committee.
The level of the liability for representations and warranties is difficult to estimate and requires considerable
management judgment. The level of mortgage loan repurchase losses is dependent on economic factors, investor
repurchase demand or insurer claim denial strategies, and other external conditions that may change over the lives of the
underlying mortgage loans. The Company’s representations and warranties are generally not subject to stated limits of
exposure. However, the Company believes that the current unpaid principal balance of mortgage loans sold to date
represents the maximum exposure to repurchases related to representations and warranties.
Mortgage Loan Servicing Fees
Mortgage loan servicing fees are received by the Company for servicing residential mortgage loans. Mortgage
loan servicing activities include loan administration, collection, and default management, including the collection and
remittance of loan payments; response to customer inquiries; accounting for principal and interest; holding custodial
(impounded) funds for the payment of property taxes and insurance premiums; counseling delinquent mortgagors; and
supervising foreclosures and REO property dispositions.
Mortgage loan servicing fee amounts are based upon fee schedules established by the applicable investor and
depend on whether the Company is directly servicing loans, where it holds the MSRs, subservicing MSRs or loans held
by PMT or another third party or subservicing distressed mortgage loans for the Advised Entities.
F-16
The Company’s obligations under its mortgage loan servicing agreements are fulfilled as the Company services
the mortgage loans. Fees are collected when the mortgage loan payments are received from the borrowers in the case of
MSRs held by the Company or within 30 days of the applicable month-end from the Advised Entities.
Owned mortgage loan servicing fees are recorded net of Agency guarantee fees paid by the Company and are
recognized when the mortgage loan payments are received from the borrowers. Mortgage loan servicing fees relating to
mortgage loans serviced for the Advised Entities are recognized in the month in which the mortgage loans are serviced.
Fulfillment Fees
Fulfillment fees represent fees the Company collects for services it performs on behalf of PMT in connection
with the acquisition, packaging and sale of mortgage loans. Fulfillment fee amounts are based upon a negotiated fee
schedule and the unpaid principal balance of the mortgage loans purchased by PMT. The Company’s obligation under
the agreement is fulfilled when PMT completes the sale or securitization of a mortgage loan it purchases. Fulfillment fee
revenue is recognized in the month the mortgage loan is purchased by PMT. Fulfillment fees are generally collected
within 30 days of purchase by PMT, although a portion of the fulfillment fees may not be collected until 30 days
following sale or securitization to the extent such sale or securitization does not occur in the month of purchase.
Management fees
Management fees represent compensation to the Company for its management services provided to the Advised
Entities. Management fees were earned based on the Investment Funds’ net assets and are based on PMT’s shareholders’
equity amounts and profitability in excess of specified thresholds. Management fees are recognized as services are
provided and are paid to the Company on a quarterly basis within 30 days of the end of the quarter.
Stock-Based Compensation
The Company’s 2013 Equity Incentive Plan provides for awards of nonstatutory and incentive stock options,
time-based restricted stock units, performance-based restricted stock units, stock appreciation rights, performance units
and stock grants. The Company establishes the cost of its share-based awards at the awards’ fair values at the grant date
of the awards. The Company estimates the fair value of time-based restricted stock units and performance-based
restricted stock units awarded with reference to the fair value of its underlying common stock and expected forfeiture
rates on the date of the award. The Company estimates the fair value of its stock option awards with reference to the
expected price volatility of its shares of common stock and risk-free interest rate for the period that exercisable stock
options are expected to be outstanding.
Compensation costs are fixed, except for performance-based restricted stock units, as of the award date as all
grantees are employees of PennyMac or directors of the Company. The cost of performance-based restricted stock units
is adjusted in each reporting period after the grant for changes in expected performance attainment until the performance
share units vest. The Company amortizes the cost of stock based awards to compensation expense over the vesting
period using the graded vesting method. Expense relating to awards is included in Compensation expense in the
consolidated statements of income.
F-17
Income Taxes
The Company is subject to federal and state income taxes. Income taxes are provided using the asset and
liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled.
The effect on deferred taxes of a change in tax rates is recognized in income in the period in which the change
occurs. A valuation allowance is established if, in management’s judgment, it is not more likely than not that a deferred
tax asset will be realized.
The Company recognizes tax benefits relating to its tax positions only if, in the opinion of management, it is
more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority. A tax
position that meets this standard is recognized as the largest amount that is greater than 50% likely to be realized upon
ultimate settlement with the appropriate taxing authority. The Company will classify any penalties and interest as a
component of provision for income taxes.
As a result of the PennyMac recapitalization and reorganization in 2013, the Company expects to benefit from
amortization and other tax deductions resulting from increases in the tax basis of PennyMac’s assets from the exchange
of PennyMac Class A units to the shares of the Company’s common stock. Those deductions will be allocated to the
Company and will be taken into account in reporting the Company’s taxable income.
The Company assumed an agreement with certain of the former unitholders of PennyMac that provides for the
additional payment by the Company to exchanging unitholders of PennyMac equal to 85% of the amount of cash
savings, if any, in U.S. federal, state and local income tax that PFSI realizes due to (i) increases in tax basis resulting
from exchanges of the then existing unitholders and (ii) certain other tax benefits related to PFSI entering into the tax
receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. Although the
Company’s Reorganization in 2018 eliminated the potential for unitholders to exchange any additional units subject to
this tax receivable agreement, the Company continues to be subject to the agreement and provide payment when
applicable for units exchanged before the Reorganization.
Recently Issued Accounting Pronouncement
In February 2016, the FASB issued Accounting Standard Update No. 2016-02, Leases (Topic 842) (“ASU
2016-02”). ASU 2016-02 changes the standards for the recognition, measurement, presentation and disclosure of leases.
ASU 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on
the principle of whether the lease is effectively a financed purchase of the leased asset by the lessee. A lessee is also
required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless
of their classification. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years, with early adoptions permitted. The Company will adopt the new standard effective
January 1, 2019.
The Company will adopt ASU 2016-02 using the required modified retrospective approach and will not adjust
prior comparative periods. As part of the adoption of ASU 2016-02, the Company will make accounting policy elections
that will:
• Retain current classification of leases; and
• Not recognizing leases with an initial term of 12 months or less on the consolidated balance sheet.
At January 1, 2019, upon adoption of ASU 2016-02, the Company will recognize approximately $79.3 million
of lease liability and approximately $58.6 million of right-of-use asset based on the present value of remaining lease
payments. The Company does not expect the adoption of ASU 2016-02 to have a significant effect on the amount or
timing of its lease expense. The effect of ASU 2016-02 is non-cash in nature, and, as such, it will not affect the
Company’s cash flows.
F-18
Note 4—Transactions with Affiliates
Transactions with PMT
Operating Activities
Mortgage Loan Production Activities and MSR Recapture
The Company sells newly originated loans to PMT under a mortgage loan purchase agreement. Historically, the
Company has used the mortgage loan purchase agreement for the purpose of selling to PMT prime jumbo residential
mortgage loans. Beginning in the third quarter of 2017, the Company also sells conventional, conforming balance
mortgage loans to PMT under the agreement.
Pursuant to the terms of an amended and restated MSR recapture agreement, effective September 12, 2016, if
the Company refinances mortgage loans for which PMT previously held the MSRs, the Company is generally required
to transfer and convey cash in an amount equal to 30% of the fair market value of the MSRs related to all the mortgage
loans so originated. The MSR recapture agreement expires on September 12, 2020, subject to automatic renewal for
additional 18-month periods, unless terminated earlier in accordance with the terms of the agreement.
The Company provides fulfillment and other services to PMT under an amended and restated mortgage banking
services agreement for which it receives a fulfillment fee. Pursuant to the terms of the mortgage banking services
agreement, the monthly fulfillment fee is an amount that shall equal (a) no greater than the product of (i) 0.35% and (ii)
the aggregate initial unpaid principal balance (the “Initial UPB”) of all mortgage loans purchased in such month, plus (b)
in the case of all mortgage loans other than mortgage loans sold to or securitized through Fannie Mae or Freddie Mac, no
greater than the product of (i) 0.50% and (ii) the aggregate Initial UPB of all such mortgage loans sold and securitized in
such month; provided, however, that no fulfillment fee shall be due or payable to the Company with respect to any
mortgage loans underwritten to the Ginnie Mae Mortgage Backed Securities (“MBS”) Guide. PMT does not hold the
Ginnie Mae approval required to issue Ginnie Mae MBS and act as a servicer. Accordingly, under the agreement, the
Company currently purchases mortgage loans underwritten in accordance with the Ginnie Mae MBS Guide “as is” and
without recourse of any kind from PMT at PMT’s cost less an administrative fee plus accrued interest and a sourcing fee
ranging from two to three and one-half basis points, generally based on the average number of calendar days mortgage
loans are held by PMT before being purchased by the Company.
In consideration for the mortgage banking services provided by the Company with respect to PMT’s acquisition
of mortgage loans under the Company’s early purchase program, the Company is entitled to fees accruing (i) at a rate
equal to $1,500 per year per early purchase facility administered by the Company, and (ii) in the amount of $35 for each
mortgage loan that PMT acquires thereunder. The mortgage banking services agreement expires, unless terminated
earlier in accordance with the agreement, on September 12, 2020, subject to automatic renewal for additional 18-month
periods.
F-19
Following is a summary of loan production activities, including MSR recapture, between the Company and
PMT:
Net gains (loss) on mortgage loans held for sale at fair value:
Net gains on mortgage loans held for sale to PMT
Mortgage servicing rights and excess servicing spread recapture
incurred
Sale of mortgage loans held for sale to PMT
2018
Year ended December 31,
2017
(in thousands)
2016
$
69,359
$
28,238
$
—
(4,776)
64,583 $
$
$ 3,343,028 $
(6,249)
21,989 $
904,097 $
(8,092)
(8,092)
21,541
Fulfillment fee revenue
Unpaid principal balance of mortgage loans fulfilled for PMT subject
to fulfillment fees
$
81,350 $
80,359 $
86,465
$ 26,194,303 $ 22,971,119 $ 23,188,386
Sourcing fees paid to PMT
Unpaid principal balance of mortgage loans purchased from PMT
10,925 $
$
11,976
$ 36,415,933 $ 40,561,241 $ 39,908,163
12,084 $
Tax service fees earned from PMT included in Mortgage loan
origination fees
Early purchase program fees earned from PMT included in Mortgage
loan servicing fees
$
$
7,433 $
7,078 $
6,690
— $
7 $
30
Mortgage Loan Servicing
The Company has a mortgage loan servicing agreement with PMT (“Servicing Agreement”). The Servicing
Agreement provides for servicing fees of per-loan monthly amounts based on the delinquency, bankruptcy and/or
foreclosure status of the serviced mortgage loan or REO. The Company also remains entitled to customary ancillary
income and market-based fees and charges relating to mortgage loans it services for PMT. These include boarding and
deboarding fees, liquidation and disposition fees, assumption, modification and origination fees and a percentage of late
charges.
• The base servicing fee rates for distressed whole mortgage loans range from $30 per month for current
loans up to $85 per month for loans where the borrower has declared bankruptcy. The base servicing fee
rate for REO is $75 per month.
• To the extent the Company facilitates rentals of PMT's REO under its REO rental program, the Company
collects an REO rental fee of $30 per month per REO, an REO property lease renewal fee of $100 per lease
renewal, and a property management fee in an amount equal to the Company’s cost if property
management services and/or any related software costs are outsourced to a third-party property
management firm or 9% of gross rental income if the Company provides property management services
directly. The Company is also entitled to retain any tenant paid application fees and late rent fees and seek
reimbursement for certain third-party vendor fees.
• Except as otherwise provided in the MSR recapture agreement, when the Company effects a refinancing of
a mortgage loan on behalf of PMT and not through a third-party lender and the resulting mortgage loan is
readily saleable, or the Company originates a loan to facilitate the disposition of a REO, the Company is
entitled to receive from PMT market-based fees and compensation consistent with pricing and terms the
Company offers unaffiliated parties on a retail basis.
F-20
• Because PMT has a small number of employees and limited infrastructure, the Company is required to
provide a range of services and activities significantly greater in scope than the services provided in
connection with a customary servicing arrangement. For these services, the Company receives a
supplemental servicing fee of $25 per month for each distressed mortgage loan. The Company is entitled to
reimbursement for all customary, good faith reasonable and necessary out-of-pocket expenses incurred by
the Company in performance of its servicing obligations.
• The Company is entitled to retain any incentive payments made to it and to which it is entitled under the
U.S. Department of Treasury’s Home Affordable Modification Plan; provided, however, that with respect
to any such incentive payments paid to the Company in connection with a mortgage loan modification for
which PMT previously paid the Company a modification fee, the Company is required to reimburse PMT
an amount equal to the incentive payments.
• The Company is also entitled to certain activity-based fees for distressed whole mortgage loans that are
charged based on the achievement of certain events. These fees range from $750 for a streamline
modification to $1,750 for a full modification or liquidation and $500 for a deed-in-lieu of foreclosure. The
Company is not entitled to earn more than one liquidation fee, reperformance fee or modification fee per
mortgage loan in any 18-month period.
• The base servicing fees for non-distressed mortgage loans are calculated through a monthly per-loan dollar
amount, with the actual dollar amount for each loan based on whether the mortgage loan is a fixed-rate or
adjustable-rate loan. The base servicing fee rates are $7.50 per month and $8.50 per month for fixed-rate
loans and adjustable-rate loans, respectively.
The Servicing Agreement expires on September 12, 2020, subject to automatic renewal for additional 18-month
periods, unless terminated earlier in accordance with the terms of the agreement.
Following is a summary of mortgage loan servicing fees earned from PMT:
Year ended December 31,
2017
2018
2016
(in thousands)
$
347 $
690
1,037
305 $
649
954
330
733
1,063
2,771
4,784
7,555
6,650
8,960
15,610
11,078
18,521
29,599
32,854
599
33,453
42,045 $
442 $
$
$
25,991
509
26,500
43,064
19,461
492
19,953
$ 50,615
138
350 $
Mortgage loans acquired for sale at fair value:
Base and supplemental
Activity-based
Mortgage loans at fair value:
Base and supplemental
Activity-based
Mortgage servicing rights:
Base and supplemental
Activity-based
Property management fees received from PMT included in Other income
F-21
Investment Management Activities
The Company has a management agreement with PMT (“Management Agreement”). The Management
Agreement provides that:
The base management fee is calculated quarterly and is equal to the sum of (i) 1.5% per year of PMT’s
average shareholders’ equity up to $2 billion, (ii) 1.375% per year of PMT’s average shareholders’ equity
in excess of $2 billion and up to $5 billion, and (iii) 1.25% per year of PMT’s average shareholders’ equity
in excess of $5 billion.
The performance incentive fee is calculated quarterly at a defined annualized percentage of the amount by
which PMT’s “net income,” on a rolling four-quarter basis and before deducting the incentive fee, exceeds
certain levels of return on “equity.”
The performance incentive fee is equal to the sum of: (a) 10% of the amount by which PMT’s “net income”
for the quarter exceeds (i) an 8% return on equity plus the “high watermark,” up to (ii) a 12% return on
PMT’s equity; plus (b) 15% of the amount by which PMT’s “net income” for the quarter exceeds (i) a 12%
return on PMT’s equity plus the “high watermark,” up to (ii) a 16% return on PMT’s equity; plus (c) 20%
of the amount by which PMT’s “net income” for the quarter exceeds a 16% return on equity plus the “high
watermark.”
For the purpose of determining the amount of the performance incentive fee:
“Net income” is defined as net income or loss attributable to PMT’s common shares of beneficial interest
computed in accordance with GAAP adjusted for certain other non-cash charges determined after
discussions between the Company and PMT’s independent trustees and approval by a majority of PMT’s
independent trustees.
“Equity” is the weighted average of the issue price per common share of all of PMT’s public offerings,
multiplied by the weighted average number of common shares outstanding (including restricted share units)
in the rolling four-quarter period.
The “high watermark” is the quarterly adjustment that reflects the amount by which the “net income”
(stated as a percentage of return on equity) in that quarter exceeds or falls short of the lesser of 8% and the
average Fannie Mae 30-year MBS yield (the “Target Yield”) for the four quarters then ended. If the
“net income” is lower than the Target Yield, the high watermark is increased by the difference. If the
“net income” is higher than the Target Yield, the high watermark is reduced by the difference. Each time a
performance incentive fee is earned, the high watermark returns to zero. As a result, the threshold amounts
required for the Company to earn a performance incentive fee are adjusted cumulatively based on the
performance of PMT’s “net income” over (or under) the Target Yield, until the “net income” in excess of
the Target Yield exceeds the then-current cumulative high watermark amount, and a performance incentive
fee is earned.
The base management fee and the performance incentive fee are both receivable quarterly in arrears. The
performance incentive fee may be paid in cash or a combination of cash and PMT’s common shares (subject to a limit of
no more than 50% paid in common shares), at PMT’s option.
The Management Agreement expires on September 12, 2020, subject to automatic renewal for additional
18-month periods, unless terminated earlier in accordance with the terms of the agreement. In the event of termination of
the Management Agreement between PMT and the Company, the Company may be entitled to a termination fee in
certain circumstances. The termination fee is equal to three times the sum of (a) the average annual base management
fee, and (b) the average annual performance incentive fee earned by the Company, in each case during the 24-month
period immediately preceding the date of termination.
F-22
Following is a summary of the base management and performance incentive fees earned from PMT:
Base management
Performance incentive
Expense Reimbursement
2018
Year ended December 31,
2017
(in thousands)
2016
$ 23,033 $
1,432
$ 24,465 $
22,280 $
304
22,584
$
20,657
—
20,657
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,
from and after September 12, 2016, the Company shall be reimbursed $120,000 per fiscal quarter, such amount to be
reviewed annually and not preclude reimbursement for any other services performed by the Company or its affiliates.
PMT is also required to pay its pro rata portion of rent, telephone, utilities, office furniture, equipment,
machinery and other office, internal and overhead expenses of the Company and its affiliates required for PMT’s and its
subsidiaries’ operations. These expenses will be allocated based on the ratio of PMT’s proportion of gross assets
compared to all remaining gross assets managed by the Company as calculated at each fiscal quarter end.
The Company received reimbursements from PMT for expenses as follows:
Reimbursement of:
Common overhead incurred by the Company (1)
Compensation (1)
Expenses incurred on (the Company's) PMT's behalf, net
Payments and settlements during the year (2)
2018
Year ended December 31,
2017
(in thousands)
2016
$
4,640
480
1,113
6,233
$
$ 71,943
$
5,306
—
2,257
7,563
$
$ 64,945
$
7,898
—
(163)
7,735
$
$ 143,542
(1) The Company adopted Accounting Standards Update 2014-09 Revenues from Contracts with Customers
(“ASU 2014-09”) using the modified retrospective method effective January 1, 2018. Adoption of ASU 2014-09
using the modified retrospective method required the Company to include those reimbursements from PMT in Other
revenue starting January 1, 2018. Before adoption of ASU 2014-09, the Company included such reimbursements in
the respective expense line items.
(2) Payments and settlements include payments for management fees and correspondent production activities itemized
in the preceding tables and netting settlements made pursuant to master netting agreements between the Company
and PMT.
Conditional Reimbursement of Underwriting Fees
In connection with its initial public offering of common shares of beneficial interest on August 4, 2009 (“IPO”),
PMT conditionally agreed to reimburse the Company up to $2.9 million for underwriting fees paid to the IPO
underwriters by the Company on PMT’s behalf. In the event a termination fee is payable to the Company under the
Management Agreement, and the Company has not received the full amount of the reimbursements and payments under
the reimbursement agreement, such amount will be paid in full. On February 1, 2019, the term of the reimbursement
agreement was extended, and it now expires on February 1, 2023. The Company received $69,000, $30,000, and $0 in
reimbursement from PMT during the years ended December 31, 2018, 2017, and 2016, respectively.
F-23
Investing Activities
Master Repurchase Agreement
On December 19, 2016, the Company, through PLS, entered into a master repurchase agreement with one of
PMT’s wholly-owned subsidiaries, PennyMac Holdings, LLC (“PMH”) (the “PMH Repurchase Agreement”), pursuant
to which PMH may borrow from the Company for the purpose of financing PMH’s participation certificates representing
beneficial ownership in ESS. PLS then re-pledges such participation certificates to PNMAC GMSR ISSUER TRUST
(the “Issuer Trust”) under a master repurchase agreement by and among PLS, the Issuer Trust and PennyMac, as
guarantor (the “PC Repurchase Agreement”). The Issuer Trust was formed for the purpose of allowing PLS to finance
MSRs and ESS relating to such MSRs (the “GNMA MSR Facility”).
In connection with the GNMA MSR Facility, PLS pledges and/or sells to the Issuer Trust participation
certificates representing beneficial interests in MSRs and ESS pursuant to the terms of the PC Repurchase Agreement. In
return, the Issuer Trust (a) has issued to PLS, pursuant to the terms of an indenture, the Series 2016-MSRVF1 Variable
Funding Note, dated December 19, 2016, known as the “PNMAC GMSR ISSUER TRUST MSR Collateralized Notes,
Series 2016-MSRVF1” (the “VFN”), and (b) has issued and may, from time to time pursuant to the terms of any
supplemental indenture, issue to institutional investors additional term notes (“Term Notes”), in each case secured on a
pari passu basis by the participation certificates relating to the MSRs and ESS. The maximum principal balance of the
VFN is $1,000,000,000.
The principal amount paid by PLS for the participation certificates under the PMH Repurchase Agreement is
based upon a percentage of the market value of the underlying ESS. Upon PMH’s repurchase of the participation
certificates, PMH is required to repay PLS the principal amount relating thereto plus accrued interest (at a rate reflective
of the current market and consistent with the weighted average note rate of the VFN and any outstanding Term Notes) to
the date of such repurchase. PLS is then required to repay the Issuer Trust the corresponding amount under the PC
Repurchase Agreement.
F-24
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:
Year ended December 31,
2017
2016
2018
Assets purchased from PennyMac Mortgage Investment Trust under
agreements to resell:
Activity during the year:
(in thousands)
— $ 150,000
Refinancing of note receivable from PennyMac Mortgage Investment Trust $
—
$
Sale of assets purchased from PMT under agreement to resell
$
253
Interest income
$ 131,025 $ 144,128 $ 150,000
— $
13,103 $
7,462 $
5,872 $
8,038 $
Balance at end of year
Note receivable from PennyMac Mortgage Investment Trust:
Activity during the year:
Refinancing with repurchase agreement from PennyMac Mortgage
Investment Trust
Interest income
Balance at end of year
Common shares of beneficial interest of PennyMac Mortgage Investment
Trust:
Activity during the year:
Dividends earned from PennyMac Mortgage Investment Trust
Change in fair value of investment in common shares of PennyMac
Mortgage Investment Trust
Balance at end of year:
Fair value
Number of shares
Financing Activities
$
$
$
— $
— $
— $
— $ 150,000
7,577
— $
—
— $
$
140 $
141 $
141
$
$
192
332 $
(23)
118 $
83
224
1,397 $
75
1,205
75
Spread Acquisition and MSR Servicing Agreements
On December 19, 2016, the Company amended and restated a master spread acquisition and MSR servicing
agreement with PMT (the “Spread Acquisition Agreement”), pursuant to which the Company may sell to PMT, from
time to time, the right to receive participation certificates representing beneficial ownership in ESS arising from Ginnie
Mae MSRs acquired by the Company, in which case the Company generally would be required to service or subservice
the related mortgage loans for Ginnie Mae. The primary purpose of the amendment and restatement was to facilitate the
continued financing of the ESS owned by PMT in connection with the parties’ participation in the GNMA MSR Facility.
To the extent the Company refinances any of the mortgage loans relating to the ESS it has acquired, the Spread
Acquisition Agreement also contains recapture provisions requiring that the Company transfer to PMT, at no cost, the
ESS relating to a certain percentage of the unpaid principal balance of the newly originated mortgage loans. However,
under the Spread Acquisition Agreement, in any month where the transferred ESS relating to newly originated Ginnie
Mae mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid
principal balance of the refinanced mortgage loans, the Company is also required to transfer additional ESS or cash in
the amount of such shortfall. Similarly, in any month where the transferred ESS relating to modified Ginnie Mae
mortgage loans is not equivalent to at least 90% of the product of the excess servicing fee rate and the unpaid principal
balance of the modified mortgage loans, the Spread Acquisition Agreement contains provisions that require the
Company to transfer additional ESS or cash in the amount of such shortfall. To the extent the fair market value of the
aggregate ESS to be transferred for the applicable month is less than $200,000, the Company may, at its option, wire
cash to PMT in an amount equal to such fair market value in lieu of transferring such ESS.
F-25
Following is a summary of financing activities between the Company and PMT:
2018
Year ended December 31,
2017
(in thousands)
2016
2,688 $
5,244 $
$
6,603
$ 46,750 $ 54,980 $ 69,992
$
— $ 59,045
8,500 $ (19,350) $ (23,923)
$
$ 15,138 $ 16,951 $ 22,601
— $
$
2,584 $
4,820 $
6,529
December 31,
2018
2017
(in thousands)
$ 216,110 $ 236,534
December 31, December 31,
2018
2017
(in thousands)
$
$
$
$
10,006 $
9,066
6,559
4,841
2,071
801
120
33,464 $
346
11,542
5,901
6,583
1,735
870
142
27,119
100,554 $
179
3,898
104,631 $
132,844
282
3,872
136,998
Excess servicing spread financing:
Issuance pursuant to recapture agreement
Repayment
Settlement
Change in fair value
Interest expense
Recapture incurred pursuant to refinancings by the Company of mortgage loans
subject to excess servicing spread financing included in Net gains on mortgage
loans held for sale at fair value
Excess servicing spread financing at fair value
Receivable from and Payable to PMT
Amounts due from and payable to PMT are summarized below:
Receivable from PMT:
Fulfillment fees
Allocated expenses and expenses incurred on PMT's behalf
Management fees
Servicing fees
Correspondent production fees
Conditional Reimbursement
Interest on assets purchased under agreements to resell
Payable to PMT:
Deposits made by PMT to fund servicing advances
Mortgage servicing rights recapture payable
Other
F-26
Investment Funds
The Investment Funds were dissolved during 2018. Before their dissolution, the Company had investment
management agreements with the Investment Funds pursuant to which it received management fees consisting of base
management fees and Carried Interest. The management fees were based on the lesser of the funds’ net asset values or
aggregate capital contributions. The base management fees accrued at annual rates ranging from 1.5% to 2.0% of the
applicable amounts on which they were based.
The Company recognized Carried Interest as a participation in the profits in the Investment Funds after the
investors in the Investment Funds had achieved a preferred return as defined in the fund agreements. The Carried Interest
that the Company recognized from the Investment Funds was determined by the Investment Funds’ performance and its
contractual rights to share in the Investments Funds’ returns in excess of the preferred returns, if any, accruing to the
funds’ investors. After the investors achieved the preferred returns specified in the respective fund agreements, a “catch
up” return accrued to the Company until it received a specified percentage of the preferred return. Thereafter, the
Company participated in returns in excess of the preferred return at the rates specified in the fund agreements.
The Company also had loan servicing agreements with the Investment Funds. The loan servicing provided by
the Company under the loan servicing agreements with the Investment Funds included collecting principal, interest and
escrow account payments, if any, with respect to mortgage loans, as well as managing loss mitigation, which included,
among other things, collection activities, loan workouts, modifications, foreclosures and short sales. The Company also
engaged in certain loan origination activities that included refinancing Investment Fund mortgage loans and arranging
financings that facilitated sales of REOs.
The loan servicing agreements with the Investment Funds generally provided for fee revenue, which varied
depending on the type and quality of the loans being serviced. The Company was also entitled to certain customary
market-based fees and charges.
Carried interest and amounts due from the Investment Funds are included in Other assets, and amounts payable
to the Investment Funds are included in Accounts payable and accrued expenses, respectively, as of December 31, 2017
and are summarized below:
Carried Interest due from Investment Funds:
PNMAC Mortgage Opportunity Fund, LLC
PNMAC Mortgage Opportunity Fund Investors, LLC
Receivable from Investment Funds:
Mortgage loan servicing fee rebate deposit
Management fees
Expense reimbursements
Mortgage loan servicing fees
Payable to Investment Funds:
Deposits received to fund servicing advances
Other
December 31, 2017
(in thousands)
$
$
$
$
$
$
6,389
2,163
8,552
300
88
27
2
417
2,329
98
2,427
F-27
Exchanged Private National Mortgage Acceptance Company, LLC Unitholders
The Company assumed a tax receivable agreement with certain former owners of PennyMac that provides for
the payment from time to time by the Company to PennyMac’s exchanged unitholders an amount equal to 85% of the
amount of the net tax benefits, if any, that the Company is deemed to realize as a result of (i) increases in tax basis of
PennyMac’s assets resulting from such unitholders’ exchanges and (ii) certain other tax benefits related to entering into
the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement.
Although the Company’s Reorganization in 2018 eliminated the potential for unitholders to exchange any additional
units subject to this tax receivable agreement, the Company continues to be subject to the agreement and will be required
to make payments when applicable for units exchanged before the Reorganization.
Following is a summary of activity in Payable to exchanged Private National Mortgage Acceptance Company,
LLC unitholders under tax receivable agreement:
2018
Year ended December 31,
2017
(in thousands)
2016
Activity during the year:
Liability resulting from unit exchanges
Payments under tax receivable agreement
Repricing of liability (1)
Balance at end of year
3,652 $
2,190
$
7,723 $
—
— $ (6,726) $
$
$ (1,126) $ (32,940) $
(551)
$ 46,537 $ 44,011 $ 75,954
(1) A reduction of $32.0 million in the payable to exchanged PennyMac unitholders under the tax receivable agreement
in 2017 was the result of the change in the federal corporate tax rate to 21% from the previous maximum of 35%
under Tax Cuts and Jobs Act of 2017 (“the Tax Act”).
Note 5—Loan Sales and Servicing Activities
The Company originates or purchases and sells mortgage loans in the secondary mortgage market without
recourse for credit losses. However, the Company maintains continuing involvement with the mortgage loans in the form
of servicing arrangements and the liability under representations and warranties it makes to purchasers and insurers of
the mortgage loans.
The following table summarizes cash flows between the Company and transferees as a result of the sale of
mortgage loans in transactions where the Company maintains continuing involvement as servicer with the mortgage
loans:
2018
Year ended December 31,
2017
(in thousands)
2016
$ 44,557,560 $ 50,235,245 $ 49,633,909
261,163
$
8,274
$
376,160 $
52,353 $
488,483 $
28,557 $
Cash flows:
Sales proceeds
Servicing fees received (1)
Net servicing advances
(1) Net of guarantee fees paid to the Agencies
F-28
The following table summarizes the UPB of the mortgage loans sold by the Company in which it maintains
continuing involvement:
Unpaid principal balance of mortgage loans outstanding
Delinquencies:
30-89 days
90 days or more:
Not in foreclosure
In foreclosure
Foreclosed
Bankruptcy
December 31,
2018
2017
(in thousands)
$ 145,224,596 $ 120,853,138
$
6,222,864 $
5,097,688
$
$
$
$
2,208,083 $
720,894 $
24,243 $
970,329 $
2,303,114
606,744
30,310
657,368
The following tables summarize the UPB of the Company’s mortgage loan servicing portfolio:
Servicing
rights owned
December 31, 2018
Contract
servicing and
subservicing
(in thousands)
Total
mortgage
loans serviced
Investor:
Non-affiliated entities:
Originated
Purchased
PennyMac Mortgage Investment Trust
Mortgage loans held for sale
Subserviced for the Company (1)
Delinquent mortgage loans:
30 days
60 days
90 days or more:
Not in foreclosure
In foreclosure
Foreclosed
Bankruptcy
Custodial funds managed by the Company (2)
$ 145,224,596 $
56,990,486
202,215,082
—
2,420,636
— $ 145,224,596
56,990,486
—
202,215,082
—
94,658,154
94,658,154
2,420,636
—
$ 204,635,718 $ 94,658,154 $ 299,293,872
414,219
$
414,219 $
— $
$
6,677,179 $
1,983,381
525,989 $
113,238
7,203,168
2,096,619
217,115
127,025
176,377
3,102,492
1,027,493
33,493
3,319,607
1,154,518
209,870
$ 12,824,038 $ 1,159,744 $ 13,983,782
1,522,189
$
4,003,986
$
1,415,106 $
3,033,658 $
107,083 $
970,328 $
(1) Certain of the mortgage loans for which the Company has purchased the MSRs are subserviced on the Company’s
behalf by other mortgage loan servicers on an interim basis when servicing of the loans has not yet been transferred
to the Company’s operating platform.
(2) Custodial funds include cash accounts holding funds on behalf of borrowers and investors relating to mortgage 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 mortgage loans’
investors, which are included in Interest income in the Company’s consolidated statements of income.
F-29
Investor:
Non-affiliated entities:
Originated
Purchased
Advised Entities
Mortgage loans held for sale
Delinquent mortgage loans:
30 days
60 days
90 days or more:
Not in foreclosure
In foreclosure
Foreclosed
Bankruptcy
Custodial funds managed by the Company (1)
Servicing
rights owned
December 31, 2017
Contract
servicing and
Total
mortgage
subservicing
(in thousands)
loans serviced
$ 120,853,138 $
47,016,708
167,869,846
—
2,998,377
— $ 120,853,138
47,016,708
—
167,869,846
—
74,980,268
74,980,268
2,998,377
—
$ 170,868,223 $ 74,980,268 $ 245,848,491
$
5,326,710 $
1,935,216
515,922 $
215,957
5,842,632
2,151,173
541,945
293,835
278,890
3,690,159
916,614
41,244
4,232,104
1,210,449
320,134
$ 11,909,943 $ 1,846,549 $ 13,756,492
1,223,293
$
4,168,320
$
1,046,969 $
3,267,279 $
176,324 $
901,041 $
(1) Custodial funds include cash accounts holding funds on behalf of borrowers and investors relating to mortgage 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 mortgage loans’
investors, which are included in Interest income in the Company’s consolidated statements of income.
Following is a summary of the geographical distribution of mortgage loans included in the Company’s
servicing portfolio for the top five and all other states as measured by UPB:
State
California
Texas
Florida
Virginia
Maryland
All other states
Note 6—Fair Value
December 31,
2018
December 31,
2017
(in thousands)
$ 51,377,441 $ 45,621,369
19,741,970
17,490,194
16,210,673
11,350,939
135,433,346
$ 299,293,872 $ 245,848,491
23,648,042
22,650,926
19,011,950
13,774,011
168,831,502
Most of the Company’s assets and certain of its liabilities are measured at or based on their fair values. The
application of fair value may be on a recurring or nonrecurring basis depending on the accounting principles applicable
to the specific asset or liability and whether the Company has elected to carry the item at its fair value as discussed in the
following paragraphs.
F-30
Fair Value Accounting Elections
The Company identified its MSLs and all of its non-cash financial assets other than Assets purchased from
PennyMac Mortgage Investment Trust under agreements to resell, and, beginning January 1, 2018, all of it MSRs 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. Management has also identified its ESS financing to be accounted for at fair
value as a means of hedging the related MSRs’ fair value risk.
Before January 1, 2018, originated MSRs backed by mortgage loans with initial interest rates of less than or
equal to 4.5% were accounted for using the amortization method. Effective January 1, 2018, the Company elected to
change the accounting for the classes of MSRs it had accounted for using the amortization method through
December 31, 2017, to the fair value method as allowed in the Transfers and Servicing topic of the FASB’s ASC. The
Company determined that a single accounting treatment across all currently existing classes of MSRs is consistent with
lender valuation under its financing arrangements and simplifies the Company’s hedging activities.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Following is a summary of assets and liabilities that are measured at fair value on a recurring basis:
Level 1
Level 2
Level 3
Total
December 31, 2018
Assets:
Short-term investments
Mortgage loans held for sale at fair value
Derivative assets:
$
Interest rate lock commitments
Repurchase agreement derivatives
Forward purchase contracts
Forward sales contracts
MBS put options
MBS call options
Put options on interest rate futures purchase contracts
Call options on interest rate futures purchase contracts
Total derivative assets before netting
Netting
Total derivative assets
Investment in PennyMac Mortgage Investment Trust
Mortgage servicing rights at fair value
Liabilities:
Excess servicing spread financing payable to PennyMac
Mortgage Investment Trust at fair value
Derivative liabilities:
$
$
Interest rate lock commitments
Forward purchase contracts
Forward sales contracts
Total derivative liabilities before netting
Netting
Total derivative liabilities
Mortgage servicing liabilities at fair value
$
F-31
(in thousands)
— $
117,824 $
—
2,261,639
260,008
— $
117,824
2,521,647
—
—
—
—
—
—
866
5,965
6,831
—
6,831
1,397
—
50,507
26,770
35,916
437
720
2,135
866
5,965
123,316
(26,969)
96,347
1,397
2,820,612
126,052 $ 2,300,847 $ 3,157,897 $ 5,557,827
50,507
26,770
—
—
—
—
—
—
77,277
—
77,277
—
2,820,612
—
—
35,916
437
720
2,135
—
—
39,208
—
39,208
—
—
— $
— $
216,110 $
216,110
—
—
—
—
—
—
—
— $
—
215
26,762
26,977
—
26,977
—
26,977 $
1,169
—
—
1,169
—
1,169
8,681
225,960 $
1,169
215
26,762
28,146
(25,082)
3,064
8,681
227,855
Level 1
Level 2
Level 3
Total
December 31, 2017
(in thousands)
— $
170,080 $
—
2,316,892
782,211
— $
170,080
3,099,103
—
—
—
—
—
3,570
938
4,508
—
4,508
1,205
—
60,012
10,656
4,288
2,101
3,481
3,570
938
85,046
(6,867)
78,179
1,205
638,010
175,793 $ 2,326,762 $ 1,490,889 $ 3,986,577
60,012
10,656
—
—
—
—
—
70,668
—
70,668
—
638,010
—
—
4,288
2,101
3,481
—
—
9,870
—
9,870
—
—
— $
— $
236,534 $
236,534
—
—
—
—
—
—
—
— $
—
1,272
7,031
8,303
—
8,303
—
8,303 $
1,740
—
—
1,740
—
1,740
14,120
252,394 $
1,740
1,272
7,031
10,043
(4,247)
5,796
14,120
256,450
Assets:
Short-term investments
Mortgage loans held for sale at fair value
Derivative assets:
$
Interest rate lock commitments
Repurchase agreement derivatives
Forward purchase contracts
Forward sales contracts
MBS put options
Put options on interest rate futures purchase contracts
Call options on interest rate futures purchase contracts
Total derivative assets before netting
Netting
Total derivative assets
Investment in PennyMac Mortgage Investment Trust
Mortgage servicing rights at fair value
Liabilities:
Excess servicing spread financing payable to PennyMac
Mortgage Investment Trust at fair value
Derivative liabilities:
$
$
Interest rate lock commitments
Forward purchase contracts
Forward sales contracts
Total derivative liabilities before netting
Netting
Total derivative liabilities
Mortgage servicing liabilities at fair value
$
F-32
As shown above, certain of the Company’s mortgage loans held for sale, IRLCs, repurchase agreement
derivatives, MSRs at fair value, ESS and MSLs are measured using Level 3 fair value inputs. Following are roll
forwards of these items for each of the three years ended December 31, 2018 where significant Level 3 fair value inputs
were used:
Year ended December 31, 2018
Assets:
Balance, December 31, 2017
Reclassification of mortgage servicing rights
previously accounted for under the
amortization method pursuant to adoption of
the fair value method of accounting
Balance, January 1, 2018
Purchases and issuances, net
Sales and repayments
Mortgage servicing rights resulting from
mortgage loan sales
Changes in fair value included in income
arising from:
Changes in instrument-specific credit risk
Other factors
Transfers from Level 3 to Level 2
Transfers to real estate acquired in settlement
of loans
Transfers of interest rate lock commitments to
mortgage loans held for sale
Balance, December 31, 2018
Changes in fair value recognized during the
year relating to assets still held at
December 31, 2018
Mortgage
loans held
for sale
Net interest
rate lock
agreement
commitments (1) derivatives
(in thousands)
Repurchase Mortgage
servicing
rights
Total
$
782,211 $
58,272 $ 10,656 $ 638,010 $ 1,489,149
—
782,211
2,972,042
(1,360,667)
—
58,272
195,974
—
—
10,656
49,725
(31,907)
1,482,426
2,120,436
237,803
1,482,426
2,971,575
3,455,544
— (1,392,574)
—
—
—
591,757
591,757
158
—
158
(2,128,551)
—
1,285
1,285
—
—
(1,704)
(1,704)
—
—
(129,384)
(129,384)
158
(129,803)
(129,645)
— (2,128,551)
(5,185)
—
—
—
(5,185)
—
260,008 $
(206,193)
(206,193)
49,338 $ 26,770 $ 2,820,612 $ 3,156,728
—
—
(263) $
49,338 $
— $ (129,384) $
(80,309)
$
$
(1) For the purpose of this table, the IRLC asset and liability positions are shown net.
Year ended December 31, 2018
Excess
servicing
spread
financing
Mortgage
servicing
liabilities
(in thousands)
Total
Liabilities:
Balance, December 31, 2017
Issuance of excess servicing spread financing pursuant to a recapture
agreement with PennyMac Mortgage Investment Trust
Accrual of interest
Repayments
Mortgage servicing liabilities resulting from mortgage loan sales
Changes in fair value included in income
Balance, December 31, 2018
Changes in fair value recognized during the year relating to liabilities still
outstanding at December 31, 2018
$ 236,534 $
14,120 $ 250,654
2,688
15,138
(46,750)
—
8,500
$ 216,110 $
—
—
—
7,601
(13,040)
2,688
15,138
(46,750)
7,601
(4,540)
8,681 $ 224,791
$
8,500 $ (13,040) $
(4,540)
F-33
Mortgage
loans held
for sale
Year ended December 31, 2017
Repurchase Mortgage
Net interest
rate lock
agreement
servicing
rights
Total
commitments (1) derivatives
(in thousands)
Assets:
Balance, December 31, 2016
Purchases and issuances, net
Sales and repayments
Mortgage servicing rights resulting from
mortgage loan sales
Changes in fair value included in income
arising from:
Changes in instrument-specific credit risk
Other factors
Transfers from Level 3 to Level 2
Transfers of interest rate lock commitments to
mortgage loans held for sale
Balance, December 31, 2017
Changes in fair value recognized during the
year relating to assets still held at
December 31, 2017
$
47,271 $
59,391 $
— $ 515,925 $
2,928,249
(1,339,580)
302,389
—
10,986
—
183,850
—
622,587
3,425,474
(1,339,580)
—
—
—
24,471
24,471
(1,794)
—
(1,794)
(851,935)
—
115,434
115,434
—
—
(330)
(330)
—
—
(86,236)
(86,236)
—
(1,794)
28,868
27,074
(851,935)
—
782,211 $
$
(418,942)
(418,942)
58,272 $ 10,656 $ 638,010 $ 1,489,149
—
—
$
(556) $
58,272 $
(330) $ (86,236) $
(28,850)
(1) For the purpose of this table, the IRLC asset and liability positions are shown net.
Liabilities:
Balance, December 31, 2016
Issuance of excess servicing spread financing pursuant to a recapture
agreement with PennyMac Mortgage Investment Trust
Accrual of interest
Repayments
Mortgage servicing liabilities resulting from mortgage loan sales
Changes in fair value included in income
Balance, December 31, 2017
Changes in fair value recognized during the year relating to liabilities still
outstanding at December 31, 2017
Year ended December 31, 2017
Excess
servicing
spread
financing
Mortgage
servicing
liabilities
(in thousands)
Total
$ 288,669 $
15,192 $ 303,861
5,244
16,951
(54,980)
—
(19,350)
$ 236,534 $
5,244
—
16,951
—
(54,980)
—
17,229
17,229
(18,301)
(37,651)
14,120 $ 250,654
$ (19,350) $ (18,301) $ (37,651)
F-34
Year ended December 31, 2016
Mortgage
loans held
for sale
Net interest
rate lock
commitments (1)
Mortgage
servicing
rights
(in thousands)
Total
Assets:
Balance December 31, 2015
Purchases
Sales and repayments
Interest rate lock commitments issued, net
Mortgage servicing rights resulting from mortgage loan
sales
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk
Other factors
Transfers from Level 3 to Level 2
Transfers of interest rate lock commitments to mortgage
loans held for sale
Balance, December 31, 2016
Changes in fair value recognized during the year relating to
assets still held at December 31, 2016
$
48,531 $
1,608,627
(1,202,621)
—
43,773 $ 660,247 $
—
—
429,598
146
—
—
752,551
1,608,773
(1,202,621)
429,598
—
—
17,319
17,319
3,469
—
3,469
(410,735)
—
—
143,867 (161,787)
143,867 (161,787)
—
—
—
(557,847)
—
$
47,271 $
59,391 $ 515,925 $
3,469
(17,920)
(14,451)
(410,735)
(557,847)
622,587
$
936 $
59,391 $ (161,787) $
(101,460)
(1) For the purpose of this table, the IRLC asset and liability positions are shown net.
Liabilities:
Balance December 31, 2015
Issuance of excess servicing spread financing pursuant to a recapture
agreement with PennyMac Mortgage Investment Trust
Accrual of interest
Repayments
Settlement
Mortgage servicing liabilities resulting from mortgage loan sales
Mortgage servicing liabilities assumed
Changes in fair value included in income
Balance, December 31, 2016
Changes in fair value recognized during the year relating to liabilities still
outstanding at December 31, 2016
Year ended December 31, 2016
Excess
servicing
spread
financing
Mortgage
servicing
liabilities
(in thousands)
Total
$ 412,425 $
1,399 $ 413,824
6,603
22,601
(69,992)
(59,045)
—
—
(23,923)
$ 288,669 $
6,603
—
22,601
—
(69,992)
—
(59,045)
—
14,991
14,991
10,139
10,139
(35,260)
(11,337)
15,192 $ 303,861
$ (16,713) $ (11,337) $ (28,050)
The information used in the preceding roll forwards represents activity for any assets and liabilities measured at
fair value on a recurring basis and identified as using “Level 3” significant fair value inputs at either the beginning or the
end of the years presented. The Company had transfers among the fair value levels arising from transfers of IRLCs to
mortgage loans held for sale at fair value upon purchase or funding of the respective mortgage loans and from the return
to salability in the active secondary market of certain mortgage loans held for sale.
F-35
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:
2018
Net gains on
Net
mortgage mortgage
loans held
for sale at
loan
servicing
fees
fair value Total
Year ended December 31,
2017
Net gains on
Net
mortgage mortgage
loans held
for sale at
loan
servicing
fees
fair value Total
2016
Net
Net gains on
mortgage mortgage
loans held
for sale at
loan
servicing
fees
fair value Total
Assets:
Mortgage loans
held for sale
Mortgage servicing
rights
$
— $
188,611 $ 188,611 $
— $
426,092 $ 426,092 $
— $
513,331 $ 513,331
(in thousands)
(129,384)
$ (129,384) $
—
188,611 $
(129,384)
(86,236)
—
(86,236)
(161,787)
59,227 $ (86,236) $
426,092 $ 339,856 $ (161,787) $
—
(161,787)
513,331 $ 351,544
Liabilities:
Excess servicing
spread financing at
fair value payable to
PennyMac
Mortgage
Investment Trust
Mortgage servicing
liabilities
$
$
(8,500) $
— $
(8,500) $ 19,350 $
— $ 19,350 $
23,923 $
— $
23,923
13,040
4,540 $
—
— $
13,040
4,540 $ 37,651 $
18,301
18,301
—
— $ 37,651 $
11,337
35,260 $
—
— $
11,337
35,260
Following are the fair value and related principal amounts due upon maturity of assets accounted for under the
fair value option:
December 31, 2018
Principal
amount
due upon
maturity
Difference
December 31, 2017
Principal
amount
due upon
maturity
Difference
Fair
value
Fair
value
(in thousands)
Mortgage loans held for sale:
Current through 89 days delinquent $ 2,324,203 $ 2,220,371 $ 103,832 $ 2,430,517 $ 2,326,772 $ 103,745
90 days or more delinquent:
Not in foreclosure
In foreclosure
143,631
53,813
(28)
(2,991)
$ 2,521,647 $ 2,420,636 $ 101,011 $ 3,099,103 $ 2,998,377 $ 100,726
614,357
57,248
144,011
56,254
614,329
54,257
(380)
(2,441)
Assets Measured at Fair Value on a Nonrecurring Basis
Following is a summary of assets that are measured at fair value on a nonrecurring basis:
Real estate acquired in settlement of loans
$
— $
(in thousands)
—
$
2,150 $
2,150
Level 1
Level 2
Level 3
Total
December 31, 2018
F-36
Mortgage servicing rights at lower of amortized cost
or fair value
Real estate acquired in settlement of loans
Level 1
Level 2
Level 3
Total
December 31, 2017
(in thousands)
$
$
— $
—
— $
—
—
—
$ 1,463,552 $ 1,463,552
2,355
$ 1,465,907 $ 1,465,907
2,355
The following table summarizes the total net losses on assets measured at fair values on a nonrecurring basis:
2018
Year ended December 31,
2017
(in thousands)
2016
Mortgage servicing rights at lower of amortized cost or fair value
Real estate acquired in settlement of loans
$
$
— $
(75)
(75) $
(6,853) $ (60,487)
(86)
(6,978) $ (60,487)
(125)
Fair Value of Financial Instruments Carried at Amortized Cost
The Company’s Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell,
Assets sold under agreements to repurchase, Mortgage loan participation purchase and sale agreements, Notes payable
and Obligations under capital lease are carried at amortized cost.
These assets and liabilities are classified as “Level 3” fair value items due to the Company’s reliance on
unobservable inputs to estimate these instruments’ fair values. The Company has concluded that these assets and
liabilities’ fair values approximate the carrying value other than the term notes due to their short terms and/or variable
interest rates. The fair value of the term notes at December 31, 2018 and 2017, was $1.3 billion and $903.9 million,
respectively. The fair value of term notes is estimated using a discounted cash flow approach using indications of market
pricing spreads provided by non-affiliated brokers to develop an appropriate discount rate.
Valuation Governance
Most of the Company’s financial assets, and all of its MSRs, ESS, derivative liabilities and MSLs, are carried at
fair value with changes in fair value recognized in current period income. Certain of the Company’s financial assets and
all of its MSRs, ESS and MSLs are “Level 3” fair value assets and liabilities which require the 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, management 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 executive chairman, chief executive, chief financial, chief
risk and deputy chief financial officers.
F-37
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 IRLCs fair values to its Capital Markets Risk
Management staff. The fair values developed by the Capital Markets Risk Management staff are reviewed by the
Company’s Capital Markets Operations group.
Valuation Techniques and Inputs
Following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and
“Level 3” fair value assets and liabilities:
Mortgage Loans Held for Sale
Most of the Company’s mortgage 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 mortgage loans are
determined using their quoted market or contracted selling price or market price equivalent.
Certain of the Company’s mortgage loans held for sale are not saleable into active markets and are therefore
categorized as “Level 3” fair value assets. Mortgage loans held for sale categorized as “Level 3” fair value assets
include:
• Certain delinquent government guaranteed or insured mortgage loans purchased by the Company from
Ginnie Mae guaranteed pools in its mortgage loan servicing portfolio. The Company’s right to
purchase delinquent government guaranteed or insured mortgage loans arises as the result of the
borrower’s failure to make payments for at least three consecutive months preceding the month 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 mortgage loans may be resold to investors and thereafter may be repurchased to the extent
eligible for resale into a new Ginnie Mae guaranteed pool. Such eligibility for resale generally occurs
when the repurchased mortgage loans become current either through the borrower’s reperformance or
through completion of a modification of the mortgage loan’s terms.
• Certain of the Company’s mortgage loans held for sale that become non-saleable into active markets
due to identification of a defect by the Company or to the repurchase by the Company of a mortgage
loan with an identified defect.
The Company uses a discounted cash flow model to estimate the fair value of its “Level 3” fair value mortgage
loans held for sale. The significant unobservable inputs used in the fair value measurement of the Company’s “Level 3”
fair value mortgage loans held for sale are discount rates, home price projections, voluntary prepayment/resale speeds
and total prepayment speeds. Significant changes in any of those inputs in isolation could result in a significant change
to the mortgage loans’ fair value measurement. Increases in home price projections are generally accompanied by an
increase in voluntary prepayment speeds.
F-38
Following is a quantitative summary of key “Level 3” fair value inputs used in the valuation of mortgage loans
held for sale at fair value:
Key inputs (1)
Discount rate:
Range
Weighted average
Twelve-month projected housing price index change:
Range
Weighted average
Voluntary prepayment / resale speed (2):
Range
Weighted average
Total prepayment speed (3):
Range
Weighted average
December 31, 2018
December 31, 2017
2.8% – 9.2% 2.9% – 10.0%
2.9%
2.9%
2.2% – 5.0%
3.5%
3.1% – 5.6%
3.6%
0.1% – 21.8% 0.2% – 72.2%
20.1%
44.6%
0.1% – 40.5% 0.2% – 75.2%
37.7%
55.8%
(1) Weighted average inputs are based on fair value of mortgage 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.
Changes in fair value attributable to changes in instrument specific credit risk are measured by reference to the
change in the respective mortgage loan’s delinquency status and performance history at year end from the later of the
beginning of the year or acquisition date. Changes in fair value of mortgage loans held for sale are included in Net gains
on mortgage 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 a “Level 3” fair value asset or liability. The Company estimates the fair
value of an IRLC based on quoted Agency MBS prices, its estimate of the fair value of the MSRs it expects to receive in
the sale of the mortgage loans and the probability that the mortgage loan will fund or be 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 mortgage 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 mortgage loans acquired for sale at fair value and
may be allocated to Net mortgage loan servicing fees – Amortization, impairment and change in fair value of mortgage
servicing rights and mortgage servicing liabilities as an economic hedge of the fair value of MSRs in the consolidated
statements of income when IRLCs are included as a component of the Company’s MSR hedging strategy.
F-39
Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:
Key inputs (1)
Pull-through rate:
Range
Weighted average
Mortgage servicing rights value expressed as:
Servicing fee multiple:
Range
Weighted average
Percentage of unpaid principal balance:
Range
Weighted average
December 31, 2018
December 31, 2017
16.6% – 100% 25.0% – 100%
84.1%
85.6%
1.5 – 5.5
3.8
1.4 – 5.8
4.0
0.4% – 3.2%
1.5%
0.3% – 3.0%
1.4%
(1) Weighted average inputs are based on the committed amounts.
Hedging Derivatives
Fair value of exchange-traded hedging derivative financial instruments are categorized by the Company as
“Level 1” fair value assets and liabilities. Fair value of hedging derivative financial instruments based on observable
MBS prices or interest rate volatilities in the MBS market are categorized as “Level 2” fair value assets and liabilities.
Changes in the fair value of hedging derivatives are included in Net gains on mortgage loans acquired for sale
at fair value, or Net mortgage loan servicing fees – Amortization, impairment and change in fair value of mortgage
servicing rights and mortgage servicing liabilities, as applicable, in the consolidated statements of income.
Repurchase Agreement Derivatives
The Company has a master repurchase agreement that includes incentives for financing mortgage loans
approved for satisfying certain consumer relief characteristics. These incentives are classified for financial reporting
purposes as embedded derivatives and are accounted for separate from the master repurchase agreement. The Company
classifies these derivatives as “Level 3” fair value assets. The significant unobservable inputs into the valuation of these
derivative assets are the discount rate and the Company’s expected approval rate of the mortgage loans financed under
the master repurchase agreement. The resulting ratio included in the Company’s fair value estimate was 97% at
December 31, 2018.
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 prepayment and
default rates of the underlying mortgage loans, the applicable pricing spread (discount rate) and annual per-loan cost to
service mortgage loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result
in a significant change in the MSR fair value measurement. Changes in these key inputs are not necessarily directly
related. Recognized changes in the fair value of MSRs are included in Net mortgage loan servicing fees—Amortization,
impairment and change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated
statements of income.
F-40
Following are the key inputs, separated by the Company’s basis of accounting for the respective asset, used in
determining the fair value of MSRs at the time of initial recognition, excluding MSR purchases:
2018
Fair
value
Amortized
cost
(Amount recognized and unpaid principal balance of underlying mortgage loans amounts in thousands)
Amortized
cost
Fair
value
Fair
value
Year ended December 31,
2017
2016
MSR and pool characteristics:
Amount recognized
Unpaid principal balance of underlying mortgage loans
Weighted average servicing fee rate (in basis points)
$591,757
$42,008,585
36
$24,471
$2,316,539
31
$556,630
$44,664,551
31
$17,319
$1,452,779
33
$560,212
$44,827,516
30
Key inputs (1):
Pricing spread (2):
Range
Weighted average
Annual total prepayment speed (3):
Range
Weighted average
Life (in years):
Range
Weighted average
Per-loan annual cost of servicing:
Range
Weighted average
5.8% – 16.4%
9.9%
7.6% – 11.2%
10.5%
7.6% – 15.2%
10.7%
7.2% – 10.5%
9.2%
7.2% – 14.4%
9.5%
3.9% – 61.8%
10.8%
3.9% – 71.8%
12.6%
3.4% – 47.6%
9.1%
3.3% – 53.8%
11.8%
2.8% – 50.9%
9.0%
0.5 – 11.6
7.3
$78 – $99
$91
0.8 – 11.7
6.6
$78 – $101
$89
1.5 – 12.2
8.1
$79 – $101
$89
0.5 – 11.9
6.8
$68 – $105
$88
1.3 – 12.9
8.1
$68 – $106
$89
(1) Weighted average inputs are based on UPB of the underlying mortgage 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”) curve for purposes of discounting cash flows relating to MSRs.
(3) Prepayment speed is measured using Life Total CPR.
F-41
Following is a quantitative summary of key inputs, separated by the Company’s basis of accounting for the
respective asset, used in the valuation and assessment for impairment of the Company’s MSRs at year end and the effect
on the fair value from adverse changes in those inputs:
MSR and pool characteristics:
Carrying value
Unpaid principal balance of underlying mortgage loans
Weighted average note interest rate
Weighted average servicing fee rate (in basis points)
Key inputs (1):
Pricing spread (2):
Range
Weighted average
Effect on fair value of (3):
5% adverse change
10% adverse change
20% adverse change
Prepayment speed (4):
Range
Weighted average
Average life (in years):
Range
Weighted average
Effect on fair value of (3):
5% adverse change
10% adverse change
20% adverse change
Annual per-loan cost of servicing:
Range
Weighted average
Effect on fair value of (3):
5% adverse change
10% adverse change
20% adverse change
December 31, 2018
Fair
value
December 31, 2017
Fair
value
Amortized
cost
(Carrying value, unpaid principal balance of underlying
mortgage loans and effect on fair value amounts in thousands)
$2,820,612
$201,054,144
4.0%
33
$638,010
$51,883,539
4.0%
32
$1,481,578
$114,365,698
3.8%
31
5.8% – 16.1%
8.7%
7.6% – 14.1%
9.8%
7.6% – 14.1%
10.3%
($45,268)
($89,073)
($172,556)
($10,760)
($21,155)
($40,916)
($27,700)
($54,376)
($104,869)
8.4% – 32.6%
9.9%
7.9% – 46.2%
10.5%
7.4% – 44.1%
9.7%
1.5 – 7.9
7.2
($47,687)
($93,626)
($180,623)
$78 – $99
$93
($22,944)
($45,888)
($91,775)
1.2 – 7.8
6.6
($10,809)
($21,239)
($41,038)
$78 – $97
$89
($6,247)
($12,494)
($24,987)
2.0 – 8.3
7.5
($23,544)
($46,284)
($89,514)
$79 – $97
$89
($11,216)
($22,431)
($44,863)
(1) Weighted average inputs are based on UPB of the underlying mortgage loans.
(2) The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash
flows relating to MSRs.
(3) For MSRs carried at fair value, an adverse change in one of the above-mentioned key inputs is expected to result in
a reduction in fair value which would be recognized in income. For MSRs carried at lower of amortized cost or fair
value, an adverse change in one of the above-mentioned key inputs may have resulted in recognition of MSR
impairment. The extent of the recognized MSR impairment depended on the relationship of fair value to the
carrying value of such MSRs immediately before the adverse change event.
(4) Prepayment speed is measured using Life Total CPR.
F-42
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.
Excess Servicing Spread Financing at Fair Value
The Company categorizes ESS as a “Level 3” fair value liability. Because the ESS is a claim to a portion of the
cash flows from MSRs, the fair value measurement of the ESS is similar to that of MSRs. The Company uses the same
discounted cash flow approach to measuring the ESS as it uses to measure MSRs except that certain inputs relating to
the cost to service the mortgage loans underlying the MSR and certain ancillary income are not included as these cash
flows do not accrue to the holder of the ESS. The key inputs used in the estimation of ESS fair value include pricing
spread (discount rate) and prepayment speed. Significant changes to either of those inputs in isolation could result in a
significant change in the fair value of ESS. Changes in these key inputs are not necessarily directly related.
ESS is generally subject to fair value increases when mortgage interest rates increase. Increasing mortgage
interest rates normally discourage mortgage refinancing activity. Decreased refinancing activity increases the life of the
mortgage loans underlying the ESS, thereby increasing its fair value. Changes in the fair value of ESS are included in
Net mortgage loan servicing fees—Change in fair value of excess servicing spread payable to PennyMac Mortgage
Investment Trust.
Following are the key inputs used in determining the fair value of ESS financing:
Carrying value (in thousands)
ESS and pool characteristics:
Unpaid principal balance of underlying mortgage loans (in thousands)
Average servicing fee rate (in basis points)
Average excess servicing spread (in basis points)
Key inputs (1):
Pricing spread (2):
Range
Weighted average
Annualized prepayment speed (3):
Range
Weighted average
Average life (in years):
Range
Weighted average
December 31, December 31,
2018
$216,110
2017
$236,534
$23,196,033
34
19
$27,217,199
34
19
2.8% – 3.2% 3.8% – 4.3%
3.1%
4.1%
8.2% – 29.5% 8.4% – 41.4%
9.7%
10.8%
1.6 – 7.6
6.8
1.4 – 7.7
6.5
(1) Weighted average inputs are based on UPB of the underlying mortgage loans.
(2) The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash
flows relating to ESS.
(3) Prepayment speed is measured using Life Total CPR.
F-43
Mortgage Servicing Liabilities
MSLs are categorized as “Level 3” fair value liabilities. The Company uses a discounted cash flow approach to
estimate the fair value of MSLs. This approach consists of projecting net servicing cash flows discounted at a rate that
management believes market participants would use in their determinations of fair value. The key inputs used in the
estimation of the fair value of MSLs include the applicable pricing spread (discount rate), the prepayment rates of the
underlying mortgage loans, and the per-loan annual cost to service the respective mortgage loans. Changes in the fair
value of MSLs are included in Net servicing fees—Amortization, impairment and change in fair value of mortgage
servicing rights and mortgage servicing liabilities in the consolidated statements of income.
Following are the key inputs used in determining the fair value of MSLs:
MSL and pool characteristics:
Carrying value (in thousands)
Unpaid principal balance of underlying mortgage loans (in thousands)
Servicing fee rate (in basis points)
Key inputs:
Pricing spread (1)
Prepayment speed (2)
Average life (in years)
Annual per-loan cost of servicing
December 31,
2018
2017
$
8,681
$ 1,160,938
25
$
14,120
$ 1,620,609
25
7.3%
32.2%
3.8
373
$
7.7%
32.9%
3.5
404
$
(1) The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash
flows relating to MSLs.
(2) Prepayment speed is measured using Life Total CPR.
Note 7—Mortgage Loans Held for Sale at Fair Value
Mortgage loans held for sale at fair value include the following:
Government-insured or guaranteed
Conventional conforming
Purchased from Ginnie Mae pools serviced by the Company
Repurchased pursuant to representations and warranties
Fair value of mortgage loans pledged to secure:
Assets sold under agreements to repurchase
Mortgage loan participation purchase and sale agreements
December 31, December 31,
2018
2017
(in thousands)
$ 2,116,126 $ 2,085,764
231,128
777,300
4,911
$ 2,521,647 $ 3,099,103
145,513
250,585
9,423
$ 1,923,857 $ 2,530,299
551,688
$ 2,478,858 $ 3,081,987
555,001
F-44
Note 8—Derivative Activities
Derivative Notional Amounts and Fair Value of Derivatives
The Company had the following derivative financial instruments recorded on its consolidated balance sheets:
Instrument
Derivatives not designated as hedging
instruments:
Not subject to master netting
arrangements:
Interest rate lock commitments
Repurchase agreement derivatives
Used for hedging purposes:
Forward purchase contracts
Forward sales contracts
MBS put options
MBS call options
Put options on interest rate futures
purchase contracts
Call options on interest rate futures
purchase contracts
Treasury futures purchase contracts
Treasury futures sale contracts
Interest rate swap futures purchase
contracts
Total derivatives before netting
Netting
Deposits placed with derivative
counterparties
December 31, 2018
Fair value
Notional
amount
Derivative Derivative
Notional
liabilities amount
assets
(in thousands)
December 31, 2017
Fair value
Derivative Derivative
liabilities
assets
2,805,400 $ 50,507 $
26,770
35,916
437
720
2,135
6,657,026
6,890,046
4,635,000
1,450,000
1,169
—
3,654,955 $ 60,012 $
215
26,762
—
—
4,920,883
5,204,796
4,925,000
—
10,656
4,288
2,101
3,481
—
3,085,000
866
—
2,125,000
3,570
1,512,500
835,000
1,450,000
5,965
—
—
—
—
—
100,000
100,000
—
938
—
—
1,740
—
1,272
7,031
—
—
—
—
—
—
625,000
—
123,316
(26,969)
$ 96,347 $
—
28,146
(25,082)
3,064
1,400,000
—
85,046
(6,867)
$ 78,179 $
—
10,043
(4,247)
5,796
$
1,887
$
2,620
F-45
The following table summarizes notional amount activity for derivative contracts used in the Company’s
hedging activities:
Instrument
Forward purchase contracts
Forward sale contracts
MBS put options
MBS call options
Put options on interest rate futures purchase contracts
Call options on interest rate futures purchase contracts
Put options on interest rate futures sale contracts
Call options on interest rate futures sale contracts
Treasury futures purchase contracts
Treasury futures sale contracts
Interest rate swap futures purchase contracts
Interest rate swap futures sales contracts
Instrument
Forward purchase contracts
Forward sale contracts
MBS put options
MBS call options
Put options on interest rate futures purchase contracts
Call options on interest rate futures purchase contracts
Put options on interest rate futures sale contracts
Call options on interest rate futures sale contracts
Treasury futures purchase contracts
Treasury futures sale contracts
Interest rate swap futures purchase contracts
Interest rate swap futures sales contracts
Instrument
Amount
beginning of
year
Year ended December 31, 2018
Additions
Dispositions/
expirations
(in thousands)
4,920,883
5,204,796
4,925,000
—
2,125,000
100,000
—
—
100,000
—
1,400,000
—
184,780,152
230,735,936
31,085,000
14,325,000
20,559,800
4,387,500
20,474,800
2,100,000
9,837,500
11,213,800
1,510,000
2,285,000
(183,044,009)
(229,050,686)
(31,375,000)
(12,875,000)
(19,599,800)
(2,975,000)
(20,474,800)
(2,100,000)
(9,102,500)
(9,763,800)
(2,285,000)
(2,285,000)
Amount
beginning of
year
Year ended December 31, 2017
Additions
Dispositions/
expirations
(in thousands)
12,746,191
16,577,942
1,175,000
1,600,000
1,125,000
900,000
—
—
—
—
200,000
—
181,761,564
226,000,107
25,050,000
17,700,000
11,360,000
1,939,300
10,010,000
2,739,300
544,900
444,900
2,100,000
900,000
(189,586,872)
(237,373,253)
(21,300,000)
(19,300,000)
(10,360,000)
(2,739,300)
(10,010,000)
(2,739,300)
(444,900)
(444,900)
(900,000)
(900,000)
Amount
beginning of
year
Year ended December 31, 2016
Additions
Dispositions/
expirations
(in thousands)
Amount
end of
year
6,657,026
6,890,046
4,635,000
1,450,000
3,085,000
1,512,500
—
—
835,000
1,450,000
625,000
—
Amount
end of
year
4,920,883
5,204,796
4,925,000
—
2,125,000
100,000
—
—
100,000
—
1,400,000
—
Amount
end of
year
Forward purchase contracts
Forward sale contracts
MBS put options
MBS call options
Put options on interest rate futures purchase contracts
Call options on interest rate futures purchase contracts
Put options on interest rate futures sale contracts
Call options on interest rate futures sale contracts
Treasury futures purchase contracts
Treasury futures sale contracts
Interest rate swap futures purchase contracts
Interest rate swap futures sales contracts
5,254,293
6,230,811
1,275,000
—
1,650,000
600,000
—
—
—
—
—
—
210,412,697
262,202,884
19,225,000
1,600,000
15,331,000
5,687,500
9,436,000
550,000
585,800
585,800
400,000
200,000
(202,920,799)
(251,855,753)
(19,325,000)
—
(15,856,000)
(5,387,500)
(9,436,000)
(550,000)
(585,800)
(585,800)
(200,000)
(200,000)
12,746,191
16,577,942
1,175,000
1,600,000
1,125,000
900,000
—
—
—
—
200,000
—
F-46
Derivative Balances and Netting of Financial Instruments
The Company has elected to present net derivative asset and liability positions, and cash collateral obtained
from (or posted to) its counterparties when subject to a master netting arrangement that is legally enforceable on all
counterparties in the event of default. The derivatives that are not subject to a master netting arrangement are IRLCs and
repurchase agreement derivatives.
Offsetting of Derivative Assets
Following are summaries of derivative assets and related netting amounts.
Derivatives not subject to master
netting arrangements:
Interest rate lock commitments
Repurchase agreement derivatives
Derivatives subject to master netting
arrangements:
Forward purchase contracts
Forward sale contracts
MBS put options
MBS call options
Put options on interest rate futures
purchase contracts
Call options on interest rate futures
purchase contracts
Netting
Gross
amount of
recognized
assets
December 31, 2018
Gross amount Net amount
December 31, 2017
Gross
Gross amount Net amount
offset in the of assets in the amount of
consolidated recognized
consolidated
balance sheet balance sheet assets
offset in the of assets in the
consolidated
consolidated
balance sheet balance sheet
(in thousands)
$ 50,507 $
26,770
77,277
— $
—
—
50,507 $ 60,012 $
26,770
77,277
10,656
70,668
— $
—
—
60,012
10,656
70,668
35,916
437
720
2,135
866
5,965
46,039
—
—
—
—
—
35,916
437
720
2,135
4,288
2,101
3,481
—
866
3,570
—
—
—
—
—
4,288
2,101
3,481
—
3,570
—
(26,969)
(26,969)
5,965
(26,969)
19,070
96,347 $ 85,046 $
938
—
14,378
—
(6,867)
(6,867)
(6,867) $
938
(6,867)
7,511
78,179
$ 123,316 $ (26,969) $
F-47
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.
December 31, 2018
Gross amount not
offset in the
consolidated
balance sheet
Financial
Cash
collateral
Net
December 31, 2017
Gross amount not
offset in the
consolidated
balance sheet
Financial
Cash
collateral
Net
Net amount
of assets in the
consolidated
Net amount
of assets in the
consolidated
balance sheet instruments received
amount
balance sheet instruments received
amount
(in thousands)
Interest rate lock
commitments
Deutsche Bank
RJ O'Brien
Wells Fargo Bank, N.A.
Bank of America, N.A.
Citibank, N.A.
JPMorgan Chase Bank, N.A.
Federal National Mortgage
Association
Others
$ 50,507 $
26,770
6,831
3,707
2,781
2,488
1,399
456
1,408
$ 96,347 $
— $
—
—
—
—
—
—
—
—
— $
— $ 50,507 $ 60,012 $
—
—
—
—
—
—
26,770
6,831
3,707
2,781
2,488
1,399
10,656
4,508
—
—
472
267
456
1,408
—
—
— $ 96,347 $ 78,179 $
1,092
1,172
— $
—
—
—
—
—
—
—
—
— $
— $ 60,012
10,656
—
4,508
—
—
—
—
—
472
—
267
—
1,092
—
1,172
—
— $ 78,179
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.
Derivatives not subject to master
netting arrangements – Interest rate
lock commitments
Derivatives subject to a master netting
arrangement:
$
Forward purchase contracts
Forward sale contracts
Netting
Total derivatives
Assets sold under agreements to
repurchase:
Amount outstanding
Unamortized premiums and debt
issuance costs, net
December 31, 2018
Net
amount
of liabilities
in the
consolidated
balance sheet balance sheet
Gross amount
offset in the
consolidated
December 31, 2017
Net
amount
of liabilities
in the
consolidated
balance sheet balance sheet
Gross amount
offset in the
consolidated
Gross
amount of
recognized
liabilities
Gross
amount of
recognized
liabilities
(in thousands)
1,169 $
— $
1,169 $
1,740 $
— $
1,740
215
26,762
—
—
— (25,082)
26,977 (25,082)
28,146 (25,082)
215
26,762
(25,082)
1,895
3,064
1,272
7,031
—
8,303
10,043
—
—
(4,247)
(4,247)
(4,247)
1,272
7,031
(4,247)
4,056
5,796
1,935,200
— 1,935,200 2,380,866
— 2,380,866
(1,341)
1,933,859
—
672
—
672
— 2,381,538
— 1,933,859 2,381,538
$ 1,962,005 $ (25,082) $ 1,936,923 $ 2,391,581 $ (4,247) $ 2,387,334
(1,341)
F-48
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.
December 31, 2018
Gross amounts
not offset in the
consolidated
balance sheet
Financial
instruments
Net amount
of liabilities
in the
Cash
collateral
consolidated
pledged amount balance sheet
Net
December 31, 2017
Gross amounts
not offset in the
consolidated
balance sheet
Financial
instruments
Cash
collateral
pledged amount
Net
Net amount
of liabilities
in the
consolidated
balance sheet
1,169 $
— $
— $ 1,169 $
1,740 $
— $
— $ 1,740
(in thousands)
$
Interest rate lock
commitments
Credit Suisse First Boston
Mortgage Capital LLC
Deutsche Bank
Bank of America, N.A.
BNP Paribas
Morgan Stanley Bank, N.A.
JPMorgan Chase Bank, N.A.
Royal Bank of Canada
Citibank, N.A.
Barclays Capital
Others
691,030
741,978
170,820
149,675
77,687
54,326
35,181
14,960
—
1,438
(690,766)
(741,978)
(170,820)
(149,482)
(77,687)
(54,326)
(35,181)
(14,960)
—
—
$ 1,938,264 $ (1,935,200) $
264 1,010,562 (1,010,320)
(593,864)
(406,355)
(87,753)
(138,983)
(90,442)
(23,752)
(23,010)
(6,387)
—
—
—
—
—
—
193
—
—
—
—
—
—
—
—
—
—
—
— 1,438
— $ 3,064 $ 2,386,662 $ (2,380,866) $
593,864
406,787
87,753
139,491
90,442
24,835
23,010
6,387
1,791
242
—
—
—
432
—
—
—
508
—
—
—
— 1,083
—
—
—
—
— 1,791
— $ 5,796
Following are the gains (losses) recognized by the Company on derivative financial instruments and the income
statement line items where such gains and losses are included:
Derivative activity
Income statement line
Year ended December 31,
2017
2018
2016
(in thousands)
Interest rate lock commitments
Repurchase agreement derivatives
Hedged item:
Interest rate lock commitments and
mortgage loans held for sale
Mortgage servicing rights
Net gains on mortgage loans
held for sale at fair value
Interest expense
$
$
(8,934) $
(1,704) $
(1,120) $
(330) $
15,618
—
Net gains on mortgage loans
held for sale at fair value
Net mortgage loan servicing
fees–Amortization,
impairment and change in fair
value of mortgage servicing
rights and mortgage servicing
liabilities
$
81,522 $
(21,255) $
20,619
$ (121,045) $
(37,855) $
26,405
F-49
Note 9—Mortgage Servicing Rights and Mortgage Servicing Liabilties
Mortgage Servicing Rights Carried at Fair Value:
The activity in MSRs carried at fair value is as follows:
Balance at beginning of year
Reclassification of mortgage servicing rights previously accounted for under
the amortization method pursuant to adoption of the fair value method of
accounting
Balance after reclassification
Additions:
Purchases
Resulting from mortgage loan sales
Change in fair value due to:
Changes in inputs used in valuation model (1)
Other changes in fair value (2)
Total change in fair value
Balance at end of year
2018
Year ended December 31,
2017
(in thousands)
$ 638,010 $ 515,925 $ 660,247
2016
1,482,426
2,120,436
—
515,925
—
660,247
237,803
591,757
829,560
183,850
24,471
208,321
146
17,319
17,465
174,458
(303,842)
(129,384)
(80,244)
(81,543)
(161,787)
$ 2,820,612 $ 638,010 $ 515,925
(4,771)
(81,465)
(86,236)
Fair value of mortgage servicing rights pledged to secure Assets sold under
agreements to repurchase and Notes payable
$ 2,807,333 $ 630,711
(1) Principally reflects changes in discount rate and prepayment speed inputs, primarily due to changes in market
interest rates, and changes in expected borrower performance and servicer losses given default.
(2) Represents changes due to realization of cash flows.
December 31,
2018
2017
(in thousands)
F-50
Mortgage Servicing Rights Carried at Lower of Amortized Cost or Fair Value:
The activity in MSRs carried at the lower of amortized cost or fair value is summarized below:
Amortized cost:
Balance at beginning of year
Transfer of mortgage servicing rights to mortgage servicing rights
carried at fair value pursuant to adoption of the fair value method of
accounting
Balance after reclassification
Mortgage servicing rights resulting from mortgage loan sales
Amortization
Application of valuation allowance to recognize other-than-temporary
impairment
Balance at end of year
Valuation allowance:
Balance at beginning of year
Reduction resulting from transfer of mortgage servicing rights to
mortgage servicing rights carried at fair value pursuant to adoption of
the fair value method of accounting
Balance after reclassification
Increase in valuation allowance
Application of valuation allowance to recognize other-than-temporary
impairment
Balance at end of year
Mortgage servicing rights, net at end of year
Fair value of mortgage servicing rights at:
Beginning of year
End of year
2018
Year ended December 31,
2017
(in thousands)
2016
$ 1,583,378 $ 1,206,694
$ 798,925
(1,583,378)
—
—
—
—
1,206,694
556,630
(179,946)
—
798,925
560,212
(139,666)
—
1,583,378
(12,777)
1,206,694
—
(101,800)
(94,947)
(47,237)
101,800
—
—
—
(94,947)
(6,853)
—
(47,237)
(60,487)
—
—
—
(101,800)
— $ 1,481,578
12,777
(94,947)
$ 1,111,747
$
$ 1,112,302
$ 1,482,426
$ 766,345
$ 1,112,302
Fair value of mortgage servicing rights pledged to secure assets sold
under agreements to repurchase and note payable
December 31,
2017
(in thousands)
$ 1,467,356
F-51
Mortgage Servicing Liabilities Carried at Fair Value:
The activity in mortgage servicing liability carried at fair value is summarized below:
2018
Year ended December 31,
2017
(in thousands)
2016
Balance at beginning of year
Mortgage servicing liabilities resulting from mortgage loan sales
Mortgage servicing liabilities assumed
Changes in fair value due to:
Changes in valuation inputs used in valuation model (1)
Other changes in fair value (2)
Total change in fair value
Balance at end of year
$ 14,120 $ 15,192
17,229
—
7,601
—
$
1,399
14,991
10,139
10,787
(23,827)
(13,040)
6,526
(24,827)
(18,301)
8,681 $ 14,120
$
5,264
(16,601)
(11,337)
$ 15,192
(1) Principally reflects changes in expected borrower performance and servicer losses given default.
(2) Represents changes due to realization of cash flows.
Servicing fees relating to MSRs and MSLs are recorded in Net mortgage loan servicing fees—Loan servicing
fees—From non-affiliates on the consolidated statements of income; late charges and other ancillary fees relating to
MSRs and MSLs are recorded in Net mortgage loan servicing fees—Mortgage loan servicing fees—Ancillary and other
fees on the Company’s consolidated statements of income. Such amounts are summarized below:
Contractual servicing fees
Ancillary and other fees:
Late charges
Other
2018
Year ended December 31,
2017
(in thousands)
2016
$
585,101 $
475,848 $
385,633
27,940
6,276
619,317 $
25,097
4,603
505,548 $
19,341
4,706
409,680
$
Note 10—Furniture, Fixtures, Equipment and Building Improvements
Furniture, fixtures, equipment and building improvements is summarized below:
Furniture, fixtures, equipment and building improvements
Less: Accumulated depreciation and amortization
Fixed assets pledged to secure obligations under capital lease
December 31,
2018
2017
(21,877)
(in thousands)
$ 55,251 $ 54,186
(24,733)
$ 33,374 $ 29,453
$ 16,281 $ 23,915
F-52
Depreciation and amortization expenses are summarized below:
2018
Year ended December 31,
2017
(in thousands)
2016
Depreciation and amortization expenses
Less: Depreciation and amortization allocated to PMT(1)
Depreciation and amortization expenses included in Occupancy and equipment
$ 9,500 $ 8,150 $
—
(1,396)
$ 9,500 $ 6,754 $
6,842
(1,350)
5,492
(1) The Company’s management agreement with PMT provides for allocation by the Company of certain common
overhead costs to PMT. The Company adopted ASU 2014-09 using the modified retrospective method effective
January 1, 2018, Adoption of ASU 2014-09 required the Company to include those reimbursements from PMT of
$1.2 million in Other revenue starting January 1, 2018. Before adoption of ASU 2014-09, the Company included
such reimbursements in the respective expense line items.
Note 11—Capitalized Software
Capitalized software is summarized below:
Cost
Less: Accumulated amortization
Capitalized software pledged to secure obligation under capital lease
December 31,
2018
2017
(5,291)
(in thousands)
$ 45,039 $ 29,621
(3,892)
$ 39,748 $ 25,729
$ 1,017 $ 1,568
Software amortization expense totaled $3.4 million, $1.6 million and $357,000 for the years ended
December 31, 2018, 2017 and 2016, respectively. The Company recorded $0, $827,000 and $0 of impairment of
capitalized software during the year ended December 31, 2018, 2017 and 2016, respectively.
Note 12—Carried Interest Due from Investment Funds
The activity in the Company’s Carried Interest due from Investment Funds, which were dissolved during the
year ended December 31, 2018, is included in Other assets, and is summarized as follows:
2018
Year ended December 31,
2017
(in thousands)
2016
Balance at beginning of year
Carried Interest recognized during the year
Cash received during the year
Balance at end of year
$
$
8,552 $ 70,906 $ 69,926
980
(1,040)
(365)
—
(61,314)
(8,187)
8,552 $ 70,906
— $
The Carried Interest that the Company recognized from the Investment Funds was determined by the
Investment Funds’ performance and its contractual rights to share in the Investments Funds’ returns in excess of the
preferred returns, if any, that accrued to the funds’ investors. The Company recognized Carried Interest as a participation
in the profits in the Investment Funds after the investors in the Investment Funds achieved a preferred return as defined
in the fund agreements. After the investors achieved the preferred returns specified in the respective fund agreements, a
“catch up” return accrued to the Company until it received a specified percentage of the preferred return. Thereafter, the
Company participated in future returns in excess of the preferred return at the rates specified in the fund agreements.
F-53
Note 13—Borrowings
The borrowing facilities described throughout this Note 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 December 31, 2018.
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 mortgage loans held for sale at fair value or participation certificates backed by
MSRs. Eligible mortgage loans and participation certificates backed by MSRs are sold at advance rates based on the fair
value (as determined by the lender) of the assets sold. Interest is charged at a rate based on the lender’s overnight cost of
funds rate or on LIBOR depending on the terms of the respective agreements. Mortgage loans and MSRs financed under
these agreements may be re-pledged by the lenders.
F-54
Assets sold under agreements to repurchase are summarized below:
Average balance of assets sold under agreements to repurchase
Weighted average interest rate (1)
Total interest expense (2)
Maximum daily amount outstanding
Carrying value:
Unpaid principal balance
Unamortized debt issuance premiums and costs, net
Weighted average interest rate
Available borrowing capacity (3):
Committed
Uncommitted
2018
Year ended December 31,
2017
(dollars in thousands)
$ 1,626,729 $ 1,829,257 $ 1,438,181
2016
3.87 %
22,463 $
3.18 %
60,286 $
$
49,791
$ 2,380,121 $ 3,022,656 $ 2,661,746
2.91 %
December 31,
2018
2017
(dollars in thousands)
$ 1,935,200 $ 2,380,866
(1,341)
672
$ 1,933,859 $ 2,381,538
4.22 %
3.24 %
695,767
$
2,354,033
$ 3,049,800
316,503
$
2,257,631
$ 2,574,134
$ 1,923,857
$ 2,530,299
131,025
$
$
162,895
$ 2,807,333
3,750
$
144,128
$
$
114,643
$ 2,098,067
3,750
$
Fair value of assets securing repurchase agreements:
Mortgage loans held for sale
Assets purchased from PennyMac Mortgage Investment Trust under agreements to
resell
Servicing advances (4)
Mortgage servicing rights (4)
Margin deposits placed with counterparties (5)
(1) Excludes the effect of amortization of net premiums totaling $40.5 million and $1.3 million, for the years ended
December 31, 2018 and 2017, respectively; and debt issuance costs of $7.3 million for the year ended
December 31, 2016.
(2) In 2017, PFSI entered into a master repurchase agreement that provides the Company with incentives to finance
mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. The
Company included $48.1 million and $9.2 million of such incentives as a reduction in Interest expense during the
year ended December 31, 2018 and 2017, respectively. The master repurchase agreement is subject to a rolling six-
month term through August 21, 2019, unless terminated earlier at the option of the lender. The Company expects
that it will cease to accrue the incentives under the repurchase agreement in the second quarter of 2019.
(3) The amount the Company is able to borrow under asset repurchase agreements is tied to the fair value of
unencumbered assets eligible to secure those agreements and the Company’s ability to fund the agreements’ margin
requirements relating to the assets financed.
(4) Beneficial interests in the Ginnie Mae MSRs and servicing advances are pledged to the Issuer Trust and together
serve as the collateral backing the VFN, 2018-GT1 Notes and 2018-GT2 Notes described in Notes Payable. The
VFN financing is included in Assets sold under agreements to repurchase and 2018-GT1 Notes and 2018-GT2
Notes are included in Notes payable on the Company's consolidated balance sheet.
(5) Margin deposits are included in Other assets on the Company’s consolidated balance sheets.
F-55
Following is a summary of maturities of outstanding advances under repurchase agreements by maturity date:
Remaining maturity at December 31, 2018
Within 30 days
Over 30 to 90 days
Over 90 to 180 days
Over one to two years
Total assets sold under agreements to repurchase
Weighted average maturity (in months)
Balance
(dollars in thousands)
397,374
1,397,080
746
140,000
1,935,200
2.9
$
$
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 December 31, 2018:
Counterparty
Credit Suisse First Boston Mortgage Capital LLC
Credit Suisse First Boston Mortgage Capital LLC
Deutsche Bank AG
Bank of America, N.A.
BNP Paribas
Morgan Stanley Bank, N.A.
JP Morgan Chase Bank, N.A.
Royal Bank of Canada
Citibank, N.A.
Weighted average
maturity of advances
under repurchase
agreement
Facility maturity
Amount at risk
(in thousands)
April 26, 2020
$ 1,416,794
33,906
$
February 2, 2019
53,901 March 16, 2019
$
$
15,863
$
$
$
$
$
April 26, 2020
April 26, 2019
June 30, 2019
January 30, 2019 October 28, 2019
August 2, 2019
March 7, 2019 August 23, 2019
March 3, 2019 October 11, 2019
January 25, 2019 March 29, 2019
June 7, 2019
9,222 March 18, 2019
5,825
5,286
2,129
586 February 28, 2019
The Company is subject to margin calls during the period the 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 mortgage 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.
F-56
The mortgage loan participation and sale agreements are summarized below:
Average balance
Weighted average interest rate (1)
Total interest expense
Maximum daily amount outstanding
2018
Year ended December 31,
2017
(dollars in thousands)
2016
$ 248,539
$ 208,613
$ 268,416
$
3.29 %
8,754
$ 722,611
2.34 %
$
5,496
$ 532,266
1.75 %
$
5,523
$ 1,268,871
(1) Excludes the effect of amortization of debt issuance costs totaling $588,000, $545,000 and $740,000 for the years
ended December 31, 2018, 2017 and 2016, respectively.
Carrying value:
Unpaid principal balance
Unamortized debt issuance costs
Weighted average interest rate
Fair value of mortgage loans pledged to secure mortgage loan participation purchase
and sale agreements
December 31,
2018
2017
(dollars in thousands)
$ 532,466
(215)
$ 527,706
(311)
$ 532,251 $ 527,395
3.77 %
2.81 %
$ 555,001
$ 551,688
Notes Payable
Term Notes
On February 16, 2017, the Company, through the Issuer Trust, issued an aggregate principal amount of
$400 million in Term Notes (the “2017-GT1 Notes”) to qualified institutional buyers under Rule 144A of the Securities
Act of 1933, as amended (the “Securities Act”). The 2017-GT1 Notes bore interest at a rate equal to one-month LIBOR
plus 4.75% per annum. The 2017-GT1 Notes were scheduled to mature on February 25, 2020 or, if extended pursuant to
the terms of the related indenture supplement, February 25, 2021 (unless earlier redeemed in accordance with their
terms).
On August 10, 2017, the Company, through the Issuer Trust, issued an aggregate principal amount of
$500 million in Term Notes (the “2017-GT2 Notes”) to qualified institutional buyers under Rule 144A of the Securities
Act. The 2017-GT2 Notes bore interest at a rate equal to one-month LIBOR plus 4.0% per annum. The 2017-GT2 Notes
were scheduled to mature on August 25, 2022 or, if extended pursuant to the terms of the related indenture supplement,
August 25, 2023 (unless earlier redeemed in accordance with their terms).
On February 28, 2018, the Company, through the Issuer Trust, issued an aggregate principal amount of
$650 million in Term Notes (the “2018-GT1 Notes”) to qualified institutional buyers under Rule 144A of the Securities
Act. The 2018-GT1 Notes bear interest at a rate equal to one-month LIBOR plus 2.85% per annum. The 2018-GT1
Notes will mature on February 25, 2023 or, if extended pursuant to the terms of the related indenture supplement,
February 25, 2025 (unless earlier redeemed in accordance with their terms).
On February 28, 2018, in connection with its issuance of the 2018-GT1 Notes, the Company also redeemed all
of the 2017-GT1 Notes previously issued by the Issuer Trust. The redemption amount for the 2017-GT1 Notes was
$400 million plus all accrued and unpaid interest. As a result, the Company recognized the unamortized debt issuance
cost of $3.4 million in Interest Expense.
F-57
On August 10, 2018, the Company, through the Issuer Trust, issued an aggregate principal amount of
$650 million in Term Notes (the “2018-GT2 Notes”) to qualified institutional buyers under Rule 144A of the Securities
Act. The 2018-GT2 Notes bear interest at a rate equal to one-month LIBOR plus 2.65% per annum. The 2018-GT2
Notes will mature on August 25, 2023 or, if extended pursuant to the terms of the related indenture supplement,
August 25, 2025 (unless earlier redeemed in accordance with their terms).
On August 10, 2018, in connection with its issuance of the 2018-GT2 Notes, the Company also redeemed all of
the 2017-GT2 Notes previously issued by the Issuer Trust. The redemption amount for the 2017-GT2 Notes was
$500 million plus all accrued and unpaid interest. As a result, the Company recognized the unamortized debt issuance
cost of $4.6 million in Interest Expense.
All the Term Notes rank pari passu with each other and with the VFN issued by 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.
Corporate Revolving Line of Credit
On November 1, 2018, the Company, through its subsidiary, PennyMac (the “Borrower”), entered into
amendments (the "Amendments") to that certain (i) amended and restated credit agreement, dated as of
November 18, 2016, by and among the Borrower, the lenders that are parties thereto and Credit Suisse AG, as
administrative agent and collateral agent, and Credit Suisse Securities (USA) LLC, as sole bookrunner and sole lead
arranger (the “Credit Agreement”); and (ii) amended and restated collateral and guaranty agreement, dated as of
November 18, 2016, by and among the Borrower, as grantor, Credit Suisse AG, Cayman Islands Branch (“CS
Cayman”), as collateral agent, and PNMAC Holdings, Inc. (formerly known as PennyMac Financial Services, Inc.) and
certain of its subsidiaries, PCM, PLS and PNMAC Opportunity Fund Associates, LLC (Associates), as guarantors and
grantors (“the “Guaranty”). Pursuant to the Credit Agreement, the lenders have agreed to make revolving loans to the
Borrower in an amount not to exceed $150 million. Interest on the loans shall accrue at a per annum rate of interest equal
to, at the election of the Borrower, either LIBOR plus the applicable margin or an alternate base rate (as defined in the
Credit Agreement). During the existence of certain events of default, interest shall accrue at a higher default rate. The
proceeds of the loans are to be used solely for working capital and general corporate purposes of the Borrower and its
subsidiaries.
The primary purposes of the Amendments are to (i) extend the maturity date of the Credit Agreement to
October 31, 2019; (ii) name the Company as an additional guarantor under the Credit Agreement; and (iii) release
Associates from its obligations as a guarantor under the Credit Agreement. Accordingly, the obligations of the Borrower
under the Credit Agreement are now guaranteed by PFSI, PNMAC Holdings, Inc., PCM and PLS, and secured by a
grant by each of the referenced grantors of its respective right, title and interest in and to limited and otherwise
unencumbered (other than specified permitted encumbrances) specified contract rights, specified deposit accounts, all
documents and instruments related to such specified contract rights and specified deposit accounts, and any and all
proceeds and products thereof. All other terms and conditions of the Credit Agreement and Guaranty remain the same in
all material respects.
MSR Note Payable
During December 2015, the Company issued a note payable in favor of Barclays Bank PLC that was secured by
Fannie Mae and Freddie Mac MSRs. Interest was charged at a rate based on LIBOR plus the applicable contract margin.
The facility expired on February 1, 2018.
On February 1, 2018, the Company issued a note payable in favor of CS Cayman that is secured by Fannie Mae
and Freddie Mac MSRs. Interest is charged at a rate based on LIBOR plus the applicable contract margin. The facility
expires on February 1, 2020. The maximum amount that the Company may borrow under the note payable is
$400 million, less any amount outstanding under the agreement to repurchase pursuant to which the Company finances
the VFN. The Company did not borrow under this note payable during the year ended December 31, 2018.
F-58
Notes payable are summarized below:
Average balance
Weighted average interest rate (1)
Total interest expense
Maximum daily amount outstanding
Year ended December 31,
2017
2018
2016
(dollars in thousands)
$ 1,169,452 $ 586,135 $ 108,475
5.29 %
5.13 %
$
8,688
$ 1,300,000 $ 900,006 $ 153,849
73,610 $ 39,369 $
5.86 %
(1) Excluding the effect of amortization of debt issuance costs and non-utilization fees totaling $11.7 million,
$4.5 million and $3.0 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Carrying value:
Unpaid principal balance
Unamortized debt issuance costs
Weighted average interest rate
Unused amount
Assets pledged to secure notes payable:
Cash
Servicing advances (1)
Mortgage servicing rights (1)
Other assets‒Carried Interest
December 31,
2018
2017
(dollars in thousands)
$ 1,300,000 $
(7,709)
$ 1,292,291
$
900,006
(8,501)
891,505
5.07 %
5.66 %
$
150,000
$
280,000
108,174
$
$
162,895
$ 2,807,333
—
$
20,765
$
$
114,643
$ 2,098,067
8,552
$
(1) Beneficial interests in the Ginnie Mae MSRs and servicing advances are pledged to the Issuer Trust and together
serve as the collateral backing the VFN, 2018-GT1 Notes and 2018-GT2 Notes. The VFN financing is included in
Assets sold under agreements to repurchase and 2018-GT1 Notes and 2018-GT2 Notes are included in
Notes payable on the Company's consolidated balance sheet.
Obligations Under Capital Lease
In December 2015, the Company entered into a capital lease transaction secured by certain fixed assets and
capitalized software. The capital lease matures on March 23, 2020 and bears interest at a spread over one-month LIBOR.
Obligations under capital lease are summarized below:
Average balance
Weighted average interest rate
Total interest expense
Maximum daily amount outstanding
Year ended December 31,
2018
2017
2016
(dollars in thousands)
$
13,498
$
24,830
$ 18,620
3.96 %
536
20,971
$
$
3.07 %
769
30,044
2.47 %
$
510
$ 24,242
$
$
F-59
Unpaid principal balance
Weighted average interest rate
Assets pledged to secure obligations under capital lease:
Furniture, fixtures and equipment
Capitalized software
Excess Servicing Spread Financing at Fair Value
December 31,
2018
December 31,
2017
(in thousands)
$
6,605 $
4.46 %
20,971
3.26 %
$
$
16,281
1,017
$
$
23,915
1,568
In conjunction with the Company’s purchase from non-affiliates of certain MSRs on pools of Agency-backed
residential mortgage loans, the Company has entered into sale and assignment agreements with PMT. Under these
agreements, the Company sold to PMT the right to receive ESS cash flows relating to certain MSRs. The Company
retained a fixed base servicing fee and all ancillary income associated with servicing the loans. The Company continues
to be the servicer of the mortgage loans and retains all servicing obligations, including responsibility to make servicing
advances.
Following is a summary of ESS:
Balance at beginning of year
Issuances of excess servicing spread to PennyMac Mortgage Investment Trust
pursuant to recapture agreement
Accrual of interest
Repayment
Settlement (1)
Change in fair value
Balance at end of year
2018
Year ended December 31,
2017
(in thousands)
$ 236,534 $ 288,669 $ 412,425
2016
2,688
15,138
(46,750)
—
8,500
6,603
22,601
(69,992)
(59,045)
(23,923)
$ 216,110 $ 236,534 $ 288,669
5,244
16,951
(54,980)
—
(19,350)
(1) On February 29, 2016, the Company and PMT terminated that certain master spread acquisition and MSR servicing
agreement that the parties entered into effective February 1, 2013 (the “2/1/2013 Spread Acquisition Agreement”) and
all amendments thereto. In connection with the termination of 2/1/2013 Spread Acquisition Agreement, the Company
reacquired from PMT all of its right, title and interest in and to all of the Fannie Mae ESS previously sold by the
Company to PMT under the 2/1/2013 Spread Acquisition Agreement and then subject to such 2/1/2013 Spread
Acquisition Agreement. On February 29, 2016, the Company also reacquired from PMT all of its right, title and
interest in and to all of the Freddie Mac ESS previously sold to PMT by the Company.
F-60
Note 14—Liability for Losses Under Representations and Warranties
Following is a summary of the Company’s liability for losses under representations and warranties:
Balance at beginning of year
Provision for losses on mortgage loans sold:
Resulting from sales of mortgage loans
Reduction in liability due to change in estimate
Incurred losses, net
Balance at end of year
Unpaid principal balance of mortgage loans subject to representations and
warranties at end of year
Note 15—Income Taxes
Year ended December 31,
2018
2017
2016
(in thousands)
$
20,053 $
19,067 $ 20,611
5,824
(4,672)
(50)
21,155 $
5,890
(4,301)
(603)
7,090
(7,672)
(962)
20,053 $ 19,067
$
$ 137,849,704 $ 120,855,101
The Company files U.S. federal and state corporate income tax returns for PFSI and partnership returns for
PennyMac. The Company’s federal tax returns are subject to examination for 2015 and forward and its state tax returns
are generally subject to examination for 2014 and forward. PennyMac’s federal partnership returns are subject to
examination for 2015 and forward, and its state tax returns are generally subject to examination for 2014 and forward.
No returns are currently under examination.
As a result of the Reorganization, the Company recorded through equity a net deferred tax liability attributable
to the noncontrolling interest in the amount of $320.5 million. Beginning from November 1, 2018, the Company’s
income subject to the corporate federal and state statutory rates will include the portion of its income formerly attributed
to the conversion of the noncontrolling interest. As a result, the Company expects an increase in the effective tax rate.
The Reorganization is to be treated as an integrated transaction that qualifies as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code and/or a transfer described in Section 351(a) of the Internal
Revenue Code.
PFSI received a ruling from the California Franchise Tax Board in November 2018 which allows the Company
to apply a reduced California statutory rate of 8.84% compared to the 10.84% rate previously applied by the Company.
As a result, the Company recorded a tax benefit of $8.5 million due to remeasurement of deferred tax assets and tax
liabilities.
The Company’s tax expense for the year ended December 31, 2017 was significantly impacted by the Tax Act.
The Tax Act reduces the U.S. federal corporate tax rate to 21% from the previous maximum rate of 35%, effective
January 1, 2018. Other than the change in the applicable federal rate, the changes introduced by the Tax Act did not have
a significant impact on the 2018 tax expense.
In the fourth quarter of 2017, the Company recorded a tax benefit of $13.7 million due to a re-measurement of
deferred tax assets and liabilities resulting from a decrease in the federal tax rate. The re-measurement of the deferred tax
assets and liabilities is predominantly based on a reduction to the federal rate as described above which will result in
lower tax expense when these deferred tax assets and liabilities are realized.
Revaluation of the deferred tax asset resulting from PennyMac unitholder exchanges under the tax receivable
agreement resulted in the repricing of the Company’s corresponding liability under the tax receivable agreement. The
Company recorded a reduction of $32.0 million in the Payable to exchanged Private National Mortgage Acceptance
Company, LLC unitholders under the tax receivable agreement for the year ended December 31, 2017 as a result of the
Tax Act.
F-61
The following table details the Company’s income tax expense:
Current expense:
Federal
State
Total current expense
Deferred expense:
Federal
State
Total deferred expense
Total provision for income taxes
2018
Year ended December 31,
2017
(in thousands)
2016
$
12 $
274
286
(81) $ (1,622)
(244)
56
(1,866)
(25)
23,395
(427)
22,968
38,082
9,887
47,969
$ 23,254 $ 24,387 $ 46,103
14,674
9,738
24,412
As the result of the Company’s reclassification of the noncontrolling interest to paid-in capital pursuant to the
Reorganization on November 1, 2018, the liability for deferred taxes for the year ended December 31, 2018 reflects each
individual adjustment item in the underlying investment in PennyMac. The provision for deferred income taxes for the
years ended December 31, 2017, and 2016 primarily relates to the Company’s investment in PennyMac partially offset
by the Company’s generation and utilization of a net operating loss and generation of tax credits. The portion attributable
to its investment in PennyMac primarily relates to MSRs that PennyMac received pursuant to sales of mortgage loans
held for sale at fair value and Carried Interest from the Investment Funds.
The following table is a reconciliation of the Company’s provision for income taxes at statutory rates to the
provision for income taxes at the Company’s effective tax rate:
Federal income tax statutory rate
Less: Income attributable to noncontrolling interest
State income taxes, net of federal benefit
Tax rate revaluation
Other
Effective tax rate
21.0 %
(12.3) %
2.3 %
(2.2) %
(0.1) %
8.7 %
35.0 %
(22.0) %
2.2 %
(8.0) %
0.1 %
7.3 %
The components of the Company’s provision for deferred income taxes are as follows:
2016
35.0 %
(24.8) %
1.6 %
0.0 %
0.2 %
12.0 %
Year ended December 31,
2017
2018
2018
Year ended December 31,
2017
(in thousands)
2016
$ 46,064 $
— $
—
(14,902)
(3,596)
(1,848)
34,011
(9,675)
—
—
—
40,493
8,110
—
—
(1,391)
(1,302)
(57)
—
—
(634)
$ 22,968 $ 24,412 $ 47,969
—
—
76
Mortgage servicing rights
Investment in PennyMac
Net operating loss
Compensation accruals
Reserves and losses
Additional tax basis in partnership from exchanges of partnership units into the
Company's common stock
Other
Tax credits
Total provision for deferred income taxes
F-62
The components of Income taxes payable are as follows:
Taxes currently payable (receivable)
Deferred income tax liability, net
Income taxes payable
December 31,
2018
2017
$
(in thousands)
218
400,328
$ (2,126)
54,286
$ 400,546 $ 52,160
The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities are presented
below:
Deferred income tax assets:
Additional tax basis in partnership from exchanges of partnership units into the
Company's common stock
Compensation accruals
Reserves and losses
Net operating loss carryforward
Tax credits carryforward
Gross deferred tax assets
Deferred income tax liabilities:
Mortgage servicing rights
Investment in PennyMac
Other
Gross deferred tax liabilities
Net deferred income tax liability
December 31,
2018
2017
(in thousands)
$
44,165 $
28,752
26,589
25,104
616
125,226
517,042
—
8,512
525,554
$ 400,328 $
—
—
—
10,202
558
10,760
—
65,046
—
65,046
54,286
The Company recorded a deferred tax asset of $25.1 million related to a net operating loss of approximately
$93.5 million. For federal income tax purposes, as it relates to net operating loss carryforwards, $1.3 million arising in
2015 expires in 2035, $35.2 million arising in 2017 expires in 2037, and $57.0 million arising in 2018 has no expiration
date. Net operating losses arising in tax years beginning after December 31, 2017 are limited in annual use to 80% of
taxable income (without regard to net operating loss deduction) but can be carried forward indefinitely. For state income
tax purposes, net operating losses arising in years 2015, 2017, and 2018 generally expire in 2035, 2037, and 2038,
respectively. The Company has tax credits of $0.6 million, which generally have no expiration date.
At December 31, 2018 and 2017, the Company had no unrecognized tax benefits and does not anticipate any
unrecognized tax benefits. Should the recognition of any interest or penalties relative to unrecognized tax benefits be
necessary, it is the Company’s policy to record such expenses in the Company’s income tax accounts. No such accruals
existed at December 31, 2018 and 2017.
F-63
Note 16—Commitments and Contingencies
Litigation
The Company is a party to legal proceedings and potential claims arising in the ordinary course of our 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 such proceedings and exposure will not
have a material adverse impact on the financial condition, results of operations, or cash flows of the Company.
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, the Federal Housing Administration as well as subject to the requirements of the
Agencies it sells loans to and performs loan servicing for. As the result, the Company may become involved in
information-gathering requests, reviews, investigations and proceedings (both formal and informal) by the various
federal, state and local regulatory bodies.
Commitments to Purchase and Fund Mortgage Loans
The Company’s commitments to purchase and fund mortgage loans totaled $2.8 billion as of
December 31, 2018.
Leases
The Company leases office facilities. Rent expense during the years ended December 31, 2018, 2017 and 2016
was $12.3 million, $12.3 million and $9.1 million, respectively.
The following table provides a summary of future minimum lease payments required under lease agreements,
which may also contain renewal options as of December 31, 2018:
Year ended December 31,
2019
2020
2021
2022
2023
Thereafter
Note 17—Stockholders’ Equity
Future
minimum lease
payments
(in thousands)
15,586
15,664
14,693
12,107
11,155
24,495
93,700
$
$
In June 2017, the Company’s board of directors authorized a stock repurchase program under which the
Company may repurchase up to $50 million of its outstanding common stock.
The following table summarizes the Company’s stock repurchase activity:
Shares of common repurchased
Cost of shares of common stock repurchased
F-64
Year ended December 31,
2017
2018
Cumulative
total (1)
(in thousands)
260
5,293
$
505
8,599
$
765
13,892
$
(1) Amounts represent the total shares common stock repurchased under the stock repurchase program through
December 31, 2018.
The shares of repurchased common stock were canceled upon settlement of the repurchase transactions and
returned to the authorized but unissued common stock pool.
Note 18—Noncontrolling Interest
As a result of the Reorganization on November 1, 2018, noncontrolling interest unitholders contributed their
Class A units of PNMAC for shares of PFSI common stock without any cash considerations on a one-for-one basis and
became stockholders of the Company. Consequently, the noncontrolling interest was reclassified to the Company’s paid-
in capital accounts.
Net income attributable to the Company’s common stockholders and the effects of changes in noncontrolling
ownership interest in PennyMac for each of the three years ended December 31, 2018 is summarized below:
Net income attributable to PennyMac Financial Services, Inc. common
stockholders
Increase in the Company's paid-in capital accounts for exchanges of Class A units
of Private National Mortgage Acceptance Company, LLC to Class A common
stock of PennyMac Financial Services, Inc.
Shares of Class A common stock of PennyMac Financial Services, Inc. issued
pursuant to exchange of Class A units of Private National Mortgage Acceptance
Company, LLC by noncontrolling interest unitholders and issued as equity
compensation
Increase in the Company's paid-in capital for exchanges of Class A units of
Private National Mortgage Acceptance Company, LLC to common stock of
PennyMac Financial Services, Inc. pursuant to the Reorganization
Shares of common stock of PennyMac Financial Services, Inc. issued for
exchange of Class A units of Private National Mortgage Acceptance Company,
LLC by noncontrolling interest unitholders pursuant to the Reorganization
$
$
Year ended December 31,
2018
2017
2016
(in thousands)
87,694 $ 100,757 $ 66,079
33,156 $ 27,119 $ 6,877
1,635
1,608
301
$ 1,064,320 $
— $
—
52,263
—
—
December 31,
2018
2017
Percentage of Private National Mortgage Acceptance Company, LLC held by
noncontrolling interest
— %
69.2 %
F-65
Note 19—Net Gains on Mortgage Loans Held for Sale
Net gains on mortgage loans held for sale at fair value is summarized below:
2018
Year ended December 31,
2017
(in thousands)
2016
From non-affiliates:
Cash loss:
Mortgage loans
Hedging activities
Non-cash gain:
$ (469,647) $ (174,669) $ (62,283)
10,275
(52,008)
(16,866)
(191,535)
93,288
(376,359)
Mortgage servicing rights and mortgage servicing liabilities resulting from
mortgage loan sales
Provision for losses relating to representations and warranties:
Pursuant to mortgage loan sales
Reduction in liability due to change in estimate
Change in fair value relating to mortgage loans and derivatives held at
year end:
584,156
563,872
562,540
(5,824)
4,672
(5,890)
4,301
(7,090)
7,672
(8,934)
(1,506)
(11,766)
184,439
64,583
15,618
2,796
10,344
539,872
(8,092)
$ 249,022 $ 391,804 $ 531,780
(1,120)
4,576
(4,389)
369,815
21,989
Interest rate lock commitments
Mortgage loans
Hedging derivatives
From PennyMac Mortgage Investment Trust
F-66
Note 20—Net Interest Income (Expense)
Net interest income (expense) is summarized below:
Interest income:
From non-affiliates:
Short-term investments
Mortgage loans held for sale at fair value
Placement fees relating to custodial funds
2018
Year ended December 31,
2017
(in thousands)
2016
2,038 $
2,356 $
$
128,732
78,184
208,954
91,972
40,813
135,141
2,558
54,584
16,155
73,297
From PennyMac Mortgage Investment Trust—Assets purchased from
PennyMac Mortgage Investment Trust under agreements to resell
Interest expense:
To non-affiliates:
Assets sold under agreements to repurchase (1)
Mortgage loan participation purchase and sale agreements
Notes payable
Obligations under capital lease
Interest shortfall on repayments of mortgage loans serviced for Agency
securitizations
Interest on mortgage loan impound deposits
To PennyMac Mortgage Investment Trust—Excess servicing spread financing
at fair value
7,462
216,416
8,038
143,179
7,830
81,127
22,463
8,754
73,610
536
60,286
5,496
39,369
769
18,777
5,319
129,459
16,933
4,716
127,569
49,791
5,523
8,688
510
15,102
3,991
83,605
22,601
16,951
15,138
144,597
106,206
144,520
$ 71,819 $ (1,341) $ (25,079)
(1) In 2017, the Company entered a master repurchase agreement that provides the Company with incentives to finance
mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. During
the years ended December 31, 2018 and 2017, the Company included $48.1 million and $9.2 million, respectively of
such incentives as a reduction in Interest expense. The master repurchase agreement is subject to a rolling six-month
term through August 21, 2019, unless terminated earlier at the option of the lender. The Company expects that it
will cease to accrue the incentives under the repurchase agreement in the second quarter of 2019.
Note 21—Stock-based Compensation
The Company’s 2013 Equity Incentive Plan provides for grants of stock options, time-based and performance-
based restricted stock units (“RSUs”), stock appreciation rights, performance units and stock grants. As of
December 31, 2018, the Company has 3.9 million units available for future awards.
F-67
Following is a summary of the stock-based compensation expense by instrument awarded:
2018
Year ended December 31,
2017
(in thousands)
2016
Performance-based RSUs
Time-based RSUs
Stock options
Exchangeable PNMAC units
Performance-Based RSUs
$ 12,425 $ 11,020 $
9,475
2,494
4,464
72
$ 25,251 $ 20,697 $ 16,505
6,608
6,218
—
4,768
4,909
—
The performance-based RSUs provide for the issuance of shares of the Company’s common stock based on the
attainment of earnings per share and/or return on equity and are generally adjusted for grantee job performance ratings.
The satisfaction of the performance goals and issuance of shares will be approved by a committee of the Company’s
board of directors. Approximately 649,000 shares vested under the grants with a performance period ended
December 31, 2018 will be issued to the grantees in March 2019.
The fair value of the performance-based RSUs is measured based on the fair value of the Company’s common
stock at the grant date, taking into consideration management’s estimate of the expected outcome of the performance
goal, and the number of shares to be forfeited during the vesting period. The Company assumes forfeiture rates of
0 - 23.2% per year based on the grantees’ employee classification. The actual number of shares that vest could vary from
zero, if the performance goals are not met, to as much as 130% of the units granted, if the performance goals are
meaningfully exceeded.
The table below summarizes performance-based RSU activity:
Year ended December 31,
2017
(in thousands, except per unit amounts)
2016
2018
Number of units:
Outstanding at beginning of year
Granted
Vested (1)
Forfeited or cancelled
Outstanding at end of year
Weighted average grant date fair value per unit:
Outstanding at beginning of year
Granted
Vested
Forfeited
Outstanding at end of year
Compensation expense recorded during the year
2,389
524
(730)
(291)
1,892
2,475
694
(446)
(334)
2,389
2,350
813
—
(688)
2,475
15.57 $
24.40 $
12.86 $
16.17 $
14.48 $
14.24
$
18.04
$
13.65
$
14.45
$
$
15.57
$ 12,425 $ 11,020
$
$
$
$
$
$
16.30
11.28
—
16.87
14.24
9,475
(1) The actual number of performance-based RSUs vested during the year ended December 31, 2018 was
774,000 shares, which is approximately 106% of the 730,000 originally granted units due to the performance goals
exceeding the established target.
Following is a summary of performance-based RSUs as of December 31, 2018:
Unamortized compensation cost (in thousands)
Number of shares expected to vest (in thousands)
Weighted average remaining vesting period (in months)
$
5,805
1,784
11
F-68
Time-Based RSUs
The RSU grant agreements provide for the award of time-based RSUs, entitling the award recipient to one share
of the Company’s common stock for each RSU. One-third of the time-based RSUs vest on each of the first, second, and
third anniversaries of the grant date, subject to the recipient’s continued service through each anniversary.
Compensation cost relating to time-based RSUs is based on the grant date fair value of the Company’s common
stock and the number of shares expected to vest. For purposes of estimating the cost of the time-based RSUs granted, the
Company assumes forfeiture rates of 0 - 23.2% per year based on the grantees’ employee classification.
The table below summarizes time-based RSU activity:
Year ended December 31,
2017
(in thousands, except per unit amounts)
2016
2018
Number of units:
Outstanding at beginning of year
Granted
Vested
Forfeited
Outstanding at end of year
Weighted average grant date fair value per unit:
Outstanding at beginning of year
Granted
Vested
Forfeited
Outstanding at end of year
Compensation expense recorded during the year
Following is a summary of RSUs as of December 31, 2018:
Unamortized compensation cost (in thousands)
Number of units expected to vest (in thousands)
Weighted average remaining vesting period (in months)
Stock Options
600
328
(254)
(47)
627
382
408
(173)
(17)
600
271
261
(127)
(23)
382
$ 16.37 $ 13.71 $ 17.81
$ 24.25 $ 18.02 $ 11.77
$ 16.08 $ 14.66 $ 17.99
$ 19.40 $ 14.87 $ 15.55
$ 20.39 $ 16.37 $ 13.71
$ 6,608 $ 4,768 $ 2,494
$
4,158
579
11
The stock option award agreements provide for the award of stock options to purchase the optioned common
stock. In general, and except as otherwise provided by the agreement, one-third of the stock option awards vests on each
of the first, second, and third anniversaries of the grant date, subject to the recipient’s continued service through each
anniversary. Each stock option has a term of ten years from the date of grant but expires (1) immediately upon
termination of the holder’s employment or other association with the Company for cause, (2) one year after the holder’s
employment or other association is terminated due to death or disability and (3) three months after the holder’s
employment or other association is terminated for any other reason.
F-69
The fair value of each stock option award is estimated on the date of grant using a variant of the Black Scholes
model based on the following inputs:
Expected volatility (1)
Expected dividends
Risk-free interest rate
Expected grantee forfeiture rate
2018
30%
0%
1.7% - 3.0%
0.0% - 23.2%
Year ended December 31,
2017
31%
0%
0.8% - 2.7%
0.0% - 21.1%
2016
28%
0%
0.3% - 2.1%
0.0% - 20.2%
(1) Based on historical volatilities of the Company’s common stock.
The Company uses its historical employee departure behavior to estimate the grantee forfeiture rates used in its
option-pricing model. The expected term of common stock options granted is derived from the Company’s option
pricing model and represents the period that common stock options granted are expected to be outstanding. The risk-free
interest rate for periods within the contractual term of the common stock option is based on the U.S. Treasury yield
curve in effect at the time of grant.
The table below summarizes stock option award activity:
Year ended December 31,
2017
(in thousands, except per option amounts)
2016
2018
Number of stock options:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Weighted average exercise price per option:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Compensation expense recorded during the year
Following is a summary of stock options as of December 31, 2018:
Number of options exercisable at end of year (in thousands)
Weighted average exercise price per exercisable option
Weighted average remaining contractual term (in years):
Outstanding
Exercisable
Aggregate intrinsic value:
Outstanding (in thousands)
Exercisable (in thousands)
Expected vesting amounts:
Number of options expected to vest (in thousands)
Weighted average vesting period (in months)
3,457
674
(322)
(116)
3,693
2,738
861
(90)
(52)
3,457
1,845
962
(9)
(60)
2,738
$
$
$
$
$
$
16.40 $
24.40 $
16.24 $
18.46 $
17.81 $
6,218 $
15.81 $
18.05 $
15.04 $
15.58 $
16.40 $
4,909 $
18.17
11.29
17.33
15.66
15.81
4,464
2,235
16.69
$
7.0
6.0
$
$
14,764
10,207
1,368
10
F-70
Note 22—Earnings Per Share of Common Stock
Basic earnings per share of common stock is determined using net income attributable to the Company’s
common stockholders divided by the weighted average number of shares of common stock outstanding during the year.
Diluted earnings per share of common stock is determined by dividing net income attributable to the Company’s
common stockholders by the weighted average number of shares of common stock outstanding, assuming all dilutive
shares of common stock were issued.
Potentially dilutive shares of common stock include non-vested stock-based compensation awards and
PennyMac Class A units. The Company applies the treasury stock method to determine the diluted weighted average
shares of common stock outstanding based on the outstanding non-vested stock-based compensation awards. As a result
of the Reorganization on November 1, 2018, all Class A units of PNMAC converted for shares of PFSI common stock
on a one-for-one basis.
The following table summarizes the basic and diluted earnings per share calculations:
Year ended December 31,
2018
2016
2017
(in thousands, except per share data)
Basic earnings per share of common stock:
Net income attributable to common stockholders
Weighted average shares of common stock outstanding
Basic earnings per share of common stock
Diluted earnings per share of common stock:
Net income attributable to common stockholders
Net income attributable to dilutive stock-based compensation units
Net income attributable to PennyMac Class A units exchangeable to Class A
common stock, net of income taxes
Net income attributable to common stockholders for diluted earnings per
share
Weighted average shares of common stock outstanding applicable to basic
earnings per share
Effect of dilutive shares:
$ 87,694 $ 100,757 $ 66,079
22,161
2.98
4.34 $
2.62 $
23,199
33,524
$
$ 87,694 $ 100,757 $ 66,079
—
3,868
—
—
—
159,570
$ 91,562 $ 100,757 $ 225,649
33,524
23,199
22,161
Common shares issuable under stock-based compensation plan
PennyMac Class A units exchangeable to Class A common stock
1,798
—
1,800
—
517
53,951
Weighted average shares of common stock applicable to diluted earnings per
share
Diluted earnings per share of common stock
35,322
24,999
$
2.59 $
4.03 $
76,629
2.94
F-71
Calculations of diluted earnings per share require certain potentially dilutive shares to be excluded when their
inclusion in the diluted earnings per share calculation would be anti-dilutive. The following table summarizes the anti-
dilutive weighted-average number of outstanding performance-based RSUs, time-based RSUs, stock options and
Exchangeable PNMAC Class A units excluded from the calculation of diluted earnings per share:
Year ended December 31,
2017
(in thousands, except exercise price data)
2018
2016
Performance-based RSUs (1)
Time-based RSUs
Stock options (2)
Exchangeable PNMAC Class A units (3)
Total anti-dilutive stock-based compensation and PNMAC Class A units
Weighted average exercise price of anti-dilutive stock options (2)
1,084
3
740
43,700
45,527
497
—
1,323
53,299
55,119
$
17.81 $
16.40 $
2,054
—
1,829
—
3,883
15.81
(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 during the year.
(3) Exchangeable PNMAC units were anti-dilutive during 2017 primarily due to the effect of adoption of the Tax Act
on earnings attributable to PNMAC unitholders.
Note 23—Supplemental Cash Flow Information
Cash paid for interest
(Refunds received) cash paid for income taxes, net
Non-cash investing activity:
2018
Year ended December 31,
2017
(in thousands)
$ 161,001 $ 158,147 $ 104,938
1,866
$ (2,059) $ (5,513) $
2016
Mortgage servicing rights resulting from mortgage loan sales
Mortgage servicing liabilities resulting from mortgage loan sales
Unsettled portion of MSR acquisitions
Refinancing of Note receivable from PennyMac Mortgage Investment Trust as
Assets purchased from PennyMac Mortgage Investment Trust under agreements to
resell pledged to creditors
Non-cash financing activity:
$ 591,757 $ 581,101 $ 577,531
7,601 $ 17,229 $ 14,991
$
—
$ 10,139 $
5,319 $
$
— $
— $ 150,000
Issuance of Excess servicing spread payable to PennyMac Mortgage Investment
Trust pursuant to a recapture agreement
Unpaid distribution to Private National Mortgage Acceptance Company, LLC
members
Issuance of Class A common stock and common stock in settlement of director
fees
$
2,688 $
5,244 $
6,603
$
$
— $
— $
7,585
330 $
338 $
313
Note 24—Regulatory Capital and Liquidity Requirements
The Company, through PLS and PennyMac, is required to maintain specified levels of “Capital” to remain a
seller/servicer in good standing with the Agencies. Such “Capital” requirements generally are tied to the size of the
Company’s loan servicing portfolio or loan origination volume.
The Company is subject to financial eligibility requirements for sellers/servicers eligible to sell or service
mortgage loans with Fannie Mae and Freddie Mac. The eligibility requirements include tangible net worth of
F-72
$2.5 million plus 25 basis points of the Company’s total 1-4 unit servicing portfolio, excluding mortgage loans
subserviced for others and a liquidity requirement equal to 3.5 basis points of the aggregate UPB serviced for the
Agencies plus 200 basis points of total nonperforming Agency servicing UPB in excess of 600 basis points.
The Company is also subject to financial eligibility requirements for Ginnie Mae single-family issuers. The
eligibility requirements include net worth of $2.5 million plus 35 basis points of PLS' outstanding Ginnie Mae single-
family obligations and a liquidity requirement equal to the greater of $1.0 million or 10 basis points of PLS' outstanding
Ginnie Mae single-family securities.
The Agencies’ capital and liquidity requirements, the calculations of which are specified by each Agency, are
summarized below:
Agency–company subject to requirement
Actual (1)
Requirement (1) Actual (1)
Requirement (1)
December 31, 2018
December 31, 2017
(dollars in thousands)
Capital
Fannie Mae & Freddie Mac – PLS
Ginnie Mae – PLS
Ginnie Mae – PennyMac
HUD – PLS
Liquidity
Fannie Mae & Freddie Mac – PLS
Ginnie Mae – PLS
Tangible net worth / Total assets ratio
Fannie Mae & Freddie Mac – PLS
$ 1,788,430
$ 1,535,826
$ 1,786,430
$ 1,535,826
$ 271,802
$ 271,802
$
$
$
$
$
$
514,089
733,342
806,676
2,500
$ 1,561,977
$ 1,307,580
$ 1,511,201
$ 1,307,580
70,775
189,592
$ 196,415
$ 196,415
$
$
$
$
$
$
429,671
674,133
741,574
2,500
58,754
153,431
21 %
6 %
21 %
6 %
(1) Calculated in compliance with the respective Agency’s requirements.
Noncompliance with an Agency’s requirements can result in such Agency taking various remedial actions up to
and including terminating PennyMac’s ability to sell loans to and service loans on behalf of the respective Agency.
Note 25—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 mortgage loan origination, acquisition and sale activities. The servicing segment performs servicing of newly
originated mortgage loans, execution and management of early buyout transactions and servicing of mortgage 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, managing correspondent
production activities for PMT and managing the acquired assets for PMT.
F-73
Financial performance and results by segment are as follows:
Year ended December 31, 2018
Production
Mortgage Banking
Servicing
Investment
Management
Total
(in thousands)
Total
Revenue: (1)
$
Net mortgage loan servicing fees
Net gains on mortgage loans held for sale at
fair value
Mortgage loan origination fees
Fulfillment fees from PennyMac Mortgage
Investment Trust
Net interest income (expense):
Interest income
Interest expense
Management fees
Carried Interest from Investment Funds
Other
Total net revenue
Expenses
Income before provision for income taxes
and non-segment activities
Non-segment activities (2)
Income before provision for income taxes
Segment assets at year end (3)
— $ 445,393 $ 445,393 $
— $ 445,393
141,959
101,641
107,063
—
249,022
101,641
—
—
249,022
101,641
81,350
—
81,350
—
81,350
66,408
7,371
59,037
—
—
2,008
385,995
298,729
149,992
137,177
12,815
—
—
2,650
567,921
395,619
216,400
144,548
71,852
—
—
4,658
953,916
694,348
87,266
—
172,302
—
$
87,266 $ 172,302 $ 259,568 $
$ 2,434,897 $ 5,031,920 $ 7,466,817 $
259,568
—
16
49
(33)
24,469
(365)
5,516
29,587
22,584
216,416
144,597
71,819
24,469
(365)
10,174
983,503
716,932
7,003
—
266,571
1,126
7,003 $ 267,697
11,681 $ 7,478,498
(1) All revenues are from external customers.
(2) Represents repricing of Payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders
under tax receivable agreement.
(3) Excludes non-segment assets, which consist of working capital of $75,000.
F-74
Year ended December 31, 2017
Mortgage Banking
Production Servicing
Total
(in thousands)
Investment
Management
Total
$
— $ 306,059 $ 306,059 $
— $ 306,059
286,242
119,202
105,562
—
391,804
119,202
—
—
391,804
119,202
80,359
—
80,359
—
80,359
61,195
35,359
25,836
—
—
2,002
513,641
275,133
81,984
109,112
(27,128)
—
—
1,710
386,203
327,531
143,179
144,471
(1,292)
—
—
3,712
899,844
602,664
—
49
(49)
23,585
(1,040)
183
22,679
16,890
143,179
144,520
(1,341)
23,585
(1,040)
3,895
922,523
619,554
238,508
—
302,969
32,940
5,789 $ 335,909
$ 238,508 $
$ 2,459,014 $ 4,886,594 $ 7,345,608 $ 19,880 $ 7,365,488
58,672 $ 297,180 $
297,180
—
58,672
—
5,789
—
Revenue: (1)
Net mortgage loan servicing fees
Net gains on mortgage loans held for sale at
fair value
Mortgage loan origination fees
Fulfillment fees from PennyMac Mortgage
Investment Trust
Net interest income (expense):
Interest income
Interest expense
Management fees
Carried Interest from Investment Funds
Other
Total net revenue
Expenses
Income before provision for income taxes and
non-segment activities
Non-segment activities (2)
Income before provision for income taxes
Segment assets at year end (3)
(1) All revenues are from external customers
(2) Primarily represents repricing of Payable to exchanged Private National Mortgage Acceptance Company, LLC
unitholders under tax receivable agreement, of which $32.0 million is the result of the change in the federal tax rate
under the Tax Act.
(3) Excludes parent company assets, which consist primarily of working capital of $2.6 million.
F-75
Year ended December 31, 2016
Mortgage Banking
Production Servicing
Total
(in thousands)
Investment
Management
Total
$
— $ 185,466 $ 185,466 $
— $ 185,466
464,027
125,534
67,753
—
531,780
125,534
—
—
531,780
125,534
86,465
—
86,465
—
86,465
48,944
32,669
16,275
—
—
2,104
694,405
278,309
32,182
73,537
(41,355)
—
—
1,022
212,886
248,985
81,126
106,206
(25,080)
—
—
3,126
907,291
527,294
1
50
(49)
22,746
980
319
23,996
21,510
81,127
106,256
(25,129)
22,746
980
3,445
931,287
548,804
416,096
—
382,483
600
2,486 $ 383,083
$ 416,096 $
$ 2,195,330 $ 2,841,551 $ 5,036,881 $ 91,517 $ 5,128,398
(36,099) $ 379,997 $
379,997
—
(36,099)
—
2,486
—
Revenues: (1)
Net mortgage loan servicing fees
Net gains on mortgage loans held for sale at
fair value
Mortgage loan origination fees
Fulfillment fees from PennyMac Mortgage
Investment Trust
Net interest income (expense):
Interest income
Interest expense
Management fees
Carried Interest from Investment Funds
Other
Total net revenue
Expenses
Income before provision for income taxes and
non-segment activities
Non-segment activities (2)
Income before provision for income taxes
Segment assets at year end (3)
(1) All revenues are from external customers.
(2) Represents Revaluation of Payable to exchanged Private National Mortgage Acceptance Company, LLC
unitholders under tax receivable agreement.
(3) Excludes parent Company assets, which consist primarily of working capital of $5.5 million
F-76
Note 26—Selected Quarterly Data (Unaudited)
Following is a presentation of selected quarterly financial data:
2018
2017
Quarter ended
Dec. 31
Sept. 30
June. 30
Mar. 31
Dec. 31
Sept. 30
June. 30
Mar. 31
(in thousands, except per share data)
$ 105,212 $
109,703
113,689 $ 116,789 $
106,902 $
78,081 $
46,913 $
74,163
59,748
56,914
60,946
71,414
98,621
108,136
98,091
86,956
26,165
26,485
24,428
24,563
30,267
33,168
30,193
25,574
During the quarter:
Net mortgage loan servicing
fees
Net gains on mortgage loans
held for sale at fair value
Mortgage loan origination
fees
Fulfillment fees from
PennyMac Mortgage
Investment Trust
Other income
28,591
31,485
251,201
192,895
26,256
31,571
250,929
189,232
14,559
30,676
244,298
169,600
11,944
13,491
238,201
165,205
19,175
43,669
298,634
176,861
23,507
7,743
250,635
156,491
21,107
5,417
201,721
143,761
16,570
1,210
204,473
142,441
$
43,507
65,411
61,580
50,568
41,663
40,267
50,307
14,211
14,489 $
17,837 $
16,619 $
38,749 $
74,698
6,293
68,405
62,032
7,646
54,386
94,144
11,652
82,492
61,697
5,545
56,152
57,960
7,214
50,746
72,996
6,070
66,926
58,306
5,346
52,960
121,773
(2,125)
123,898
Expenses
Income before provision for
income taxes
Provision for income taxes
Net income
Less: Net income attributable
to noncontrolling interest
Net income attributable to
PennyMac Financial
Services, Inc. common
stockholders
Earnings per share of
common stock:
Basic
Diluted
At quarter end:
Mortgage loans held for sale $ 2,521,647 $ 2,416,955 $ 2,527,231 $ 2,584,236 $ 3,099,103 $ 2,935,593 $ 3,037,602 $ 2,277,751
1,725,061
Mortgage servicing rights
317,513
Servicing advances, net
Mortgage loans eligible for
repurchase
Other assets
Total assets
Short-term debt
Long-term debt
Liability for mortgage loans
eligible for repurchase
Other liabilities
Total liabilities
Total equity
Total liabilities and equity
318,378
612,674
$ 7,478,573 $ 6,992,530 $ 6,841,706 $ 6,902,891 $ 7,368,093 $ 6,388,369 $ 6,404,738 $ 5,251,377
$ 2,332,143 $ 2,222,385 $ 2,264,041 $ 2,336,826 $ 2,922,542 $ 2,640,743 $ 3,311,029 $ 2,331,357
690,476
318,378
453,571
3,793,782
1,457,595
$ 7,478,573 $ 6,992,530 $ 6,841,706 $ 6,902,891 $ 7,368,093 $ 6,388,369 $ 6,404,738 $ 5,251,377
1,102,840
740,826
5,824,782
1,653,791
462,487
448,181
4,893,486
1,511,252
1,018,488
373,020
5,108,692
1,794,199
1,208,195
382,281
5,648,419
1,719,674
889,335
397,428
5,075,820
1,916,710
879,621
362,912
4,979,762
1,861,944
584,394
421,396
4,798,078
1,590,291
2,820,612
313,197
1,951,599
291,907
2,354,489
284,145
2,785,964
259,609
2,119,588
318,066
1,102,840
720,277
1,018,488
661,533
1,208,195
623,141
2,486,157
258,900
2,016,485
262,650
0.73 $
0.71 $
0.65 $
0.63 $
0.71 $
0.70 $
0.70 $
0.67 $
2.67 $
2.44 $
0.58 $
0.57 $
0.45 $
0.44 $
462,487
661,143
889,335
640,667
879,621
689,797
584,394
589,247
0.48
0.47
1,648,973
1,380,358
1,566,672
1,135,401
1,473,188
1,151,545
17,081 $
62,318 $
10,479 $
671,789
10,879
$
$
F-77
Note 27—Parent Company Information
The Company’s debt financing agreements require PLS, the Company’s indirect controlled subsidiary, to
comply with financial covenants that include a minimum tangible net worth of $500 million. PLS is limited from
transferring funds to the Parent by this minimum tangible net worth requirement.
As a result of the Reorganization, the parent company financial statements include amounts from both Old PFSI
and New PFSI. The parent company’s condensed statement of income and cash flows for the year ended December 31,
2018 includes the balances from Old PFSI for ten month period ended October 31, 2018 and the balances from New
PFSI for two month period ended December 31, 2018.
PENNYMAC FINANCIAL SERVICES, INC.
CONDENSED BALANCE SHEETS
ASSETS
Cash
Investments in subsidiaries
Due from subsidiaries
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to exchanged Private National Mortgage Acceptance
Company, LLC unitholders under tax receivable agreement
Payable to subsidiaries
Income taxes payable
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity
$
December 31,
2018
2017
(in thousands)
$
— $
1,975,231
582
$
1,975,813
$
2,605
556,439
6,538
565,582
$
— $
575
321,447
322,022
1,653,791
1,975,813
$
44,011
—
52,160
96,171
469,411
565,582
PENNYMAC FINANCIAL SERVICES, INC.
CONDENSED STATEMENTS OF INCOME
Revenues
Dividends from subsidiary
Interest
Revaluation of Payable to exchanged Private
National Mortgage Acceptance Company, LLC
unitholders under tax receivable agreement
$
Total revenue
Expenses
Interest
Total expenses
Income before provision for income taxes and
equity in undistributed earnings in subsidiaries
Provision for income taxes
Income (loss) before equity in undistributed
earnings of subsidiaries
Equity in undistributed earnings of subsidiaries
Net income
$
F-78
2018
Year ended December 31,
2017
(in thousands)
2016
10,054
—
$
— $
—
6,418
49
—
10,054
32,940
32,940
551
7,018
32
32
—
—
—
—
10,022
20,897
32,940
24,387
7,018
46,103
(10,875)
98,569
87,694
$
8,553
92,204
100,757 $
(39,085)
105,164
66,079
PENNYMAC FINANCIAL SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by
operating activities
Equity in undistributed earnings of subsidiaries
Revaluation of Payable to exchanged Private National Mortgage
Acceptance Company, LLC unitholders under tax receivable
agreement
Decrease in deferred tax asset
Decrease (increase) in intercompany receivable
Payments to exchanged Private National Mortgage Acceptance
Company, LLC unitholders under tax receivable agreement
Increase in income taxes payable
Net cash provided by operating activities
Cash flows from investing activities
Increase in investments in subsidiaries
Net cash used by investing activities
Cash flows from financing activities
Payment of dividend to Class A common stockholders
Exercise of from Class A common stock options
Repurchase of Class A common stock
Net cash (used in) provided by financing activities
Net change in cash and restricted cash
Cash and restricted cash at beginning of year
Cash and restricted cash at end of year
Note 28—Subsequent Events
2018
Year ended December 31,
2017
(in thousands)
2016
$
87,694 $
100,757 $
66,079
(98,569)
(92,204)
(105,164)
—
—
(3,737)
—
22,889
8,277
(77)
(77)
(10,054)
803
(1,554)
(10,805)
(2,605)
2,605
$
— $
(32,940)
—
5,646
(6,726)
29,912
4,445
—
—
—
1,254
(8,599)
(7,345)
(2,900)
5,505
2,605 $
(551)
18,668
(76)
—
25,559
4,515
—
—
—
149
—
149
4,664
841
5,505
Management has evaluated all events and transactions through the date of the Company issued these
consolidated financial statements. During this period:
• During March 2019, the Company acquired from a non-affiliate seller Ginnie Mae MSRs with a total
UPB of approximately $11.9 billion.
• During February 2019, the Company entered into an agreement with a non-affiliate seller to acquire
approximately $4.5 billion in UPB of Ginnie Mae MSRs. The MSR acquisition by the Company is
subject to the negotiation and execution of definitive documentation, continuing due diligence and
customary closing conditions. There can be no assurance that the committed amounts will ultimately
be acquired or that the transaction will be completed at all.
F-79
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
PENNYMAC FINANCIAL SERVICES, INC.
(Registrant)
By:
/s/ David A. Spector
David A. Spector
President and
Chief Executive Officer
(Principal Executive Officer)
Dated: March 5, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the
following persons on behalf of the registrant in the capacities and on the dates indicated.
Signatures
/s/ David A. Spector
David A. Spector
/s/ Andrew S. Chang
Andrew S. Chang
/s/ Gregory L. Hendry
Gregory L. Hendry
/s/ Stanford L. Kurland
Stanford L. Kurland
/s/ Matthew Botein
Matthew Botein
/s/ James Hunt
James Hunt
/s/ Patrick Kinsella
Patrick Kinsella
/s/ Anne D. McCallion
Anne D. McCallion
/s/ Joseph Mazzella
Joseph Mazzella
/s/ Farhad Nanji
Farhad Nanji
Jeffrey Perlowitz
/s/ Theodore Tozer
Theodore Tozer
Title
Date
President and Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
March 5, 2019
March 5, 2019
March 5, 2019
Executive Chairman
March 5, 2019
Director
Director
Director
Director
Director
Director
Director
Director
93
March 5, 2019
March 5, 2019
March 5, 2019
March 5, 2019
March 5, 2019
March 5, 2019
March 5, 2019
/s/ Mark Wiedman
Mark Wiedman
/s/ Emily Youssouf
Emily Youssouf
Director
Director
March 5, 2019
March 5, 2019
94
EXECUTIVE MANAGEMENT*
Stanford L. Kurland
Executive Chairman
David A. Spector
President and Chief Executive Officer
Doug Jones
Senior Managing Director and Chief
Mortgage Banking Officer
Anne D. McCallion
Senior Managing Director and Chief
Enterprise Operations Officer
Steven R. Bailey
Senior Managing Director and Chief
Mortgage Operations Officer
Lior Ofir
Senior Managing Director and Chief
Information Officer
Andrew S. Chang
Senior Managing Director and Chief
Financial Officer
Daniel S. Perotti
Senior Managing Director and Deputy Chief
Financial Officer
Vandad Fartaj
Senior Managing Director and Chief
Investment Officer
Derek W. Stark
Senior Managing Director and Chief Legal
Officer and Secretary
Jim Follette
Senior Managing Director and Chief
Mortgage Fulfillment Officer
David M. Walker
Senior Managing Director and Chief
Risk Officer
Jeffrey P. Grogin
Senior Managing Director and Chief
Administrative Officer
*as of March 22, 2019
front row: Stanford L. Kurland, David A. Spector; back row: Theodore W. Tozer, Matthew Botein, Farhad Nanji, Patrick
Pictured left to right,
Kinsella, Emily Youssouf, Joseph Mazzella, James K. Hunt, Jeffrey A. Perlowitz and Anne D. McCallion
BOARD OF DIRECTORS*
Stanford L. Kurland
Executive Chairman,
PennyMac Financial Services, Inc.
David A. Spector
President and Chief Executive Officer,
PennyMac Financial Services, Inc.
(2)(3)
Matthew Botein
Managing Partner,
Consultant,
BlackRock, Inc.
Gallatin Point LLC
(2)(4)
James K. Hunt
Independent Lead Director
Managing Partner and CEO, Middle Market
Credit (Retired),
Kayne Anderson Capital Advisors, LLC
(1)(5)(6)
Patrick Kinsella
Senior Audit Partner (Retired),
Adjunct Professor,
KPMG LLP
USC Marshall School of Business
(4)(5)
Joseph Mazzella
Managing Director and General Counsel (Retired),
Highfields Capital Management LP
*as of March 22, 2019
Anne D. McCallion
Senior Managing Director and Chief Enterprise
Operations Officer,
PennyMac Financial Services, Inc.
Farhad Nanji
Co-Founder,
Managing Director (Retired),
Management LP
(2)(4)
MFN Partners Management, L.P.
Highfields Capital
(3)(6)
Jeffrey A. Perlowitz
Managing Director and Co-Head of Global
Securitized Markets (Retired),
Citigroup
(1)(5)(6)
Theodore W. Tozer
President (Retired),
Government National Mortgage Association
(Ginnie Mae)
(1)(3)
Emily Youssouf
Clinical Professor,
Real Estate
NYU Schack Institute of
(3)
(2)
Board Committees:
(1)
Audit Committee
Compensation Committee
Finance Committee
Governance and Nominating Committee
Related-Party Matters Committee
Risk Committee
(5)
(4)
(6)