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 is the leading residential mortgage
platform in the U.S.
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 and managing capital in mortgage-
related investments for more than 10 years.
(cid:3)
Dear Fellow Stockholders,
PennyMac Financial delivered exceptional results in 2019, driven by record loan production
volumes with market share gains in all of our production channels and our servicing business.
The strong results were further enhanced by our consistent and disciplined hedging of the
interest rate risk inherent in our mortgage servicing rights (MSR) investments. We reported
record revenue of $1.5 billion and pretax income of $529 million, up 50 percent and 98 percent
from the prior year, respectively. Diluted earnings per share were $4.89, up from $2.59 in the
prior year and also a record for PennyMac Financial. We are pleased to note that we earned a
21.6 percent return on equity for the year which drove growth in our book value per share to
$26.26, up 23 percent from the end of 2018. We also initiated a quarterly cash dividend, which
we believe is an important addition to the structure of providing returns to our stockholders.
Key to our record financial results were the investments we have made in our production
platform that allowed us to quickly scale our operations to address the large mortgage
origination market. In our correspondent channel, the continued growth of our seller network,
in addition to our ability to maintain high service levels and fast turn times in a vibrant
origination market, made PennyMac the largest aggregator of residential mortgage loans in the
country for the second half of the year, according to Inside Mortgage Finance. Combined with
originations in our consumer- and broker-direct lending channels, PennyMac was the third
largest mortgage lender in the U.S. in 2019 with $118 billion in unpaid principal balance (UPB),
or approximately 5 percent of the loan production market. These record volumes more than
offset elevated prepayment activity and drove the continued growth of our servicing portfolio
to $368.7 billion in UPB at year end, up 23 percent from the prior year and making PennyMac
Financial the sixth largest servicer in the U.S., according to Inside Mortgage Finance. Notably,
we expect our servicing portfolio, which has nearly doubled in size versus three years ago, to
provide a strong foundation to scale our business and drive future opportunities to grow our
consumer-direct lending channel. Our investment management business also continued its
success in 2019, as PMT again distinguished itself among public mortgage REITs with
exceptional performance and raised more than $800 million in equity to deploy in new
investments.(cid:3)
The competitive advantage PennyMac Financial enjoys is dependent upon our continued
investment in the development and utilization of technology. In 2019 we completed a multi-
year initiative for our proprietary Servicing Systems Environment (SSE), a workflow-driven
system that we designed specifically to address our unique needs as a leading, growing
servicer. SSE is based on a fully cloud-based infrastructure and enables modern approaches to
data management and real-time processing. It is a substantial technology advancement for
PennyMac Financial and will enable us to realize reduced costs, increased scalability and a
better servicing experience for our 1.8 million portfolio customers. We continue to invest in
technology to enhance our leadership in other areas of our business. In our correspondent
channel, for example, we are migrating our platform to Ellie Mae’s next generation Encompass
Digital Lending Platform, while also leveraging our own proprietary systems with the objective
to eventually transition our consumer-direct and broker-direct lending channels onto the same
cloud-based platform. We believe this new platform will enable further operational efficiencies
and process consistencies as an industry-leading mortgage lender while simultaneously
improving the customer experience. Similarly, we continue to regularly release enhancements
to our consumer and broker portals, keeping PennyMac Financial connected to our customers
and business partners.
While we are proud of our performance and success, we are in the midst of addressing the
significant dislocations in our financial markets, economy and society resulting from the spread
of the novel coronavirus. While the situation remains fluid as we write this, we are taking
numerous actions to protect the company, provide needed services to consumers suffering the
financial consequences of this environment and maintain a safe work environment to protect
the health of our staff.
Interest rates have fallen to new historic lows providing a favorable environment for mortgage
origination. With certain competitors forced to reduce or limit their participation, PennyMac
Financial is capturing elevated production volumes and margins across all three production
channels, even while substantially all of our 4,400 employees are working remotely from home
for their safety. Our disciplined approach to risk management, and in particular our continued
success in hedging our MSR assets and our production pipeline, has proven essential in the
current market environment. Our strong balance sheet, low leverage and disciplined approach
to liquidity management have also distinguished PennyMac Financial from competitors and
been critically important in navigating the recent market stresses.
Perhaps even more important, we recognize that the environment is causing increased
hardship to customers and we are taking the appropriate steps to expand our operational
capacity to address the changing servicing needs of our customers. We are well positioned as
one of the largest servicers in the country to provide the forbearance programs needed as well
as to offer refinances or loan modifications that will ultimately improve the consumers'
financial well-being. We are in alignment and working closely with the various government and
regulatory agencies to ensure that we are able to offer the relief necessary to assist our
borrowers.
Over our 12-year history, PennyMac has successfully navigated periods of market volatility and
operational disruptions driven by external influences. We are well positioned and confident in
our abilities to effectively mitigate the associated risks and execute on our business
objectives. We also believe that PennyMac's operating platform is uniquely positioned to
capitalize on opportunities that may arise as the dislocations in the mortgage market
unfold. Throughout it all, we remain steadfast in our commitment to address the needs of our
employees, 1.8 million customers, business partners and other stakeholders in PennyMac.
This February, after a successful partnership that lasted more than 12 years, BlackRock, one of
our founding sponsors, announced the contribution of its 20 percent ownership stake in
PennyMac Financial to charitable entities to fund its philanthropic endeavors. This contribution
reflects the substantial value we have created for our stockholders over time, and we are proud
to help BlackRock fund its social impact initiatives. The transfer and subsequent sale of these
shares will further increase PFSI’s public float and create opportunities for more institutional
shareholders to be a part of our growth story going forward.
We are incredibly proud of the organization we have built and the success we have achieved
under Stan’s leadership as our founder and Chairman. As Stan has relinquished his day-to-day
responsibilities, we are confident that this management team and over 4,400 of our dedicated
employees will continue to contribute to this Company(cid:3244)s success for years to come. The two of
us are working closely with the senior management team, as we always have, to advise and
guide the company through these challenging times. We are grateful to Stan for his vision and
countless contributions to PennyMac and look forward to his continued guidance as Chairman
of the Board.
Lastly, we thank you, our stockholders, as well as our customers and stakeholders for your
continued support and confidence in PennyMac Financial.
Sincerely,
Stanford L. Kurland
Chairman
March 31, 2020
David A. Spector
President and Chief Executive Officer
March 31, 2020
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, 2019, 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.
220
200
180
160
140
120
100
80
60
May-13 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19
May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18 Nov-18 May-19 Nov-19
PFSI
S&P 500
Russell 2000
PFSI
S&P 500
Russell 2000
5/8/13
100
100
100
12/31/13
100
115
121
12/31/14
96
131
127
12/31/15
89
132
121
12/31/16
94
148
147
12/31/17
127
181
169
12/31/18
123
173
150
12/31/19
197
227
188
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
Independent Registered Public Accounting
Firm
Deloitte & Touche LLP
Los Angeles, CA
Transfer Agent
Computershare Shareowner Services LLC
Jersey City, NJ
2020 Annual Meeting*
The 2020 Annual Meeting of Stockholders will
be held at 11:00 a.m. PT on May 28, 2020, at
3043 Townsgate Road, Westlake Village, CA
91361.
Market Data of PennyMac Financial Services,
Inc.
Common Stock
Traded: New York Stock Exchange
Symbol: PFSI
*We intend to hold our Annual Meeting in person. However, we are monitoring developments
regarding coronavirus disease 2019 (COVID‐19) and are planning for the possibility that the
Annual Meeting may be held solely by means of remote communication. If we take this step,
we will issue a press release announcing such change in advance, file the announcement with
the Securities and Exchange Commission as additional proxy material, and will provide details
on how to access and participate in and vote at the Annual Meeting at www.proxyvote.com or
on our Investor Relations website at www.ir.pennymacfinancial.com/2020AnnMtg.
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 July 1, 2019.
[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, 2019
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-38727
PennyMac Financial Services, Inc.
(formerly known as New PennyMac Financial Services, Inc.)
(Exact name of registrant as specified in its charter)
Delaware
(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)
(818) 224-7442
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.0001 par value
Trading Symbol(s)
PFSI
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 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
Non-accelerated filer
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, 2019 the aggregate market value of the registrant’s Common Stock, $0.0001 par value (“common stock”), held by non-affiliates was $553,217,131 based on the closing price as reported on the
New York Stock Exchange on that date.
As of February 26, 2020, the number of outstanding shares of common stock of the registrant was 78,558,156.
Documents Incorporated by Reference
Document
Definitive Proxy Statement for
2020 Annual Meeting of Stockholders
Parts Into Which Incorporated
Part III
Page
3
6
13
39
39
40
41
41
41
43
65
67
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68
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71
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71
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72
73
82
83
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, 2019
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;
lawsuits or governmental actions if we do not comply with the laws and regulations applicable to our
businesses;
the mortgage lending and servicing-related regulations promulgated by the Consumer Financial Protection
Bureau (“CFPB”) and its enforcement of these regulations;
our dependence on U.S. government-sponsored entities and changes in their current roles or their
guarantees or guidelines;
changes to government mortgage modification programs;
certain banking regulations that may limit our business activities;
foreclosure delays and changes in foreclosure practices;
the licensing and operational requirements of states and other jurisdictions applicable to our businesses, to
which our bank competitors are not subject;
3
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our ability to manage third-party service providers and vendors and their compliance with laws, regulations
and investor requirements;
changes in macroeconomic and U.S. real estate market conditions;
difficulties inherent in growing loan production volume;
difficulties inherent in adjusting the size of our operations to reflect changes in business levels;
any required additional capital and liquidity to support business growth that may not be available on
acceptable terms, if at all;
changes in prevailing interest rates;
increases in loan delinquencies and defaults;
our reliance on PennyMac Mortgage Investment Trust (“PMT”) as a significant source of financing for,
and revenue related to, our mortgage banking business;
our obligation to indemnify third-party purchasers or repurchase loans if loans that we originate, acquire,
service or assist in the fulfillment of, fail to meet certain criteria or characteristics or under other
circumstances;
our exposure to counterparties that are unwilling or unable to honor contractual obligations, including their
obligation to indemnify us or repurchase defective mortgage loans;
our ability to realize the anticipated benefit of potential future acquisitions of mortgage servicing rights
(“MSRs”);
our obligation to indemnify PMT if our services fail to meet certain criteria or characteristics or under other
circumstances;
decreases in the returns on the assets that we select and manage for our clients, and our resulting
management and incentive fees;
the extensive amount of regulation applicable to our investment management segment;
conflicts of interest in allocating our services and investment opportunities among ourselves and PMT;
the effect of public opinion on our reputation;
our recent growth;
our ability to effectively identify, manage, monitor and mitigate financial risks;
our initiation of new business activities or expansion of existing business activities;
our ability to detect misconduct and fraud;
our ability to effectively deploy new information technology applications and infrastructure;
our ability to mitigate cybersecurity risks and cyber incidents;
4
•
our exposure to risks of loss resulting from adverse weather conditions, man-made or natural disasters, the
effects of climate change, or other events; and
•
our organizational structure and certain requirements in our charter documents.
Other factors that could also cause results to differ from our expectations may not be described in this Report or
any other document. Each of these factors could by itself, or together with one or more other factors, adversely affect
our business, results of operations and/or financial condition.
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update
any forward-looking statement to reflect the impact of circumstances or events that arise after the date the forward-
looking statement was made.
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.
For tax purposes, 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. 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,
6
an affiliate of these funds and PNMAC Mortgage Opportunity Fund Investors, LLC. We refer to these funds collectively
as our Investment Funds. The Investment Funds were dissolved during 2018.
We conduct our business in three segments: production, servicing (together, production and servicing comprise
our mortgage banking activities) and investment management.
• The production segment performs loan origination, acquisition and sale activities.
• The servicing segment performs loan servicing for both newly originated loans we are holding for sale and
loans we service for others, including for PMT.
• The investment management segment represents our investment management activities, which include the
activities associated with investment asset acquisitions and dispositions such as sourcing, due diligence,
negotiation and settlement.
Following is a summary of our segment’s results:
2019
2018
2017
2016
2015
Year ended December 31,
(in thousands)
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
$
993,884 $ 385,995 $ 513,641 $ 694,405 $ 481,636
202,322
386,203
440,784
30,847
22,679
42,736
$ 1,477,404 $ 983,503 $ 922,523 $ 931,287 $ 714,805
212,886
23,996
567,921
29,587
$
$
527,834 $
(14,751)
16,361
—
87,266 $ 238,508 $ 416,096 $ 271,869
1,297
172,302
58,672
7,722
7,003
5,789
(1,695)
1,126
32,940
529,444 $ 267,697 $ 335,909 $ 383,083 $ 279,193
(36,099)
2,486
600
$ 4,836,472 $ 2,434,897 $ 2,459,014 $ 2,195,330 $ 1,122,242
2,270,940
92,893
$ 10,204,017 $ 7,478,498 $ 7,365,488 $ 5,128,398 $ 3,486,075
2,841,551
91,517
4,886,594
19,880
5,031,920
11,681
5,347,549
19,996
(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, of
which, for 2017, $32.0 million was the result of the change in the federal income tax rate under the Tax Cuts and
Jobs Act of 2017 (the “Tax Act”).
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 mortgage servicing rights (“MSRs”). Our loan production segment
sources new prime credit quality first-lien residential conventional and government-insured or guaranteed mortgage
loans and home equity loans through three channels: correspondent production, consumer direct and broker direct
lending.
7
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.
Through our consumer direct lending channel, we originate mortgage and home equity 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. 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 loans originated through the consumer direct and broker direct lending
channels. Our loan production activity is summarized below:
Unpaid principal balance ("UPB") of loans purchased and originated
for sale:
Loans sourced through our correspondent lending channel:
From PennyMac Mortgage Investment Trust
From non-affiliates
Loans sourced through our consumer direct channel
Loans sourced through our broker direct channel
UPB of conventional loans fulfilled for PennyMac Mortgage
Investment Trust
Total loan production
Loan Servicing
2019
Year ended December 31,
2018
(in thousands)
2017
$ 47,937,306
1,686,472
49,623,778
9,752,500
2,154,817
61,531,095
$ 36,415,933
—
36,415,933
4,650,316
378,544
41,444,793
$ 40,561,241
—
40,561,241
5,466,669
—
46,027,910
56,033,704
22,971,119
$ 117,564,799 $ 67,639,096 $ 68,999,029
26,194,303
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 borrowers; and supervising foreclosures and property dispositions. We service loans both as the owner of
MSRs and on behalf of other MSR or loan owners. We provide servicing for conventional and government-insured or
guaranteed mortgage loans and home equity loans (“prime servicing”), as well as servicing of distressed loans for PMT
(“special servicing”).
8
The UPB of our loan servicing portfolio is summarized below:
Servicing
rights owned
December 31, 2019
Contract
servicing and
subservicing
Total
mortgage
loans serviced
December 31, 2018
Contract
servicing and
Total
mortgage
subservicing
loans serviced
Servicing
rights owned
(in thousands)
Investor:
Non-affiliated
entities:
Originated
Purchased
PennyMac
Mortgage
Investment
Trust
Loans held for
sale
Total
$ 168,842,011 $
59,703,547
228,545,558
— $ 168,842,011 $ 145,224,596 $
—
—
59,703,547
228,545,558
56,990,486
202,215,082
— $ 145,224,596
56,990,486
—
202,215,082
—
—
135,414,668
135,414,668
—
94,658,154
94,658,154
4,724,006
2,420,636
$ 233,269,564 $ 135,414,668 $ 368,684,232 $ 204,635,718 $ 94,658,154 $ 299,293,872
4,724,006
2,420,636
—
—
Investment Management
We are an investment manager through our subsidiary, PCM. PCM currently manages PMT and, before 2019,
managed the Investment Funds. 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 PMT are summarized below:
PennyMac Mortgage Investment Trust
U.S. Mortgage Market
December 31,
2019
2018
(in thousands)
$ 2,450,916 $ 1,556,132
The U.S. residential mortgage market is one of the largest financial markets in the world, with approximately
$11.0 trillion of outstanding debt as of December 31, 2019. According to Inside Mortgage Finance, first lien mortgage
loan origination volume was approximately $2.4 trillion in 2019. 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 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 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, 2019, we serviced
1.8 million loans. 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.
According to Inside Mortgage Finance, the broker lending channel represented approximately 14% of U.S. residential
mortgage originations in 2019. 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 2019 and 2018, we funded
$2.2 billion and $378.5 million of mortgage loans, respectively, 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.
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 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.
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 2019, our correspondent, consumer direct and broker
direct loan production totaled $117.6 billion in UPB. We 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 both from large mortgage servicers and independent mortgage bankers, which are selling MSRs due to
continuing operational and regulatory and capital pressures. In 2019, we purchased approximately $16.3 billion in UPB
of MSRs.
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. 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.
10
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;
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;
11
•
•
•
•
•
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 workflow-driven cloud-based servicing system, as well as proprietary pricing engines, loan-level
analytics systems and other trade secrets that we have developed to maintain our competitive position.
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.
12
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.
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, 2019, we, through a subsidiary, had 4,215 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 (the “Exchange Act”), 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 businesses. These regulations directly impact our business and
require constant compliance, monitoring and internal and external audits and examinations by federal and state
regulators. 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. Further, PLS may be required to pay substantial penalties imposed by its regulators due to compliance
errors, or PLS may lose its license to originate and/or service loans.
13
The failure of our correspondent sellers 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 loans we acquire from such correspondent sellers. However, we may not detect every violation of law and, to
the extent any correspondent sellers or 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.
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.
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 to mitigate risks of noncompliance with applicable laws
may also have these negative results.
The outcome of the 2020 U.S. Presidential and Congressional elections could result in significant policy
changes or regulatory uncertainty in our industry. While it is not possible to predict when and whether significant policy
or regulatory changes would occur, any such changes on the federal, state or local level could significantly impact,
among other things, our operating expenses, the availability of mortgage financing, interest rates, consumer spending,
the economy and the geopolitical landscape. To the extent that the new government administration takes action by
proposing and/or passing regulatory policies that could have a negative impact on our industry, such actions may have a
material adverse effect on our business, financial condition and results of operations.
New rules and regulations and more stringent enforcement of existing rules and regulations by the CFPB or state
regulators could result in enforcement actions, fines, penalties and the inherent reputational risk that results from
such actions.
Under the Dodd-Frank Act, the CFPB has regulatory authority over certain aspects of our business as a result of
our residential mortgage banking activities, including, without limitation, the authority to conduct investigations, bring
enforcement actions, impose monetary penalties, require remediation of practices, pursue administrative proceedings or
litigation, and obtain cease and desist orders for violations of applicable federal consumer financial laws. Although there
has been a decline in enforcement actions by the CFPB under the current government administration, examinations by
state regulators and enforcement actions by state attorneys general have increased and may continue to increase in the
residential mortgage and servicing sectors.
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, 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 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. Presently, almost all of the newly originated 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 or PMT 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. A number of legislative proposals have been introduced in recent years that would wind down or
14
phase out the GSEs, including a proposal by the current White House administration to end the conservatorship and
privatize Fannie Mae and Freddie Mac. It is not possible to predict the scope and nature of the actions that the
U.S. government, will ultimately take with respect to the GSEs. 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. 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.
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, could also materially and adversely affect 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 mortgage 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.
Our business prospects, financial condition, liquidity and results of operations could be adversely impacted if, and to
the extent that, there is no longer a special exemption and qualified mortgage (“QM”) loan designation for certain
GSE eligible loans and there are no offsetting changes to the ability to repay (“ATR”) rules.
The Dodd-Frank Act provides that a lender must make “a reasonable, good faith determination” of each
borrower’s ability to repay a loan, but may presume that a borrower will be able to repay a loan if such loan has certain
characteristics that meet the QM definition. The CFPB adopted regulations that created a special exemption, generally
referred to as the “QM patch,” which allows any GSE-eligible loan to be deemed a QM. The QM patch effectively
provides QM designation for GSE eligible loans that have a debt-to-income ratio in excess of 43%, which represents a
meaningful portion of the loans currently purchased by the GSEs. Without the QM patch or an alternative, loans with
debt-to-income ratios above 43% would not be designated as QM unless they were insured by a federal agency such as
the FHA or VA, which have each adopted their own QM definition that does not currently have a debt-to-income ratio
limitation. The QM patch expires on the earlier of the end of the GSEs’ conservatorship or January 10, 2021.
15
On July 25, 2019, the CFPB released an Advanced Notice of Proposed Rulemaking (“ANPR”) regarding the
expiration of the QM patch, specifically stating that the CFPB intends to allow the QM patch to expire in January 2021.
In a letter to lawmakers on January 17, 2020, the CFPB signaled it plans to extend the QM patch for a short period until
the effective date of a proposed alternative that would replace the 43% DTI requirement or until the end of the GSEs’
conservatorship, whichever comes first. The expiration of the QM Patch or any action to modify the QM rule could have
significant implications for the U.S. housing and mortgage market. The GSEs would no longer be able to purchase or
guarantee loans with DTIs above 43% and a portion of the type of loans currently originated under the QM patch could
move away from the GSEs to other federal agencies or to the private market. We may be unable to comply with
Appendix Q of the ATR rule or to find comfort in the non-QM market, and our borrowers may be unable to meet the
43% DTI requirement. Also, a loan from another federal agency may not be attractive to all borrowers who otherwise
would have found financing under the QM patch. The GSEs could also see a significant drop in their origination
volumes if changes to the QM rule do not offset the impact of the expiration of the QM patch. Further, we may also face
operational changes and significant declines in origination volume if the QM patch expires without offsetting changes to
the QM rule. All of these events could materially and adversely affect our business, financial condition, liquidity and
results of operations.
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 and 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. 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.
In addition, the FHFA has directed the GSEs to align their guidelines for servicing delinquent mortgages and
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 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.
16
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, which 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, 2019, 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 one of our largest equity
holders. Due to this relationship, 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, and 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
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. 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.
17
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 one or more exemptions provided in the
Investment Company Act because of the historical and current composition of its assets and income; however, there can
be no assurances that the composition of PLS’ assets and income will remain the same over time such that one or more
exemptions will continue to be applicable.
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.
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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.
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. 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. 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. To
date, we have grown our loan production volumes on the basis of our product offerings, technical knowledge,
manufacturing quality, speed of execution, interest rates and fees, as well as the relationships we have established
through our network of mortgage lenders. In our correspondent production activities and broker direct lending activities,
the lenders and brokers with whom we do business are not contractually obligated to do business with us or PMT, and
our competitors also have relationships with these lenders and brokers and actively compete against us. Our non-
servicing portfolio consumer direct lending platform is also largely driven on referrals and establishing relationships.
In addition, our consumer direct lending business relies heavily on our ability 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.
We may experience significant growth in our loan production volumes. If we do not effectively manage our
growth and are unable to consistently maintain quality of execution, our reputation and existing relationships with
mortgage lenders and brokers could be damaged, we may not be able to maintain PMT’s existing relationships or
develop new relationships with mortgage lenders and brokers, our new mortgage products may not gain widespread
acceptance and the quality of our correspondent production, consumer direct lending and broker direct lending
operations could suffer, all of which could negatively affect our brand and operating results.
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Our loan production segment is also subject to overall market factors that could adversely 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;
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.
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 activities from PMT with borrowings under repurchase agreements. When we enter into
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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 MSRs are
pledged to secure borrowings under a master repurchase agreement and our and Freddie Mac MSRs are pledged to
secure borrowings under a loan and security agreement. 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
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.
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Our existing credit and financing agreements also contain certain events of default and other financial and
non-financial covenants and restrictions that impact our flexibility to determine our operating policies and investment
strategies. 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. An increase in prevailing interest
rates could:
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adversely affect our loan production volume, as refinancing an existing loan would be less attractive and
qualifying for a loan may be more difficult;
adversely affect our Ginnie Mae early buyout program because loan modifications would become less
economically feasible; and
increase the cost of servicing our outstanding debt, including debt related to servicing assets and loan
production;
A decrease in prevailing interest rates could:
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cause an increase in the expected volume of loan refinancings, which would require us to record decreases
in fair value on our MSRs; and
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reduce our earnings from our custodial deposit accounts.
An event of default, a negative ratings agency action, the perception of financial weakness, an adverse action by
a regulatory authority, a lengthening of foreclosure timelines or a general deterioration in the economy 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 manner, 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.
We are subject to risks associated with the expected discontinuation of LIBOR.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced the phase out of the use
of LIBOR by the end of 2021. To identify a set of alternative interest reference rates to LIBOR, the U.S. Federal Reserve
established the Alternative Reference Rates Committee (“ARRC”), a U.S. based working group composed of large
U.S. financial institutions. ARRC has identified the Secured Overnight Financing Rate as its preferred replacement for
LIBOR, but it is unclear how their preference may impact the risks we maintain to the cessation of LIBOR, or if other
benchmarks may emerge as a replacement for LIBOR.
The expected and actual discontinuation of LIBOR could have a significant impact on the financial markets and
our business activities. We rely substantially on financing arrangements and liabilities under which our cost of
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borrowing is based on LIBOR. We also hold assets and instruments used to hedge the value of certain assets that depend
for their value on LIBOR. We anticipate significant challenges as it relates to the transition away from LIBOR for all of
our LIBOR-based assets, financing arrangements, and liabilities, regardless whether their maturity dates fall before or
after the anticipated discontinuation date in 2021. These challenges will include, but will not be limited to, amending
agreements underlying our existing and/or new LIBOR-based assets, financing arrangements, and liabilities with
appropriate fallback language prior to the discontinuation of LIBOR, and the possibility that LIBOR may deteriorate as a
viable benchmark to ensure a fair cost of funds for our LIBOR-linked liabilities, interest income for our LIBOR-linked
assets, and/or the fair value of our LIBOR-linked assets and hedges.
We also anticipate additional risks to our current business activities as they relate to the discontinuation of
LIBOR. We service LIBOR-based adjustable rate mortgages (“ARMs”) for which the underlying mortgage notes
incorporate fallback provisions, but we cannot anticipate the response of our borrowers or note holders to such risks.
Further, we expect to originate new LIBOR-based ARMs in 2020 and 2021. We also rely on financial models that
incorporate LIBOR into their methodologies for financial planning and reporting.
Due to these risks, we expect both the impending and actual discontinuation of LIBOR could materially affect
our interest expense and earnings, our cost of capital, and the fair value of certain of our assets and the instruments we
use to hedge their value. For the same reason, we also can provide no assurance that changes in the value of our hedge
instruments will effectively offset changes in the value of the assets they are expected to hedge. Our inability to manage
these risks effectively may materially and adversely affect 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
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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 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.
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 be affected by weaker economic conditions or adverse
events specific to certain regions which could decrease the fair value of our MSRs and adversely affect our business,
financial condition, liquidity and results of operations.
A decline in the economy or difficulties in certain real estate markets are likely to cause a decline in the value
of residential and commercial properties. To the extent that certain 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 loan production businesses. 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.
Delinquencies can result from many factors including unemployment, weak economic conditions or real estate
values, or catastrophic events such as man-made or natural disasters, pandemic, war or terrorist attacks. 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.
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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 2019. As a result, we expect the delinquency rate
and defaults in the prime servicing portfolio to increase in future periods as the portfolio seasons.
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
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 activities. 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
activities 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
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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, 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 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 activities,
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.
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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. 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. Either of these occurrences could 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
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. 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 $21.4 million as of December 31, 2019.
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
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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
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 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.
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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
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.
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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. New laws or regulations, or changes in the enforcement of existing laws or regulations, applicable to us and our
clients, may adversely affect our business. Our ability to succeed in this environment will depend on our ability to
proactively monitor any such legislative and regulatory changes. 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 laws and regulations and their 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. These regulations
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. We are required to maintain an
effective compliance program, and are subject to routine periodic examinations by the staff of the SEC.
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
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perceived 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.
Risks Related to Our Business in General
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 or if we had a disruption in service due to a vendor dispute, 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 could cause harm to our
business and adversely affect our earnings.
Our business is subject to significant reputational risks. If we fail, or appear to fail, to address 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, actual or perceived conflicts of interest, violations of legal or regulatory requirements, and
any of the other risks discussed in this Item 1A. Similarly, market rumors and actual or perceived association with
counterparties whose own reputations are under question could harm our business.
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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 PMT. The SEC
and certain regulators have increased their scrutiny of potential conflicts of interest, and as we experience growth in our
businesses, we continue to monitor and mitigate or otherwise address any conflicts between our interests and those of
PMT through the implementation of procedures and controls. 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 damage 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 could impair 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, significantly harm our ability to raise capital, 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, 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
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.
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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
and to successfully develop, implement and protect proprietary technology.
Our success in the mortgage industry is highly dependent upon our ability to adapt to constant technological
changes, successfully enhance our current information technology solutions through the use of third-party and
proprietary technologies, and introduce new solutions and services that more efficiently address the needs of our
customers.
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 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. In our correspondent production activities, our and PMT’s
correspondent sellers also expect and require certain conveniences and service levels that are dependent on technological
advancement. In this regard, we are in the process of transitioning from an older loan acquisition platform to a new
workflow-driven, cloud-based loan acquisition platform. While we anticipate that this new system will increase
scalability and produce other efficiencies, there can be no assurance that the new system will prove to be effective or that
such correspondent sellers will easily adapt to a new system. Any failure to effectively or timely transition to our new
system and meet our expectations and the expectations of our correspondent sellers could have a material adverse effect
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on our business, financial condition and results of operations.
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. For example, we recently announced the completion of an initiative to develop a
proprietary, workflow-driven, cloud-based servicing system that provides for real-time processing and advanced
workflow management thereby reducing servicing costs, increasing scalability and creating sustainable efficiencies.
The development, implementation and protection of these technologies and becoming more proficient with
them requires significant capital expenditures. As these technological advancements and investor and compliance
requirements increase in the future, we will need to further 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. Moreover, litigation has become necessary to protect our technologies, and, such litigation
is expected to be time consuming and result in substantial costs and diversion of resources. Any failure by us to develop,
implement, execute or maintain our technological capabilities and any litigation costs associated with protection of our
technologies 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.
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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
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, man-made or natural disasters and the effects of climate change, 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 adversely impact properties that we own or that collateralize
loans we own or service, as well as properties where we conduct business. 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. Potentially adverse consequences
of global warming and climate change, including rising sea levels and increased intensity of extreme weather events,
could similarly have an impact on our properties and the local economies of certain areas in which we operate. Although
we believe our owned real estate and the properties collateralizing our loan assets or underlying our MSR assets are
appropriately 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. There also is a risk that one or more of our property insurers 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.
Certain types of losses, generally of a catastrophic nature, that result from events described above such as
earthquakes, floods, hurricanes, tornados, terrorism or acts of war may also be uninsurable or not economically
insurable. Inflation, changes in building codes and ordinances, environmental considerations and other factors, including
terrorism or acts of war, also might make the insurance proceeds insufficient to repair or replace a property if it is
damaged or destroyed. Under these circumstances, the insurance proceeds received might not be adequate to restore our
economic position with respect to the affected real property. Any uninsured loss could result in the loss of cash flow
from, and the asset value of, the affected property, which could have an adverse effect on our business, financial
condition, liquidity and results of operations.
35
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. Many areas of California, including
the immediate area around our corporate headquarters, have experienced extensive damage and property loss due to a
series of 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, pandemic, 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, 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.
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 have not established a minimum dividend payment level and no assurance can be given that we will be able to
make dividends to our stockholders in the future at current levels or at all.
In October 2019, we announced the initiation of a quarterly dividend for our common stockholders. We have
not established a minimum dividend payment level, and our ability to pay dividends to our stockholders may be
materially and adversely affected by the risk factors discussed in this Report and any subsequent Quarterly Reports on
Form 10-Q. Although we paid, and anticipate continuing to pay, quarterly dividends to our stockholders, our board of
directors has the sole discretion to determine the timing, form and amount of any future dividends to our stockholders,
and such determination will depend upon, among other factors, our historical and projected results of operations,
financial condition, cash flows and liquidity, capital requirements and other expense obligations, debt covenants,
contractual legal, tax, regulatory and other restrictions and such other factors as our board of directors may deem
relevant from time to time.
36
As a result, no assurance can be given that we will be able to continue to pay dividends to our stockholders in
the future or that the level of any future dividends will achieve a market yield or increase or even be maintained over
time, any of which could materially and adversely affect the market price of our common stock.
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:
•
•
•
•
•
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;
prohibit stockholder action by written consent unless the matter as to which action is being taken has been
approved by our board of directors;
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 a sale of substantially all of our assets or completion of a merger or other business combination that
constitutes a change of control without the approval of a majority of our independent directors.
These and other provisions under Delaware law could discourage, delay or prevent a transaction involving a
change in control of our company 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 and take
other corporate actions.
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,
37
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 Ownership of 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 and trading volume 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. Some of the
factors that could negatively affect the market price or trading volume of our common stock include:
•
•
•
•
•
•
•
variations in our actual and anticipated financial and operating results and those expected by investors and
analysts;
changes in the manner that investors and securities analysts who provide research to the marketplace on us
analyze the value of our common stock and similar companies;
changes in recommendations or in estimated financial results published by securities analysts who provide
research to the marketplace on us, our competitors or our industry;
litigation and governmental investigations;
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 and trading volume of our common
stock, regardless of our actual operating performance.
38
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. These
former owners of PennyMac are now eligible for long-term capital gains treatment (rather than ordinary income tax
treatment) on future sales of such common stock now that they have satisfied the required one-year holding period. 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.
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, 2019, we have an aggregate of 4.2 million 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 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, convertible debt securities or shares of preferred stock. The issuance of 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 stock, 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 stock, 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. Any issuance of securities in future offerings may reduce the market price of our common stock
and dilute existing stockholders’ interests in us.
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 loan servicing operations are primarily housed in a 142,000 square foot leased facility located in Moorpark,
CA, a 116,000 square foot facility in Fort Worth, TX, and a 51,000 square foot facility in Summerlin, NV.
39
Our consumer direct lending business occupies a 36,000 square foot leased facility in Pasadena, CA. Much of
our loan processing activity is performed in a leased 60,000 square foot facility in close proximity to our corporate
offices. We lease an additional 90,000 square feet in Tampa, FL, 75,000 square feet in Plano and 30,000 square feet in
St. Louis, MO primarily for our correspondent production activities. We have three loan production centers located in
Roseville, CA, Honolulu, HI, Edina, MN, and one collocated in our Summerlin, NV office.
Our information technology division is housed in a 50,000 square foot facility in Agoura Hills, CA and we
lease a few small locations throughout the country, generally housing loan production and servicing activities.
The financial commitments of our leases are disclosed in Note—10 Leases to our consolidated financial
statements included in Item 8 of this Report.
Item 3. Legal Proceedings
From time to time, the Company may be involved in various legal and regulatory proceedings, lawsuits and
other claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such
matters cannot be determined, but despite the inherent uncertainties of litigation, management currently believes that the
ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material
adverse effect on the financial condition, results of operations, or cash flows of the Company. Set forth below are
material updates to legal proceedings of the Company.
As previously disclosed, on December 20, 2018, a purported shareholder of the Company filed a complaint in a
putative class and derivative action in the Court of Chancery of the State of Delaware (the “Delaware Court”),
captioned Robert Garfield v. BlackRock Mortgage Ventures, LLC et al., Case No. 2018-0917-KSJM (the “Garfield
Action”). The Garfield Action alleges, among other things, that certain current directors and officers of the Company
breached their fiduciary duties to the Company and its shareholders by, among other things, agreeing to and entering into
the Reorganization without ensuring that the Reorganization was entirely fair to the Company or public shareholders.
The Reorganization was approved by 99.8% of voting shareholders on October 24, 2018. On December 19, 2019, the
Delaware Court denied a motion to dismiss filed by the Company and certain of its directors and officers. Nevertheless,
the Company continues to believe the Garfield Action is without merit and plans to vigorously defend the matter, which
remains pending.
On November 5, 2019, Black Knight Servicing Technologies, LLC, a wholly-owned indirect subsidiary of
Black Knight, Inc. (“BKI”), filed a Complaint and Demand for Jury Trial in the Circuit Court for the Fourth Judicial
Circuit in and for Duval County, Florida, captioned Black Knight Servicing Technologies, LLC v. PennyMac Loan
Services, LLC, Case No. 2019-CA-007908 (the “BKI Complaint”). Allegations contained within the BKI Complaint
include breach of contract and misappropriation of MSP® System trade secrets in order to develop an imitation
mortgage-processing system intended to replace the MSP® System. The BKI Complaint seeks damages for breach of
contract and misappropriation of trade secrets, injunctive relief under the Florida Uniform Trade Secrets Act and
declaratory judgment of ownership of all intellectual property and software developed by or on behalf of PLS as a result
of its wrongful use of and access to the MSP® System and related trade secret and confidential information. On
January 6, 2020, the Company filed a motion to compel arbitration, which has not yet been fully briefed or argued. The
Company believes the BKI Complaint is without merit and plans to vigorously defend the matter, which remains
pending.
On November 6, 2019, the Company, through its wholly-owned subsidiary, PLS, filed a complaint in the U.S.
District Court for the Central District of California (the “Federal Court”), captioned PennyMac Loan Services, LLC v.
Black Knight, Inc., et al., Case No. 2:19−cv−09526 RGK (JEMx) (the “PLS Complaint”). The PLS Complaint alleges
that BKI uses its market-dominating LoanSphere® MSP mortgage loan servicing system to engage in unfair business
tactics that both entrap its licensees and create barriers to entry that stifle competition. The PLS Complaint further
alleges that BKI violated the federal Sherman Act, the California Cartwright Act and California’s Unfair Competition
Law and engaged in unfair competition under common law. The Company seeks, among other relief, to preliminarily
and permanently enjoin BKI’s wrongful practices, and seeks the recovery of actual and statutory damages. On
February 13, 2020, the Federal Court transferred the PLS complaint to the Middle District of Florida. The matter remains
pending.
40
Item 4. Mine Safety Disclosures
Not applicable.
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 24, 2020, our shares of common stock were held by 12,099 holders of record.
We initiated a quarterly dividend for common stockholders in October 2019. The dividend level is reviewed
each quarter and determined based on a number of factors, including, among other things, our earnings, our financial
condition, growth outlook, the capital required to support ongoing growth opportunities and compliance with other
internal and external requirements. Payments of dividends are subject to approval by our board of directors. 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.
Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered equity securities during the year ended December 31, 2019.
Repurchase of our Common Stock
There was no stock repurchase activity for the quarter ended December 31, 2019.
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, 2019, 2018, and 2017 and the
condensed consolidated balance sheets data at December 31, 2019, and 2018 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, 2016 and 2015 and the condensed consolidated balance sheets data at December 31, 2017,
2016, and 2015 have been derived from our Company’s audited consolidated financial statements that are not included
in this Report.
41
Condensed Consolidated Statements of Income:
Revenues
Net gains on loans held for sale
Loan origination fees
Fulfillment fees from PennyMac Mortgage Investment Trust
Net loan servicing fees
Management fees and Carried Interest
Net interest income (expense)
Other
$
Total net revenue
Expenses
Compensation
Servicing
Loan origination
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
Loans held for sale at fair value
Mortgage servicing rights
Servicing advances
Investments in and advances to affiliates
Loans eligible for repurchase
Other
Total assets
Liabilities and stockholders' equity
Short-term debt
Long-term debt
Liability for mortgage loans eligible for repurchase
Income taxes payable
Other
Total liabilities
Stockholders' equity
2019
Year ended December 31,
2016
2017
2018
(in thousands, except per share data)
725,528 $
174,156
160,610
293,665
36,492
76,721
10,232
1,477,404
249,022 $
101,641
81,350
445,393
24,104
71,819
11,300
984,629
391,804 $
119,202
80,359
306,059
22,545
(1,341)
36,835
955,463
531,780 $
125,534
86,465
185,466
23,726
(25,079)
3,995
931,887
503,458
164,697
117,338
162,467
947,960
529,444
136,479
392,965
—
403,270
137,104
27,398
149,160
716,932
267,697
23,254
244,443
156,749
358,721
117,696
20,429
122,708
619,554
335,909
24,387
311,522
210,765
342,153
85,857
22,528
98,266
548,804
383,083
46,103
336,980
270,901
2015
320,715
91,520
58,607
229,543
30,865
(19,382)
1,242
713,110
274,262
68,085
17,396
74,174
433,917
279,193
31,635
247,558
200,330
$
392,965 $
87,694 $
100,757 $
66,079 $
47,228
527,834 $
(14,751)
513,083
16,361
—
529,444 $
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
4,912,953 $ 2,521,647 $
2,926,790
331,169
157,343
1,046,527
829,235
2,820,612
313,197
165,886
1,102,840
554,391
$ 10,204,017 $ 7,478,573 $
$
4,639,001 $ 2,332,143 $
1,493,466
1,046,527
504,569
458,947
8,142,510
2,061,507
1,648,973
1,102,840
400,546
340,280
5,824,782
1,653,791
3,099,103 $
2,119,588
318,066
181,421
1,208,195
441,720
7,368,093 $
2,172,815 $ 1,101,204
1,411,935
1,627,672
299,354
348,306
241,352
239,769
166,070
382,268
285,379
363,072
5,133,902 $ 3,505,294
2,922,542 $
1,135,401
1,208,195
52,160
330,121
5,648,419
1,719,674
7,368,093 $
2,567,658 $ 1,467,535
421,208
301,917
166,070
382,268
—
25,088
388,131
457,615
2,442,944
3,734,546
1,399,356
1,062,350
5,133,902 $ 3,505,294
$
$
$
Total liabilities and stockholders' equity
$ 10,204,017 $ 7,478,573 $
Per Common Share Data:
Earnings:
Basic
Diluted
Cash dividend declared
Year End:
Book value
Share price
$
$
$
$
$
5.02 $
4.89 $
0.12 $
2.62 $
2.59 $
0.40 $
4.34 $
4.03 $
— $
2.98 $
2.94 $
— $
2.17
2.17
—
26.26 $
34.04 $
21.34 $
21.26 $
19.95 $
22.35 $
15.49 $
16.65 $
12.32
15.36
42
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, 2019
Percentage of
Carrying value of
assets (1)
(in thousands)
Total assets
Total
stockholders'
equity
Level 1: Prices determined using quoted prices in active markets for
identical assets or liabilities.
$
81,697
1%
4%
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.
4,536,649
44%
220%
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
3,477,692
$
8,096,038
$ 10,204,017
2,061,507
$
34%
79%
169%
392%
(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, 2019, $8.1 billion or 79% of our total assets were carried at
fair value on a recurring basis and $20.3 million (real estate acquired in settlement of loans (“REO”)), were carried based
on 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, $3.5 billion or 34% 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.
43
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 2019, 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.
Loans Held for Sale
We carry loans at their fair values. We recognize changes in the fair value of loans in current period income as a
component of Net gains on loans held for sale at fair value. How we estimate the fair value of loans is based on whether
the loans are saleable into active markets with observable fair value inputs.
• We categorize loans that are saleable into active markets as “Level 2” fair value assets. We estimate the fair
value of such loans using their quoted market price or market price equivalent. At December 31, 2019, we
held $4.5 billion of such loans.
• We categorize loans that are not saleable into active markets as “Level 3” fair value assets. “Level 3” fair
value loans arise primarily from three sources:
− We may purchase certain delinquent government guaranteed or insured loans from Ginnie Mae
guaranteed securitizations included in our loan servicing portfolio. Our right to purchase such loans
arises as the result of the loan being at least three months delinquent when we buy the loan. Our ability
to purchase delinquent 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 loans
(“early buyout” or “EBO” loans) 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 loan’s terms, we measure such loans using “Level 3” fair value inputs. At
December 31, 2019, we held $374.1 million of such loans.
− Certain of our loans may become non-saleable into active markets due to our identification of one or
more defects. At December 31 2019, we held $9.2 million of such loans.
− We originate home equity loans for sale to PMT. At present, an active, observable market for such loans
does not exist. Because such loans are generally not saleable into active markets, we classify them as
“Level 3” fair value assets. At December 31, 2019, we held $513,000 of such loans.
44
We use a discounted cash flow model to estimate the fair value of “Level 3” fair value loans. The significant
unobservable inputs used in the fair value measurement of our “Level 3” fair value 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 loans’ fair value measurement.
Interest Rate Lock Commitments
Our net gains on loans held for sale include our estimates of the gains or losses we expect to realize upon the
sale of 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 loans held for sale at fair value before we fund or purchase the 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, broker or loan applicant and adjust the fair value of such IRLCs as
the 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 Loans held for sale at fair value when the 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 loans
and the probability that we will fund or purchase the 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
marketplace. Our estimate of the probability that a loan will be funded and market interest rates are updated as the loans
move through the funding or purchase process and as 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 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 interest rates have a positive effect on the fair value
of the MSR component of IRLC fair value but increase the pull-through rate for the loan principal and interest payment
cash flow component, which decreases 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 loans held for sale at fair value 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, 2019, we held $136.7 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, 2019:
Change in input (1)
Effect on fair value of IRLC of a change in pull-through rate
(in thousands)
(20) % $
(10) % $
(5) % $
5 % $
10 % $
20 % $
(35,814)
(17,892)
(8,931)
7,855
14,649
26,262
(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.
45
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 Net loan servicing
fees—Amortization, impairment and change in fair value of mortgage servicing rights and mortgage servicing
liabilities. Both our estimate of the change in fair value attributable to realization of cash flows and of the change in fair
value are affected by changes in market inputs are affected by changes in inputs. During the year ended
December 31, 2019, we recognized a $1.0 billion net reduction in fair value of MSRs: $455.5 million of the reduction
was due to realization of cash flows underlying the fair value of MSR and a $550.7 million of the reduction was due to
changes in market inputs.
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, 2019 was $2.9 billion.
Following is a summary of the effect on fair value of MSRs of various changes to these key inputs at
December 31, 2019:
Change in input
Pricing spread
Prepayment speed
(in thousands)
Servicing cost
Effect on fair value of MSRs of a change in input value
(20) % $
(10) % $
(5) % $
5 % $
10 % $
20 % $
193,469 $
93,548 $
46,104 $
(44,561) $
(87,734) $
(170,155) $
285,318 $
136,043 $
66,474 $
(63,569) $
(124,411) $
(238,549) $
98,065
49,032
24,516
(24,516)
(49,032)
(98,065)
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.
46
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
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 Net loan servicing fees—Change in fair value of excess servicing spread payable to PennyMac
Mortgage Investment Trust. During the year ended December 31, 2019, we recorded $9.3 million of net gains due to
changes 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, 2019, we carried $178.6 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, 2019:
Change in input
Pricing spread
Prepayment speed
Effect on fair value of excess servicing spread of a change in input value
(20) % $
(10) % $
(5) % $
5 % $
10 % $
20 % $
(in thousands)
4,907 $
2,422 $
1,203 $
(1,188) $
(2,361) $
(4,662) $
18,565
8,878
4,344
(4,164)
(8,160)
(15,680)
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 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 loan repurchase rates, the potential severity of loss in
the event of default and, if applicable, the probability of reimbursement by the correspondent loan seller.
The level of the liability for losses under representations and warranties is difficult to estimate and requires
considerable judgment. The level of loan repurchase losses is dependent on economic factors, purchaser or insurer loss
mitigation strategies, and other external conditions that may change over the lives of the underlying loans. Our estimate
of the liability for representations and warranties is developed by our credit administration staff. 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, 2019, we recorded $8.4 million in provision for losses relating to current
year loan sales in Net gain on loans held for sale at fair value and incurred net losses totaling $209,000.
47
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, 2019, we
recorded reductions to our previously recorded representations and warranties liability amounts totaling $7.9 million in
Net gain on loans held for sale at fair value. At December 31, 2019, the balance of our liability for losses under
representations and warranties totaled $21.4 million.
Accounting Developments
Refer to Note 3 – Significant Accounting Policies ‒ Recently Issued Accounting Pronouncements to our
consolidated financial statements for a discussion of recent accounting developments and the expected effect on the
Company.
48
Results of Operations
Our results of operations are summarized below:
Revenues:
Net gains on loans held for sale at fair value
Loan origination fees
Fulfillment fees from PennyMac Mortgage Investment Trust
Net loan servicing fees
Net interest income (expense)
Management fees & Carried Interest
Other
Total net revenue
Expenses
Income before provision for income taxes
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,
2018
(dollars in thousands except per-share amounts)
2017
2019
$
$
$
$
$
$
725,528 $
174,156
160,610
293,665
76,721
36,492
10,232
1,477,404
947,960
529,444
136,479
392,965 $
249,022 $
101,641
81,350
445,393
71,819
24,104
11,300
984,629
716,932
267,697
23,254
244,443 $
391,804
119,202
80,359
306,059
(1,341)
22,545
36,835
955,463
619,554
335,909
24,387
311,522
5.02 $
4.89 $
21.6 %
2.62 $
2.59 $
12.7 %
4.34
4.03
26.0 %
527,834 $
(14,751)
513,083
16,361
—
529,444 $
87,266 $
172,302
259,568
7,003
1,126
267,697 $
238,508
58,672
297,180
5,789
32,940
335,909
Interest rate lock commitments issued
Unpaid principal balance of loans fulfilled for PMT subject to fulfillment fees
$
$
$
72,698,014
56,033,704 $
44,786,584 $
26,194,303 $
49,606,767
22,971,119
Common stock closing prices
High
Low
At end of year
At end of year:
Unpaid principal balance of loan servicing portfolio:
Owned:
Mortgage servicing rights
Mortgage servicing liabilities
Loans held for sale
Subserviced for PMT
Net assets of Advised Entities:
PennyMac Mortgage Investment Trust
Investment Funds
Book value per share
$
$
$
34.45 $
20.34 $
34.04 $
25.20 $
18.77 $
21.26 $
22.45
15.65
22.35
$ 225,787,104
2,758,454
4,724,006
233,269,564
135,414,668
$ 368,684,232
$ 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
$
$
$
$
2,450,916
—
2,450,916
$
26.26 $
$
1,556,132
—
1,556,132
$
21.34 $
1,544,585
29,329
1,573,914
19.95
(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 the Tax Act.
Comparison of the years ended December 31, 2019, 2018 and 2017
During the year ended December 31, 2019, we recorded net income of $393.0 million, an increase of
$148.5 million, or 61%, from 2018. The increase is due to an increase of $492.8 million in total net revenue, partially
offset by an increase of $231.0 million in total expenses and $113.2 million in provision for income taxes.
49
The increase in total revenue was primarily due to an increase of $476.5 million in Net gains on loans held for
sale at fair value, $79.3 million in Fulfillment fees from PennyMac Mortgage Invest Trust, and $72.5 million in Loan
origination fees resulting from higher production volume and improved profit margins, which was partially offset by a
decrease of $151.7 million in Net loan servicing fees primarily attributable to the effect of lower interest rates on the fair
value of our MSRs that resulted in fair value losses net of hedging results compared to the year ended
December 31, 2018.
The increase in total expenses was primarily due to increases in loan origination and compensation expenses,
reflecting the continuing growth of our mortgage banking activities. The provision for income taxes increased
significantly as a result of the Reorganization which was completed in late 2018.
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 was primarily due to an
increase of $139.3 million in Net 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 loans held for sale at fair value, $17.6 million in Loan origination
fees and $31.8 million in Repricing of payable to exchanged Private National Mortgage Acceptance Company, LLC
unitholders under tax receivable agreement. The decrease in our Net gains on loans held for sale at fair value reflected
continued competitive pressures in the mortgage market place arising from the effect of then-increasing interest rates on
borrower demand for mortgage loans. Increasing interest rates also contributed $70.8 million to Net loan servicing fees
in the form of fair value gains net of hedging results during 2018 as compared to 2017.
Net gains on loans held for sale at fair value
During the year ended December 31, 2019, we recognized Net gains on loans held for sale at fair value totaling
$725.5 million, compared to $249.0 million and $391.8 million during the years ended December 31, 2018 and 2017,
respectively. The increase in 2019 compared to 2018 was primarily due to an increase in loan production volume and
improved profit margins in our mortgage production business, reflecting increased demand for mortgage loans during
2019 as compared to 2018.
The increase in demand for mortgage loans during 2019 as compared to 2018 is attributable primarily to the
decrease in market interest rates that prevailed during 2019 compared to 2018. The decreases in 2018 compared to 2017
was primarily due to decreases in both loan production volume for our own account and profit margins reflecting the
effect of then-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.
50
Our net gains on loans held for sale are summarized below:
From non-affiliates:
Cash loss:
Loans
Hedging activities
Total cash loss
Non-cash gain:
2019
Year ended December 31,
2018
(in thousands)
2017
$
(190,853) $
(175,305)
(366,158)
(469,647) $
93,288
(376,359)
(174,669)
(16,866)
(191,535)
Change in fair value of loans and derivative financial
instruments outstanding at year end:
Interest rate lock commitments
Loans
Hedging derivatives
Mortgage servicing rights and mortgage servicing liabilities
resulting from loan sales
Provision for losses relating to representations and warranties:
Pursuant to loan sales
Reduction in liability due to change in estimate
Total non-cash gain
Total gains on sale from non-affiliates
From PennyMac Mortgage Investment Trust
During the year:
Interest rate lock commitments issued:
Government-insured or guaranteed mortgage loans
Conventional mortgage loans
Jumbo mortgage loans
Home equity lines of credit
At end of year:
Loans held for sale at fair value
Commitments to fund and purchase loans
$
$
$
$
$
87,312
(42,878)
17,499
61,933
(8,934)
(1,506)
(11,766)
(22,206)
(1,120)
4,576
(4,389)
(933)
846,888
584,156
563,872
(8,377)
7,877
908,321
542,163
183,365
725,528 $
(5,824)
4,672
560,798
184,439
64,583
249,022 $
(5,890)
4,301
561,350
369,815
21,989
391,804
62,772,725 $
9,886,462
29,641
9,186
72,698,014 $
40,193,531 $
4,592,412
641
—
44,786,584 $
46,341,356
3,265,411
—
—
49,606,767
4,912,953 $
7,122,316 $
2,521,647 $
2,805,400 $
3,099,103
3,654,955
Our gain on sale of loans held for sale includes both cash and non-cash elements. We receive proceeds on sale
that include our estimate of the fair value of MSRs and we incur liabilities for mortgage servicing liabilities (which
represent the fair value of the costs we expect to incur in excess of the fees we receive for early buyout of delinquent
loans we have resold) and for the fair value of our estimate of the losses we expect to incur relating to the representations
and warranties we provide in our loan sale transactions.
Non-cash elements of gain on sale of loans
The MSRs, mortgage servicing liabilities (“MSLs”), and liability for representations and warranties we
recognize represent our estimate of the fair value of future benefits and costs we will realize for years in the future.
These estimates represented approximately 125% of our gain on sale of loans at fair value for the year ended
December 31, 2019, as compared to 225% and 143% for the years ended December 31, 2018 and 2017, respectively.
How we measure and update our measurements of MSRs and MSLs is detailed in Note 6 – Fair value –
Valuation Techniques and Inputs to the consolidated financial statements included in this Annual Report.
51
Our agreements with the purchasers and insurers include representations and warranties related to the loans we
sell. The representations and warranties require adherence to purchaser and insurer origination and underwriting
guidelines, including but not limited to the validity of the lien securing the loan, property eligibility, borrower credit,
income and asset requirements, and compliance with applicable federal, state and local law.
In the event of a breach of our representations and warranties, we may be required to either repurchase the loans
with the identified defects or indemnify the purchaser or insurer. In such cases, we bear any subsequent credit loss on the
loans. Our credit loss may be reduced by any recourse we have to correspondent originators that sold such loans to us
and breached similar or other representations and warranties. In such event, we have the right to seek a recovery of
related repurchase losses from that correspondent seller.
The method used to estimate our losses on representations and warranties is a function of our estimate of future
defaults, loan repurchase rates, the severity of loss in the event of default, if applicable, and the probability of
reimbursement by the correspondent loan seller. We establish a liability at the time loans are sold and review our
liability estimate on a periodic basis.
During the years ended December 31, 2019, 2018, and 2017 we recorded provisions for losses under
representations and warranties relating to current loan sales as a component of Net gains on loans held for sale at fair
value totaling $8.4 million, $5.8 million, and $5.9 million, respectively. We also recorded reductions in the liability
relating to previously sold loans of $7.9 million, $4.7 million, and $4.3 million, for the years ended December 31, 2019,
2018 and 2017, respectively. The reductions in the liability relating to previously sold loans resulted from those loans
meeting performance criteria established by the Agencies which significantly limits the likelihood of 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:
2019
Year ended December 31,
2018
(in thousands)
2017
8,899 $
11,629
5,162
15,366 $
7,579 $
4,511
3,191
8,899 $
5,599
3,255
1,275
7,579
18,660 $
26,025 $
20,152
12,396
18,127
14,298
6,735
2,138
8,792
(471) $
5,760 $
(2,938)
209 $
50 $
603
177,611,568 $ 137,849,704 $ 120,855,101
20,053
21,155 $
21,446 $
During the year:
Indemnification activity:
Loans indemnified by PFSI at beginning of year
New indemnifications
Less indemnified loans sold, repaid or refinanced
Loans indemnified by PFSI at end of year
Repurchase activity:
Total loans repurchased by PFSI
Less:
Loans repurchased by correspondent lenders
Loans repaid by borrowers or resold with defects
resolved
Net loans repurchased (resolved) with losses chargeable to
liability for representations and warranties
Net losses charged to liability for representations and
warranties
At end of year:
Unpaid principal balance of loans subject to representations
and warranties
Liability for representations and warranties
$
$
$
$
$
$
$
52
During the year ended December 31, 2019, we repurchased loans with unpaid principal balances totaling
$18.7 million and charged $209,000 in net incurred losses relating to repurchases against our liability for representations
and warranties. As the credit criteria relating to loans we originate and sell change, as the outstanding balance of loans
we purchase and sell subject to representations and warranties increases and as the loans sold continue to season, we
expect that the level of repurchase activity and corresponding losses may increase.
The level of the liability for losses under representations and warranties is difficult to estimate and requires
considerable judgment. The level of loan repurchase losses is dependent on economic factors, purchaser or insurer loss
mitigation strategies, and other external conditions that may change over the lives of the underlying loans. Our estimate
of the liability for representations and warranties is developed by our credit administration staff and approved by our
senior management credit committee which includes our senior executives and senior management in our loan
production, loan servicing and credit risk management groups.
Our representations and warranties are generally not subject to stated limits of exposure. However, we believe
that the current UPB of loans sold by us and subject to representation and warranty liability to date represents the
maximum exposure to repurchases related to representations and warranties.
Loan origination fees
Following is a summary of our loan origination fees:
Loan origination fee revenue
Unpaid principal balance of loans purchased and originated for sale
2019
Year ended December 31,
2018
(in thousands)
2017
174,156 $
$
119,202
$ 61,531,095 $ 41,444,793 $ 46,027,911
101,641 $
Loan origination fees increased $72.5 million during the year ended December 31, 2019 compared to the year
ended December 31, 2018, and the increase was primarily due to an increase in the volume of loans we produced. Loan
origination fees decreased $17.6 million during the years ended December 31, 2018 compared to the year ended
December 31, 2017, and the decrease was primarily due to decreases in the volume of 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 loans fulfilled subject to fulfillment fees
Average fulfillment fee rate (in basis points)
2019
Year ended December 31,
2018
(dollars in thousands)
2017
160,610 $
$
80,359
$ 56,033,704 $ 26,194,303 $ 22,971,119
35
81,350 $
31
29
Fulfillment fees from PMT represent fees we collect for services we perform on behalf of PMT in connection
with the acquisition, packaging and sale of loans. The fulfillment fees are calculated as a percentage of the UPB of the
loans we fulfill for PMT.
Fulfillment fees increased $79.3 million and $1.0 million during the years ended December 31, 2019 and 2018,
compared to the years ended December 31, 2018 and 2017, respectively. The increases were primarily due to increased
volume of loans we fulfilled for PMT, partially offset by an increase in discretionary reductions in the fulfillment fee
rate during the years ended December 31, 2019 and 2018 compared to the respective prior years.
53
Net loan servicing fees
Following is a summary of our net loan servicing fees:
Net loan servicing fees:
Loan servicing fees:
From non-affiliates
From PennyMac Mortgage Investment Trust
From Investment Funds
Other
Amortization, impairment and change in fair value of mortgage
servicing rights, mortgage servicing liabilities and excess servicing
spread financing net of hedging results
Net loan servicing fees
Average loan servicing portfolio
2019
Year ended December 31,
2018
(in thousands)
2017
$
730,165 $
48,797
—
98,564
877,526
585,101 $
42,045
3
64,133
691,282
475,848
43,064
1,461
58,924
579,297
(583,861)
293,665 $
(273,238)
$
306,059
$ 334,169,204 $ 269,402,670 $ 221,505,951
(245,889)
445,393 $
Amortization, impairment and change in fair value of mortgage servicing rights and excess servicing spread
financing net of hedging results 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 amortization, impairment and change in fair value of mortgage
servicing rights, mortgage servicing liabilities and excess servicing spread
financing net of hedging results
2019
Year ended December 31,
2018
(in thousands)
2017
$ (429,571) $ (280,015) $ (236,584)
(559,043)
9,256
395,497
163,671
(8,500)
(121,045)
(18,149)
19,350
(37,855)
$ (583,861) $ (245,889) $ (273,238)
$ 2,764,105 $ 2,433,758 $ 1,873,001
15,587
$
$ 195,461 $ 229,607 $ 262,078
18,718 $
10,506 $
$ 2,926,790 $ 2,820,612 $ 2,119,588
$
14,120
$ 178,586 $ 216,110 $ 236,534
29,140 $
8,681 $
Average balances:
Mortgage servicing rights
Mortgage servicing liabilities
Excess servicing spread financing
At year end:
Mortgage servicing rights
Mortgage servicing liabilities
Excess servicing spread financing
54
Following is a summary of our loan servicing portfolio:
Loans serviced
Prime servicing:
Owned:
Mortgage servicing rights
Originated
Acquired
Mortgage servicing liabilities
Loans held for sale
Subserviced for PMT
Total prime servicing
Special servicing – Subserviced for PMT
Total loans serviced
December 31,
December 31,
2019
2018
(in thousands)
$ 166,188,825
59,598,279
225,787,104
2,758,454
4,724,006
233,269,564
135,288,944
368,558,508
125,724
$ 368,684,232
$ 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
Net loan servicing fees decreased $151.7 million during the year ended December 31, 2019 compared to the
year ended December 31, 2018. The decrease was primarily due to an increase of $338.0 million in losses in fair value of
MSR, MSLs and excess servicing spread financing, net of hedging results, compared to the year ended
December 31, 2018, resulting from the effect of decreasing interest rates on mortgage servicing asset and liability fair
values. The increased losses were partially offset by an increase of $186.2 million in loan servicing fees, resulting from
an increase of 24% in our average servicing portfolio for the year ended December 31, 2019 compared to the year ended
December 31, 2018.
Net loan servicing fees increased $139.3 million during the year ended December 31, 2018, compared to the
year ended December 31, 2017. The increase was due to a combination of an increase of $112.0 million of mortgage
loan servicing fees, resulting from growth in our loan servicing portfolio and a decrease of $27.3 million in fair value
losses and impairment of MSRs and MSL, net of hedging results, resulting from the effect of generally rising interest
rates during 2017.
55
Net Interest Income
Net interest income increased $4.9 million during the year ended December 31, 2019 compared to the year
ended December 31, 2018. The increase was primarily due to:
•
•
•
an increase of $56.3 million in placement fees we receive relating to custodial funds that we manage,
reflecting the growth of our servicing portfolio and net interest income relating to growth in our average
inventory of loans held for sale, partially offset by
a $33.4 million decrease in the financing incentives we received from one of our lenders for financing
mortgage loans approved for satisfying certain consumer relief characteristics; and
a $22.7 million increase in interest shortfall on repayment of loans serviced for Agency securitizations.
When a borrower repays a loan, we are responsible for paying the full month’s interest to the holders of the
Agency securities that are backed by the loan regardless of when in the month the borrower repays the
loan. The increase in refinancing activity in our MSR portfolio caused the increase in the interest shortfall.
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 the master repurchase agreement described below and an increase of $37.4 million in the
placement fees we received relating to the custodial funds that we manage, reflecting the growth of our servicing
portfolio and higher placement fee rates, as well as an increase in interest income on loans held for sale.
We entered into a master repurchase agreement in 2017 that provided us with incentives to finance mortgage
loans approved for satisfying certain consumer relief characteristics as provided in the agreement. We recorded
$14.7 million, $48.1 million and $9.2 million of such incentives as reductions of Interest expense during the years ended
December 31, 2019, 2018 and 2017, respectively. The master repurchase agreement expired on August 21, 2019.
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
2019
Year ended December 31,
2018
(in thousands)
2017
$
$
29,303 $
7,189
36,492
—
36,492
—
36,492 $
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
$ 2,450,916 $ 1,566,132 $ 1,544,585
29,329
$ 1,573,914
—
$ 2,450,916 $ 1,566,132
—
Management fees from PMT increased by $12.0 million during the year ended December 31, 2019, compared
to the year ended December 31, 2018, reflecting the combined effect of the performance incentive fees arising from
PMT’s increased profitability and the increase in PMT’s average shareholders’ equity upon which its management fees
are based. The increase in average shareholders’ equity was primarily due to the issuance of new common shares by
PMT during the year ended December 31, 2019.
56
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. 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.
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:
2019
Year ended December 31,
2018
(in thousands)
2017
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
$
$
$
141 $
275
416 $
1,672 $
140 $
192
332 $
1,397 $
141
(23)
118
1,205
Change in fair value of investment in and dividends received from PMT increased $84,000 during the year
ended December 31, 2019, compared to the year ended December 31, 2018, and increased $214,000 during the year
ended December 31, 2018, compared to the year ended December 31, 2017, 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, 2019.
Other revenues
Other revenue decreased $1.2 million for the year ended December 31, 2019, compared to the year ended
December 31, 2018. The decrease was primarily due to a decrease of $747,000 in Repricing of Payable to exchanged
Private National Mortgage Acceptance Company, LLC unitholders under the tax receivable agreement as a result of a
smaller change in tax rate in 2019 compared to 2018.
Other revenue decreased $25.5 million for the year ended December 31, 2018, compared to the year ended
December 31, 2017. The decrease was primarily due to a decrease of $31.8 million in Repricing 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 recognized 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. Under Accounting Standard Update 2014-09, reimbursements must be accounted for as
revenue. Those reimbursements were included as a reduction of expense in previous years.
57
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
2019
2017
Year ended December 31,
2018
(dollars in thousands)
$ 293,987 $ 256,750 $ 229,710
65,922
42,392
20,697
$ 503,458 $ 403,270 $ 358,721
124,203
60,497
24,771
70,574
50,695
25,251
3,709
4,215
3,335
3,460
3,024
3,189
Compensation expense increased $100.2 million during the year ended December 31, 2019, compared to the
year ended December 31, 2018. The increase in compensation was primarily due to increases in incentive compensation
resulting from performance-based incentives in our mortgage banking business and higher than expected attainment of
profitability targets along with increases in base salaries, taxes and benefits due to increased average head count
resulting from the growth in our mortgage banking activities during 2019.
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.
Servicing
Servicing expense increased $27.6 million and $19.4 million in the years ended December 31, 2019 and 2018
compared to the years ended December 31, 2018 and 2017, respectively. The increases were due to growth in our
government-insured or guaranteed mortgage servicing portfolio, which includes loans that are subject to
nonreimbursable servicing advance losses, and to our EBO program to purchase defaulted loans from Ginnie Mae pools.
During the year ended December 31, 2019, we purchased $4.4 billion in UPB of EBO loans as compared to $3.0 billion
for the year ended December 31, 2018 and $2.9 billion for the year ended December 31, 2017.
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.
Technology
Technology expense increased $7.8 million and $8.1 million in the years ended December 31, 2019 and 2018
compared to the years ended December 31, 2018 and 2017, respectively. The increases were primarily due to growth in
our loan servicing operations and continued investment in our loan production and servicing infrastructure.
58
Occupancy and equipment
Occupancy and equipment expenses increased $1.8 million and $4.5 million during the years ended
December 31, 2019 and 2018, compared to the years ended December 31, 2018 and 2017, 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, 2019, 2018 and 2017, our effective tax rates were 25.8%, 8.7%, and 7.3%,
respectively. The difference in prior years 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 has in turn increased our effective income tax rate.
Balance Sheet Analysis
Following is a summary of key balance sheet items as of the dates presented:
December 31, December 31,
2019
2018
(in thousands)
ASSETS
Cash and short-term investments
Loans held for sale at fair value
Servicing advances, net
Investments in and advances to affiliates
Mortgage servicing rights
Loans eligible for repurchase
Other
Total assets
$
262,902 $
273,113
2,521,647
313,197
165,886
2,820,612
1,102,840
281,278
$ 10,204,017 $ 7,478,573
4,912,953
331,169
157,343
2,926,790
1,046,527
566,333
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt
Long-term debt
Liability for loans eligible for repurchase
Income taxes payable
Other
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity
$ 4,639,001 $ 2,332,143
1,648,973
1,102,840
400,546
340,280
5,824,782
1,653,791
$ 10,204,017 $ 7,478,573
1,493,466
1,046,527
504,569
458,947
8,142,510
2,061,507
Total assets increased $2.7 billion from $7.5 billion at December 31, 2018 to $10.2 billion at
December 31, 2019. The increase was primarily due to an increase of $2.4 billion in loans held for sale at fair value
resulting from an increase in loan production inventory and $106.2 million in MSRs reflecting continued additions from
our loan production activities and servicing portfolio acquisitions.
Total liabilities increased by $2.3 billion from $5.8 billion as of December 31, 2018 to $8.1 billion as of
December 31, 2019. The increase was primarily attributable to an increase of $2.3 billion in borrowings required to
finance a larger inventory of loans held for sale combined with a $91.3 million increase in other liabilities due to
recognition of operating lease liabilities effective January 1, 2019, as the result of our adoption of the Financial
Accounting Standards Board’s Accounting Standards Update 2016-02, Leases (Topic 842), which requires us to
recognize our contractual lease rights and obligations on our consolidated balance sheet.
59
Cash Flows
Our cash flows for the three years ended December 31, 2019 are summarized below:
Operating
Investing
Financing
Net increase (decrease) in cash and restricted cash
Operating activities
2019
Year ended December 31,
2018
(in thousands)
$ (2,245,123) $ 572,396 $ (883,412)
(339,231)
1,161,174
(61,469)
148,782
2,128,995
(322,611)
(132,034)
32,654 $ 117,751 $
$
2017
Net cash (used in) provided by operating activities totaled ($2.2) billion, $572.4 million, and ($883.4) million
during the years ended December 31, 2019, 2018, and 2017 respectively. Our cash flows from operating activities are
primarily influenced by changes in the levels of our inventory of loans held for sale as shown below:
2019
Year ended December 31,
2018
(in thousands)
2017
Cash flows from:
Loans held for sale
Other operating sources
$ (2,487,105) $ 338,838 $ (1,019,898)
136,486
(883,412)
233,558
$ (2,245,123) $ 572,396 $
241,982
Cash provided by other operating sources for the year ended December 31, 2019 was consistent with the year
ended December 31, 2018. 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 operating cash flows arising from net changes in
other assets and accounts payable and accrued expenses in the amount of $68.2 million. The master repurchase
agreement expired on August 21, 2019.
Investing activities
Net cash provided by investing activities was $148.8 million during the year ended December 2019, primarily
comprised of $366.1 million in net settlement of derivative financial instruments used to hedge our investment in MSRs,
partially offset by $227.4 million used in purchase of MSRs.
Net cash used in investing activities was $322.6 million and $339.2 million during the years ended
December 31, 2018, and 2017, respectively, primarily comprised of cash used in purchase of MSRs and net settlements
of derivative financial instruments used to hedge our investment in MSRs.
60
Financing activities
Net cash provided by financing activities totaled $2.1 billion during the year ended December 31, 2019 which
was primarily to finance the growth in our inventory of mortgage loans held for sale and our investments in MSR.
Net cash used in financing activities totaled $132.0 million during the year ended December 31, 2018 which
was 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 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 secured by 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 loans held for sale and MSRs.
Liquidity and Capital Resources
Our liquidity reflects our ability to meet our current obligations (including our operating expenses and, when
applicable, the retirement of, and margin calls relating to, our debt, and margin calls relating to hedges on our
commitments to purchase or originate mortgage loans and on our MSR investments), fund new originations and
purchases, and make investments as we identify them. We expect our primary sources of liquidity to be through cash
flows from business activities, proceeds from bank borrowings, proceeds from and issuance of ESS and/or equity or debt
offerings. We believe that our liquidity is sufficient to meet our current liquidity needs and make distributions to our
shareholders.
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, 2019, 2018 and 2017:
Average balance
Maximum daily balance
Balance at year end
2019
Year ended December 31,
2018
(in thousands)
$ 2,185,830 $ 1,626,729 $ 1,829,257
$ 4,141,680 $ 2,380,121 $ 3,022,656
$ 4,141,680 $ 1,935,200 $ 2,380,866
2017
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;
61
•
•
•
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;
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 or 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
62
• 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, 2019, we have repurchased
$14.9 million of shares under our stock repurchase program.
We continue to explore a variety of means of financing our continued growth, including debt financing through
bank warehouse lines of credit, bank loans, repurchase agreements, securitization transactions and corporate debt.
However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form
the financing will take or whether such efforts will be successful.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Off-Balance Sheet Arrangements
As of December 31, 2019, we have not entered into any off-balance sheet arrangements or guarantees.
Contractual Obligations
As of December 31, 2019 we had contractual obligations aggregating $13.7 billion, comprised of commitments
to purchase and originate 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.
Payment obligations under these agreements are summarized below:
Contractual obligations
Total
Payments due by year
Less than
1 year
1-3
years
(in thousands)
3-5
years
More than
5 years
Commitments to purchase and originate loans
Short-term debt
Long-term debt
Interest on long-term debt
Office leases
Payable to exchanged Private National Mortgage
Acceptance Company, LLC unitholders under
tax receivable agreement
Total
$ 7,122,316 $ 7,122,316 $
4,639,628
1,499,396
247,694
109,301
4,639,628
8,249
66,899
17,365
— $
—
12,561
130,309
30,702
— $
—
1,300,000
32,411
25,930
—
—
178,586
18,075
35,304
46,158
33,966
$ 13,664,493 $ 11,866,649 $ 173,572 $ 1,358,341 $ 265,931
12,192
—
—
63
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, 2019, 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.
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 (3)
Credit Suisse First Boston Mortgage Capital LLC (3)
JPMorgan Chase Bank, N.A.
Citibank, N.A.
Morgan Stanley Bank, N.A.
Bank of America, N.A.
BNP Paribas
Royal Bank of Canada
$ 1,135,430 $ 1,100,000 $ 300,000
April 24, 2020
April 26, 2020
100,000 $ 400,000 $ 400,000
$
936,172 $ 1,000,000 $ 50,000 October 9, 2020
$
653,170 $ 700,000 $ 300,000
$
August 4, 2020
582,941 $ 800,000 $ 100,000 August 21, 2020
$
374,190 $ 500,000 $ 500,000 March 12, 2020
$
183,880 $ 200,000 $ 100,000
$
July 31, 2020
175,897 $ 350,000 $ 20,000 March 31, 2020
$
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
$
497,948 $ 550,000 $
— March 12, 2020
$
$
$
$
650,000 $ 650,000
650,000 $ 650,000
— $ 150,000 $
— $
— $
February 25, 2023
August 25, 2023
— October 30, 2020
April 24, 2020
—
Banc of America Leasing and Capital LLC
$
20,810 $
25,000 $
—
June 13, 2022
(1) Outstanding indebtedness as of December 31, 2019.
(2) Total facility size, committed facility and maturity date include contractual changes through the date of this Report.
(3) The total credit facility from Credit Suisse is $1.5 billion. The borrowing of $100 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 and an
agreement to repurchase relating to the financing of Fannie Mae MSRs.
64
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, 2019:
Counterparty
Credit Suisse First Boston Mortgage Capital LLC (1)
Credit Suisse First Boston Mortgage Capital LLC (2)
JP Morgan Chase Bank, N.A.
Citibank, N.A.
Morgan Stanley Bank, N.A.
Bank of America, N.A.
Royal Bank of Canada
BNP Paribas
Weighted average
maturity of
advances under
Amount at risk repurchase agreement Facility maturity
(in thousands)
$ 1,709,197
$
$
$
$
$
$
$
April 26, 2020 April 26, 2020
72,865 February 12, 2020 April 24, 2020
61,561
March 1, 2020 October 9, 2020
48,017 March 18, 2020 August 4, 2020
42,181 March 16, 2020 August 21, 2020
January 27, 2020 January 27, 2020
29,252
13,811 March 31, 2020 March 31, 2020
July 31, 2020
10,233 March 12, 2020
(1) The borrowing facility with Credit Suisse First Boston Mortgage Capital LLC is in the form of a sale of a variable
funding note under an agreement to repurchase.
(2) The borrowing facility with Credit Suisse First Boston Mortgage Capital LLC is in the form of an asset sale under
an agreement to repurchase.
All debt financing arrangements that matured between December 31, 2019 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.
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.
65
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.
Mortgage Servicing Rights
The following tables summarize the estimated change in fair value of MSRs as of December 31, 2019, 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:
$
%
$ 3,120,259
$ 3,020,338
$ 2,972,803
$ 2,882,228
$ 2,839,055
$ 2,756,634
$
193,469
$
6.6 %
93,548
$
3.2 %
46,014
$
1.6 %
(44,561)
$
(1.5) %
(87,734)
$
(3.0) %
(170,155)
(5.8) %
66
Prepayment speed shift in %
-20%
-10%
-5%
+5%
+10%
+20%
(dollar amounts in thousands)
Fair value
Change in fair value:
$
%
$ 3,212,107
$ 3,062,832
$ 2,993,263
$ 2,863,220
$ 2,802,379
$ 2,688,240
$
285,318
$
9.7 %
136,043
$
4.6 %
66,474
$
2.3 %
(63,569)
$
(2.2) %
(124,411)
$
(4.3) %
(238,549)
(8.2) %
Per-loan servicing cost shift in %
-20%
-10%
-5%
+5%
+10%
+20%
(dollar amounts in thousands)
Fair value
Change in fair value:
$
%
$ 3,024,854
$ 2,975,822
$ 2,951,306
$ 2,902,274
$ 2,877,757
$ 2,828,725
$
98,065
$
3.4 %
49,032
$
1.7 %
24,516
$
0.8 %
(24,516)
$
(0.8) %
(49,032)
$
(1.7) %
(98,065)
(3.4) %
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, 2019, 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:
$
%
$ 183,492
$ 181,007
$ 179,789
$ 177,398
$ 176,225
$ 173,923
$
4,907
$
2.7 %
2,422
$
1.4 %
1,203
$ (1,188)
$ (2,361)
$ (4,662)
0.7 %
(0.7) %
(1.3) %
(2.6) %
Prepayment speed shift in %
-20%
-10%
-5%
+5%
+10%
+20%
(dollar amounts in thousands)
Fair value
Change in fair value:
$
%
$ 197,151
$ 187,463
$ 182,929
$ 174,421
$ 170,426
$ 162,906
$ 18,565
$
10.4 %
8,878
$
5.0 %
4,344
$ (4,164)
$ (8,160)
$ (15,680)
2.4 %
(2.3) %
(4.6) %
(8.8) %
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.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
67
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.
Management’s 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, 2019.
The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by
Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein.
68
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
PennyMac Financial Services, Inc.
3043 Townsgate Road
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, 2019, 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, 2019, 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, 2019, of the Company and our report
dated February 28, 2020, expressed an unqualified opinion on those financial statements and included explanatory paragraphs
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 and the Company’s change in method of accounting for leases in 2019 due
to adoption of Accounting Standards Update 2016-2, Leases (Topic 842).
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
February 28, 2020
69
Changes in Internal Control over Financial Reporting
In the ordinary course of business, we review our system of internal control over financial reporting and make
changes that we believe will improve the efficiency and effectiveness of controls, ensure sufficient precision of controls,
and appropriately mitigate the risk of material misstatement in the financial statements.
Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer,
whether any changes in our internal control over financial reporting that occurred during our last fiscal quarter have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Below we
describe changes in our internal control over financial reporting since June 30, 2019 that management believes have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
During the quarter ended September 30, 2019, we substantially completed the implementation of an internally
developed loan servicing system. In connection with this implementation and related business process changes, we
updated the design of multiple internal controls over financial reporting that were previously considered effective to
reflect the design of the loan servicing system and associated data sources, and implemented controls to replace controls
previously addressed by certain service organization SOC 1 Reports (System and Organization Controls Reports). We
adopted this system and the related processes and controls during the quarter ended September 30, 2019. Therefore, the
use of this system was included in the preparation of our financial statements for the year ended December 31, 2019. We
continue to monitor and test these controls for adequate design and operating effectiveness.
Item 9B. Other Information
None.
70
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 29, 2020, which is
within 120 days after the end of fiscal year 2019.
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 29, 2020, which is
within 120 days after the end of fiscal year 2019.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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;
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.
71
The following table provides information as of December 31, 2019 concerning our shares of common stock
authorized for issuance under our equity incentive plan.
(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)
6,147,999 $
—
6,147,999 $
18.40
—
18.40
4,223,430
—
4,223,430
Plan category
Equity compensation plans approved by
security holders (3)
Equity compensation plans not approved by
security holders (4)
Total
(1) The weighted average exercise price set forth in this column relates only to 3,699,164 shares of stock options
outstanding under our 2013 Equity Incentive Plan. The remaining securities included in column (a) of this table are
performance and time-based restricted stock units, for which no exercise price applies.
(2) This number includes a general pool of 4,223,430 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, 2019 pursuant to the foregoing formula was 1,322,024.
(3) Represents our 2013 Equity Incentive Plan.
(4) We do not have any equity plans that have not been approved by our stockholders.
The other 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 29, 2020, which is
within 120 days after the end of fiscal year 2019.
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 29, 2020, which is
within 120 days after the end of fiscal year 2019.
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 29, 2020, which is within
120 days after the end of fiscal year 2019.
72
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
3.1
3.1.1
3.2
3.2.1
4.1
10.1
10.2
10.3
10.4
10.5
10.6
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.
Amended and Restated Certificate of Incorporation of New PennyMac
Financial Services, Inc.
Certificate of Amendment to Amended and Restated Certificate of
Incorporation of New PennyMac Financial Services, Inc.
Amended and Restated Bylaws of New PennyMac Financial Services,
Inc.
Amendment to Amended and Restated Bylaws of PennyMac Financial
Services, Inc. (formerly known as New PennyMac Financial Services,
Inc.).
Description of Securities Registered Pursuant to Section 12 of the
Securities Exchange Act of 1934.
8-K12B
8-K12B
8-K12B
8-K12B
10-Q
*
November 1,
2018
November 1,
2018
November 1,
2018
November 1,
2018
November 4,
2019
Fifth Amended and Restated Limited Liability Company Agreement of
Private National Mortgage Acceptance Company, LLC, dated as of
November 1, 2018.
8-K12B
November 1,
2018
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
Amended and Restated Stockholder Agreement, dated as of
November 1, 2018, among PennyMac Financial Services, Inc., New
PennyMac Financial Services, Inc. and BlackRock Mortgage Ventures,
LLC.
8-K12B
November 1,
2018
Second Amended and Restated Stockholder Agreement, dated
February 12, 2020, by and among PennyMac Financial Services, Inc.
(formerly known as New PennyMac Financial Services, Inc.) and
BlackRock Mortgage Ventures, LLC.
8-K
February 13,
2020
Amended and Restated Stockholder Agreement, dated as of
November 1, 2018, among PennyMac Financial Services, Inc., New
PennyMac Financial Services, Inc. and HC Partners LLC.
8-K12B
November 1,
2018
73
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
10.7†
10.8†
10.9†
Employment Agreement, dated December 28, 2018, among
Stanford L. Kurland, Private National Mortgage Acceptance Company,
LLC and PennyMac Financial Services, Inc.
Employment Agreement, dated December 28, 2018, among David A.
Spector, Private National Mortgage Acceptance Company, LLC and
PennyMac Financial Services, Inc.
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
December 31,
2018
December 31,
2018
December 31,
2018
10.10†
Form of PennyMac Financial Services, Inc. Indemnification Agreement.
S-1/A
April 5, 2013
10.11†
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan.
8-K
May 14, 2013
10.12†
10.13†
10.14†
10.15†
10.16†
10.17†
10.18†
10.19†
10.20†
10.21†
First Amendment to the PennyMac Financial Services, Inc. 2013 Equity
Incentive Plan.
10-K
March 9, 2018
Second Amendment to the PennyMac Financial Services, Inc. 2013
Equity Incentive Plan.
DEF14A
April 17, 2018
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of
Restricted Stock Unit Award Agreement for Non-Employee Directors.
8-K
May 16, 2013
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of
Restricted Stock Unit Award Agreement for Executive Officers.
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of
Restricted Stock Unit Award Agreement for Other Eligible Participants.
10-Q
10-Q
November 6,
2015
November 6,
2015
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of
Stock Option Award Agreement.
8-K
June 17, 2013
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of
Restricted Stock Unit Subject to Performance Components Award
Agreement (2018).
10-Q
August 2, 2018
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
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of
Stock Option Award Agreement (2018).
10-Q
August 2, 2018
Omnibus Amendment to PennyMac Financial Services, Inc. 2013 Equity
Incentive Plan Restricted Stock Unit Award Agreements (2019).
10-K
March 5, 2019
74
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
10.22†
10.23†
10.24†
10.25†
10.26†
10.27†
10.28†
10.29†
10.30
10.31
10.32
10.33
Omnibus Amendment to PennyMac Financial Services, Inc. 2013 Equity
Incentive Plan Stock Option Award Agreement (2019).
10-K
March 5, 2019
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of
Restricted Stock Unit Award Agreement for Non-Employee Directors
(2019).
10-Q
May 6, 2019
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of
Restricted Stock Unit Subject to Continued Service Award Agreement
(Net Share Withholding) (2020).
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of
Restricted Stock Unit Subject to Continued Service Award Agreement
(Sale to Cover) (2020).
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of
Restricted Stock Unit Subject to Performance Components Award
Agreement (Net Share Withholding) (2020).
PennyMac Financial Services, Inc. 2013 Equity Incentive Plan Form of
Restricted Stock Unit Subject to Performance Components Award
Agreement (Sale to Cover) (2020).
Omnibus Amendment to PennyMac Financial Services, Inc. 2013 Equity
Incentive Plan Form of Restricted Stock Unit Award Agreements (Net
Share Withholding) (2017-2019).
Omnibus Amendment to PennyMac Financial Services, Inc. 2013 Equity
Incentive Plan Restricted Stock Unit Award Agreements (Sale to Cover)
(2017-2019).
Second Amended and Restated Management Agreement, dated as of
September 12, 2016, by and among PennyMac Mortgage Investment
Trust, PennyMac Operating Partnership, L.P. and PNMAC Capital
Management, LLC.
Amendment No. 1 to Second Amended and Restated Management
Agreement, dated as of September 27, 2017, by and among PennyMac
Mortgage Investment Trust, PennyMac Operating Partnership, L.P. and
PNMAC Capital Management, LLC.
Third Amended and Restated Flow Servicing Agreement, dated as of
September 12, 2016, by and between PennyMac Operating Partnership,
L.P. and PennyMac Loan Services, LLC.
10-Q
10-Q
10-Q
10-Q
10-Q
10-Q
November 4,
2019
November 4,
2019
November 4,
2019
November 4,
2019
November 4,
2019
November 4,
2019
8-K
September 12,
2016
10-Q
8-K
November 7,
2017
September 12,
2016
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
75
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
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
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.
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.
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-Q
August 8, 2017
10-Q
November 7,
2017
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
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-K
March 5, 2019
Mortgage Loan Purchase Agreement, dated as of September 25, 2012,
by and between PennyMac Loan Services, LLC and PennyMac Corp.
10-K
March 10, 2016
Flow Sale Agreement, dated as of June 16, 2015, by and between
PennyMac Corp. and PennyMac Loan Services, LLC.
10-Q
August 7, 2015
HELOC Flow Purchase and Servicing Agreement, dated as of
February 25, 2019, by and between PennyMac Loan Services, LLC and
PennyMac Corp.
10-Q
May 6, 2019
Third Amended and Restated Master Repurchase Agreement, dated as of
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.
8-K
May 3, 2017
76
Exhibit No. Exhibit Description
10.45
10.46
10.47
10.48
10.49
10.50
10.51
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.
Amendment No. 2 to Third Amended and Restated Master Repurchase
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.
Amendment No. 3 to Third Amended and Restated Master Repurchase
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.
Amendment No. 4 to Third Amended and Restated Master Repurchase
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.
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.
Amendment No. 6 to Third Amended and Restated Master Repurchase
Agreement, dated as of April 26, 2019, 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.
Amendment No. 7 to the Third Amended and Restated Master
Repurchase Agreement, dated as of September 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.
Incorporated by Reference
from the Below-Listed Form
(Each Filed under SEC File
Number 15-68669 or 001-38727)
Form
Filing Date
10-Q
August 8, 2017
10-K
March 9, 2018
8-K
February 7, 2018
10-Q
August 2, 2018
10-K
March 5, 2019
10-Q
May 6, 2019
10-Q
November 4,
2019
10.52
Amended and Restated Guaranty, dated as of April 28, 2017, by Private
National Mortgage Acceptance LLC in favor of Credit Suisse First
Boston Mortgage Capital LLC.
8-K
May 3, 2017
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
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62
10.63
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
Amendment No. 1 to Amended and Restated Credit Agreement, dated
November 17, 2017, by and among Private National Mortgage
Acceptance Company, LLC and Credit Suisse AG.
10-K
March 9, 2018
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-K
March 5, 2019
Amendment No. 3 to Amended and Restated Credit Agreement, dated
October 31, 2019, by and among Private National Mortgage Acceptance
Company, LLC and Credit Suisse AG, Cayman Islands Branch.
*
Amended and Restated Collateral and Guaranty Agreement, dated
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.
8-K
November 22,
2016
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-K
March 5, 2019
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
First Amendment to Master Repurchase Agreement, dated as of May 23,
2017, between PennyMac Loan Services, LLC and JPMorgan Chase
Bank, N.A.
8-K
May 30, 2017
Second Amendment to Master Repurchase Agreement, dated as of
September 27, 2017, between JPMorgan Chase Bank, N.A. and
PennyMac Loan Services, LLC.
Third Amendment to Master Repurchase Agreement, dated as of
October 13, 2017, between JPMorgan Chase Bank, N.A. and PennyMac
Loan Services, LLC.
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
10-Q
10-Q
November 7,
2017
November 7,
2017
November 2,
2018
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
10.64
10.65
10.66
10.67
10.68
10.69
10.70
10.71
10.72
10.73
10.74
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
Sixth Amendment to Master Repurchase Agreement, dated as of July 23,
2019, by and between JPMorgan Chase Bank, N.A. and PennyMac Loan
Services, LLC.
8-K
July 25, 2019
Seventh Amendment to Master Repurchase Agreement, dated as of
October 11, 2019, between JPMorgan Chase Bank, N.A. and PennyMac
Loan Services, LLC.
10-Q
November 4,
2019
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
First Amendment to Guaranty, dated as of October 11, 2019, by Private
National Mortgage Acceptance Company, LLC in favor of JPMorgan
Chase Bank, N.A.
10-Q
November 4,
2019
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, 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.
Amendment No. 3 to Second Amended and Restated Base Indenture,
dated as of April 29, 2019, among PNMAC GMSR ISSUER TRUST,
Citibank, N.A., PennyMac Loan Services, LLC, Credit Suisse First
Boston Mortgage Capital LLC, and Pentalpha Surveillance LLC.
Amended and Restated Series 2016-MSRVF1 Indenture Supplement to
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.
8-K
August 16, 2017
8-K
March 6, 2018
8-K
August 15, 2018
10-Q
August 6, 2019
8-K
March 6, 2018
Amendment No. 1 to Amended and Restated Series 2016-MSRVF1
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.
10-Q
November 2,
2018
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
10.75
10.76
10.77
10.78
10.79
10.80
10.81
10.82
10.83
10.84
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
March 6, 2018
8-K
August 15, 2018
Master Repurchase Agreement, dated as of December 19, 2016, by and
among PNMAC GMSR ISSUER TRUST, PennyMac Loan Services,
LLC, and Private National Mortgage Acceptance Company, LLC.
8-K
December 21,
2016
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.
Guaranty, dated as of December 19, 2016, made by Private National
Mortgage Acceptance Company, LLC, in favor of PNMAC GMSR
ISSUER TRUST.
Amendment No. 1 to Guaranty, dated as of February 16, 2017, by and
between PNMAC GMSR ISSUER TRUST and Private National
Mortgage Acceptance Company, LLC.
Master Repurchase Agreement, dated as of December 19, 2016, by and
among PennyMac Holdings, LLC, PennyMac Loan Services, LLC, and
PennyMac Mortgage Investment Trust.
Guaranty, dated as of December 19, 2016, by PennyMac Mortgage
Investment Trust, in favor of PennyMac Loan Services, LLC.
Subordination, Acknowledgment and Pledge Agreement, dated as of
December 19, 2016, between PNMAC GMSR ISSUER TRUST and
PennyMac Holdings, LLC.
80
8-K
February 23,
2017
8-K
August 16, 2017
8-K
8-K
8-K
8-K
8-K
December 21,
2016
February 23,
2017
December 21,
2016
December 21,
2016
December 21,
2016
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
10.85
10.86
10.87
10.88
10.89
10.90
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
December 21,
2016
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
Guaranty, dated as of December 19, 2016, by Private National Mortgage
Acceptance Company, LLC in favor of Credit Suisse First Boston
Mortgage Capital LLC.
10-Q
November 7,
2017
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.
Amendment Number One to Loan and Security Agreement, dated as of
January 29, 2020, 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
Master Repurchase Agreement, dated as of September 11, 2019, by and
among Credit Suisse AG, Cayman Islands Branch, Credit Suisse First
Boston Mortgage Capital LLC, PennyMac Loan Services, LLC and
Private National Mortgage Acceptance Company, LLC.
10-Q
November 4,
2019
21.1
Subsidiaries of PennyMac Financial Services, Inc.
23.1
Consent of Deloitte & Touche LLP.
31.1
31.2
32.1
32.2
Certification of David A. Spector pursuant to Rule 13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Andrew S. Chang pursuant to Rule 13a-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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.
*
*
*
*
**
**
81
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, 2019 and
December 31, 2018 (ii) the Consolidated Statements of Income for the
years ended December 31, 2019 and December 31, 2018, (iii) the
Consolidated Statements of Changes in Stockholders’ Equity for the
years ended December 31, 2019 and December 31, 2018, (iv) the
Consolidated Statements of Cash Flows for the years ended
December 31, 2019 and December 31, 2018 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.
82
PENNYMAC FINANCIAL SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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-4
F-5
F-6
F-7
F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors 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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2019, 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, 2019, 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 February 28, 2020, expressed an unqualified opinion on the
Company's internal control over financial reporting.
Change in Accounting Principles
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 (“MSRs”) it had accounted for using the amortization method.
As discussed in Note 3 to the financial statements, the Company has changed its method of accounting for leases in 2019
due to adoption of Accounting Standards Update 2016-2, Leases (Topic 842) using the modified retrospective approach.
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.
F-2
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements
that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or
disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Mortgage Servicing Rights - Refer to Notes 3, 6 and 9 to the Financial Statements
Critical Audit Matter Description
The Company accounts for MSRs at fair value and categorizes its MSRs as “Level 3” fair value assets. The Company
uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the estimation of the
fair value of MSRs include the applicable pricing spread (a component of the discount rate), the prepayment and default
rates of the underlying loans (“prepayment speed”) and the annual per-loan cost of servicing, all of which are
unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSRs’
fair value measurement.
We identified the pricing spread and prepayment speed assumptions used in the valuation of MSRs as a critical audit
matter because of the significant judgments made by management in determining these assumptions. Auditing these
assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve
our fair value specialists, to evaluate the reasonableness of management’s estimates and assumptions related to selection
of the pricing spread and prepayment speed.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the pricing spread and prepayment speed assumptions used by the Company to estimate
the fair value of MSRs included the following, among others:
• We tested the design and operating effectiveness of internal controls over determining the fair value of MSRs,
including those over the determination of the pricing spread and prepayment speed assumptions
• With the assistance of our fair value specialists, we evaluated the reasonableness of management’s prepayment
speed assumptions by comparing them to independent market information
• We evaluated the reasonableness of management’s prepayment speed assumptions of the underlying mortgage
loans, by comparing historical prepayment speed assumptions to actual results
• We tested management’s process for determining the pricing spread assumptions by comparing them to the implied
spreads within market transactions and other third-party information used by management
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
February 28, 2020
We have served as the Company’s auditor since 2008.
F-3
PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2019
2018
(in thousands, except share amounts)
$
ASSETS
Cash (includes $52,599 and $108,174 pledged to creditors)
Short-term investments at fair value
Loans held for sale at fair value (includes $4,846,138 and $2,478,858 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 $82,157 and $70,582; $207,460 and $162,895
pledged to creditors)
Mortgage servicing rights at fair value (includes $2,920,603 and $2,807,333 pledged to creditors)
Real estate acquired in settlement of loans
Operating lease right-of-use assets
Furniture, fixtures, equipment and building improvements, net (includes $20,406 and $16,281 pledged to
creditors)
Capitalized software, net (includes $12,192 and $1,017 pledged to creditors)
Investment in PennyMac Mortgage Investment Trust at fair value
Receivable from PennyMac Mortgage Investment Trust
Loans eligible for repurchase
Other
$
$
Total assets
LIABILITIES
Assets sold under agreements to repurchase
Mortgage loan participation purchase and sale agreements
Obligations under capital lease
Notes payable secured by mortgage servicing assets
Excess servicing spread financing payable to PennyMac Mortgage Investment Trust at fair value
Derivative liabilities
Operating lease 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 loans eligible for repurchase
Liability for losses under representations and warranties
Total liabilities
Commitments and contingencies – Note 16
$
$
$
188,291
74,611
4,912,953
107,512
159,686
331,169
2,926,790
20,326
73,090
30,480
63,130
1,672
48,159
1,046,527
219,621
10,204,017
4,141,053
497,948
20,810
1,294,070
178,586
22,330
91,320
175,273
29,140
73,280
46,158
504,569
1,046,527
21,446
8,142,510
155,289
117,824
2,521,647
131,025
96,347
313,197
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
6,605
1,292,291
216,110
3,064
—
156,212
8,681
104,631
46,537
400,546
1,102,840
21,155
5,824,782
STOCKHOLDERS’ EQUITY
Common stock—authorized 200,000,000 shares of $0.0001 par value; issued and outstanding, 78,515,047
and 77,494,332 shares, respectively
Additional paid-in capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders’ equity
8
1,335,107
726,392
2,061,507
10,204,017
$
8
1,310,648
343,135
1,653,791
7,478,573
$
The accompanying notes are an integral part of these financial statements.
F-4
PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
2018
(in thousands, except earnings per share)
2017
2019
Revenues
Net gains on loans held for sale at fair value:
From non-affiliates
From PennyMac Mortgage Investment Trust
Loan origination fees:
From non-affiliates
From PennyMac Mortgage Investment Trust
Fulfillment fees from PennyMac Mortgage Investment Trust
Net loan servicing fees:
Loan servicing fees:
From non-affiliates
From PennyMac Mortgage Investment Trust
From Investment Funds
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 financing payable to PennyMac Mortgage Investment Trust
Net loan servicing fees
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
Repricing of payable to exchanged Private National Mortgage Acceptance Company, LLC unitholders under tax
receivable agreement
Other
Total net revenues
Expenses
Compensation
Servicing
Loan origination
Technology
Professional services
Occupancy and equipment
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
$
$
$
$
$
$
$
$
542,163
183,365
725,528
159,461
14,695
174,156
160,610
730,165
48,797
—
98,564
877,526
(593,117)
9,256
(583,861)
293,665
282,398
6,302
288,700
201,688
10,291
211,979
76,721
36,492
—
36,492
—
416
557
379
8,880
1,477,404
503,458
164,697
117,338
67,946
32,859
28,916
32,746
947,960
529,444
136,479
392,965
—
392,965
5.02
4.89
78,206
80,340
184,439
64,583
249,022
94,208
7,433
101,641
81,350
585,101
42,045
3
64,133
691,282
(237,389)
(8,500)
(245,889)
445,393
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
27,398
60,103
27,615
27,152
34,290
716,932
267,697
23,254
244,443
156,749
87,694
2.62
2.59
33,524
35,322
$
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$
$
369,815
21,989
391,804
112,124
7,078
119,202
80,359
475,848
43,064
1,461
58,924
579,297
(292,588)
19,350
(273,238)
306,059
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
20,429
52,013
17,845
22,615
30,235
619,554
335,909
24,387
311,522
210,765
100,757
4.34
4.03
23,199
24,999
The accompanying notes are an integral part of these financial statements.
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PENNYMAC FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flow from operating activities
Net income
2019
Year ended December 31,
2018
(in thousands)
2017
$
392,965 $
244,443 $
311,522
Adjustments to reconcile net income to net cash used in operating activities:
Net gains on loans held for sale at fair value
Amortization, impairment and change in fair value of mortgage servicing
rights, mortgage servicing liabilities and excess servicing spread
Accrual of servicing rebate payable to Investment Funds
Capitalization of interest and advance on 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
Amortization of right-of-use assets
Loss from disposition of fixed assets and impairment of capitalized
software
Purchase of loans held for sale from PennyMac Mortgage Investment Trust
Origination of loans held for sale
Purchase of loans held for sale from non-affiliates
Purchase of loans from Ginnie Mae securities and early buyout investors for
modification and subsequent sale
Sale to non-affiliates and principal payments of loans held for sale
Sale of loans held for sale to PennyMac Mortgage Investment Trust
Repurchase of loans subject to representations and warranties
Settlement of repurchase agreement derivatives
Increase in servicing advances
Sale of real estate acquired in settlement of loans
Increase in receivable from PennyMac Mortgage Investment Trust
(Increase) decrease in other assets
Decrease in operating lease liabilities
Increase (decrease) in accounts payable and accrued expenses
Decrease 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 (used in) provided by operating activities
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 in margin deposits
Net cash provided by (used in) investing activities
(725,528)
(249,022)
(391,804)
583,861
—
(73,611)
10,291
(4,100)
—
(275)
(557)
(379)
24,771
36,149
15,021
10,158
—
(50,110,085)
(11,831,703)
(1,725,227)
(6,271,447)
61,214,102
6,255,915
(18,660)
31,993
(98,121)
28,901
(20,257)
(62,549)
(12,680)
38,551
(36,645)
—
104,023
(2,245,123)
43,213
23,513
366,137
(227,445)
(6,124)
(29,385)
(21,127)
148,782
245,889
—
(79,317)
15,138
(29,170)
365
(192)
(589)
(1,126)
25,251
40,306
12,925
—
—
(37,967,724)
(5,000,193)
(531,665)
(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
52,256
13,103
(122,227)
(227,664)
(13,421)
(17,444)
(7,214)
(322,611)
273,238
129
(44,922)
16,951
6,348
1,040
23
(94)
(32,940)
20,697
43,249
8,395
—
1,336
(42,624,288)
(5,557,244)
—
(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)
(84,116)
5,872
(36,618)
(178,531)
(6,791)
(16,992)
(22,055)
(339,231)
F-7
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 purchase and sale certificates
Repayment of mortgage loan participation purchase and sale certificates
Advance of obligations under capital lease
Repayment of obligations under capital lease
Issuance of notes payable secured by mortgage servicing assets
Repayment of notes payable secured by mortgage servicing assets
Repayment of excess servicing spread financing
Payment of debt issuance costs
Issuance of common stock pursuant to exercise of stock options
Repurchase of common stock and Class A common stock
Payment of withholding taxes relating to stock-based compensation
Payment of dividend to common stock and Class A common stockholders
Net cash provided by (used in) 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 end of year are comprised of the following:
Cash
Restricted cash included in Other assets
2019
Year ended December 31,
2018
(in thousands)
2017
63,803,260
(61,596,780)
23,451,400
(23,485,918)
25,123
(10,918)
—
—
(40,316)
(6,603)
5,145
(1,056)
(4,634)
(9,708)
2,128,995
32,654
155,924
188,578 $
41,375,177
(41,820,843)
25,284,270
(25,279,510)
—
(14,366)
1,300,000
(900,000)
(46,750)
(19,982)
5,317
(5,293)
—
(10,054)
(132,034)
117,751
38,173
155,924 $
35,698,381
(35,054,437)
23,011,607
(23,155,463)
10,298
(12,751)
935,000
(186,935)
(54,980)
(22,201)
1,254
(8,599)
—
—
1,161,174
(61,469)
99,642
38,173
188,291 $
287
188,578 $
155,289 $
635
155,924 $
37,725
448
38,173
$
$
$
The accompanying notes are an integral part of these financial statements.
F-8
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 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 loan servicing. PennyMac’s investment management activities and a portion of its loan servicing
activities are conducted on behalf of entities that invest in residential mortgage loans and related assets. PennyMac’s
primary wholly owned subsidiaries are:
• PennyMac Loan Services, LLC (“PLS”)—a Delaware limited liability company that services portfolios of
residential mortgage loans on behalf of non-affiliates and PennyMac Mortgage Investment Trust (“PMT”),
a publicly held real estate investment trust, 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”).
• 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 PMT. 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 (collectively,
the “Investment Funds”). Together, PMT and the Investment Funds are referred to as the “Advised
Entities”. The Investment Funds were dissolved during 2018.
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-9
• 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.
• The Reorganization was treated as an integrated transaction that qualifies as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code and/or a transfer described in Section 351(a) of
the Internal Revenue Code.
• 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 are the Company’s historical financial
statements.
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, loan origination fees, fulfillment fees, loan
servicing fees, management fees, carried interest, less net interest paid to these entities) totaled 31%, 21%, and 20% of
total net revenues for the years ended December 31, 2019, 2018 and 2017, 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 these 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-10
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.
Cash Flows
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. Tenant security
deposits are included in Other assets on the Company’s consolidated balance sheets.
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.
Short-Term Investments
Short-term investments, which represent investments in accounts with depository institutions, 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.
F-11
Loans Held for Sale at Fair Value
Management has elected to account for 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 loans held for sale at fair value. The Company classifies most of the loans held for sale at
fair value as “Level 2” fair value assets. Certain of the Company’s loans held for sale may not be saleable into active
markets due to identified defects or delinquency. Such loans are classified as “Level 3” fair value assets.
Sale Recognition
The Company recognizes transfers of loans as sales when it surrenders control over the loans. Control over
transferred loans is deemed to be surrendered when (i) the 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 loans, and (iii) the Company does not maintain effective control over the transferred 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 specific loans.
Interest Income Recognition
Interest income on loans held for sale at fair value is recognized over the life of the loans using their contractual
interest rates. Income recognition is suspended and the interest receivable is reversed against interest income when 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 loan becomes contractually current.
Derivative Financial Instruments
The Company holds and issues derivative financial instruments that are created as a result of certain of its
operations. The Company also enters into derivative transactions as part of its interest rate risk management activities.
Derivative financial instruments created as a result of the Company’s operations include:
•
Interest rate lock commitments (“IRLCs”) that are created when the Company commits to purchase or
originate a 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 loans that satisfy certain consumer relief characteristics as
provided in the master repurchase agreement.
The Company is exposed to price risk relative to:
•
Its loans held for sale as well as to IRLCs. The Company bears price risk from the time a commitment to
fund a loan is made to a borrower or to purchase a loan from PMT, to the time either the prospective
transaction is cancelled or the loan is sold. During this period, the Company is exposed to losses if market
interest rates increase, because the fair value of the purchase commitment or prospective loan decreases.
• The fair value of its mortgage servicing rights (“MSRs”) when interest rates decrease. MSRs 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, thereby reducing their fair value. Reductions in
the fair value of MSRs affect earnings primarily through change in fair value and impairment charges.
F-12
The Company engages in interest rate risk management activities in an effort to moderate the effect of changes
in market interest rates on the fair value of 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 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 that are actively traded on an exchange 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, loans held for sale at
fair value and MSRs are included in Net gains on 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.
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
property 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. A valuation
allowance is provided for amounts expected to become 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 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.
F-13
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
placement fees 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 their existing loan 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.
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.
F-14
MSRs accounted for using the amortization method were periodically evaluated for impairment. Impairment
occurred when the current fair value of the MSRs decreased 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.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in Operating
lease right-of-use assets and Operating lease liabilities in its consolidated balance sheet, except leases with initial terms
less than or equal to 12 months. Lease expense is recognized on the straight-line basis over the lease term and is
recorded in Occupancy and equipment in the consolidated statements of income.
The Company’s lease agreements include both lease and non-lease components (such as common area
maintenance), which are generally included in the lease and are accounted for together with the lease as a single lease
component. As such, lease payments represent payments on both lease and non-lease components. At lease
commencement, lease liabilities are recognized based on the present value of the remaining lease payments and
discounted using the Company’s incremental borrowing rate. Right-of-use assets initially equal the lease liability,
adjusted for any lease payments made before lease commencement and for any lease incentives.
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.
Capitalized Software
The Company capitalizes certain consulting, payroll, and payroll-related costs related to the development of
computer software 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.
F-15
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 the Company 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.
Loans Eligible for Repurchase
The terms of the Ginnie Mae MBS program allow, but do not require, the Company to repurchase loans when
the loan is at least three months delinquent when it is repurchased. As a result of this right, the Company recognizes the
loans in Loans eligible for repurchase at their unpaid principal balances and records a corresponding liability in Liability
for loans eligible for repurchase on its consolidated balance sheets.
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 the Company’s Notes payable secured by
mortgage servicing assets, 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.
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 of ESS 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.
F-16
Liability for Losses Under Representations and Warranties
The Company’s agreements with the Agencies and other investors include representations and warranties
related to the 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 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 loans with the identified defects or indemnify the investor or insurer. In such cases, the Company bears any
subsequent credit loss on the loans. The Company’s credit loss may be reduced by any recourse it may have to
correspondent 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 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 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 loan repurchase rates, the
estimated severity of loss in the event of default and the probability of reimbursement by the correspondent loan seller.
The Company establishes a liability at the time 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 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
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 loans sold to date represents the maximum exposure to
repurchases related to representations and warranties.
Loan Servicing Fees
Loan servicing fees are received by the Company for servicing loans. 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.
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, is subservicing MSRs or loans held by PMT
or another third party or is subservicing distressed mortgage loans for the Advised Entities.
The Company’s obligations under its loan servicing agreements are fulfilled as the Company services the loans.
Fees are collected when the 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 loan servicing fees are recorded net of Agency guarantee fees paid by the Company and are recognized
when the loan payments are received from the borrowers. Loan servicing fees relating to loans serviced for the Advised
Entities are recognized in the month in which the loans are serviced.
F-17
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 loans. Fulfillment fee amounts are based upon a negotiated fee schedule and
the unpaid principal balance of the loans purchased by PMT. The Company’s obligation under the agreement is fulfilled
when PMT completes the sale or securitization of a loan it purchases. Fulfillment fee revenue is recognized in the month
the loan is purchased by PMT. Fulfillment fees are generally collected within 30 days of purchase by PMT.
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 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. 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.
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
F-18
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 Pronouncements
Effective January 1, 2019, the Company adopted FASB Accounting Standards Update 2016-02, Leases (Topic
842), as amended (“ASU 2016-02”), using the modified retrospective approach. As the result of this adoption, the
Company recorded a $58.6 million right-of-use asset, a corresponding lease liability and reclassified $20.7 million of
deferred rent from accrued liabilities to the lease liability for a total lease liability of $79.3 million. The Company did not
adjust amounts reported in the prior comparative period. At the adoption date, ASU 2016-02 did not have any effect on
the Company’s consolidated statements of income, stockholder’s equity or cash flows.
As part of its adoption of ASU 2016-02, the Company made the following accounting policy elections:
•
•
to retain its existing classification of existing leases; and
to exclude from its consolidated balance sheet leases with initial terms that are less than or equal to
12 months.
The Company determines if an arrangement is a lease at inception. Operating leases are included in Operating
lease right-of-use assets and Operating lease liabilities in its consolidated balance sheet. Operating lease right-of-use
assets represent the Company’s right to use the underlying assets and operating lease liabilities represent its obligation to
make the payments required by the leases.
As most of the Company’s leases do not provide an implicit discount rate, the Company uses its incremental
borrowing rate based on information available at the lease commencement date to determine the present value of its
lease payment obligations. The operating lease right-of-use assets also reflect any lease payments made and are reduced
by lease incentives. Lease expense is recognized on the straight-line basis over the lease term.
The Company has lease agreements that include both lease and non-lease components (such as common area
maintenance), which are generally included in the lease and are accounted for together with the lease as a single lease
component. Detailed lease disclosures are included in Note 10‒Leases.
In June 2016, the FASB issued Accounting Standard Update No. 2016-13, Financial Instruments-Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13, as amended,
replaces the existing measurement of the allowance for credit losses that is based on incurred loss accounting model with
an expected loss model, which requires the Company to use a forward-looking expected credit loss model for accounts
receivable, loans and other financial instruments that measured at amortized cost basis. Most of the Company’s financial
assets are measured at their fair values and are therefore not subject to the requirements of ASU 2016-13.
ASU 2016-13 is effective January 1, 2020 for the Company. Adoption of ASU 2016-13 will be applied using a
modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date.
Because of the Company’s current accounting, the adoption of ASU 2016-13 on January 1, 2020 is not expected to have
a significant effect on the Company’s allowance for credit losses on its assets subject to ASU 2016-13 due to the assets’
relatively short-term lives.
F-19
Note 4—Transactions with Affiliates
Transactions with PMT
Operating Activities
Mortgage Loan Production Activities and MSR Recapture
The Company sells newly originated conforming balance non-government insured or guaranteed loans to PMT
under a mortgage loan purchase agreement.
Pursuant to the terms of an MSR recapture agreement by and between the Company and PMT, which was
amended and restated effective September 12, 2016, if the Company refinances mortgage loans for which PMT
previously held the MSRs, the Company is generally required to transfer and convey to PMT cash in an amount equal to
30% of the fair market value of the MSRs related to all such mortgage loans. The MSR recapture agreement expires on
September 12, 2020, subject to automatic renewal for additional 18-month periods, unless terminated earlier in
accordance with the terms of the agreement.
Pursuant to a mortgage banking services agreement, which was amended and restated effective
September 12, 2016, the Company provides PMT with certain mortgage banking services, including fulfillment and
disposition-related services, for which it receives a fulfillment fee. Pursuant to the terms of the mortgage banking
services agreement, the monthly fulfillment fee is an amount that shall equal (a) no greater than the product of (i) 0.35%
and (ii) the aggregate initial unpaid principal balance (the “Initial UPB”) of all mortgage loans purchased in such month,
plus (b) in the case of all mortgage loans other than mortgage loans sold to or securitized through Fannie Mae or Freddie
Mac, no greater than the product of (i) 0.50% and (ii) the aggregate Initial UPB of all such mortgage loans sold and
securitized in such month; provided, however, that no fulfillment fee shall be due or payable to the Company with
respect to any mortgage loans underwritten to the Ginnie Mae 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 the respective mortgage loans
are held by PMT before being purchased by the Company. The Company purchases these mortgage loans “as is” and
without recourse of any kind from PMT; however, where the Company has a claim for repurchase, indemnity or
otherwise as against a correspondent seller, the Company is entitled, at its sole expense, to pursue any such claim
through or in the name of PMT.
F-20
Following is a summary of loan production activities, including MSR recapture, between the Company and
PMT:
Net gains on loans held for sale at fair value:
Net gains on loans held for sale to PMT
Mortgage servicing rights and excess servicing spread recapture
incurred
Sale of loans held for sale to PMT
2019
Year ended December 31,
2018
(in thousands)
2017
$
190,416
$
69,359
$
28,238
(7,051)
183,365 $
(4,776)
64,583 $
$
$ 6,255,915 $ 3,343,028 $
(6,249)
21,989
904,097
Tax service fees earned from PMT included in Loan origination fees
$
14,695 $
7,433 $
7,078
Fulfillment fee revenue
Unpaid principal balance of loans fulfilled for PMT subject to
fulfillment fees
$
160,610 $
81,350 $
80,359
$ 56,033,704 $ 26,194,303 $ 22,971,119
Sourcing fees paid to PMT
Unpaid principal balance of loans purchased from PMT
Loan Servicing
14,381 $
12,084
$
$ 47,937,306 $ 36,415,933 $ 40,561,241
10,925 $
The Company has a 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-21
• 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.
• During the period the U.S. Department of Treasury’s Home Affordable Modification Plan (“HAMP”) was
in place, the Company was entitled to retain any incentive payments made to it and to which it was entitled
under the 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 was required to reimburse PMT an amount equal to the incentive payments.
• The Company is 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 loan is a fixed-rate or adjustable-
rate loan. The base servicing fee rates are $7.50 per month for fixed-rate loans and $8.50 per month for
adjustable-rate loans.
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 loan servicing and property management fees earned from PMT:
2019
Year ended December 31,
2018
(in thousands)
2017
$
1,037
7,555
33,453
42,045
$
442 $
954
15,610
26,500
43,064
350
Loan type serviced:
Loans acquired for sale at fair value
Loans at fair value
Mortgage servicing rights
Property management fees received from PMT included in Other income
$
$
$
1,772 $
2,207
44,818
48,797 $
314 $
F-22
Investment Management Activities
The Company has a management agreement with PMT (“Management Agreement”), which was amended and
restated effective September 12, 2016. Pursuant to the Management Agreement, the Company oversees PMT’s business
affairs in conformity with the investment policies that are approved and monitored by its board of trustees, for which it
collects a base management fee and may collect a performance incentive fee. The Management Agreement provides that:
• The base management fee is calculated quarterly and is equal to the sum of (i) 1.5% per year of PMT’s
average shareholders’ equity up to $2 billion, (ii) 1.375% per year of PMT’s average shareholders’ equity
in excess of $2 billion and up to $5 billion, and (iii) 1.25% per year of PMT’s average shareholders’ equity
in excess of $5 billion.
• The performance incentive fee is calculated quarterly at a defined annualized percentage of the amount by
which PMT’s “net income,” on a rolling four-quarter basis and before deducting the incentive fee, exceeds
certain levels of return on “equity.”
The performance incentive fee is equal to the sum of: (a) 10% of the amount by which PMT’s “net income”
for the quarter exceeds (i) an 8% return on equity plus the “high watermark,” up to (ii) a 12% return on
PMT’s equity; plus (b) 15% of the amount by which PMT’s “net income” for the quarter exceeds (i) a 12%
return on PMT’s equity plus the “high watermark,” up to (ii) a 16% return on PMT’s equity; plus (c) 20%
of the amount by which PMT’s “net income” for the quarter exceeds a 16% return on equity plus the “high
watermark.”
For the purpose of determining the amount of the performance incentive fee:
“Net income” is defined as net income or loss attributable to PMT’s common shares of beneficial interest
computed in accordance with GAAP adjusted for certain other non-cash charges determined after
discussions between the Company and PMT’s independent trustees and approval by a majority of PMT’s
independent trustees.
“Equity” is the weighted average of the issue price per common share of all of PMT’s public offerings,
multiplied by the weighted average number of common shares outstanding (including restricted share units)
in the rolling four-quarter period.
The “high watermark” is the quarterly adjustment that reflects the amount by which the “net income”
(stated as a percentage of return on equity) in that quarter exceeds or falls short of the lesser of 8% and the
average Fannie Mae 30-year MBS yield (the “Target Yield”) for the four quarters then ended. If the
“net income” is lower than the Target Yield, the high watermark is increased by the difference. If the
“net income” is higher than the Target Yield, the high watermark is reduced by the difference. Each time a
performance incentive fee is earned, the high watermark returns to zero. As a result, the threshold amounts
required for the Company to earn a performance incentive fee are adjusted cumulatively based on the
performance of PMT’s “net income” over (or under) the Target Yield, until the “net income” in excess of
the Target Yield exceeds the then-current cumulative high watermark amount, and a performance incentive
fee is earned.
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.
F-23
The Management Agreement expires on September 12, 2020, subject to automatic renewal for additional
18-month periods, unless terminated earlier in accordance with the terms of the agreement. In the event of termination of
the Management Agreement between PMT and the Company, the Company may be entitled to a termination fee in
certain circumstances. The termination fee is equal to three times the sum of (a) the average annual base management
fee, and (b) the average annual performance incentive fee earned by the Company, in each case during the 24-month
period immediately preceding the date of termination.
Following is a summary of the base management and performance incentive fees earned from PMT:
Base management
Performance incentive
Expense Reimbursement
2019
Year ended December 31,
2018
(in thousands)
$ 29,303 $ 23,033 $ 22,280
304
$ 22,584
1,432
$ 36,492 $ 24,465
7,189
2017
Under the Management Agreement, PMT reimburses the Company for its organizational and operating
expenses, including third-party expenses, incurred on PMT’s behalf, it being understood that the Company and its
affiliates shall allocate a portion of their personnel’s time to provide certain legal, tax and investor relations services for
the direct benefit of PMT. With respect to the allocation of the Company’s and its affiliates’ personnel compensation, the
Company shall be reimbursed $120,000 per fiscal quarter, such amount to be reviewed annually and not preclude
reimbursement for any other services performed by the Company or its affiliates.
PMT is also required to pay its pro rata portion of rent, telephone, utilities, office furniture, equipment,
machinery and other office, internal and overhead expenses of the Company and its affiliates required for PMT’s and its
subsidiaries’ operations. These expenses are allocated based on the ratio of PMT’s proportion of gross assets compared
to all remaining gross assets managed by the Company as calculated at each fiscal quarter end.
F-24
The Company received reimbursements from PMT for expenses as follows:
Reimbursement of:
Common overhead incurred by the Company (1)
Compensation (1)
Expenses incurred on PMT's behalf, net
Payments and settlements during the year (2)
2019
Year ended December 31,
2018
(in thousands)
2017
$
5,340
480
4,362
$ 10,182
$ 177,116
$
4,640
480
1,113
$
6,233
$ 71,943
$
5,306
—
2,257
$
7,563
$ 64,945
(1) The Company adopted Accounting Standards Update 2014-09 Revenues from Contracts with Customers (Topic
606) (“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 as offsets to the respective expense line items.
(2) Payments and settlements include payments for the operating, investing and financing activities summarized in this
note 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 to February 1, 2023. The Company received $580,000, $69,000 and $30,000 in reimbursement
from PMT during the years ended December 31, 2019, 2018, and 2017, respectively.
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 under the Spread Acquisition Agreement. 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.
F-25
The principal amount paid by PLS for the participation certificates under the PMH Repurchase Agreement is
based upon a percentage of the market value of the underlying ESS. Upon PMH’s repurchase of the participation
certificates, PMH is required to repay PLS the principal amount relating thereto plus accrued interest (at a rate reflective
of the current market and consistent with the weighted average note rate of the VFN and any outstanding Term Notes) to
the date of such repurchase. PLS is then required to repay the Issuer Trust the corresponding amount under the PC
Repurchase Agreement.
The Company holds an investment in PMT in the form of 75,000 common shares of beneficial interest.
Following is a summary of investing activities between the Company and PMT:
2019
Year ended December 31,
2018
(in thousands)
2017
Assets purchased from PennyMac Mortgage Investment Trust under
agreements to resell:
Activity during the year:
Net repayments of assets purchased from PMT under agreement to resell
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
23,513 $
6,302 $
$
$
$ 107,512 $ 131,025
13,103 $
7,462 $
5,872
8,038
$
141 $
140 $
141
$
$
275
416 $
192
332 $
(23)
118
1,672 $
75
1,397
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, pay cash
to PMT in an amount equal to such fair market value in lieu of transferring such ESS.
F-26
Following is a summary of financing activities between the Company and PMT:
Excess servicing spread financing:
Issuance pursuant to recapture agreement
Repayment
Gain (loss) recognized
Interest expense
Recapture incurred pursuant to refinancings by the Company of mortgage
loans subject to excess servicing spread financing included in Net gains on
loans held for sale at fair value
Excess servicing spread financing at fair value
Receivable from and Payable to PMT
Amounts due from and payable to PMT are summarized below:
2019
Year ended December 31,
2018
(in thousands)
2017
$
$
$
$
1,757 $
40,316 $
9,256 $
10,291 $
2,688 $
46,750 $
(8,500) $
15,138 $
5,244
54,980
19,350
16,951
$
1,726 $
2,584 $
4,820
December 31, December 31,
2019
2018
(in thousands)
$ 178,586 $ 216,110
Receivable from PMT:
Fulfillment fees
Management fees
Correspondent production fees
Servicing fees
Allocated expenses and expenses incurred on PMT's behalf
Conditional reimbursement
Interest on assets purchased under agreements to resell
Payable to PMT:
Amounts advanced by PMT to fund its servicing advances
Mortgage servicing rights recapture payable
Other
December 31, December 31,
2019
2018
(in thousands)
$
$
$
$
18,285 $
10,579
10,606
4,659
3,724
221
85
48,159 $
10,006
6,559
2,071
4,841
9,066
801
120
33,464
70,520 $
149
2,611
73,280 $
100,554
179
3,898
104,631
F-27
Exchanged Private National Mortgage Acceptance Company, LLC Unitholders
The Company has a tax receivable agreement with certain former owners of PennyMac that provides for the
payment from time to time by the Company to PennyMac’s exchanged unitholders of an amount equal to 85% of the
amount of the net tax benefits, if any, that the Company is deemed to realize as a result of (i) increases in tax basis of
PennyMac’s assets resulting from exchanges of ownership interests in PennyMac and (ii) certain other tax benefits
related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax
receivable agreement.
The Reorganization eliminated the potential for unitholders to exchange any additional units subject to this tax
receivable agreement. However, the Company continues to be subject to the agreement and will be required to make
payments, to the extent any of the tax benefits specified above are deemed to be realized, under the tax receivable
agreement to those certain prior owners of PennyMac who effected exchanges of ownership interests in PennyMac for
the Company’s common stock before the closing of the Reorganization in November 2018.
Following is a summary of activity in Payable to exchanged Private National Mortgage Acceptance Company,
LLC unitholders under tax receivable agreement:
2019
Year ended December 31,
2018
(in thousands)
2017
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 $
— $
— $
7,723
$
— $ (6,726)
$
$
(379) $ (1,126) $ (32,940)
$ 46,158 $ 46,537 $ 44,011
(1) A $32.0 million reduction 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 loans in the form of
servicing arrangements and the liability under representations and warranties it makes to purchasers and insurers of the
loans.
The following table summarizes cash flows between the Company and transferees as a result of the sale of
loans in transactions where the Company maintains continuing involvement as servicer with the loans as servicer:
2019
Year ended December 31,
2018
(in thousands)
2017
$ 61,214,102 $ 44,557,560 $ 50,235,245
376,160
$
52,353
$
488,483 $
28,557 $
587,919 $
36,277 $
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 unpaid principal balance (the “UPB”) of the loans sold by the Company in
which it maintains continuing involvement:
Unpaid principal balance of loans outstanding
$ 168,842,011 $ 145,224,596
December 31,
2019
2018
(in thousands)
Delinquencies:
30-89 days
90 days or more:
Not in foreclosure
In foreclosure
Foreclosed
Bankruptcy
$
7,947,560 $
6,222,864
$
$
$
$
3,237,563 $
888,136 $
15,387 $
1,343,816 $
2,208,083
720,894
24,243
970,329
The following tables summarize the UPB of the Company’s loan servicing portfolio:
Investor:
Non-affiliated entities:
Originated
Purchased
PennyMac Mortgage Investment Trust
Loans held for sale
Delinquent 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, 2019
Contract
servicing and
subservicing
(in thousands)
Total
loans serviced
$ 168,842,011 $
59,703,547
228,545,558
—
4,724,006
— $ 168,842,011
59,703,547
—
228,545,558
—
135,414,668
135,414,668
4,724,006
—
$ 233,269,564 $ 135,414,668 $ 368,684,232
$
7,987,132 $
2,490,797
857,660 $
172,263
8,844,792
2,663,060
4,070,482
1,113,806
18,315
$ 15,680,532 $
1,898,367 $
$
6,412,291 $
$
274,592
68,331
89,421
4,345,074
1,182,137
107,736
1,462,267 $ 17,142,799
2,035,185
8,942,275
136,818 $
2,529,984 $
(1) Custodial funds include cash accounts holding funds on behalf of borrowers and investors relating to loans serviced
under servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company
earns placement fees on certain of the custodial funds it manages on behalf of the loans’ investors. Placement fees
are included in Interest income in the Company’s consolidated statements of income.
F-29
Investor:
Non-affiliated entities:
Originated
Purchased
PennyMac Mortgage Investment Trust
Loans held for sale
Subserviced for the Company (1)
Delinquent loans:
30 days
60 days
90 days or more:
Not in foreclosure
In foreclosure
Foreclosed
Bankruptcy
Custodial funds managed by the Company (2)
Servicing
rights owned
December 31, 2018
Contract
servicing and
Total
subservicing
(in thousands)
loans serviced
$ 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 loans for which the Company has purchased the MSRs are subserviced on the Company’s behalf by
other loan servicers on an interim basis when servicing of the loans has not yet been transferred to the Company’s
loan servicing platform.
(2) Custodial funds include cash accounts holding funds on behalf of borrowers and investors relating to loans serviced
under servicing agreements and are not recorded on the Company’s consolidated balance sheets. The Company
earns placement fees on certain of the custodial funds it manages on behalf of the loans’ investors. Placement fees
are included in Interest income in the Company’s consolidated statements of income.
Following is a summary of the geographical distribution of loans included in the Company’s servicing portfolio
for the top five and all other states as measured by UPB:
State
California
Florida
Texas
Virginia
Maryland
All other states
Note 6—Fair Value
December 31,
2019
December 31,
2018
(in thousands)
$ 57,311,867 $ 51,377,441
22,650,926
23,648,042
19,011,950
13,774,011
168,831,502
$ 368,684,232 $ 299,293,872
28,940,696
27,909,821
22,115,619
16,829,320
215,576,909
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 all of its MSRs, MSLs and all of its non-cash financial assets other than Assets
purchased from PennyMac Mortgage Investment Trust under agreements to resell pledged to creditors, to be accounted
for at fair value so changes in fair value will be reflected in income as they occur and more timely reflect the results of
the Company’s performance. The Company has also identified its ESS financing to be accounted for at fair value as a
means of hedging the related MSRs’ fair value risk.
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, 2019
Assets:
Short-term investments
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
Swaptions
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
Mortgage servicing rights at fair value
Investment in PennyMac Mortgage Investment Trust
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)
— $
74,611 $
—
4,529,075
— $
74,611
4,912,953
383,878
138,511
8,187
—
—
—
138,511
—
8,187
—
12,364
—
17,097
—
3,415
—
2,409
—
3,945
3,945
1,469
1,469
187,397
5,414
(27,711)
—
159,686
5,414
2,926,790
—
1,672
1,672
81,697 $ 4,564,360 $ 3,457,366 $ 8,075,712
—
—
12,364
17,097
3,415
2,409
—
—
35,285
—
35,285
—
—
—
—
146,698
—
146,698
2,926,790
—
— $
— $
178,586 $
178,586
—
—
—
—
—
—
—
— $
—
19,040
18,045
37,085
—
37,085
—
37,085 $
1,861
—
—
1,861
—
1,861
29,140
209,587 $
1,861
19,040
18,045
38,946
(16,616)
22,330
29,140
230,056
Level 1
Level 2
Level 3
Total
December 31, 2018
(in thousands)
— $
117,824 $
—
2,261,639
— $
117,824
2,521,647
260,008
—
—
—
—
—
—
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
2,820,612
1,397
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
Assets:
Short-term investments
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
Mortgage servicing rights at fair value
Investment in PennyMac Mortgage Investment Trust
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 loans held for sale, IRLCs, repurchase agreement derivatives,
MSRs, 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, 2019:
Year ended December 31, 2019
Assets
Loans held
for sale
Net interest
rate lock
Repurchase Mortgage
servicing
agreement
rights
commitments (1) derivatives
Total
Balance, December 31, 2018
Purchases and issuances, net
Capitalization of interest and advances
Sales and repayments
Mortgage servicing rights resulting from 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
loans held for sale
Balance, December 31, 2019
Changes in fair value recognized during the
year relating to assets still held at
December 31, 2019
$
$
(in thousands)
$
260,008 $
5,163,730
72,302
(3,456,856)
49,338 $ 26,770 $ 2,820,612 $ 3,156,728
15,019
5,976,266
570,072
227,445
—
—
72,302
—
— (3,488,849)
— (31,993)
—
—
—
884,876
884,876
(6,332)
—
(6,332)
(1,646,554)
—
331,067
331,067
—
—
—
(1,609) (1,006,143)
(1,609) (1,006,143)
(6,332)
(676,685)
(683,017)
— (1,646,554)
—
(2,420)
—
—
—
(2,420)
—
383,878 $
(813,827)
136,650 $
—
(813,827)
8,187 $ 2,926,790 $ 3,455,505
—
(5,755) $
136,650 $
165 $ (1,006,143) $
(875,083)
(1) For the purpose of this table, the IRLC asset and liability positions are shown net.
Liabilities
Balance, December 31, 2018
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 loan sales
Changes in fair value included in income
Balance, December 31, 2019
Changes in fair value recognized during the year relating to liabilities still
outstanding at December 31, 2019
Year ended December 31, 2019
Excess
servicing
spread
financing
Mortgage
servicing
liabilities
(in thousands)
Total
$ 216,110 $
8,681 $ 224,791
1,757
10,291
(40,316)
—
(9,256)
$ 178,586 $
1,757
—
10,291
—
(40,316)
—
37,988
37,988
(17,529)
(26,785)
29,140 $ 207,726
$
(9,256) $ (17,529) $ (26,785)
F-33
Assets
Loans held
for sale
Year ended December 31, 2018
Net interest
rate lock
Repurchase Mortgage
servicing
rights
agreement
commitments (1) derivatives
Total
$
782,211 $
58,272 $ 10,656 $ 638,010 $ 1,489,149
(in thousands)
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 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
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
—
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.
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 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
Year ended December 31, 2018
Excess
servicing
spread
financing
Mortgage
servicing
liabilities
(in thousands)
Total
$ 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-34
Assets
Balance, December 31, 2016
Purchases and issuances, net
Sales and repayments
Mortgage servicing rights resulting from 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
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
Loans held
for sale
Year ended December 31, 2017
Repurchase Mortgage
Net interest
rate lock
agreement
servicing
rights
Total
commitments (1) derivatives
(in thousands)
$
47,271 $
2,928,249
(1,339,580)
59,391 $
302,389
—
— $ 515,925 $
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 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
(37,651)
(18,301)
14,120 $ 250,654
$ (19,350) $
(18,301) $ (37,651)
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
loans held for sale at fair value upon purchase or funding of the respective loans and from the return to salability in the
active secondary market of certain loans held for sale.
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 the
Company’s election of the fair value option by income statement line item are summarized below:
Net
loan
servicing
fees
2019
Net gains on
loans held
for sale at
fair value Total
Year ended December 31,
2018
2017
Net
loan
servicing
fees
Net gains on
loans held
for sale at
fair value Total
(in thousands)
Net
loan
Net gains on
loans held
for sale at
servicing
fees
fair value Total
Assets:
Loans held for
sale
Mortgage
servicing rights
$
— $
811,895 $
811,895 $
— $
188,611 $ 188,611
$
— $
426,092 $ 426,092
(1,006,143)
$ (1,006,143) $
—
811,895 $
(1,006,143)
(129,384)
(194,248) $ (129,384) $
—
188,611 $
(129,384) (86,236)
59,227
$ (86,236) $
—
(86,236)
426,092 $ 339,856
Liabilities:
Excess
servicing
spread
financing
payable to
PennyMac
Mortgage
Investment
Trust
Mortgage
servicing
liabilities
$
9,256 $
— $
9,256 $
(8,500) $
— $
(8,500) $ 19,350 $
— $ 19,350
17,529
26,785 $
$
—
— $
17,529
26,785 $
13,040
4,540 $
—
— $
13,040
4,540
18,301
$ 37,651 $
—
18,301
— $ 37,651
Following are the fair value and related principal amounts due upon maturity of assets accounted for under the
fair value option:
Loans held for sale
December 31, 2019
Principal
amount
due upon
maturity
Difference
December 31, 2018
Principal
amount
due upon
maturity
Difference
Fair
value
Fair
value
(in thousands)
Current through 89 days delinquent $ 4,628,333 $ 4,431,854 $ 196,479 $ 2,324,203 $ 2,220,371 $ 103,832
90 days or more delinquent:
Not in foreclosure
In foreclosure
236,650
47,970
(380)
(2,441)
$ 4,912,953 $ 4,724,006 $ 188,947 $ 2,521,647 $ 2,420,636 $ 101,011
241,958
50,194
144,011
56,254
143,631
53,813
(5,308)
(2,224)
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
Level 1
Level 2
Level 3
Total
December 31, 2019
December 31, 2018
$
$
— $
— $
(in thousands)
—
—
$
$
9,850 $
2,150 $
9,850
2,150
F-36
The following table summarizes the total net losses on assets measured at fair values on a nonrecurring basis:
2019
Year ended December 31,
2018
(in thousands)
2017
Real estate acquired in settlement of loans
Mortgage servicing rights at lower of amortized cost or fair value
$
$
(1,913) $
—
(1,913) $
(75) $
—
(75) $
(125)
(6,853)
(6,978)
Fair Value of Financial Instruments Carried at Amortized Cost
The Company’s Assets purchased from PennyMac Mortgage Investment Trust under agreements to resell
pledged to creditors, Assets sold under agreements to repurchase, Mortgage loan participation purchase and sale
agreements, Notes payable secured by mortgage servicing assets 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 their fair values. The Company has concluded that the fair values of these assets and
liabilities other than the Term Notes included in Notes payable secured by mortgage servicing assets approximate their
carrying values due to their short terms and/or variable interest rates.
The fair value of the Term Notes at December 31, 2019 was based on non-affiliate broker indications of fair
value. The fair value of Term Notes at December 31, 2018 was estimated using a discounted cash flow approach using
indications of market pricing spreads provided by non-affiliate brokers to develop an appropriate discount rate. The fair
value and carrying value of the Term Notes are summarized below:
Term Notes
Fair value
Carrying value
Valuation Governance
December 31, 2019 December 31, 2018
(in thousands)
$
$
1,303,047 $
1,294,070 $
1,285,894
1,292,291
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 use of unobservable inputs
that are significant to the estimation of the items’ fair values. Unobservable inputs reflect the Company’s own judgments
about the factors that market participants use in pricing an asset or liability, and are based on the best information
available under the circumstances.
Due to the difficulty in estimating the fair values of “Level 3” fair value assets and liabilities, the Company has
assigned the responsibility for estimating the fair value of these items to specialized staff and subjects the valuation
process to significant senior management oversight. The Company’s Financial Analysis and Valuation group (the “FAV
group”) is the Company’s specialized staff responsible for estimating the fair values of “Level 3” fair value assets and
liabilities other than IRLCs.
F-37
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. During the years presented,
the Company’s senior management valuation committee included the Company’s executive chairman, chief executive,
chief financial, chief risk and deputy chief financial officers.
The FAV group is responsible for reporting to the Company’s senior management valuation committee on the
changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the
valuation and any changes in model methods and inputs. To assess the reasonableness of its valuations, the FAV group
presents an analysis of the effect on the valuation of changes to the significant inputs to the models.
The Company has assigned responsibility for developing the fair values of IRLCs to its Capital Markets Risk
Management staff. The fair values developed by the Capital Markets Risk Management staff are reviewed by the
Company’s Capital Markets Operations group.
Valuation Techniques and Inputs
Following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and
“Level 3” fair value assets and liabilities:
Loans Held for Sale
Most of the Company’s loans held for sale at fair value are saleable into active markets and are therefore
categorized as “Level 2” fair value assets. The fair values of “Level 2” fair value loans are determined using their quoted
market or contracted selling price or market price equivalent.
Certain of the Company’s loans held for sale are not saleable into active markets with observable inputs that are
significant to the estimation of fair value and are therefore categorized as “Level 3” fair value assets. Loans held for sale
categorized as “Level 3” fair value assets include:
• Certain delinquent government guaranteed or insured loans purchased by the Company from Ginnie Mae
guaranteed pools in its loan servicing portfolio. The Company’s right to purchase delinquent government
guaranteed or insured loans arises as the result of the loan being at least three months delinquent on the
date of repurchase by the Company and provides an alternative to its obligation to continue advancing
principal and interest at the coupon rate of the related Ginnie Mae security. Such repurchased loans may be
resold to investors and thereafter may be repurchased to the extent eligible for resale into a new Ginnie
Mae guaranteed pool. Such eligibility for resale generally occurs when the repurchased loans become
current either through the borrower’s reperformance or through completion of a modification of the loan’s
terms.
• Certain of PFSI’s loans held for sale that become non-saleable into active markets due to identification of a
defect or to the repurchase of a loan with an identified defect by the Company.
• Home equity lines of credit held for sale to PMT. At present, an active market with observable inputs that
are significant to the estimation of fair value of home equity lines of credit does not exist.
The Company uses a discounted cash flow model to estimate the fair value of its “Level 3” fair value loans held
for sale. The significant unobservable inputs used in the fair value measurement of the Company’s “Level 3” fair value
loans held for sale are discount rates, home price projections, voluntary prepayment/resale speeds and total prepayment
speeds. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value
measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment
speeds.
F-38
Following is a quantitative summary of key “Level 3” fair value inputs used in the valuation of loans held for
sale at fair value:
Fair value (in thousands)
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
(1) Weighted average inputs are based on fair value of loans.
December 31, 2019 December 31, 2018
$
260,008
383,878
$
3.0% – 9.2%
3.0%
2.8% – 9.2%
2.9%
2.6% – 3.2%
2.8%
2.2% – 5.0%
3.5%
0.4% – 21.4%
18.2%
0.1% – 21.8%
20.1%
0.5% – 39.2%
36.2%
0.1% – 40.5%
37.7%
(2) Voluntary prepayment/resale speed is measured using Life Voluntary Conditional Prepayment Rate (“CPR”).
(3) Total prepayment speed is measured using Life Total CPR.
All changes in fair value relating to loans held for sale are the result of changes in the loan’s instrument specific
credit risk as indicated by successful modifications of the loan’s terms or changes in the respective 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 loans held for sale are included in Net gains on loans held for sale at fair value in the Company’s consolidated
statements of income.
Derivative Financial Instruments
Interest Rate Lock Commitments
IRLCs are categorized 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 loans and the probability that the 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 loan principal and interest payment cash flow
component, which has decreased in fair value. Changes in fair value of IRLCs are included in Net gains on loans
acquired for sale at fair value in the consolidated statements of income.
F-39
Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:
Fair value (in thousands) (1)
Key inputs (2):
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, 2019 December 31, 2018
$
136,650
49,338
$
12.2% – 100%
86.5%
16.6% – 100%
84.1%
1.4 – 5.7
4.2
1.5 – 5.5
3.8
0.3% – 2.8%
1.6%
0.4% – 3.2%
1.5%
(1) For purposes of this table, the IRLC assets and liability positions are shown net.
(2) Weighted average inputs are based on the committed amounts.
Hedging Derivatives
Fair value of hedging derivative financial instruments that are actively traded on exchanges 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 loans acquired for sale at fair
value, or Net 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
Through August 21, 2019, the Company had a master repurchase agreement that included incentives for
financing loans approved for satisfying certain consumer relief characteristics. These incentives are classified for
financial reporting purposes as embedded derivatives and are separated for reporting purposes from the master
repurchase agreement. The Company classifies repurchase agreement derivatives as “Level 3” fair value assets. The
significant unobservable inputs into the valuation of repurchase agreement derivative assets are the discount rate and the
Company’s expected approval rate of the loans financed under the master repurchase agreement. The resulting ratios
included in the Company’s fair value estimate were 99.0% and 97.0% at December 31, 2019 and December 31, 2018,
respectively.
F-40
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 loan 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, 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:
2019
Fair
value
Year ended December 31,
2018
Fair
value
2017
Fair
value
Amortized
cost
(Amount recognized and unpaid principal balance of underlying mortgage loans amounts in thousands)
MSR and pool characteristics:
Amount recognized
Unpaid principal balance of underlying mortgage loans
Weighted average servicing fee rate (in basis points)
$884,876
$56,038,354
41
Key inputs (1):
Pricing spread (2):
Range
Weighted average
Prepayment speed (3):
Range
Weighted average
Average life (in years):
Range
Weighted average
Annual per-loan cost of servicing:
Range
Weighted average
5.5% – 16.2%
8.5%
7.7% – 32.8%
13.5%
2.6 – 8.2
6.2
$78 – $100
$97
$591,757
$42,008,585
36
5.8% – 16.4%
9.9%
3.9% – 61.8%
10.8%
0.5 – 11.6
7.3
$78 – $99
$91
$24,471
$2,316,539
31
7.6% – 11.2%
10.5%
3.9% – 71.8%
12.6%
0.8 – 11.7
6.6
$78 – $101
$89
$556,630
$44,664,551
31
7.6% – 15.2%
10.7%
3.4% – 47.6%
9.1%
1.5 – 12.2
8.1
$79 – $101
$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”)/swap curve for purposes of discounting cash flows relating to MSRs.
(3) Prepayment speed is measured using Life Total CPR. Equivalent average life is included for informational purposes.
F-41
Following is a quantitative summary of key inputs used in the valuation of the Company’s MSRs and the effect
on the fair value from adverse changes in those inputs:
Fair value
Pool characteristics:
December 31, 2019
December 31, 2018
(Fair value, unpaid principal balance of underlying
loans and effect on fair value amounts in thousands)
$ 2,926,790
$ 2,820,612
Unpaid principal balance of underlying loans
Weighted average note interest rate
Weighted average servicing fee rate (in basis points)
$ 225,787,103
3.9%
35
$ 201,054,144
4.0%
33
Key inputs (1):
Pricing spread (2):
Range
Weighted average
Effect on fair value of:
5% adverse change
10% adverse change
20% adverse change
Prepayment speed (3):
Range
Weighted average
Average life (in years):
Range
Weighted average
Effect on fair value of:
5% adverse change
10% adverse change
20% adverse change
Annual per-loan cost of servicing:
Range
Weighted average
Effect on fair value of:
5% adverse change
10% adverse change
20% adverse change
6.8% – 15.8%
8.5%
5.8% – 16.1%
8.7%
($44,561)
($87,734)
($170,155)
($45,268)
($89,073)
($172,556)
9.3% – 40.9%
12.7%
8.4% – 32.6%
9.9%
1.4 – 7.4
6.1
($63,569)
($124,411)
($238,549)
$77 – $100
$97
($24,516)
($49,032)
($98,065)
1.5 – 7.9
7.2
($47,687)
($93,626)
($180,623)
$78 – $99
$93
($22,944)
($45,888)
($91,775)
(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/swap curve for purposes of discounting
cash flows relating to MSRs.
(3) Prepayment speed is measured using Life Total CPR. Equivalent average life is included for informational purposes.
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 analysis should not be viewed as earnings forecasts.
Excess Servicing Spread Financing at Fair Value
ESS are categorized 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 MSRs and certain ancillary income are not included as these cash flows do not
accrue to the holder of the ESS.
The key inputs used in the estimation of ESS fair value include pricing spread (discount rate) and prepayment
speed. Significant changes to either of those inputs in isolation could result in a significant change in the fair value of
ESS. Changes in these key inputs are not 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 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:
Fair value (in thousands)
Pool characteristics:
Unpaid principal balance of underlying 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,
2019
$ 178,586
2018
$ 216,110
$ 19,904,571 $ 23,196,033
34
19
34
19
3.0% – 3.3% 2.8% – 3.2%
3.1%
3.1%
8.7% – 16.2% 8.2% – 29.5%
11.0%
9.7%
2.7 – 7.2
6.1
1.6 – 7.6
6.8
(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/swap curve for purposes of discounting
cash flows relating to ESS.
(3) Prepayment speed is measured using Life Total CPR. Equivalent average life is included for informational purposes.
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
the Company 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:
Fair value (in thousands)
Pool characteristics:
Unpaid principal balance of underlying 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,
2019
$ 29,140
$
2018
8,681
$ 2,758,454 $ 1,160,938
25
25
8.2%
29.2%
3.9
300 $
7.3%
32.2%
3.8
373
$
(1) The Company applies a pricing spread to the United States Dollar LIBOR/swap curve for purposes of discounting
cash flows relating to MSLs.
(2) Prepayment speed is measured using Life Total CPR. Equivalent average life is included for informational purposes.
Note 7—Loans Held for Sale at Fair Value
Loans held for sale at fair value include the following:
Loan type
Government-insured or guaranteed
Conventional conforming
Jumbo
Home equity lines of credit
Purchased from Ginnie Mae pools serviced by the Company
Repurchased pursuant to representations and warranties
Fair value of loans pledged to secure:
Assets sold under agreements to repurchase
Mortgage loan participation purchase and sale agreements
December 31,
2019
December 31,
2018
(in thousands)
$ 4,222,010 $ 2,116,126
144,872
641
—
250,585
9,423
$ 4,912,953 $ 2,521,647
307,065
—
513
374,121
9,244
$ 4,322,789 $ 1,923,857
555,001
$ 4,846,138 $ 2,478,858
523,349
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
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
Swaptions
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
Collateral placed with (received from)
derivative counterparties
December 31, 2019
Fair value
Notional
amount
Derivative Derivative
Notional
liabilities amount
assets
(in thousands)
December 31, 2018
Fair value
Derivative Derivative
liabilities
assets
1,861
—
2,805,400 $ 50,507 $
7,122,316 $ 138,511 $
8,187
12,364
17,097
3,415
—
2,409
13,618,361
16,220,526
6,100,000
—
1,750,000
19,040
18,045
—
—
—
6,657,026
6,890,046
4,635,000
1,450,000
—
26,770
35,916
437
720
2,135
—
2,250,000
3,945
—
3,085,000
866
750,000
1,276,000
1,010,000
1,469
—
—
—
—
—
1,512,500
835,000
1,450,000
5,965
—
—
1,169
—
215
26,762
—
—
—
—
—
—
—
3,210,000
—
187,397
(27,711)
—
38,946
(16,616)
$ 159,686 $ 22,330
625,000
—
123,316
(26,969)
$ 96,347 $
—
28,146
(25,082)
3,064
$ (11,095)
$ (1,887)
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
Swaptions
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
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 sale contracts
Notional amounts, year ended December 31, 2019
Beginning of
year
Additions
Dispositions/
expirations
End of
year
(in thousands)
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
—
331,273,011
395,584,533
97,035,000
6,750,000
23,322,500
14,377,800
1,750,000
33,297,800
5,937,500
14,344,400
13,463,400
5,300,000
2,715,000
(324,311,676)
(386,254,053)
(95,570,000)
(8,200,000)
(24,157,500)
(15,140,300)
—
(33,297,800)
(5,937,500)
(13,903,400)
(13,903,400)
(2,715,000)
(2,715,000)
13,618,361
16,220,526
6,100,000
—
2,250,000
750,000
1,750,000
—
—
1,276,000
1,010,000
3,210,000
—
Notional amounts, year ended December 31, 2018
Beginning of
year
Additions
Dispositions/
expirations
End of
year
(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)
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
—
Notional amounts, year ended December 31, 2017
Beginning of
year
Additions
Dispositions/
expirations
End of
year
(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)
4,920,883
5,204,796
4,925,000
—
2,125,000
100,000
—
—
100,000
—
1,400,000
—
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.
Gross
amount of
recognized
assets
December 31, 2019
Gross amount Net amount
offset in the of assets in the
consolidated
consolidated
balance sheet balance sheet
Gross
amount of
recognized
assets
December 31, 2018
Gross amount Net amount
offset in the of assets in the
consolidated
consolidated
balance sheet balance sheet
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
Swaptions
Put options on interest rate futures
purchase contracts
Call options on interest rate futures
purchase contracts
Netting
$ 138,511 $
8,187
146,698
12,364
17,097
3,415
—
2,409
3,945
1,469
—
40,699
(in thousands)
— $ 138,511 $ 50,507 $
—
—
8,187
146,698
26,770
77,277
12,364
17,097
3,415
—
2,409
35,916
437
720
2,135
—
—
—
—
—
—
— $
—
—
50,507
26,770
77,277
—
—
—
—
35,916
437
720
2,135
3,945
866
—
866
—
(27,711)
(27,711)
1,469
(27,711)
12,988
5,965
—
46,039
—
(26,969)
(26,969)
5,965
(26,969)
19,070
96,347
$ 187,397 $ (27,711) $ 159,686 $ 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 qualify for setoff
accounting.
December 31, 2019
Gross amount not
offset in the
consolidated
balance sheet
Financial
Cash
collateral
Net amount
of assets in the
consolidated
balance sheet instruments received
December 31, 2018
Gross amount not
offset in the
consolidated
balance sheet
Financial
Cash
collateral
Net
Net amount
of assets in the
consolidated
balance sheet instruments received
amount
Net
amount
(in thousands)
Interest rate lock
commitments
Deutsche Bank
RJ O'Brien
Goldman Sachs
JPMorgan Chase Bank, N.A.
Mizuho Securities
Wells Fargo Bank, N.A.
Bank of America, N.A.
Citibank, N.A.
Others
$ 138,511 $
9,138
5,414
2,548
2,196
1,597
—
—
—
282
$ 159,686 $
— $
—
—
—
—
—
—
—
—
—
— $
— $ 138,511 $ 50,507 $
—
—
—
—
—
—
—
—
—
— $ 159,686 $ 96,347 $
9,138
5,414
2,548
2,196
1,597
—
—
—
282
26,770
6,831
—
1,399
—
3,707
2,781
2,488
1,864
— $
—
—
—
—
—
—
—
—
—
— $
— $ 50,507
26,770
—
6,831
—
—
—
1,399
—
—
—
3,707
—
2,781
—
2,488
—
—
1,864
— $ 96,347
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 setoff accounting.
December 31, 2019
Net
amount
of liabilities
in the
consolidated
balance sheet balance sheet
Gross amount
offset in the
consolidated
December 31, 2018
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)
1,861 $
— $
1,861 $
1,169 $
— $
1,169
19,040
18,045
—
—
— (16,616)
37,085 (16,616)
38,946 (16,616)
19,040
18,045
(16,616)
20,469
22,330
215
26,762
—
—
— (25,082)
26,977 (25,082)
28,146 (25,082)
215
26,762
(25,082)
1,895
3,064
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 debt issuance cost, net
4,141,680
(627)
4,141,053
— 1,935,200
— 4,141,680 1,935,200
—
(1,341)
—
(1,341)
(627)
— 1,933,859
— 4,141,053 1,933,859
$ 4,179,999 $ (16,616) $ 4,163,383 $ 1,962,005 $ (25,082) $ 1,936,923
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.
Net amount
of liabilities
in the
consolidated
balance sheet
December 31, 2019
Gross amounts
not offset in the
consolidated
balance sheet
Financial
instruments
Cash
collateral
pledged amount
Net
December 31, 2018
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
(in thousands)
Interest rate lock
commitments
Credit Suisse First Boston
Mortgage Capital LLC
JPMorgan Chase Bank, N.A.
Citibank, N.A.
Morgan Stanley Bank, N.A.
Bank of America, N.A.
BNP Paribas
Royal Bank of Canada
Wells Fargo Bank, N.A.
Deutsche Bank
Others
$
1,861 $
— $
— $ 1,861 $
1,169 $
— $
— $ 1,169
1,235,430 (1,235,430)
(936,172)
(653,170)
(582,941)
(374,190)
(183,880)
(175,897)
—
—
—
$ 4,164,010 $ (4,141,680) $
936,172
655,831
582,941
379,400
183,880
175,897
11,212
—
1,386
(690,766)
—
—
(54,326)
—
—
(14,960)
2,661
—
(77,687)
—
—
(170,820)
5,210
—
(149,482)
—
—
(35,181)
—
—
—
— 11,212
(741,978)
—
—
—
—
1,386
— $ 22,330 $ 1,938,264 $ (1,935,200) $
691,030
54,326
14,960
77,687
170,820
149,675
35,181
—
741,978
1,438
264
—
—
—
—
—
—
—
—
—
193
—
—
—
—
—
—
—
— 1,438
— $ 3,064
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
2019
Year ended December 31,
2018
(in thousands)
2017
Interest rate lock commitments
Repurchase agreement derivatives
Hedged item:
Interest rate lock commitments and loans
held for sale
Mortgage servicing rights
Net gains on loans held for
sale at fair value
Interest expense
$
$
87,312 $
(1,609) $
(8,934) $
(1,704) $
(1,120)
(330)
Net gains on loans held for
sale at fair value
Net loan servicing fees–
Change in fair value of
mortgage servicing rights and
mortgage servicing liabilities $ 395,497 $ (121,045) $ (37,855)
81,522 $ (21,255)
$ (157,806) $
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:
Year ended December 31,
2019
2018
2017
(in thousands)
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:
Resulting from loan sales
Purchases
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
$ 2,820,612 $
638,010 $ 515,925
—
2,820,612
1,482,426
2,120,436
—
515,925
884,876
227,445
1,112,321
591,757
237,803
829,560
24,471
183,850
208,321
(550,666)
(455,477)
(1,006,143)
(4,771)
(81,465)
(86,236)
$ 2,926,790 $ 2,820,612 $ 638,010
174,458
(303,842)
(129,384)
Fair value of mortgage servicing rights pledged to secure Assets sold under
agreements to repurchase and Notes payable
$ 2,920,603 $ 2,807,333
(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,
2019
2018
(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:
Year ended December 31,
2017
2018
( in thousands)
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
Balance at end of year
$
1,583,378
$
1,206,694
(1,583,378)
—
—
—
—
—
1,206,694
556,630
(179,946)
1,583,378
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
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
(101,800)
(94,947)
101,800
—
—
—
—
—
(94,947)
(6,853)
(101,800)
1,481,578
1,112,302
1,482,426
$
$
$
Mortgage Servicing Liabilities Carried at Fair Value:
The activity in MSLs carried at fair value is summarized below:
2019
Year ended December 31,
2018
(in thousands)
2017
Balance at beginning of year
Mortgage servicing liabilities resulting from loan sales
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
$
8,681 $ 14,120
7,601
37,988
$ 15,192
17,229
8,377
(25,906)
(17,529)
$ 29,140 $
10,787
(23,827)
(13,040)
8,681
6,526
(24,827)
(18,301)
$ 14,120
(1) Principally reflects changes in expected borrower performance and servicer losses given default.
(2) Represents changes due to realization of cash flows.
F-51
Servicing fees relating to MSRs and MSLs are recorded in Net loan servicing fees—Loan servicing fees—From
non-affiliates on the consolidated statements of income; late charges and other ancillary fees relating to MSRs and MSLs
are recorded in Net loan servicing fees—Loan servicing fees—Other on the Company’s consolidated statements of
income. Such amounts are summarized below:
Contractual servicing fees
Other fees:
Late charges
Other
Note 10—Leases
2019
Year ended December 31,
2018
(in thousands)
2017
$
730,165 $
585,101 $
475,848
43,350
14,258
787,773 $
27,940
6,276
619,317 $
25,097
4,603
505,548
$
Substantially all of the Company’s lease agreements are operating leases and relate to its office facilities. The
Company’s operating lease agreements have remaining terms ranging from less than one year to ten years; some of these
operating lease agreements include options to extend the term for up to five years. None of the Company’s operating
lease agreements require the Company to make variable lease payments.
Lease expense:
Operating leases
Short-term leases
Sublease income
Net lease expense included in Occupancy and equipment
Other information:
Cash payments for operating leases
Operating lease right-of-use assets recognized:
Upon adoption of ASU 2016-02
New leases
Period end:
Weighted averages:
Remaining lease term (in years)
Discount rate
$
$
$
$
$
Year ended
December 31, 2019
(dollars in thousands)
13,644
821
(94)
14,371
16,167
58,713
24,535
83,248
7.1
4.3%
Lease expense during the years ended December 31, 2019, 2018 and 2017 was $14.4 million, $12.3 million and
$12.3 million, respectively.
F-52
The maturities of the Company’s operating lease liabilities are summarized below:
Year ended December 31,
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less imputed interest
Total
$
Operating leases
(in thousands)
17,102
16,051
13,791
14,006
11,673
35,178
107,801
(16,481)
91,320
$
As of December 31, 2019, the Company has one operating lease that has not yet commenced with an
undiscounted minimum payment commitment totaling $1.5 million. The lease is expected to commence in May 2020.
Note 11—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
Depreciation and amortization expenses are summarized below:
December 31,
2019
2018
(in thousands)
$
$
$
57,012 $
(26,532)
30,480
20,406
$
$
55,251
(21,877)
33,374
16,281
2019
Year ended December 31,
2018
(in thousands)
2017
Depreciation and amortization expenses
Less: Depreciation and amortization allocated to PMT(1)
Depreciation and amortization expenses included in Occupancy and equipment
$ 9,018 $ 9,500 $
—
—
$ 9,018 $ 9,500 $
8,150
(1,396)
6,754
(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 and $1.2 million in Other revenue for the years ended December 31, 2019 and 2018, respectively.
Before adoption of ASU 2014-09, the Company included such reimbursements in the respective expense line items.
F-53
Note 12—Capitalized Software
Capitalized software is summarized below:
Cost
Less: Accumulated amortization
Capitalized software pledged to secure obligations under capital lease
December 31,
2019
2018
(in thousands)
$ 74,325 $
(11,195)
$ 63,130 $
$ 12,192 $
45,039
(5,291)
39,748
1,017
Software amortization expense totaled $6.0 million, $3.4 million and $1.6 million for the years ended
December 31, 2019, 2018 and 2017, respectively. The Company recorded $827,000 of impairment of capitalized
software during the year ended December 31, 2017. No such impairment was recorded for the years ended
December 31, 2019 and 2018.
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, 2019.
Assets Sold Under Agreements to Repurchase
The Company has multiple borrowing facilities in the form of asset sales under agreements to repurchase.
These borrowing facilities are secured by loans held for sale at fair value or participation certificates backed by MSRs.
Eligible loans and participation certificates backed by MSRs are sold at advance rates based on the fair value (as
determined by the lender) of the assets sold. Interest is charged at a rate based on the lender’s overnight cost of funds
rate or on LIBOR depending on the terms of the respective agreements. 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:
2019
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
Year ended December 31,
2018
(dollars in thousands)
$ 1,626,729
2017
$ 2,185,830
$ 1,829,257
$
74,215
$ 4,141,680
3.74 %
$
22,463
$ 2,380,121
3.87 %
$
60,286
$ 3,022,656
3.18 %
December 31,
2019
2018
(dollars in thousands)
$ 4,141,680
(627)
$ 4,141,053
$ 1,935,200
(1,341)
$ 1,933,859
3.29 %
4.22 %
$
$
125,810
782,510
908,320
695,767
$
2,354,033
$ 3,049,800
$ 4,322,789
$ 1,923,857
107,512
$
$
207,460
$ 2,902,721
5,000
$
131,025
$
$
162,895
$ 2,807,333
3,750
$
Fair value of assets securing repurchase agreements:
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 debt issuance premiums totaling $7.5 million, $40.5 million and
$1.3 million, for the years ended December 31, 2019, 2018 and 2017, respectively.
(2) In 2017, PFSI entered into a master repurchase agreement that provided the Company with incentives to finance
mortgage loans approved for satisfying certain consumer relief characteristics as provided in the agreement. The
Company included $14.7 million, $48.1 million and $9.2 million of such incentives as a reduction in Interest
expense during the years ended December 31, 2019, 2018 and 2017, respectively. The master repurchase agreement
expired on August 21, 2019.
(3) The amount the Company is able to borrow under asset repurchase agreements is tied to the fair value of
unencumbered assets eligible to secure those agreements and the Company’s ability to fund the agreements’ margin
requirements relating to the assets financed.
(4) Beneficial interests in the Ginnie Mae MSRs of $2.8 billion 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 secured by mortgage servicing assets. 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 secured by mortgage servicing
assets 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, 2019
Unpaid principal balance
Within 30 days
Over 30 to 90 days
Over 90 to 180 days
Total assets sold under agreements to repurchase
Weighted average maturity (in months)
$
$
(dollars in thousands)
715,059
3,157,444
269,177
4,141,680
2.0
The amount at risk (the fair value of the assets pledged plus the related margin deposit, less the amount
advanced by the counterparty and interest payable) relating to the Company’s assets sold under agreements to repurchase
is summarized by counterparty below as of December 31, 2019:
Counterparty
Credit Suisse First Boston Mortgage Capital LLC
Credit Suisse First Boston Mortgage Capital LLC
JP Morgan Chase Bank, N.A.
Citibank, N.A.
Morgan Stanley Bank, N.A.
Bank of America, N.A.
Royal Bank of Canada
BNP Paribas
Weighted average
maturity of advances
under repurchase
agreement
Facility maturity
Amount at risk
(in thousands)
$ 1,709,197
$
$
$
$
$
$
$
April 26, 2020
April 26, 2020
April 24, 2020
72,865 February 12, 2020
61,561
March 1, 2020 October 9, 2020
48,017 March 18, 2020 August 4, 2020
42,181 March 16, 2020 August 21, 2020
January 27, 2020 January 27, 2020
29,252
13,811 March 31, 2020 March 31, 2020
July 31, 2020
10,233 March 12, 2020
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 which generally occurs within
30 days. 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:
2019
Average balance
Weighted average interest rate (1)
Total interest expense
Maximum daily amount outstanding
Year ended December 31,
2018
(dollars in thousands)
$ 248,539
2017
$ 208,613
$ 244,203
3.42 %
$
8,754
$ 722,611
3.29 %
$
5,496
$ 532,266
$
8,874
$ 548,038
2.34 %
(1) Excludes the effect of amortization of debt issuance costs totaling $514,000, $588,000 and $545,000 for the years
ended December 31, 2019, 2018 and 2017, respectively.
Carrying value:
Unpaid principal balance
Unamortized debt issuance costs
Weighted average interest rate
Fair value of loans pledged to secure mortgage loan participation purchase and sale
agreements
Obligations Under Capital Lease
December 31,
December 31,
2019
2018
(dollars in thousands)
$ 497,948
—
$ 532,466
(215)
$ 497,948 $ 532,251
3.05 %
3.77 %
$ 523,349
$ 555,001
The Company has a capital lease transaction secured by certain fixed assets and capitalized software. The
capital lease matures on June 13, 2022 and bears interest at a spread over one-month LIBOR.
Obligations under capital lease are summarized below:
2019
17,021
Year ended December 31,
2018
(dollars in thousands)
$
3.96 %
$
536
$
20,971
$
4.07 %
$
693
$
28,295
13,498
2017
24,830
3.07 %
769
30,044
December 31,
2019
December 31,
2018
$
(dollars in thousands)
20,810 $
3.74 %
6,605
4.46 %
$
$
20,406
12,192
$
$
16,281
1,017
Average balance
Weighted average interest rate
Total interest expense
Maximum daily amount outstanding
$
$
$
Unpaid principal balance
Weighted average interest rate
Assets pledged to secure obligations under capital lease:
Furniture, fixtures and equipment
Capitalized software
F-57
Notes Payable Secured by Mortgage Servicing Assets
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.
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.
MSR Note Payable
On February 1, 2018, the Company issued a note payable in favor of Credit Suisse AG, Cayman Islands Branch
(“CS Cayman”) that is secured by Fannie Mae and Freddie Mac MSRs. On September 11, 2019, CS Cayman terminated
and released the portion of its security interest relating to the Fannie Mae MSRs in connection with the Loan and
Security Agreement and entered a separate repurchase facility to purchase a participation certificate relating to the
Fannie Mae 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 agreements to repurchase pursuant to which the Company finances the
VFN and Fannie Mae MSRs. The Company did not borrow under this note payable during the year ended
December 31, 2019.
F-58
Notes payable are summarized below:
Average balance
Weighted average interest rate (1)
Total interest expense
Maximum daily amount outstanding
2019
Year ended December 31,
2018
(dollars in thousands)
$ 1,300,000 $ 1,169,452 $ 586,135
2017
5.08 %
67,789 $
$
71,697 $ 37,001
$ 1,300,000 $ 1,300,000 $ 900,006
5.29 %
5.86 %
(1) Excluding the effect of amortization of debt issuance costs totaling $1.8 million, $9.8 million and $3.4 million for
the years ended December 31, 2019, 2018 and 2017, respectively.
Carrying value:
Unpaid principal balance
Unamortized debt issuance costs
Weighted average interest rate
Assets pledged to secure notes payable:
Servicing advances (1)
Mortgage servicing rights (1)
December 31,
2018
2019
(dollars in thousands)
$ 1,300,000 $ 1,300,000
(7,709)
$ 1,294,070 $ 1,292,291
(5,930)
4.46 %
5.07 %
207,460 $
162,895
$
$ 2,861,442 $ 2,807,333
(1) Beneficial interests in the Ginnie Mae MSRs of $2.8 billion 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 secured by mortgage servicing assets on the Company's consolidated balance sheet.
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.
F-59
The primary purposes of the Amendments were to (i) extend the maturity date of the Credit Agreement to
October 30, 2020; (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. The Company did not borrow under this facility during the years ended December 31, 2019 and
2018.
Corporate revolving line of credit is summarized below:
2019
Year ended December 31,
2018
(in thousands)
2017
Interest expense (1)
$
1,921 $
1,913 $
2,368
Carrying value
Unused amount
Cash pledged to secure corporate revolving line of credit
December 31,
2019
2018
(in thousands)
$
—
— $
$ 150,000 $ 150,000
$ 52,599 $ 108,174
(1) Interest expenses for the years ended December 31, 2019 and 2018 represent debt issuance costs and non-utilization
fees.
Excess Servicing Spread Financing at Fair Value
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:
2019
Year ended December 31,
2018
(in thousands)
2017
$ 216,110 $ 236,534 $ 288,669
1,757
10,291
(40,316)
(9,256)
5,244
16,951
(54,980)
(19,350)
$ 178,586 $ 216,110 $ 236,534
2,688
15,138
(46,750)
8,500
Balance at beginning of year
Issuances of excess servicing spread to PennyMac Mortgage Investment Trust
pursuant to recapture agreement
Accrual of interest
Repayment
Change in fair value
Balance at end of year
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 loans sold:
Resulting from sales of loans
Reduction in liability due to change in estimate
Losses incurred , net
Balance at end of year
Unpaid principal balance of loans subject to representations and warranties
at end of year
$
Year ended December 31,
2019
2018
2017
(in thousands)
$
21,155 $
20,053 $ 19,067
8,377
(7,877)
(209)
21,446 $
5,824
(4,672)
(50)
5,890
(4,301)
(603)
21,155 $ 20,053
$ 177,611,568 $ 137,849,704
Note 15—Income Taxes
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 2016 and forward and its state tax returns
are generally subject to examination for 2015 and forward. PennyMac’s federal partnership returns are subject to
examination for 2016 and forward, and its state tax returns are generally subject to examination for 2015 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 income taxes will include the portion of its income formerly attributed
to the noncontrolling interest. As a result, the Company has recognized an increase in its effective income tax rate.
The Reorganization was treated as an integrated transaction that qualifies as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code (“IRC”) and/or a transfer described in Section 351(a) of the
IRC.
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 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 provision for income taxes:
Current expense:
Federal
State
Total current expense
Deferred expense:
Federal
State
Total deferred expense
Total provision for income taxes
2019
Year ended December 31,
2018
(in thousands)
2017
$ 17,661 $
12 $
8,071
25,732
274
286
(81)
56
(25)
85,296
25,451
110,747
14,674
9,738
24,412
$ 136,479 $ 23,254 $ 24,387
23,395
(427)
22,968
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 income tax rate
21.0 %
— %
5.6 %
(0.6) %
(0.2) %
25.8 %
21.0 %
(12.3) %
2.3 %
(2.2) %
(0.1) %
8.7 %
The components of the Company’s provision for deferred income taxes are as follows:
2017
35.0 %
(22.0) %
2.2 %
(8.0) %
0.1 %
7.3 %
Year ended December 31,
2018
2019
Mortgage servicing rights
Net operating loss
Compensation accruals
Additional tax basis in partnership from exchanges of partnership units into the
Company's common stock
Reserves and losses
Other
Tax credits
Investment in PennyMac
Total provision for deferred income taxes
2019
Year ended December 31,
2018
(in thousands)
2017
$ 91,592 $ 46,064 $
23,445
(12,286)
(14,902)
(3,596)
—
(9,675)
—
4,269
(2,945)
6,106
566
—
—
—
—
76
34,011
$ 110,747 $ 22,968 $ 24,412
(1,391)
(1,848)
(1,302)
(57)
—
As the result of the Company’s reclassification of the noncontrolling interest to paid-in capital pursuant to the
Reorganization on November 1, 2018, beginning in 2018, the provision for deferred taxes reflects each individual
adjustment item in PFSI’s underlying investment in PennyMac. The provision for deferred income taxes for the year
ended December 31, 2017 primarily relates to PFSI’s investment in PennyMac partially offset by the Company’s
generation and utilization of a net operating loss and generation of tax credits. The provision for income taxes
attributable to PFSI’s 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.
F-62
The components of Income taxes payable are as follows:
Income taxes currently (receivable) payable
Deferred income tax liability, net
Income taxes payable
December 31,
2019
2018
(in thousands)
$
$
(6,506)
511,075
218
400,328
$ 504,569 $ 400,546
The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities are presented
below:
Deferred income tax assets:
Compensation accruals
Additional tax basis in partnership from exchanges of partnership units into the
Company's common stock
Reserves and losses
Net operating loss carryforward
Tax credits carryforward
Gross deferred tax assets
Deferred income tax liabilities:
Mortgage servicing rights
Other
Gross deferred tax liabilities
Net deferred income tax liability
December 31,
2019
2018
(in thousands)
$
41,038 $
28,752
39,897
29,534
1,658
50
112,177
44,165
26,589
25,104
616
125,226
608,635
14,617
623,252
517,042
8,512
525,554
$ 511,075 $ 400,328
The Company recorded a deferred tax asset of $1.7 million related to California and other states’ net operating
loss carryforwards, which were mostly incurred in 2018 and expire in 2038, and are expected to be fully utilized in 2020.
All of the federal net operating loss carryforward has been fully utilized in 2019. The Company has tax credits of $0.1
million, which generally have no expiration date.
At December 31, 2019 and 2018, 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, 2019 and 2018.
Note 16—Commitments and Contingencies
Litigation
From time to time, the Company may be involved in various legal and regulatory proceedings, lawsuits and
other claims arising in the ordinary course of its business. The amount, if any, of ultimate liability with respect to such
matters cannot be determined, but despite the inherent uncertainties of litigation, management currently believes that the
ultimate disposition of any such proceedings and exposure will not have, individually or taken together, a material
adverse effect on the financial condition, results of operations, or cash flows of the Company.
F-63
On December 20, 2018, a purported shareholder of the Company filed a complaint in a putative class and
derivative action in the Court of Chancery of the State of Delaware (the “Delaware Court”), captioned Robert Garfield v.
BlackRock Mortgage Ventures, LLC et al., Case No. 2018-0917-KSJM (the “Garfield Action”). The Garfield Action
alleges, among other things, that certain current directors and officers of the Company breached their fiduciary duties to
the Company and its shareholders by, among other things, agreeing to and entering into the Reorganization without
ensuring that the Reorganization was entirely fair to the Company or public shareholders. The Reorganization was
approved by 99.8% of voting shareholders on October 24, 2018. On December 19, 2019, the Delaware Court denied a
motion to dismiss filed by the Company and certain of its directors and officers. While no assurance can be provided as
to the ultimate outcome of this claim or the account of any losses to the Company, the Company believes the Garfield
Action is without merit and plans to vigorously defend the matter, which remains pending.
On November 5, 2019, Black Knight Servicing Technologies, LLC, a wholly-owned indirect subsidiary of
Black Knight, Inc. (“BKI”), filed a Complaint and Demand for Jury Trial in the Circuit Court for the Fourth Judicial
Circuit in and for Duval County, Florida, captioned Black Knight Servicing Technologies, LLC v. PennyMac Loan
Services, LLC, Case No. 2019-CA-007908 (the “BKI Complaint”). Allegations contained within the BKI Complaint
include breach of contract and misappropriation of MSP® System trade secrets in order to develop an imitation
mortgage-processing system intended to replace the MSP® System. The BKI Complaint seeks damages for breach of
contract and misappropriation of trade secrets, injunctive relief under the Florida Uniform Trade Secrets Act and
declaratory judgment of ownership of all intellectual property and software developed by or on behalf of PLS as a result
of its wrongful use of and access to the MSP® System and related trade secret and confidential information. On
January 6, 2020, the Company filed a motion to compel arbitration, which has not yet been fully briefed or argued.
While no assurance can be provided at to the ultimate outcome of this claim or the account of any losses to the
Company, the Company believes the BKI Complaint is without merit and plans to vigorously defend the matter, which
remains pending.
Regulatory Matters
The Company and/or its subsidiaries are subject to various state and federal regulations related to its loan
production and servicing operations by the various states it operates in as well as federal agencies such as the Consumer
Financial Protection Bureau, HUD, 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 Loans
The Company’s commitments to purchase and fund loans totaled $7.1 billion as of December 31, 2019.
Note 17—Stockholders’ Equity
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 stock repurchased
Cost of shares of common stock repurchased
$
51
1,056 $
(in thousands)
260
5,293
$
505
8,599
$
816
14,948
Year ended December 31,
2018
2017
2019
Cumulative
total (1)
(1) Amounts represent the total shares common stock repurchased under the stock repurchase program through
December 31, 2019.
F-64
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 consideration 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 the years ended December 31, 2018 and 2017 is summarized below:
$
$
Year ended December 31,
2018
2017
(in thousands)
87,694 $ 100,757
33,156 $
27,119
1,635
1,608
$ 1,064,320 $
—
52,263
—
December 31,
2018
2017
— %
69.2 %
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
Percentage of Private National Mortgage Acceptance Company, LLC held by
noncontrolling interest
F-65
Note 19—Net Gains on Loans Held for Sale
Net gains on mortgage loans held for sale at fair value is summarized below:
2019
Year ended December 31,
2018
(in thousands)
2017
From non-affiliates:
Cash loss:
Loans
Hedging activities
Non-cash gain:
$ (190,853) $ (469,647) $ (174,669)
(16,866)
(191,535)
93,288
(376,359)
(175,305)
(366,158)
Mortgage servicing rights and mortgage servicing liabilities resulting from
loan sales
Provision for losses relating to representations and warranties:
Pursuant to loan sales
Reduction in liability due to change in estimate
Change in fair value of loans and derivatives held at year end:
846,888
584,156
563,872
(8,377)
7,877
(5,824)
4,672
(5,890)
4,301
87,312
(42,878)
17,499
542,163
183,365
(1,120)
4,576
(4,389)
369,815
21,989
$ 725,528 $ 249,022 $ 391,804
(8,934)
(1,506)
(11,766)
184,439
64,583
Interest rate lock commitments
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:
Cash and short-term investments
Loans held for sale at fair value
Placement fees relating to custodial funds
2019
Year ended December 31,
2018
(in thousands)
2017
$
9,776 $
2,038 $
138,124
134,498
282,398
128,732
78,184
208,954
2,356
91,972
40,813
135,141
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
Obligations under capital lease
Notes payable
Interest shortfall on repayments of mortgage loans serviced for Agency
securitizations
Interest on mortgage loan impound deposits
6,302
288,700
7,462
216,416
8,038
143,179
74,215
8,874
693
69,710
22,463
8,754
536
73,610
60,286
5,496
769
39,369
41,439
6,757
201,688
18,777
5,319
129,459
16,933
4,716
127,569
To PennyMac Mortgage Investment Trust—Excess servicing spread financing at
fair value
10,291
211,979
16,951
15,138
144,520
144,597
$ 76,721 $ 71,819 $ (1,341)
(1) In 2017, the Company entered a master repurchase agreement that provided it with incentives to finance mortgage
loans approved for satisfying certain consumer relief characteristics as provided in the agreement. During the years
ended December 31, 2019, 2018 and 2017, the Company included $14.7 million, $48.1 million and $9.2 million,
respectively of such incentives as a reduction in Interest expense. The master repurchase agreement expired on
August 21, 2019.
Note 21—Stock-based Compensation
The Company has adopted an equity incentive plan that 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, 2019, the Company has 4.2 million units available for future awards.
F-67
Following is a summary of the stock-based compensation expense by instrument awarded:
2019
Year ended December 31,
2018
(in thousands)
2017
Performance-based RSUs
Time-based RSUs
Stock options
Performance-Based RSUs
$ 14,820 $ 12,425 $ 11,020
4,768
4,909
$ 24,771 $ 25,251 $ 20,697
6,608
6,218
6,659
3,292
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 603,000 shares vested under the grants with a performance period ended
December 31, 2019 will be issued to the grantees in March 2020.
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,
2018
2017
2019
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
(in thousands, except per unit amounts)
1,892
682
(735)
(32)
1,807
2,389
524
(730)
(291)
1,892
2,475
694
(446)
(334)
2,389
$
$
$
$
$
14.48 $
23.11 $
11.28 $
21.72 $
21.67 $
15.57
24.40
12.86
16.17
14.48
$
$
$
$
$
14.24
18.04
13.65
14.45
15.57
(1) The actual number of performance-based RSUs vested during the year ended December 31, 2019 and 2018 was
648,000 and 774,000 shares, respectively, which is approximately 88% and 106% of the 735,000 and 730,000
originally granted units, respectively, due to the performance varying from the established target for the respective
grant.
Following is a summary of performance-based RSUs as of December 31, 2019:
Unamortized compensation cost (in thousands)
Number of shares expected to vest (in thousands)
Weighted average remaining vesting period (in months)
$
14,252
1,596
12
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 - 22.7% per year based on the grantees’ employee classification.
The table below summarizes time-based RSU activity:
Year ended December 31,
2018
(in thousands, except per unit amounts)
2017
2019
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
Following is a summary of RSUs as of December 31, 2019:
Unamortized compensation cost (in thousands)
Number of units expected to vest (in thousands)
Weighted average remaining vesting period (in months)
Stock Options
627
334
(300)
(19)
642
600
328
(254)
(47)
627
382
408
(173)
(17)
600
$ 20.39 $ 16.37 $ 13.71
$ 22.88 $ 24.25 $ 18.02
$ 18.73 $ 16.08 $ 14.66
$ 22.29 $ 19.40 $ 14.87
$ 22.40 $ 20.39 $ 16.37
$
4,107
570
10
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
2019
30%
0%
2.5% - 2.7%
2.3% - 22.7%
Year ended December 31,
2018
30%
0%
1.7% - 3.0%
0.0% - 23.2%
2017
31%
0%
0.8% - 2.7%
0.0% - 21.1%
(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,
2018
(in thousands, except per option amounts)
2017
2019
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
Following is a summary of stock options as of December 31, 2019:
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)
3,693
344
(317)
(21)
3,699
3,457
674
(322)
(116)
3,693
2,738
861
(90)
(52)
3,457
$
$
$
$
$
17.81 $
22.92 $
16.26 $
20.70 $
18.40 $
16.40 $
24.40 $
16.24 $
18.46 $
17.81 $
15.81
18.05
15.04
15.58
16.40
2,676
16.91
$
6.3
5.5
$
$
57,858
45,837
929
9
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,
2019
2017
2018
(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 common stockholders for diluted earnings per
share
Weighted average shares of common stock outstanding applicable to basic
earnings per share
Effect of dilutive shares:
$ 392,965 $ 87,694 $ 100,757
23,199
4.34
5.02 $
2.62 $
78,206
33,524
$
$ 392,965 $ 87,694 $ 100,757
—
3,868
—
$ 392,965 $ 91,562 $ 100,757
78,206
33,524
23,199
Common shares issuable under stock-based compensation plan
2,134
1,798
1,800
Weighted average shares of common stock applicable to diluted earnings per
share
Diluted earnings per share of common stock
80,340
35,322
$
4.89 $
2.59 $
24,999
4.03
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
weighted-average number of anti-dilutive outstanding performance-based RSUs, time-based RSUs, stock options and
Exchangeable PNMAC Class A units excluded from the calculation of diluted earnings per share:
2019
Year ended December 31,
2018
(in thousands except for weighted-average
exercise price)
2017
Performance-based RSUs (1)
Time-based RSUs
Stock options (2)
Exchangeable PNMAC Class A units (3)
Total anti-dilutive shares and units
Weighted average exercise price of anti-dilutive stock options (2)
1,032
—
572
—
1,604
23.70 $
1,084
3
740
43,700
45,527
17.81 $
497
—
1,323
53,299
55,119
16.40
$
(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
2019
Year ended December 31,
2018
(in thousands)
2017
Cash paid for interest
Cash paid (refunds received) for income taxes , net
Non-cash investing activity:
Mortgage servicing rights resulting from loan sales
Mortgage servicing liabilities resulting from loan sales
Unsettled portion of MSR acquisitions
Operating right-of-use assets recognized
Non-cash financing activity:
$ 188,346 $ 161,001 $ 158,147
$ 32,457 $ (2,059) $ (5,513)
$ 884,876 $ 591,757 $ 581,101
7,601 $ 17,229
$ 37,988 $
5,319
$
—
$ 83,248 $
— $ 10,139 $
— $
Issuance of Excess servicing spread payable to PennyMac Mortgage Investment
Trust pursuant to a recapture agreement
Issuance of common stock and Class A common stock in settlement of director
fees
$
1,757 $
2,688 $
5,244
$
233 $
330 $
338
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
$2.5 million plus 25 basis points of the Company’s total 1-4 unit servicing portfolio, excluding 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.
F-72
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, 2019
December 31, 2018
(dollars in thousands)
Capital
Fannie Mae & Freddie Mac – PLS
Ginnie Mae – PLS
HUD – PLS
Liquidity
Fannie Mae & Freddie Mac – PLS
Ginnie Mae – PLS
Tangible net worth / Total assets ratio
Fannie Mae & Freddie Mac – PLS
$ 2,247,751
$ 1,907,398
$ 1,907,398
$
$
257,794
257,794
$
$
$
$
$
585,674
910,456
2,500
$ 1,788,430
$ 1,535,826
$ 1,535,826
79,991
216,119
$
$
271,802
271,802
$
$
$
$
$
514,089
733,342
2,500
70,775
189,592
22 %
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 loan origination, acquisition and sale activities. The servicing segment performs servicing of newly originated
loans, execution and management of early buyout transactions and servicing of loans sourced and managed by the
investment management segment for PMT, including executing the loan resolution strategy identified by the investment
management segment relating to distressed mortgage loans.
The investment management segment represents the activities of the Company’s investment manager, which
include sourcing, performing diligence, bidding and closing investment asset acquisitions, managing the acquired assets
and correspondent production activities for PMT.
F-73
Financial performance and results by segment are as follows:
Revenue: (1)
Net gains on loans held for sale at fair
value
Loan origination fees
Fulfillment fees from PennyMac
Mortgage Investment Trust
Net loan servicing fees
Net interest income (expense):
Interest income
Interest expense
Management fees
Other
Total net revenue
Expenses
Income before provision for income taxes $
Segment assets at year end
Production
Mortgage Banking
Servicing
Total
Investment
Management
Total
Year ended December 31, 2019
(in thousands)
$
635,464 $
174,156
90,064 $
—
725,528 $
174,156
— $
—
725,528
174,156
160,610
—
—
293,665
160,610
293,665
—
—
160,610
293,665
82,338
59,973
22,365
—
1,289
993,884
466,050
527,834 $
288,700
211,923
76,777
—
3,932
1,434,668
921,585
513,083 $
$ 4,836,472 $ 5,347,549 $ 10,184,021 $
206,362
151,950
54,412
—
2,643
440,784
455,535
(14,751) $
288,700
—
211,979
56
76,721
(56)
36,492
36,492
10,232
6,300
1,477,404
42,736
947,960
26,375
16,361 $
529,444
19,996 $ 10,204,017
(1) All revenues are from external customers.
F-74
Revenue: (1)
Net gains on loans held for sale at fair value
Loan origination fees
Fulfillment fees from PennyMac Mortgage
Investment Trust
Net loan servicing fees
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.
Year ended December 31, 2018
Production
Mortgage Banking
Servicing
Total
(in thousands)
Investment
Management
Total
$ 141,959 $ 107,063 $
101,641
—
249,022 $
101,641
— $
—
249,022
101,641
81,350
—
—
445,393
81,350
445,393
—
—
81,350
445,393
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
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
87,266
—
266,571
1,126
$
267,697
$ 2,434,897 $ 5,031,920 $ 7,466,817 $ 11,681 $ 7,478,498
259,568
—
259,568 $
7,003
—
7,003 $
87,266 $ 172,302 $
172,302
—
(2) Represents repricing 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 $75,000.
F-75
Revenues: (1)
Net gains on loans held for sale at fair value
Loan origination fees
Fulfillment fees from PennyMac Mortgage
Investment Trust
Net loan servicing fees
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.
Year ended December 31, 2017
Production
Mortgage Banking
Servicing
Total
(in thousands)
Investment
Management
Total
$ 286,242 $ 105,562 $
119,202
—
391,804 $
119,202
— $
—
391,804
119,202
80,359
—
—
306,059
80,359
306,059
—
—
80,359
306,059
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
$ 238,508 $
335,909
$ 2,459,014 $ 4,886,594 $ 7,345,608 $ 19,880 $ 7,365,488
297,180
—
297,180 $
58,672
—
58,672 $
5,789
—
5,789 $
(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-76
Note 26—Selected Quarterly Data (Unaudited)
Following is a presentation of selected quarterly financial data:
During the quarter:
Net gains on loans held for
sale at fair value
Loan origination fees
Fulfillment fees from
PennyMac Mortgage
Investment Trust
Net loan servicing fees
Other income
2019
2018
Quarter ended
Dec. 31
Sept. 30
June. 30
Mar. 31
Dec. 31
Sept. 30
June. 30
Mar. 31
(in thousands, except per share data)
$
257,487 $
235,732 $ 147,533 $
63,868
49,434
36,924
84,776 $
23,930
59,748 $
26,165
56,914 $
26,485
60,946 $
24,428
71,414
24,563
58,297
87,731
22,992
490,375
287,009
45,149
66,229
39,803
436,347
270,150
29,590
59,134
29,796
302,977
203,387
27,574
80,571
30,854
247,705
187,414
28,591
105,212
31,485
251,201
192,895
26,256
109,703
31,571
250,929
189,232
14,559
113,689
30,676
244,298
169,600
11,944
116,789
13,491
238,201
165,205
$
$
$
—
—
—
—
14,211
50,307
41,663
50,568
72,696 $
46,135 $
38,749 $
121,473 $
152,661 $
58,306
5,346
52,960
72,996
6,070
66,926
61,697
5,545
56,152
74,698
6,293
68,405
60,291
14,156
46,135
99,590
26,894
72,696
166,197
44,724
121,473
203,366
50,705
152,661
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:
Loans held for sale
Mortgage servicing rights
Servicing advances, net
Loans eligible for
repurchase
Other assets
Total assets
Short-term debt
Long-term debt
Liability for mortgage
loans eligible for
1,018,488
repurchase
58,956
Income taxes payable
314,064
Other liabilities
5,108,692
Total liabilities
Total equity
1,794,199
Total liabilities and equity $ 10,204,017 $ 9,303,199 $ 8,398,376 $ 7,819,000 $ 7,478,573 $ 6,992,530 $ 6,841,706 $ 6,902,891
1,018,488
661,533
$ 10,204,017 $ 9,303,199 $ 8,398,376 $ 7,819,000 $ 7,478,573 $ 6,992,530 $ 6,841,706 $ 6,902,891
$ 4,639,001 $ 4,053,514 $ 3,270,261 $ 2,449,908 $ 2,332,143 $ 2,222,385 $ 2,264,041 $ 2,336,826
1,380,358
$ 4,912,953 $ 4,522,971 $ 3,506,406 $ 2,668,929 $ 2,521,647 $ 2,416,955 $ 2,527,231 $ 2,584,236
2,354,489
284,145
1,094,702
414,636
405,745
6,117,808
1,701,192
879,621
67,357
295,555
4,979,762
1,861,944
892,631
480,559
464,235
7,391,586
1,911,613
1,102,840
400,546
340,280
5,824,782
1,653,791
1,007,435
441,336
384,716
6,619,379
1,778,997
889,335
74,158
323,270
5,075,820
1,916,710
1,046,527
504,569
458,947
8,142,510
2,061,507
1,094,702
866,049
2,905,090
284,230
2,486,157
258,900
1,102,840
720,277
892,631
1,059,843
1,007,435
892,666
2,820,612
313,197
2,720,335
271,534
2,556,253
271,501
2,785,964
259,609
1,046,527
986,578
2,926,790
331,169
1.95 $
1.88 $
0.59 $
0.58 $
1.55 $
1.51 $
0.71 $
0.70 $
0.93 $
0.92 $
0.58 $
0.57 $
0.65 $
0.63 $
879,621
689,797
889,335
640,667
0.70
0.67
1,752,817
1,473,188
1,515,631
1,500,647
1,648,973
1,566,672
14,489 $
17,837 $
1,493,466
16,619
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.
PENNYMAC FINANCIAL SERVICES, INC.
CONDENSED BALANCE SHEETS
ASSETS
Cash
Investments in subsidiaries
Due from subsidiaries
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to subsidiaries
Income taxes payable
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity
December 31,
2019
2018
(in thousands)
$
$
2,250 $
2,443,407
100
$
2,445,757
—
1,975,231
582
1,975,813
$
4,194 $
380,056
384,250
2,061,507
2,445,757
$
$
575
321,447
322,022
1,653,791
1,975,813
PENNYMAC FINANCIAL SERVICES, INC.
CONDENSED STATEMENTS OF INCOME
Revenues
Dividends from subsidiary
Repricing of Payable to exchanged Private National Mortgage
Acceptance Company, LLC unitholders under tax receivable
agreement
Total revenue
Expenses
Interest
Total expenses
2019
Year ended December 31,
2018
(in thousands)
2017
$
36,376
$
10,054
$
—
—
36,376
153
153
—
10,054
32,940
32,940
32
32
—
—
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
36,223
91,291
(55,068)
448,033
392,965
$
10,022
20,897
(10,875)
98,569
87,694
$
32,940
24,387
8,553
92,204
100,757
$
F-78
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
Repricing of Payable to exchanged Private National Mortgage
Acceptance Company, LLC unitholders under tax receivable
agreement
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
2019
Year ended December 31,
2018
(in thousands)
2017
$
392,965 $
87,694 $
100,757
(448,033)
(98,569)
(92,204)
—
8,962
—
58,609
12,503
—
—
—
(3,737)
—
22,889
8,277
(77)
(77)
(32,940)
5,646
(6,726)
29,912
4,445
—
—
—
1,254
(8,599)
—
(7,345)
(2,900)
5,505
2,605
Payment of dividend to common stock and Class A common
stockholders
Issuance of common stock pursuant to exercise of stock options
Repurchase of common stock and Class A common stock
Payment of withholding taxes relating to stock-based compensation
Net cash used in 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
(9,708)
5,145
(1,056)
(4,634)
(10,253)
2,250
—
2,250 $
(10,054)
803
(1,554)
—
(10,805)
(2,605)
2,605
— $
$
F-79
Note 28—Subsequent Events
Management has evaluated all events and transactions through the date the Company issued these
consolidated financial statements. During this period:
• During February 2020, the Company acquired from a non-affiliate seller approximately $2.3 billion in
UPB of Ginnie Mae MSRs.
• During February 2020, the Company entered into an agreement with a non-affiliate seller to acquire
approximately $292 million in UPB of MSRs related to defaulted government loans. 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-80
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: February 28, 2020
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
/s/ Jeffrey Perlowitz
Jeffrey Perlowitz
/s/ Theodore Tozer
Theodore Tozer
/s/ Emily Youssouf
Emily Youssouf
Title
Date
President and Chief Executive Officer, and Director
(Principal Executive Officer)
February 28, 2020
Senior Managing Director and Chief Financial Officer
(Principal Financial Officer)
February 28, 2020
Chief Accounting Officer
(Principal Accounting Officer)
February 28, 2020
Chairman of the Board, and Director
February 28, 2020
Director
Director
Director
Director
Director
Director
Director
Director
Director
83
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
EXECUTIVE(cid:3)MANAGEMENT*(cid:3)
(cid:3)
David(cid:3)A.(cid:3)Spector(cid:3)
President(cid:3)and(cid:3)Chief(cid:3)Executive(cid:3)Officer(cid:3)
(cid:3)
Steven(cid:3)R.(cid:3)Bailey(cid:3)
Senior(cid:3)Management(cid:3)Director(cid:3)and(cid:3)Chief(cid:3)
Mortgage(cid:3)Operations(cid:3)Officer(cid:3)
(cid:3)
Andrew(cid:3)S.(cid:3)Chang(cid:3)
Senior(cid:3)Managing(cid:3)Director(cid:3)and(cid:3)Chief(cid:3)(cid:3)
Financial(cid:3)Officer(cid:3)
(cid:3)
Vandad(cid:3)Fartaj(cid:3)
Senior(cid:3)Managing(cid:3)Director(cid:3)and(cid:3)Chief(cid:3)(cid:3)
Investment(cid:3)Officer(cid:3)
James(cid:3)Follette(cid:3)
Senior(cid:3)Managing(cid:3)Director(cid:3)and(cid:3)Chief(cid:3)(cid:3)
Mortgage(cid:3)Fulfillment(cid:3)Officer(cid:3)
(cid:3)
Jeffrey(cid:3)P.(cid:3)Grogin(cid:3)
Senior(cid:3)Managing(cid:3)Director(cid:3)and(cid:3)Chief(cid:3)(cid:3)
Enterprise(cid:3)Operations(cid:3)Officer(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
*as(cid:3)of(cid:3)March(cid:3)31,(cid:3)2020(cid:3)
(cid:3)
Doug(cid:3)Jones(cid:3)
Senior(cid:3)Managing(cid:3)Director(cid:3)and(cid:3)Chief(cid:3)
Mortgage(cid:3)Banking(cid:3)Officer(cid:3)(cid:3)
(cid:3)
Pamela(cid:3)Marsh(cid:3)
Senior(cid:3)Managing(cid:3)Director(cid:3)and(cid:3)Treasurer(cid:3)
(cid:3)
Lior(cid:3)Ofir(cid:3)
Senior(cid:3)Managing(cid:3)Director(cid:3)and(cid:3)Chief(cid:3)(cid:3)
Information(cid:3)Officer(cid:3)
(cid:3)
Daniel(cid:3)S.(cid:3)Perotti(cid:3)
Senior(cid:3)Managing(cid:3)Director(cid:3)and(cid:3)Deputy(cid:3)Chief(cid:3)
Financial(cid:3)Officer(cid:3)
Derek(cid:3)W.(cid:3)Stark(cid:3)
Senior(cid:3)Managing(cid:3)Director(cid:3)and(cid:3)Chief(cid:3)Legal(cid:3)(cid:3)
Officer(cid:3)and(cid:3)Secretary(cid:3)
David(cid:3)M.(cid:3)Walker(cid:3)
Senior(cid:3)Managing(cid:3)Director(cid:3)and(cid:3)Chief(cid:3)(cid:3)
Risk(cid:3)Officer(cid:3)
(cid:3)
(cid:3)
Pictured left to right, front row: Stanford L. Kurland, David A. Spector; back row: Theodore W. Tozer, Matthew Botein, Farhad Nanji, Patrick
Kinsella, Emily Youssouf, Joseph Mazzella, James K. Hunt, Jeffrey A. Perlowitz and Anne D. McCallion
BOARD OF DIRECTORS*
Stanford L. Kurland
Chairman,
PennyMac Financial Services, Inc.
David A. Spector
President and Chief Executive Officer,
PennyMac Financial Services, Inc.
Matthew Botein(2)(3)
Managing Partner, Gallatin Point LLC
Consultant, BlackRock, Inc.
James K. Hunt(2)(4)
Independent Lead Director
Managing Partner and CEO, Middle Market
Credit (Retired),
Kayne Anderson Capital Advisors, LLC
Anne D. McCallion(3)(6)
Senior Managing Director and Chief Enterprise
Operations Officer,
PennyMac Financial Services, Inc.
Farhad Nanji(2)(4)
Co-Founder, MFN Partners Management, L.P.
Managing Director (Retired), Highfields Capital
Management LP
Jeffrey A. Perlowitz(3)(6)
Managing Director and Co-Head of Global
Securitized Markets (Retired), Citigroup
Theodore W. Tozer(1)(5)(6)
President (Retired),
Government National Mortgage Association
(Ginnie Mae)
Patrick Kinsella(1)(5)(6)
Senior Audit Partner (Retired), KPMG LLP
Adjunct Professor, USC Marshall School of Business
Emily Youssouf(1)(3)
Clinical Professor, NYU Schack Institute of
Real Estate
Joseph Mazzella(4)(5)
Managing Director and General Counsel (Retired),
Highfields Capital Management LP
*as of March 31, 2020
Board Committees:
(1)Audit Committee
(2)Compensation Committee
(3)Finance Committee
(4)Nominating and Corporate Governance Committee
(5)Related Party Matters Committee
(6)Risk Committee